Graduate School of Development Studies

A Research Paper presented by:

Carlos Alberto García ReyesGuatemala

in partial fulfilment of the requirements for obtaining the degree of

MASTERS OF ARTS IN DEVELOPMENT STUDIES

Specialization:Master in Governance and Democracy

M.A. G&D

Members of the examining committee:

Dr Karim Knio (Supervisor)Dr. Rosalba Icaza (Reader)Dr. Sylvia Bergh (Reader)

The Hague, The NetherlandsNovember, 2010

The Politics behind the Free Trade Agreement between Guatemala and the United States of

America

Disclaimer:

This document represents part of the author’s study programme while at the Institute of Social Studies. The views stated therein are those of the author and not necessarily those of the Institute.Research papers are not made available for circulation outside of the Institute.

Inquiries:

Postal address: Institute of Social StudiesP.O. Box 297762502 LT The HagueThe Netherlands

Location: Kortenaerkade 122518 AX The HagueThe Netherlands

Telephone: +31 70 426 0460

Fax: +31 70 426 0799

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Introduction iv

Chapter 1The DR-CAFTA Negotiation Process 6

Chapter 2Free Trade Agreement Background 10

2.1 Brief overview of the negotiations and signing of the Treaty.

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Chapter 3Negotiation Objectives of the DR-CAFTA 12

3.1 General Objectives3.2 Structure and Conditions of Trading 14

Chapter 4Nexus between the General Objectives of the DR-CAFTA and Neoliberalism. 16

Chapter 5The Context 24

5.1 Globalization, Integration and development 255.2 Inclusion into the global economy and Central American integration 295.3 The DR-CAFTA in the globalization context 31

Chapter 6The DR-CAFTA Political and Economical analysis 34

6.1 External Environment 366.2 Internal Environment 38

Chapter 7Government Commercial Policy Plans and the Relationship between Guatemala and the United States of America 42

7.1 Beneficiary sectors 427.2 Analysis of important beneficiary sectors of the DR-CAFTA 44

Chapter 8Critical Analysis of the four principal rules of the DR-CAFTA 49

Conclusions and Reflections 52

Bibliographic References 55

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I. Introduction

The Research presented below contains an analysis of the process of negotiation of the Free Trade Agreement between the United States of America, Central America and the Dominican Republic, giving a specific approach to what has happened in Guatemala.

 In this research paper, we will observe how since the beginning

of the negotiations some Guatemalan productive sectors were involved in the process of negotiation of the bases of Dominican Republic, Central America free Trade Agreement (DR-CAFTA).

 The document begins with a brief description of the antecedent

or background of the Treaty as well as the nature and the need to negotiate a Treaty that could allow the Central American region a possible economic and social development in all its scales, specially in this case, Guatemala. Subsequently it enters in the history of the negotiation of DR-CAFTA as well as the primary and secondary actors.

 It is important for the interest of the present document to clarify,

that this documents intention is not to describe the process itself, but even more, tries to provide a political-critical analysis, analyzing the various components of the free trade agreement by stages.

 Through out the document, the author seeks to show and

analyze the nexus between the objectives of DR-CAFTA and the prevailing economic model that not only Guatemala but the Central American region follows.

 Once detailed the particulars of the negotiation it proceeds to

give an analysis of the context of DR-CAFTA and the possible results in the short and long term, analyzing how a free trade agreement with the most important commercial partner in the region plays an important role in globalization, integration and development of the region particularly in the case of the Republic of Guatemala.

 It is without a doubt for Guatemala, DR-CAFTA along with the

Association Agreement between the European Union and Central America consists in two of the economic events of more relevance in the last few decades, also as well you will see in this document, this Treaty is not only an agreement for tariff barriers liberalization and opening of markets, but also is a treaty which provides assistance to the Central American region to take a step forward in the integration of the region as well as to enable the incorporation in a global economy.

 

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Subsequently, as it is evidenced in the document, there are internal and external contexts which are of singular political importance to Guatemala, due to the reason that through this negotiation Guatemala was obliged to create and generate a series of reforms to its political and legal system to accommodate a possible accession to the US market and thus enhance competitiveness and productivity of the different productive sectors of the country.

 Next in this document, we refer to the commercial policies of the

Government, referring to Government plans from political parties that have held the Presidency of the Republic in the last decade; these parties are the Gran Alianza Nacional (GANA) and the Unidad Nacional de la Esperanza (UNE) actual political party at the head of the Government of the Republic. In the same order of ideas, it is analyzed the commercial relationship between Guatemala and United States of America, with an emphasis on certain benefited sectors as a sign of the possible outcomes of DR-CAFTA.

 After delivering this clear theoretical and situational framework of

DR-CAFTA in Guatemala and the Central American region, proceeds a critical analysis of the implications of the Treaty for the political system of Guatemala, where it can be highlighted with crystal clear clarity how the Government of the United States of America offers, proposes and stimulates the country (Guatemala) to concretize this Treaty with the aim of having higher exports of its products to a developing country. It is here where we can highlight a bit how history repeats it self, where a powerful commercial and economically country such as the United States of America does not give suggestions or possibilities but forces a "developing country" to opt for a mechanism of exchange of products and opening up of markets with certain unfavorable parameters for the last.

 Subsequently it is presented a critical analysis of the four

principal rules of DR-CAFTA, giving a better approach for the reader of the bases on which a Treaty of singular importance is founded and that without a doubt, will bring along it side the possible negotiation of new and better free trade agreements with other economically developed countries such as Latin American countries and others in different continents of the world.

 Finally this Research Paper offers the reader a number of

conclusions which seek to show relevant aspects on the productive sectors involved and other less privileged, as well as a series of public policy recommendations for Guatemala and its possible impact in the short, medium and long term.

