Renewing the Nicaragua Tariff Preference Level (TPL)

As I mentioned the other day, you generally don't tend to hear praise of CAFTA-DR unless is you are speaking about Nicaragua. Praise might be too strong of a work but you do read more positives about the effects of CAFTA-DR there than in the Northern Triangle or the other member states of CAFTA-DR.

One of the reasons is that Nicaragua qualifies for some additional support because of its impoverishment. One of the extra bonuses that the country receives is the Nicaragua Tariff Preference Level (TPL) which "allows a limited number of Nicaraguan-made garments to enter the United States duty free without regard to the source of the fabrics." The US and Nicaragua also have a fabric matching program that benefits workers, businesses and consumers (presumably) in both countries.

As a result, trade in apparel between the US and Nicaragua has increased since CAFTA-DR went into effect while it has decreased between the US and every other member of CAFTA-DR. The program is set to expire at the end of this year which would be a shame if the benefits that the op-ed cites are true. It seems like a program that the US and Nicaraguan governments should consider extending and that the US should consider expanding to other countries in the region. Obviously, doing so would probably disadvantage Nicaragua and might even water down the benefits to everybody to such an extent that perhaps the current single-country model is the best..

US and El Salvador to move forward with second Millennium Challenge Corporation Compact

Earlier this week, it was announced that the second Millennium Challenge Corporation compact between El Salvador and the US (FOMILENIO II) would go forward as planned. The agreement had been held up as a result of concerns on the part of various US government institutions concerning access to Salvadoran agricultural markets, perceived weak money laundering laws and presidential elections.

The US seems to have relented on forcing El Salvador to also consider purchasing seeds from US corporations rather than solely national small- and medium-sized farmers. The reforms to the Public-Private Partnership (P3) and money laundering laws moved the legislation towards where the US wanted them to go but maybe not as much as it wanted. Hence, negotiations.

Republicans also wanted the US to hold the compact hostage in return for lifting the ban on gold mining in El Salvador. It's not clear, however, that any of those directly involved in the negotiations were pushing this condition.

In a telephone interview Saturday, Mari Carmen Aponte, the U.S. ambassador to El Salvador, said her embassy must be “vigilant” to make sure El Salvador follows through on promised reforms. But looking back at the past year of negotiations, she said it has been a learning experience for both sides.

“The new government in El Salvador has learned a lot. We also have learned a lot,” Aponte said. “We have to keep our eyes open” going forward, she added. But given the migrant crisis, she was excited that $101 million of the aid is for improved training and education that could help young men and women find jobs in El Salvador

The two countries will now move forward with the $277 million compact for coastal and maritime development, including $101 million for improved training and education. The FMLN, however, will have to continue to work with those communities in the affected areas, many of whom are against the proposed development projects. They fear that the proposed projects will destroy already fragile ecosystems and their livelihoods as well as turn the region into another Cancun. 

Citizens are always sensitive when it appears that foreign governments and corporations and international tribunals are intervening ...

Citizens are always sensitive when it appears that foreign governments and corporations and international tribunals are intervening in their sovereign affairs. During the last few weeks, we've seen the people of Guatemala and El Salvador push back against efforts by the United States, Monsanto, and Australian-Canadian gold mining companies to require national governments to abide by national and international agreements over the objections of domestic constituents.

In Guatemala,

On September 4th, after ten days of widespread street protests against the biotech giant Monsanto’s expansion into Guatemalan territory, groups of indigenous people joined by social movements, trade unions and farmer and women’s organizations won a victory when congress finally repealed the legislation that had been approved in June.

...

The Monsanto Law would have given exclusivity on patented seeds to a handful of transnational companies. Mayan people and social organizations claimed that the new law violated the Constitution and the Mayan people’s right to traditional cultivation of their land in their ancestral territories.

The Guatemalan people's success followed similar efforts in El Salvador to defeat Monsanto. There, it took place within the context of the government's negotiations with the United States over a $277 million second Millennium Challenge Compact.

El Salvador is a recent example of corporate domination in U.S. foreign aid. The United States will withhold the Millennium Challenge Compact aid deal, approximately $277 million in aid, unless El Salvador purchases genetically-modified seeds from biotech giant, Monsanto.[1] The Millennium Challenge Corporation is “a U.S. foreign aid agency that was created by the U.S. Congress in January 2004,”[2] according to Sustainable Pulse, and serves as a conduit for foreign aid funds.

