by Richard Barajas, WCCN Intern and UW-Madison Student
In the past decade the importance of free trade agreements to the countries of the world has grown exponentially. The effect of these agreements on countries in Central America had been minimal; this however changed with the passing of the Dominican Republic and Central American Free Trade Agreement (DR-CAFTA).
The passing of this agreement by congress has been a contentious issue in the United States (www.ustr.gov). It has also been an important issue for the individuals and groups that are at the forefront of the anti-globalization movement. In order to better understand these issues and the complaints that are brought up, there must first be an explanation of what a free trade agreement is and how DR-CAFTA fits into this framework. We can then discuss the possible benefits to Nicaragua from this agreement as well as the possible drawbacks.
A current model that could be used to hypothesize the effect of DR-CAFTA on Nicaragua would be Mexico and how it has fared in the past decade since the implementation of the North American Free Trade Agreement (NAFTA), of which Mexico has been a member since 1994.
What is a Free Trade Agreement?
To many people the mention of free trade agreements conjures up an image of men in suits sitting around a table discussing bureaucratic jargon. In spite of the fact that this is how the framework of the agreement is created, the implementation of a free trade agreement occurs all around us.
A majority of the goods we purchase in our everyday lives now come from places that many of us will never see. To verify this we would simply need to take a look at the tags in the clothes we are wearing and see where they were made. A free trade agreement facilitates the trade of goods by lowering the barriers that these products face when trying to enter the country (Vargas 2003). All countries participating in a trade agreement treat each other's good as their own.
As a result of NAFTA a product manufactured in Mexico is seen as an identical good to the one produced in the United States. In addition, in many cases free trade agreements have provisions that facilitate the transfer of capital from one country to the other. This is done in the hope that economic growth will flow from one country to another usually in the form of new business investments that would boost the poorer countries' economy as well as the well-being of its citizens. Other provisions that may be included in a free trade agreement may focus on labor standards or environmental regulations. DR-CAFTA contains these two types of provisions in the hope that it will improve labor standards as well as environmental standards in the member countries (Salgado October, 2005). A free trade agreement sounds like a simple idea, however, as the critics of these agreements show this is not often the case. There are many individuals who will gain from DR-CAFTA but there will also be those individuals who will not be as fortunate.
DR-CAFTA and its Gains
The Central American Free Trade Agreement connects all countries in Central America plus the Dominican Republic to the market and capital of the United States. Products traded between any two countries in this region have lower restrictions and are, in essence, viewed as if they had been produced in country, as explained above. Supporters of this agreement have stated that there will be significant gains for both Central America and the United States (Goldstein 2003). The primary gain that is often touted for countries such as Nicaragua is an increased access to the sizable market that is the United States consumer, both individuals and businesses. CAFTA will allow these small countries to export their goods more easily into the United States while at the same time opening the flow of foreign capital leading to economic growth that will benefit the generation and investment of new businesses as well as raising the standard of living. For Nicaragua this increased economic activity will stabilize the economy allowing more people to climb out of poverty. In turn this will lead to stabilization in the democratic situation in the country allowing Nicaragua to escape the poverty that is now abundant (www.ustr.gov). Of course the United States will also gain from this agreement but I will not go into detail about this since this is not the focus of this paper.
DR-CAFTA's Negatives
This agreement sounds easy and straightforward, however as the detractors point out, many negative points have been glossed over in the above interpretation. The majority of the Nicaraguan poor and the poor in general in Central America are employed in the agricultural sector. CAFTA would be good for these individuals since they could then sell their crops to the United States; however this is not the case. The U.S. has an agricultural policy that emphasizes the use of subsidies. This means that the government pays each farm a given sum in order for it to produce agricultural products.
This sum is only paid out to domestic farmers. As a result of these subsidies, U.S. farmers can reduce the price of their products; in fact they can reduce the price so much that in many cases they are cheaper than the price of the crops in developing countries. Thus, the promise of poverty alleviation that CAFTA could realize may never develop. Instead of a flow of agricultural products from Nicaragua to the U.S. the exact opposite may occur only making the poverty in Central American worse than it already is (Acevedo Vogl 2003). This is echoed by the director of the Center for the Promotion and Investigation of Rural and Social Development (CIPRES), Orlando Nunez. He states that there is a significant risk that DR-CAFTA will displace agricultural products as well as the workers in this sector in Nicaragua (Obregón October, 2005).
This possible collapse of the small agricultural producer in Nicaragua could lead to an increase in the unemployment level in the country making the problems the country faces even worse. This unemployment could lead to a shift in Nicaragua towards maquila type manufacturing that has taken hold in Mexico since the implementation of NAFTA (Acevedo Vogl 2003). Whichever industry takes hold in Nicaragua, there is a high probability that it will be a low wage industry that will do little to raise the economic situation of the country. In order to better understand the possible effects of CAFTA on Nicaragua, Mexico and its experience with a free trade agreement similar to CAFTA poses as a good model.
Mexico and NAFTA
In 1994 Mexico became a member of NAFTA; this was a similar agreement to CAFTA between the U.S., Canada, and Mexico. Just as in the case of CAFTA the supporters promised that NAFTA would help to lift Mexicans out of poverty and improve the economic and social situations of the country. More than a decade after the implementation the results are not very clear. Since 1994 Mexico has experienced an explosion in border factories, maquilas, which primarily employ the services of women. These factories offer low paying jobs that in many cases require long hours.
Mexico has also not seen the economic growth that was promised. There are still millions of individuals who are mired in poverty. The people who have gained the most from the implementation of NAFTA have been the few who were already wealthy (Vargas 2003). The subsidies that are used by the U.S. also had negative effects in Mexico. Many of the small subsistence farmers have been forced out of business since they cannot compete with the large agricultural corporations that take advantage of U.S. subsidies. To put this in perspective, much of the corn that Mexico consumes is now imported from the United States in spite of the fact that Mexico is the birthplace of maize (Rosenberg 2002). This does not bode favorably for the small farmers in Nicaragua and the rest of Central America.
CAFTA has many possible effects on Nicaragua and the rest of the countries in the region, however determining what these will be is not an easy task. If the United States would abolish its subsidy policy, the possible drawbacks I have discussed above could be tempered. This may be taking place as this is being read since this is the main target of the current round of negotiations taking place at the World Trade Organization. Unfortunately, perhaps the only way CAFTA and its effects will be able to be studied will be in hindsight. Hopefully none of the negatives I have discussed will be present and the positives will be.
References
- Acevedo Vogl, Adolfo Jose. Potential Impacts of the Central America Free Trade Agreement on the Agricultural Sector and Rural Poverty in Nicaragua. American Friends Service Committee. 2003.
- Goldstein, Benjamín. "The Meaning of DR-CAFTA." Peace and Conflict Monitor. 2003.
- Obregón, Patricia. "Opositores al CAFTA-DR lamenta su ratificación." El Observador Económico. October, 2005.
- Rosenberg, Tina. "The Free Trade Fix." New York Times Magazine. 18 August, 2002.
- Salgado, Carlos A. "CAFTA-DR: Más que un juego de letras." El Observador Económico. October, 2005.
- Vargas, Oscar-René. Qué Es El CAFTA? Universidad Politécnica de Nicaragua. 2003.
- www.ustr.gov