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Chapter 1

The DR-CAFTA Negotiation Process

In the past five years the process of globalization of markets for goods, services and capital has deepened, generating greater interdependence between countries and regions. These forces, especially small countries as Guatemala to raise its competitiveness to achieve a better integration in the global market, and thus countries achieve sustainable economic growth and development process. However, given that, in a world more interconnected there is greater sensitivity to external shocks; it is necessary to have strategies to leverage the benefits of globalization in general and free trade agreements in particular. In this vein, in the present research plans of Government of both parties such as the Gran Alianza Nacional (GANA) and the Unidad Nacional de la Esperanza (UNE) are described and discussed, with the expressed purpose of comparing these plans with the governmental actions implemented in this field, with the exception that it only discusses the first year of UNE government.

Economists, academics and civil society had focused on a great discussion and impasse, especially concerning economical growth by the raise of exportations of goods and services, the increase in the national and foreign investment rates, all this strengthened by the juridical certainty provided by the consolidation and improvement of unilateral preferences granted through the Caribbean Basin Initiative (CBI)

Before this FTA, the Central American Countries spoke about their economical issues in a closed and weak environment, without paying attention in what was being debated on the neighbor countries: yet, with this FTA the debate has completely regionalized the debate. The ones in charge of the decision making, entrepreneurs, academics and civil society had been involved in a whirlwind of discussions in which have been brought out numerous positions and reactions about diverse topics that the FTA includes.

by that time it was comprehensible that the discussion about a free trade agreement could become polarizing, departing from ideological discussions, in which it was pretended that the DR-CAFTA could be sold as the miracle that will save the Central American economies or as the apocalypses that would cause their complete collapse. The sides were clearly established and limited. The debate about the FTA became instead as an extension of what it had been discussed since few decades before 2002 between defenders and critics of globalization, radicalized even more because

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this FTA involved nothing less than the United States of America, country which in several occasions has raised diverse discussions and reactions in Latin America.

After the promulgation of the Decree 11-2006 of the Guatemalan National Congress “legal reforms for the implementation of the Free Trade Agreement DR-CAFTA”1 on July the 1st 2006, all negotiations that started in January the 8th 2003 concluded, after nine exhausting rounds in which Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua jointly participated.

Even when the FTA with the United States of America commercial normative is applicable to all signing States, some chapters are applied in a different manner in the bilateral commercial relations, issue that makes, from a legal point of view, that the FTA constitutes a different juridical entity for each one of the commercial associates. From this point of view, it is wise to refer to this commercial agreement as the Bilateral Free Trade Agreement between Guatemala and the United States of America, and due to this, from here on further the DR-CAFTA is going to be treated in bilateral terms.

With a process duration of 12 years, on January the 1st, 1984 the Caribbean Basin Initiative (CBI) imposed the introduction of a program of the United States of America government, designed to promote economical development in the Central American region, through the free import taxes for most of the products from the Central American countries and the Caribbean to the United States territory. Later in the 1990’s the CBI was modified by the “Law of expansion of the economical recuperation of the Caribbean Basin, which introduced improvements to the program of benefits apart from giving to it a permanent character. In the year 2000, the expansion of the CBI was approved, improving its coverage while giving access to certain products which had been excluded by the previous agreement, such as clothing goods, the equity in taxes for canned tuna was accomplished, shoe industry and some leather goods that Mexico was already enjoying due to the previous North American free Trade Agreement (NAFTA), and by then it was agreed that by the 30th of September 2008 or la date in which it could enter into force the Americas Free Trade Area by its abbreviation in Spanish (ALCA)2, or a similar agreement between the United States of

1 Reformas legales para la implementación del Tratado de Libre Comercio República Dominicana-Centroamérica-Estados Unidos de America; translated into english by the author

2 Área de Libre Comercio de las Américas

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America and those beneficiary countries from the Caribbean Basin Initiative. Es 30

Under the scheme of the CBI, Guatemala was allowed to export tax free the 30.66% of its total tariff, equivalent to 3,262 tariff fractions, which comprehended the vast majority of products oriented towards the North American market. Yet, products such as coffee and bananas enjoyed a free trade before the CBI, some others like oil and precious metals, the existing tariffs, had more a symbolic character. In this sense, it is probable that the effects of the FTA over the increase in exports, at least in a short term, could be below the generated expectations.

With the DR-CAFTA, it was added around 6,404 fractions of the tariffs to the list of products that already enjoyed of free tariff, with which the coverage for this category was expanded to 90.88% of the Guatemala’s total tariff, which is precisely where the non explored potential is settled. “Never the less, it is imperative to recognize that still now, Guatemala has to make great efforts not only in investment, infrastructure, technology and human resources training, to take all this possibilities, but also to be well prepared to accomplish all the high quality standards, technique normatives, phytosanitary measurements, customs control and other possible dispositions not less important that are essential to access the North American market.”3

Referring to the impact of the Free Trade Agreement in the region’s economies, the World Banks argues:

“…the magnitude of this positive effects and the form in which they are distributed inside the national economies of Central America, will depend primarily on the capacity of each country in taking the opportunities that the agreement offers, specially because the benefits of the foreign commerce depend on the ability which each economy owns to change its patterns of production and employment, and of adopting new foreign technologies. To be more precise, the evidence suggests that the institutional reforms and the public investment in innovation and infrastructure will affect the magnitude of the impacts of the foreign investments, the transfer of technologies and international commerce.”4

Indeed, the United States of America is the main economic power in

3 Evaluación De Las Relaciones Comerciales Guatemala-Estados Unidos De America: Dos Años De Vigencia Del Tratado De Libre Comercio. Ministry of Economy, Guatemala, 2008 (translated into English by the author)

4 World Bank Los efectos económicos del CAFTA-RD: Más arte que ciencia, capítulo IV. Mayo 2005 The Economical Effects of the DR-CAFTA: More art than Science, chapter IV, May 2005 ( Translation into English by the author)

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the world, which even in this juncture of economic recession is the largest market worldwide, and in the case of Guatemala, continues to be the main trading partner. In this context, Guatemala in conjunction with the other countries of the isthmus5 and the Dominican Republic signed a Free Trade Agreement with the United States of America, popularly known as DR-CAFTA in order to consolidate the trade preferences granted in previous agreements. The implications of this Treaty in the commercial area are also studied and analyzed in this paper.