MCC’s unethical aid conditions would force El Salvador to purchase controversial seeds from the American biotech corporation instead of purchasing non-GMO seeds from the country’s local farmers[3] – an action that would have negative effects on El Salvador’s agricultural industry in addition to presenting serious health and environmental risks.

Sure the laws were meant to give Monsanto a foot in the door, but they were also simply designed to have foreign companies treated in the same manner as domestic companies (give or take) as everybody agreed to in CAFTA-DR (that free trade agreement pursued by the Central American governments with the US). The US eventually relented on Monsanto and it was recently agreed that the two parties would go forward with the second compact.

Unlike agricultural reform, the evil CAFTA-DR is also being used to reforms that the left is cheering.

The United States accused Guatemala this week of failing to live up to the labor standards spelled out in the countries' trade agreement, pursuing a case that could lead to fines if Guatemala doesn't move to better protect its workers.

U.S. Trade Representative Michael Froman said he was moving ahead with the case in hopes that Guatemala, a partner of the U.S. in the Dominican Republic-Central America Free Trade Agreement (CAFTA), would make "concrete improvements" in enforcing labor laws already on its books.

"Our goal is to raise standards," Froman said at a press conference Thursday.

The case is being filed at a time when the U.S.-Mexican border is being overwhelmed by young immigrants, many of them Guatemalan children and teens fleeing violence in their home country. Froman said the complaint was aimed at helping to make Guatemala a safer place to live and work, so that its citizens don't feel compelled to "embark on a dangerous journey of migration."

...

The Guatemalan government agreed last year to follow a plan to address the country's labor law violations. Froman, who traveled to Guatemala this summer, said the country had taken "significant steps" since then.

But Guatemalan union leaders insist the government hasn't made sufficient progress in addressing the violence. Those unions first raised their concerns back in 2008, when they filed a joint petition with the AFL-CIO calling on Guatemala to make good on its commitments.

The case announced by the trade representative's office Thursday will create an arbitration panel to determine whether or not Guatemala is failing on its obligations.

See also here and here. It's nice to see the US using its free trade agreements to enforce worker protection rights but where's the outrage with against the US for using its free trade agreement with Guatemala to interfere with the country's internal affairs? Is the process with regard to labor versus Monsanto so different or is it simply the presumed outcome of that pressure?

Finally, there's gold mining in El Salvador.

A multilateral arbitration panel here began final hearings Monday in a contentious and long-running dispute between an international mining company and the government of El Salvador.

An Australian mining company, OceanaGold, is suing the Salvadoran government for refusing to grant it a gold-mining permit that has been pending for much of the past decade. El Salvador, meanwhile, cites national laws and policies aimed at safeguarding human and environmental health, and says the project would threaten the country’s water supply.

“This mining process would use some really poisonous substances – cyanide, arsenic – that would destroy the environment. Ultimately, the people suffer the consequences." -- Father Eric Lopez

The country also claims that OceanaGold has failed to comply with basic requirements for any gold-mining permitting. Further, in 2012, El Salvador announced that it would continue a moratorium on all mining projects in the country.

Yet using a controversial provision in a free trade agreement, OceanaGold has been able to sue El Salvador for profits – more than 300 million dollars – that the company says it would have made at the goldmine. The case is being heard before the International Centre for the Settlement of Investment Disputes (ICSID), an obscure tribunal housed in the Washington offices of the World Bank Group.

“The case threatens the sovereignty and self-determination” of El Salvador’s people, Hector Berrios, coordinator of MUFRAS-32, a member of the Salvadoran National Roundtable against Metallic Mining, said Monday in a statement. “The majority of the population has spoken out against this project and [has given its] priority to water.”

Pacific Rim, Oceana Gold's predecessor, tried to pursue its claims through CAFTA-DR but its claim was rejected when it was determined to be a Canadian company and therefore not eligible to sue under this free trade agreement. Oceana Gold is now using the ICSID because the Salvadoran government became a party to that trade agreement in 1999.

Obviously many people would have preferred that the US and the countries of Central America had not signed a free trade agreement, but we have. After a decade of requests from Central American leaders, the US agreed and the agreement was signed in 2004, becoming effective a few years later. I'm just not comfortable blaming CAFTA-DR for all of the region's recent economic problems as was frequently heard during this summer's unaccompanied minors crisis.

The free trade agreement can be used to enforce laws to benefit more positive outcomes enjoyed by large (workers' rights) or small (mining corporations) groups. The Central American country that tends to get some of the highest marks from CAFTA-DR and for addressing workers' rights is Nicaragua. While not perfect, Nicaragua seems to be benefiting from CAFTA-DR to a greater extent than its neighbors (at least in the media). Part of that is due to its poverty (they received special benefits) but there are other factors as well.

While, for now, I am happy that the Monsanto laws were repealed or not passed and that the US is using CAFTA-DR to help promote workers' rights in Guatemala, it's not based on any principled reasoning. If anything, it's based upon what I see are outcomes that serve the needs of some of the region's most vulnerable. Now, I'm just waiting for a vote in favor of the environment in El Salvador.

Investing in El Salvador

The United States and Salvadoran governments, as well as the Salvadoran private sector, clearly see increased foreign direct investment as necessary to kick-starting the Salvadoran economy. The first Millennium Challenge Corporation compact for the northern region and the second proposed compact for coastal and maritime areas are designed to provide needed investments in infrastructure that will encourage foreign direct investment. The Partnership for Growth is also designed to tackle insecurity and corruption that will then lead to more investment and better returns on investments. Those investments will create jobs and, hopefully, improve conditions so that Salvadorans lead better lives and fewer leave (among other benefits).

However, I was speaking with someone yesterday who reminded me just how difficult this is going to be. Here is Raul Gallegos from February:

The country's business leaders are no visionaries either.

Many local entrepreneurs sold out to foreign companies and invest their money in Nicaragua or Costa Rica rather than at home.

El Salvador's investment levels, at 14 percent of GDP, are low compared with peers.

But no one can blame the business community: As economist Ricardo Hausmann has put it, El Salvador is a "low-return country" with a lack of productive investments or profitable opportunities.

Many Salvadoran businessmen seem to have cashed out their business investments in the 1990s and early 2000s. Since then, they have instead been investing in neighboring countries where their potential returns on investments are perceived to be much greater. I don't know how true this holds up to more systematic analysis but it sure passes the smell test.

Anyway, yesterday, the person was telling me about Salvadoran friends of his whose family is seriously concerned with the new FMLN government headed by Salvador Sanchez Ceren. They remain fearful that he and the FMLN intend to turn the country into another Venezuela. They are worried about increasing corruption, insecurity, and the greater potential for nationalizations of private businesses. As a result, they have been moving assets out of the country.

Now I don't know the details but but when I think of all the resources that the US and international community, including ALBA, are investing in this small Central American country, it is going to be all for nothing if Salvadoran economic actors do not invest themselves. It doesn't help if foreign investments are simply replacing national investment as I fear has been occurring these last few years and the potential for which will only increase under the FMLN's Sanchez Ceren.

Bananas, seeds and gold courses in Central America

So how is international pressure impacting the Guatemalan banana industry? Fresh Fruit Portal has a pretty balanced (accurate?) overview of the situation in Guatemala.

With pressure from bodies such as the International Labor Organization (ILO), Guatemala’s attorney general has given greater attention to Sitrabi’s cases.

Russell said much of the investigative interest has stemmed from fear of an ILO-led commission of inquiry that could bring greater grievances to light.

On a recent visit to the attorney general’s office, Russell said representatives were quick to highlight their progress on cases emphasized by the ILO.

“For as long as that pressure is there, we think that’s a potential engine for influencing change. Unfortunately it’s still on the table. It will be discussed by the ILO governing body in November. It’s a hanging threat that the government there is aware of,” Russell said.

“They realize if there were a commission of inquiry, a lot of things would be uncovered that they are currently managing to keep hidden. This might have a knock on effect to their free trade relationships with the States and the EU.”

In particular, Guatemala’s union situation has been flagged under the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR).