Chapter 2

Free Trade Agreement Background

5 El Salvador, Honduras, Nicaragua and Costa Rica

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Before the term of DR-CAFTA in July 2006, Guatemala enjoyed preferential access to the market of the United States of America through the Caribbean Basin Trade and Partnership Act (CBTPA) whose validity was from October 2000 to June 2006. The CBTPA was a program of preferential tariffs benefits granted unilaterally by the United States of America to the countries of Central America and the Caribbean basin. Through this via the United States of America granted preferential access to more than one third of Guatemalan exports.

The history of the CBTPA was the Caribbean Basin Initiative (CBI), whose validity was from 1984 to the year 2000 and it granted tariff-free access to a wide range of export goods that met the conditions for preferential access. It is worth mentioning that the CBTPA awarded best entry to products agreed at the CBI, quotas and tariff benefits only if they were produced with American raw materials.

 Finally, it is important to emphasize that the preferential access granted to Guatemala under the aegis of the CBI and then the CBTPA, favored the change in the structure of exports, because if at the beginning of the 1980s the Guatemalan exports to the United States of America consisted primarily of coffee, bananas, sugar, cotton and meat, and by the end of the 1990s non traditional products represented more than half of exports.

2.1 Brief overview of the negotiations and the signing of the Treaty.

On January 16th 2002, the President of the United States of America George W. Bush announced the intention of its Government to negotiate a free trade agreement with Central America and the Dominican Republic. On August 2 of the same year, the Congress gave authorization to the Fast Track6 to initiate negotiations with Central America and Dominican Republic. January 8, 2003, was officially announced the start of negotiations for the free trade agreement7.

6 It is the authority granted by the Congress to the presidential administration to negotiate trade agreements that may not be amended by Congress and can only be approved as have been negotiated. The trade promotion authority expired at the end of June 2007.

7 United States took as a model for this Treaty agreements that had been previously signed with Chile, Peru and Mexico: the contents of DR-CAFTA is therefore quite similar to these agreements, excluding only chapters

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The rounds of negotiations were conducted with little more than a month of separation between each one, a timetable quite tighter if compared to other agreements (i.e. Association Agreement between the EU and Central America); it is worth noting that in the middle of each round of negotiation the Central American countries met to agree on common positions.

 Once completed the negotiations, another process of decisions took place in each country, in which everyone should pass through its legislative power the entry into force of the agreement.

Prior to the delivery of the deposit of ratification before the Organization of American States (OAS), Guatemala had to adapt its legislation as agreed in the Treaty, which justifies the period of more than one year from the publication in the Official Journal of Guatemala to the deposit of ratification to the OAS. It is during this period where the dispute stands in the case of Guatemala, and when some sectors started to demand a renegotiation of the Treaty, when almost it had been developed with a year of anticipation8.

The DR-CAFTA ratification process in the United States of America was not free from difficulty, since the Democrat Senators showed a firm opposition to any attempt to negotiate trade agreements with other regions. On February 20th 2004, the President of the United States of America, George W. Bush, notified to the Congress of his country the intention to subscribe a free trade agreement with Costa Rica, El Salvador, Honduras, Guatemala and Nicaragua - Dominican Republic was incorporated on August 5, 20049

Chapter 3

Negotiation Objectives of the DR-CAFTA

of temporary entry of business people and the chapter policies monopoly, competition and State enterprises.

8 This reflects little information from all sectors, as well as limited government capacity to reconcile the various interests.

9 Extract: Cabrera, M. and J. A. Fuentes (2004) El CAFTA y el desarrollo humano en Centroamérica. Guatemala, Programa de Naciones Unidas para el Desarrollo PNUD (translated into english by the author)

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3.1 General Objectives

Employment and investment generation, exports increase, competitiveness improvement, fight against poverty, rural development, consumers benefits.

To maximize the benefits of a Free Trade Agreement between Central America and the United States of America (DR-CAFTA) is important that the negotiations were conducted in a pragmatic and simple way to reach a mutual fulfilment in a reasonable time. The conduct of negotiations would be headed by the Ministers responsible for Foreign Trade of each Central American country and the representative of the Commercial Office of the United States.

Regarding to this point, the Central American countries presented the following ideas regarding the negotiation process with the U.S.:

The ongoing building of a partnership based on common interests and shared values, in this case resulted from the Free Trade which will contribute to the development of a strategy in Central America and the consolidation of democratic systems as well as the principles that promote freedom, human development and social equity.

Seek into the negotiation results that privileged the establishment of more and better opportunities to provide improved standards of living for people, to strengthen the position of Central America as a region for investment and development and enhance productive capacities, employment generation and sustained economic growth.

To promote with DR-CAFTA economic and social development in Central America through the consolidation of economic liberalization achieved so far and to promote the continuance of the process leading to economic growth and improve living standards of people in Central America, helping to ensure the sustainability of democracies in the region.

To maintain the building of open economies and eradicate any existing protectionism, based on modernization and trade facilitation with the conviction that the best option to promote economic and social development is free trade.

Likewise the DR-CAFTA was intended to reach a free trade area between the parties, providing new and expanded trade opportunities for the presented and potential export supply, both in the area of

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goods and the services; the purpose of all this was to make this “free trade zone” a boost factor to the process of negotiating the Free Trade Area of the Americas.

In a time it was proposed to set out, or to create a stable legal framework to promote and develop investment, joint ventures and strategic association in the territories of the Parties, taking the opportunity to improve, expand and extend the market access conditions resulting from U.S. existing trade preferences.

It was evident that dealing about these issues brought out the necessity to regulate the trade in goods and services by establishing clear, transparent and stable regulations, which allowed the required dynamism to the growth of business in order to promote sustainable development of production and trade flows among member countries.

It was necessary to establish mechanisms to avoid the application of unilateral and discretionary measures that affected trade flows in order to achieve, increase and promote competition by improving productivity and competitiveness of goods and services in the region.

The DR-CAFTA seeks to promote economic cooperation and complementarity between member states of the free trade area through the implementation of specific projects on priority issues for each of the countries and also promote ongoing communication with civil society in the negotiation process.

It is worth mentioning that within the framework of negotiations, the strict obedience to the Constitutions of the countries was imperative in order to uphold the rule of law and thus be consistent with the rights and obligations of the World Trade Organization.

Within DR-CAFTA negotiation the principle of reciprocity of rights and obligations ought to be imperative and also the recognizing of the differences in dimensions and levels of development between the parties, which promoted the stipulation of asymmetric treatment for Central American countries to be implemented in accordance with the nature of the different disciplines covered by the Treaty.

During the first negotiations arose the necessity of recognition of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua as a sole negotiating party and the United States of America as the other part, with the objective of negotiating the legislation part jointly, this mechanism was also used to establish the Annexes that will conform

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the Treaty, however, aspects of each country had to be considered separately.

In conclusion, it is important to emphasize that within the negotiation was established that the negotiation process was tolerant and would be governed by the principle that “nothing was agreed until everything was agreed”, thus providing greater certainty for the parties that the DR "CAFTA was negotiated as a package that would have the following effects:

1. A third-generation agreement with a broad and comprehensive scope that would include, in addition to provisions for exchange of goods, provisions regulating trade in services, temporary entry of business people, investment regulations and other relevant issues at that time, such as electronic commerce, business facilitation, among others.2. Provisions concerning the build-up in the area of origin with regard to trading partners with whom all parties have an effective free trade.3. Working from a base text which could be agreed at the beginning, except those provisions that still require further negotiation.

3.2 Structure and Conditions of Trading

1. Central America privileged a simple structure with a limited number of trading desks that deal with related issues, such as:

Market access (at the beginning this group focused on: market access for goods, rules of origin, custom procedures, safe-guards, trade facilitation, technical barriers to trade and sani-tary and phytosanitary rules);

Services and investment (this group was responsible to deal mainly on, cross-border trade services, temporary entry of business people and investment)

Institutional provisions and dispute settlement (this group was responsible for dealing, mainly, about institutional chapters of the treaty and dispute settlement);

Other topics of interest (this group was in charge of dealing with the topics as unfair trade practices, competition policy and government procurement)

Negotiating Group Heads. (Conformed by Deputy Ministers or the respective Chief Negotiator appointed by each country; they were responsible to carry out the negotiations on a global basis).

2. The foreign trade Ministers were the highest decision-making instance by the end of this negotiation. The technical leadership in the negotiations was entrusted to the Deputy Ministers or Heads of delegation, appointed by his country's delegate. Also, the directors of

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each country were responsible for the coordination of the respective negotiating groups.

3. Among Ministers and Deputy Ministers, Central America appointed a spokesman on behalf of the five countries, through a pattern of rotation according to the President pro tempore, with the support of representatives of other countries. And, among the Coordinators of the negotiating desks, a spokesman was appointed by consensus among Central American countries.

4. It was proposed that the meetings were held in alternative venues, two meetings in Central America and one in the United States of America, in the case of Central America the headquarters will be determined according to the alphabetical order of the countries.

5. The Private Sector participation into the negotiations was characterized by adjoining a fourth party, leaving aside private interests for the different economic sectors, which in my opinion, generated distrust between public and private sector, not knowing under which arguments the negotiation would be.

At last, it is essential to mention that although, throughout the content of DR-CAFTA the objectives are not fully developed, the precepts under which they should negotiate a treaty that grants equal conditions to both parties are fully evidenced in a concrete and clear way.

Nevertheless, as Foucault suggests, there are a number of ways in which the exercise of power can be resisted. In this specific sense, the Central American countries could have made resistance to some of the positions adopted by the US Government towards what should be negotiated and what should be inputted into the DR-CAFTA. It is also wise to affirm, that also according to Foucault “at one point that resistance is co-extensive with power, namely as soon as there is a power relation, there is a possibility of resistance”10. So in this sense it is obvious to argue that, Central American States, could negotiate under different terms the DR-CAFTA, but we also have to remember that an economical strong State such as the United States of America, has more tools to coerce this source of treaties under their own scope, rather to live an open context for the less powerful nations to discuss.

Chapter 4

10 http://www.michel-foucault.com/concepts/index.html

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Nexus between the General Objectives of the DR-CAFTA and Neoliberalism

It is important to mention that although the model of the Central American economies is not frequently discussed, is the neoliberal model that prevails.

As Joseph Nathan Cohen argued “Neoliberal policies are widely argued to have helped developing countries prosper, and the historical record can be read as validating these claims… Neoliberal policies differentiate fast- from slow-growth countries in only one period - the early 1990s - and its effects may be attributable to the considerable influx of desperately-needed foreign capital and debt re-lief that accrued to reformers during that period.”11

Professor Cohen argues that freer markets are not intrinsically more prosperous, and might render little benefit apart from attracting foreign capital.