Under pressure from the ILO, the validity of the U.S. free trade agreement with Guatemala was put into doubt in 2008. The labor body has questioned Guatemala’s perceived lack of labor policy enforcement, which could violate certain articles of CAFTA-DR.

In its first labor claim using a free trade agreement, the U.S. challenged Guatemalan practices in 2011 by requesting a panel to improve enforcement.

 There's nothing wrong with creating jobs in Central America, Clay Aiken.

No love for Monsanto here - looking for a solution to El Salvador's seed program's lack of compliance with CAFTA-DR and even national laws.

Perhaps the MAG’s seed distribution program violates the Central American Free Trade Agreement, but that does not make it a bad program. It is just another reason why CAFTA and free trade are bad policies. 

And really, does anyone really think that it is a good idea to spend needed development assistance on luxury condos and golf courses in El Salvador?

Two largest importers of Guatemalan sugarcane? One I guessed

Every so often we read a story of Korean nationals being the victims of crime or owners of troubled businesses in Guatemala. I can't say that I ever thought too much about the subject but The Korea Times has an interesting story on its nationals' operations in Guatemala. Apparently, a large number of Koreans moved to Guatemala in the 1980s to participate in the "textile boom" and now over 8,000 Koreans currently reside there.

Guatemala has been viewed by Korean investors as one of the best countries to operate textile businesses due to its geographical proximity to the U.S. market and cheap labor.

Recently, however, some industry observers have voiced concern over a triple whammy facing Korean textile companies there, namely rising wages, the scrapping of tax benefits and a decrease of demand for garments in the United States.

Guatemalan Ambassador to Korea Gustavo Lopez said that his government is doing its utmost effort to  help them keep doing business there and attract more investment.

Some Korean textile businesses are considering a move to Haiti or Nicaragua where they consider business conditions somewhat superior where wages are lower and tax benefits are more favorable. Slowing demand in the US won't change but the "better" wage, tax, and security conditions are tempting.

And it is not just Korean investments in the Guatemalan textile sector. After China, Korea is the second largest importer of Guatemalan sugarcane. Korea also imports a good deal of Antigua coffee. There are hopes to increase Guatemalan exports of coffee, rum and beer as well as to increase the number of Koreans who visit Guatemala each year.

In El Salvador, a glimmer of hope for a stronger economy.

So I forgot to link to this when the first round of voting was occurring - In El Salvador, a glimmer of hope for a stronger economy.

In stubbornly slow developing economies, like El Salvador, cultivating entrepreneurship is an essential ingredient for growth. With modest start-up costs, it is the small, even micro firms -- from one to 50 employees -- that generate most of the jobs. Yet, here, their emergence has been "absolutely stifled by the security situation," says a seasoned diplomat in San Salvador.

Real numbers are hard to come by, but it's clear that criminal demands on the country's commercial life stymy growth.

El Salvador doesn't get a "favorable" story in Fortune very often.

And there's still this interview by Elaine Freedman with César Villalona in Envio that provides a bit of a different take on El Salvador's economic performance under Funes and the FMLN.

Trade, Development, and the Shadow of Dependence: Latin America and the United States in the World Trade Organization

The following is a guest post by Christina Fattore, a professor of political science at West Virginia University. Christina's research and teaching interests focus on international political economy, international organizations, and gender and international relations.

John Kerry's claim in November 2013 that the Monroe Doctrine is over drives right to the heart of my research, and I'm not sure if I actually buy it.  On its surface, one could argue (like Slate's Joshua Keating did) that greater interdependence has helped the rise of regional leaders such as Brazil and Argentina.  One could also say that these countries are looking elsewhere to build new economic relationships, specifically with China.  However, looking past this handful of countries that have done so well in the Bretton Woods/Washington Consensus system, the negative effects of interdependence continue to influence the foreign policy decision-making of most of the region, particularly, trade policy.  Disregarding Argentina, Brazil, and Mexico, it's easy to see that formal trade ties with the US leads Latin American states to support the US agenda in the World Trade Organization (WTO).