Once seen Dr. Cohen’s position, we can discuss the topic that really concerns us and is nothing more than to clarify which aspects can be unified overall DR-DR-CAFTA objectives with the neoliberal model followed by some of Central American countries, in this particular case Guatemala.

After DR-DR-CAFTA negotiation (mid-2004), during 2005 DR-CAFTA was analyzed and ratified by all the National Congresses, with the exception of Costa Rica. The government of the United States of America was trying to achieve an economic objective, but above all a very apparent geopolitical fact, DR-CAFTA represents, after 12 years into the North American Free Trade Agreement (NAFTA ), the next step toward a possible new economic, military and politics colonization in Latin America. It was certainly at that time, a necessary step, given the serious difficulties being experienced by all the processes of liberalization negotiated multilaterally, and in particular those that have been discussed within the World Trade Organization (WTO) given the stumbling Doha Round ministerial meeting in Cancun, Mexico (September 2003) and Hong Kong (December 2005) and the rejection that has led to the Free Trade Area of the Americas.

11 Neoliberalism’s Economic Success: Market or State-Engineering? November 3, 2010 The Graduate Center, Queen, New York

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It is convenient to analyze three preliminary considerations to clarify the nature of the negotiated agreement:

1. DR-DR-CAFTA has nothing new. Represents rather the destination and the legalization of policies imposed on the region beginning in the 80's through Structural Adjustment Policies, which led to a gradual opening of trade borders and financial. As Joseph Stiglitz concludes, before drawing a new reform agenda for Latin America, addressing poverty reduction and social transformations under way, and before macroeconomic stability the following topics must be considered:

a. The reforms increased the vulnerability of countries at risk, without increasing their financial capacity to address them;

b. The macroeconomic reforms were not balanced;c. The reforms pushed privatization and strengthening to the

private sector, but underestimated the public sector.

2. The DR-DR-CAFTA is attached to the Plan Puebla Panama (PPP) since 2001, which tries to create in the southwest of Mexico and Central America, the physical infrastructure to make the region attractive to international capital investment and facilitate the exploitation of natural resources. The completion of the PPP is subjected to the capacity of debtedness of the countries in the region with international and regional financial institutions, and to attract private investment during the phase of the project.

3. Despite the introduction of PPP as a regional integration project, the main problem is that Central American countries have lacked a true national integration. Indigenous minorities or, in the case of Guatemala's indigenous majority, have been marginalized from economic and political life of countries. Their rights have been trampled. Huge peripheral and marginal areas throughout Central America have remained as such, without having experienced the so-called "development" or "progress." The model states that "marginal citizens" are relocated to the major industrial corridors to be developed around high-speed arteries (motorways), although even today the majority of roads have not been paved. It is a paradox of development.

The ratification of DR-CAFTA is given in a context of widespread opposition, even in the U.S. In the U.S. Congress, the Treaty was approved with 217 votes to 215 against; this represented a minimal support to an initiative defined as "the number one trade priority for Bush on 2005." There was also opposition from trade unionists, social organizations and civil society. In Central America the main actors were unions, rural and indigenous communities. Throughout

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the region, the popular forces were mobilized against the treaty, claiming that its application would undermine the right to life of millions of human beings, causing the death of American agriculture, the total loss of national sovereignty, the weakening of labor rights and the granting of natural resources to foreign companies.

The reasons for their opposition are quite obvious and just by reading some of the reports published on the tenth anniversary of NAFTA in 2004, both versions, those developed by oppositional NGO's to free trade, and the framers of World Bank officials, millions of peasants and indigenous Mexicans expelled from their land by unfair competition from subsidized agricultural products by the government of the United States of America, forced to move to urban centers and look for a job in industrial areas, or to seek their fortunes beyond the borders of Mexico.

Considering the remarkable similarities between the NAFTA and DR-CAFTA (none considers the profound economic asymmetries between the signatories), it is easy to foresee the possible consequences of DR-CAFTA in Central America in the economic and social aspects.

In a time, there was no opposition from the governments or parliaments to the Treaty in the Central American region except for Costa Rica, where the Treaty had not been approved, and where civil society was very well organized and also had sort of a greater access to education. It is also important to mention the incapacity of Central America representatives to negotiate an agreement that serves the interests of citizens.

The problem lies in the political class:

"Negotiating means having a project and making it viable through negotiation.” During the negotiation of DR-CAFTA, one of the parties, the United States of America, have built a project and its viability. The other part, which represents the interests of the Central American oligarchies, does not have a plan B. And as evidenced in the DR-CAFTA signing, either had the will to resist the draft counterpart. In fact his project is part of the project to the other party.

To have a better understanding of the critics about DR-CAFTA, it is important to analyze the implications of the Treaty on these three aspects: its impact on the agricultural sector, the maquiladora industry and the control of natural resources.”12

12 Barahona, Amaru, “En el TLC hemos entregado en bandeja nuestras ventajas mas valiosas” Revista Envío

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The agricultural sector In October 2003 an analytical article published by the World

Bank clarified the opportunities that DR-CAFTA represented for Central American agricultural and agribusiness sector as well as the biggest challenges for a true effectiveness of the treaty.

According to researchers at the World Bank in Washington, the treaty should answer two key questions:

1. How to ensure better market access in the U.S. for agricultural exports and agribusiness from Central America;

2. How to promote a more open market to U.S. imports of foods that are "sensitive" in domestic markets of Central American countries.

The same document states, however, the categories that will take advantage of new opportunities of DR-CAFTA:

"In Central America the only positive reactions to the new trade-related business comes from exports of traditional goods (coffee, bananas, sugar, meat) and non-traditional and producers involved in agriculture of import substitution or non-tradable goods."

In the same article the World Bank suggests that Central American countries should eliminate rates that currently protect "sensitive products" (key agricultural goods for domestic consumption as an example, milk, yellow corn, rice, beans, sugar, meat, pork and chicken). The restrictions are not correct, -quotes WB- referring to the poor competitiveness of these products.

DR-CAFTA predicts for the future of American markets that they are going to be literally flooded with cheap corn produced by U.S. (produced in excess by very high subsidies to agribusiness in the U.S.). This will cause the retirement from the market for small farmers who produce corn for home consumption and then sell the surplus to meet other expenses or emergencies.

The Washington theorists believe, however, that this is not a problem. According to the estimates from a database collected in El Salvador, Guatemala and Nicaragua, "Most of the families in these

Número 270, Managua, Nicaragua, septiembre 2004 “In the FTA we have given up our most valuable benefits” Envio Magazine issue # 270, Managua, Nicaragua, September 2004.

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countries will be benefited in some way from the price change associated with the elimination of trade barriers for agricultural goods classified as "sensitive." More specifically, 90% of all families in Nicaragua, 84% in Guatemala and 68% in El Salvador, respectively, were recognized as net consumers of the basket of sensitive goods and therefore can be assumed to be able to benefit from price changes related to the DR-CAFTA. Only 9% of families in Nicaragua, 16% in Guatemala and 5% in El Salvador have been classified as net producers of the basket of sensitive goods and therefore may experience reductions in their welfare."

The lack of dialogue between the two positions is undoubtedly a deep cultural gap, starting with the definition of "poverty" developed by the World Bank for those who earn less than US$2 a day, which considers subsistence farming and the existence of small Indigenous farmers as a relic of the past, and admits that is not possible to survive out of the market and to fight those who would eliminate that right.

The opening of these markets is a matter of survival for the economic model and the industrial system that goes through a phase of overproduction and finding it increasingly difficult to enter new markets.

The Maquiladora IndustryThe word maquiladora is used to describe any factory, domestic

or foreign ownership, with central government permission to import and export products under a special regime of tariffs and taxes on income. The term evokes often typical images of the first generation of maquiladoras a very large plant throughout the country, owned by transnational companies. However, there is great diversity in the manufacturing sector, from huge subsidiaries of transnational corporations to small businesses that export only a portion of their production under the maquila system to complement the domestic market sales.

Millions of peasants expelled of their land will be forced, as we have seen, to relocate into to the maquiladora industry. The sector is an important outlet for many who otherwise would have to seek their destiny in America.

It is a sector, however, that witness several years of deep crisis (exacerbated at the beginning of 2005 by the expiry of Multi Fiber Agreement, which restricted the export volume of textile products from China). Notwithstanding the claims of its promoters, even the DR-CAFTA will save the textile industry, one of the main turns of the maquiladoras in Central American countries. Todd Tucker, Research

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Director of Global Trade Watch of Public Citizen in the United States of America, discuss some of the economic myths related to DR-CAFTA, and highlights structural conditions that make Chinese cotton totally invincible for firms located in Central America.

With or without DR-CAFTA, says Tucker, "Central America will lose its market share, for the huge cost advantages in China." The low level of Chinese wages, usually about 15-30 cents per hour, costs of production yields are unlikely to be equal, while in Guatemala, the Dominican Republic and Costa Rica are anything but decent wages (U.S. $ 1.49 per hour, $ 1.65 and $ 2.70 respectively).

Even the geographical proximity between Central America and the U.S. can secure important advantages over the Chinese industry. First, some Chinese shipping companies have significantly reduced the journey time to the U.S. west coast and also Central American producers can never become, for reasons of scale and production capacity, to providers "on measure" (they will not be able to present to the great U.S. stores new styles in a short term when the way of life and fashion changes so suddenly).

It is therefore necessary to think about whether it can be considered positive or negative the presence of a greater amount of assembly companies in these countries.

The estimates for Mexico, the birthplace of the maquiladoras, -along the U.S. border- show that the domestic value added per dollar exported by the maquiladora industry does not exceed two cents (2%).

It is seen that this type of industry, already receiving large government grants (do not pay taxes, have unlimited access to water, are not recognized trade union rights-) does not produce wealth for the country. Can all this be considered "development”?

The control of natural resourcesThe Indigenous are forced to leave their land also for corporate strategies of some multinational corporations. The corporate interests, and the search for new and higher profits, are indeed the engine of economic policy promoted by the U.S. government. For the rural sector, strategies promote only grabbing acreage and always higher for large agricultural plantations. DR-CAFTA recognizes the “competitive advantage" of these Central American products in comparison to those from US. In addition there are plentiful natural

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resources currently concentrated in areas traditionally inhabited by indigenous people.

According to the neoliberal logics, no matter what, it will be necessary to divest the control of the indigenous population from the land. Whether through the DR-CAFTA or through the constitutional reforms approved and that will take part of the Agreement or approved in previous years to please the World Bank or International Monetary Fund is seeking to legalize the looting.

To understand this situation, it is enough to read the General Law on Concessions that the Guatemalan Congress held in 2004, concerning the arrangements to promote the development of the State's infrastructure and public services and secure the basic regulations for its implementation and / or provision of legal persons on private, domestic or foreign, by granting concessions.