I am currently in the midst of a book project on how Latin American overdependence on the US for trade and investment over the past century continues to affect their current behavior in the WTO.  The Dispute Settlement Mechanism (DSM) of the WTO has been dominated by the major powers, mainly, the EU and US.  Underdeveloped countries mainly avoid the DSM due to a lack of legal capacity (the inability to staff an office with legal experts at WTO headquarters in Geneva or the lack of bureaucratic strength to build a strong trade dispute), the inability to identify and pursue illegal trade behaviors, and a fear of retaliation by the major powers.  Basically, a country's internal limitations are to blame.  If an underdeveloped country does not have the resources to participate in Geneva, they exclude themselves.

While I was investigating this trend, I discovered there was an external facet as to why underdeveloped states are less likely to participate in the DSM.  I theorize that underdeveloped states depend on their large trading partners to represent their trade interests in Geneva.  Mike Allison and I explored this trend in our 2013 article using the decade long "banana war" between the US and the European Union.  Neither the US or the EU actually grow bananas for export; however, they are intricately involved due to investment in the area.  This trade dispute originated with the adoption of the Common Market and the Lome Conventions, where the EU countries agreed to a preferential regime for bananas grown in former colonial holdings in the Asian, Caribbean, and Pacific (ACP) regions.  However, US-headquartered banana grower Chiquita felt as though this preferential treatment of ACP bananas was hurting its market share, and therefore, turned to the US government to file a complaint against the EU.  This is a clear example of major trade powers representing (or in a way, usurping) trade issues in underdeveloped regions as their own.

Latin America is the only region outside of Europe and North America where every single country has been involved in a trade dispute, either as a complainant, defendant, or a third party.  This is mainly true because of the banana disputes, where many countries were involved as co-complainants or third parties, where the US took the lead.  In a paper that I am presenting this week at the Political Economy of International Organizations conference, I tested hypotheses relating to how dependence on the US for trade and investment affects Latin American participation in the DSM.  I found that Latin American states that have formal trade ties through a preferential trading arrangement with the US are less likely to target the US.  This result falls along the lines of the previous literature, where smaller states fear retaliation as punishment for targeting a large trade partner.  However, Latin American states were more likely to join a US-initiated dispute as a third party when the defendant was another large economy, specifically China or the EU.  This supports my expectation that Latin American states support the US trade agenda due to the shadow of dependence due to trade relationships and investment.

While the Monroe Doctrine may be officially over, its effects continue to perpetuate.  Latin American engagement in the WTO's dispute settlement mechanism is just one example of how the region continues to operate under the cloud of the negative effects of interdependence.

Has the FMLN government been an economic failure?

Let me just say that I found this interview by Elaine Freedman with economist César Villalona very persuasive. In Has the FMLN government been an economic failure?, Villalona tackles debt, the deficit, capital flight, investor confidence, public spending, poverty, and taxes/tax evasion among other important topics.

Here's a taste:

EF: But Miguel Lacayo insists that “There are more poor people, more unemployed and less optimism about the future today than when Funes and the FMLN took the helm of this country.” And Salvador Samayoa adds that “right from the start of his mandate the President completely misplaced the papers related to his main promise: job creation. And the people have felt the effects. In the last opinion survey by JBS Market Research for El Diario de Hoy, 92% of those polled said the employment situation is the same or worse. It’s an overwhelming figure. And it’s no trick or manipulation of the figures, like others do when consolidating answers for the benefit of their own arguments. In this ‘same or worse’ figure the vast majority of people (68.5%) think the employment situation is worse.” What do you think about this?

CV: The Multi-Purpose Household Survey, conducted every year since the seventies by the Economy Ministry’s General Directorate of Statistics and Censuses, reported a national poverty rate of 40% in 2008. In 2012 the rate had dropped to 34%. When President Funes took office, unemployment was calculated at 7.3%. In 2012 it was 6.1%. I’m referring to open employment here. Under-employment has neither risen nor fallen, remaining at 35-40%. Although that’s significant under-employment, Miguel Lacayo’s statement got things completely the wrong way round.

Certainly, the majority of people are still in a very difficult situation and the 34% poverty rate is still a high figure. For someone living in poverty, the fact that the rate has dropped a few percentage points doesn’t mean anything, because personally speaking the situation hasn’t changed. But that doesn’t mean that the overall situation in the country hasn’t improved.

Honestly, it's worth reading the entire interview.