The law, which applies to the construction and / or maintenance of roads, highways, viaducts, tunnels, railways, ports, airports, aqueducts, pipelines, installation and / or operation and / or service delivery of electricity generation, tourism development, public buildings, clean and environmental protection, postal services, food services for hospitals, prisons and schools, development of identity documents such as passports, certificates, patents, public transport systems (bus, surface trains, subways, etc.), and tourist parks, has received the approval of the Committees for Decentralization and Development of Congress to recognize, through this, right-legal or legal persons who invest heavy sums of capital in the country, "to recover and get the profits that an investor is required to participate in the process of concession of public services or public works."

It is worth asking whether the North could have interest in controlling some of these sectors.

What they failed to understand on the northern Central America, specifically in Mexico, is the strategy of activist organizations in Central America to relegate to second place the PPP. The PPP is embedded, as we have seen, with free trade and, specifically, the DR-CAFTA. The PPP, is clear, is not a free trade agreement, but responds to the same interests of American elites that move in close collaboration with Central America. I is well understood that it has been a priority for social and civic organizations in Central America to beat DR-CAFTA, detach it from the PPP, and not draw their intimate relationship, has produced a predictable effect: the DR-CAFTA has been approved in six from seven legislatures and begin to govern trade relations soon, notwithstanding the delay has had on Costa

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Rican legislature. But the PPP is now a subject virtually unknown in Central America. Its reintroduction will take some extra effort, as seen in the Sixth Mesoamerican Forum in San Jose Costa Rica, held in December 2005 and where 1,500 representatives attended various regional organizations. Despite its importance to Central America and Mexico, the PPP was not a point of analysis (except for a brief roundtable discussion sponsored by Mexican organizations), and proposed strategies to fight against it. Worse than the prevailing ignorance, is the progress that still has the mega infrastructure projects in the region without proper organization and response of the people who most suffer its effects.

In summary, the strategy to "isolate" the DR-CAFTA and concentrate all the weight of the opposition to defeat it was not as successful as expected. Instead, it missed the opportunity to continue to link the two phenomena as individual and local expressions of a larger project and where we need to point all batteries: capitalism in its present neoliberal phase.

Chapter 5

The Context

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As we have discussed in previous chapters, the Central American governments, opted to sign a free trade agreement with the United States of America. When taking effect, it was neither a panacea that boosted the development of the countries of the region, nor the devastating consequences predicted by extremists’ critics. How positive or adverse outcome would have as an element to contribute to development depended mainly on the policies that the Central American governments adopted at national and collective level, to avail the opportunities offered and still offers such legal instrument.

The come into force of DR-CAFTA was a fact of complex and diverse consequences, which inevitably had and still have not provided many leads. Therefore, at the time, the issue raised so many conflicting reactions, ranging from opponents and proponents, through a wide range of intermediate positions. This was so, that in the short term, some businesses and their employees benefited from the Treaty and others could not withstand competition from imported goods and services of the United States of America, notwithstanding the gradual elimination regimes for products more sensitive. At the same time, some stakeholders were willing to adapt to greater discipline demanded by the commitments contained in the instrument, and others were reluctant to do so. Still other opponents were behind the Treaty a new expression of historical vocation by the United States of America to maintain a dominant presence on the national stage. Therefore, those who did not share the latter view, and believed to benefit from DR-CAFTA would defend, and conversely, those who may suffer suspected or doubted the intentions of the other party, would be seen with reluctance or outright opposition.

In addition, it also had a temporary problem, since the potential benefits for society as a whole required some time to establish, while the potential costs could arise almost immediately. In that sense, it would be little comfort to employers who wrecked or individuals who lose their jobs to try to convince them that in the medium to long term, the country as a whole would be benefited.

But that was exactly the challenge that lay ahead Guatemalan community. The challenge was to imagine if the Central American economies and the Dominican Republic would be better positioned, because of the rearrangements that involved creating a free trade area with the United States of America to promote their development. On the other hand, in order to calculate the net effects for the future of gradual and progressive integration of markets in the region and the United States of America, it was also convenient to consider the cost of not doing so. In an increasingly globalized economy, and given the strategy chosen by the United States of America to address the eventual establishment of a zone of hemispheric free trade

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through partial agreements with other countries, or groups of countries in Latin America; Central America and the Dominican Republic simply could not afford to be left out. To do so would yield some ground to other countries in terms of investment flows and trade.

In consequence the Central American governments decided to sign the Treaty; it seemed accurate and consistent with the choice made a few years ago, to try to improve the quality of integration of their economies in international trade and financial flows. Indeed, one could argue that the option of further integration into the global economy through various instruments, including the signing of this and other free trade agreements, was the best that Central America and the Dominican Republic had could do, and it would be wrong not to take advantage of it, despite its inherent risks.

We must acknowledge the complexity of the issue and the legitimacy of the fears aroused. First, as noted in the short term, DR-CAFTA does not only generate benefits but also costs, regardless of whether the net balance shows a positive balance of net generation in terms of production, employment and welfare, or as they are derived to major macroeconomic variables. Second, DR-CAFTA commitments involve rules, laws and policies that would not be necessarily welcomed by all sectors of the Central American population. Third, the region tends to redeem a non-reciprocal preferential treatment agreed with the United States of America, a new regime where preferential treatment is based on reciprocity, however, the asymmetries between the United States of America, on one hand, and Central America and the Dominican Republic on the other. Fourth, many of the commitments would have a huge impact and its consequences would be very difficult to assess.

According to this, we find the incidence of DR-CAFTA on the Central America integration, and since its conceptual standpoint, this instrument not only has the potential of bringing together the countries of the region around a common initiative, but also to divide them around the possible need to reconcile national positions and gathering into a regional position.

5.1 Globalization, Integration and development

The debate over economic integration, free trade and development is part of a much broader debate that has gained considerable strength in the world: the effects of economic globalization on developing countries. This is a very complex issue and many shades. As it is well known, since the 80s, the international economy began to run on new bases, shaped by technological innovations, especially in computing, communications and transportation. This gave great

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flexibility to international companies to decentralize their production and marketing patterns, and taking the advantage of changing the way they dealt with the goods and services between countries. It became feasible to produce and assemble components on more than one country and set up a large distribution center - including a free zone, all based on the comparative advantages offered by each location in terms of efficiency and productivity.

In reaction to this new status of things, all developing countries, with differences of degree and intensity, were forced to change their economic policies in order to participate in a global economy promising opportunities, but also burdened with threats. The past paradigm, combining an export orientation based on static comparative advantages of home country with an incipient industrialization based on import substitution led to a new paradigm, characterized by trade and financial liberalization and a readjustment in the relationship State-market, favoring the latter. In the world of ideas, these trends were favored by certain tiredness which was perceived as the excesses of state interventionism and the welfare state, pointing in several countries to approach closer to traditional liberalism.

In order to have the opportunity to participate in globalization, the countries were faced with the need to respond to certain patterns of conduct, including prudent macroeconomic management, privatization of public enterprises, the strengthening of institutions considered important for a good "business climate" and strengthening the rule of law, and deregulation to promote the free competition. This new paradigm - described by many analysts as the "neoliberal model" - was embraced by some countries to enthusiastically and intentionally, in the belief that when inserted into the global economy and allow market stimuli extended exercise their magic, the export sector became the engine of economic growth. In contrast, other countries showed more apprehension to the risks of exposing their poor economies and weak institutions to intensely competitive global economy, but given the imperative of adopting the new paradigm in a defensive way, as not doing so would have meant even greater risk to "stay out" the most dynamic currents of international trade and major external capital flows.

Empirical results from the application of "openness" in its different alternatives have been less than satisfactory up to date. With the exception of Chile in Latin America and some Asian countries - having China and India in the lead, although both of these models, especially Chinese, have very peculiar features - in general economic performance of countries development during the last ten years has been less satisfactory than the ones observed during the fifties, sixties and seventies. However, it is difficult to establish

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precisely causal relationships between the effects of globalization, the policy response in each country, and economic performance, since it is a function of many variables, both internal and external.

Indeed, there are no absolute truths when it comes to assessing the impact of globalization on a country like Guatemala. Some industries and some companies respond to the opportunities of globalization, others operating under enhanced protection regimes, aren’t they able to survive? Even businesses that are internationally competitive and eager to progress can increase productivity per employee to the extent that, the generation of employment would be modest, zero or even negative. In addition, tend to measure the effects of short-term policies without taking into consideration the potential impact on future productivity and benefit to the consumer.

It is not surprising that relying on market signals as a great resource allocation mechanism, the benefits of growth tend to focus, at least in the absence of policies to mitigate this effect. Obviously, those with greater calling to work into the market -firms with economies of scale, with good business organization and access to technology and finance - to thrive more than those who do not have the necessary requirements. Therefore, it is said often and with some reason, that globalization tends, at least in the early stages of adapting to the global economy; to benefit the most developed countries and questioning the benefits to the poorest countries. Following this logic, it also argues that, in the inside of each country, are the strata of the population with greater ability to defend those who benefit, often at the expense of the strata of the population behind.

There is abundant evidence supporting this hypothesis of increasing concentration of the benefits of globalization in favor of more economically advanced countries and from within each country, between different strata of the population (ECLAC, 2002). This is the basis of the vigorous debate that is ongoing about the advantages or disadvantages of the phenomenon, including up controversy emotional elements. Thus, opposition to globalization has led to street protests if the authorities of multilateral emblematic of the new paradigm - the International Monetary Fund, World Bank and WTO - held its regular conferences, and has even given rise to a Forum which takes place every year to bring together opponents and critics of globalization.13

13 World Social Forum held in Porto Alegre, Brazil, as an antagonistic event of the simultaneous World Economic Forum in Davos, Switzerland.

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The complexity of the issue also has another expression: the difficulty of measuring, objectively, the net costs and benefits of globalization from the perspective of a developing country like Guatemala. This is because, in addition to methodological problems involved both the costs and benefits are direct and indirect effects, and both have multiplier effects that can be positive or negative. Moreover, the relation of costs and benefits of globalization is not the past model, but what would happen in the absence of incentives to try to exploit potential of globalization. For example, Guatemala achieved an average economic growth rate of 5.5% annually in real terms in the sixties and seventies, the rate fell to 4.1% in the nineties, and 2.2% from 2000 to 2004. But you can not say that if Guatemala had persisted in the policy implementation bygone growth rates over the past decade had recovered the dynamism of the sixties and seventies, but rather, it is likely that within the constraints of globalization economic performance would have been even more disappointing.

But the strongest reason to not fall into the trap of an analysis of costs and benefits of globalization is that it places the emphasis where it should be. The right question that Central would have to ask is: What policies should continue to benefit from globalization and reduce the risks? This is due to the fact that globalization seems to be an irreversible fact, at least from the perspective of small countries that are not in a position to influence mostly on the main parameters of the global economy. This does not mean resigning ourselves to expect the effects of an external phenomenon, but to adopt an active attitude to assimilate in the most constructive way possible. So America and the Dominican Republic are undergoing a more competitive regime, marked by market signals, but this does not mean that there is room - even an important place - for public policy, aiming to support employers and employees in the region to seize the opportunities of globalization and mitigate its risks.

This observation - which insist on repeatedly throughout this chapter - provides an opportunity not only to support the productive sectors to improve their productivity through investment in infrastructure, education, research, funding, and a favorable investment environment but to reduce or even reverse the trend towards concentration of income brought about by globalization before alluded. Indeed, one of the opportunities that Central American countries, but especially Guatemala, is that DR-CAFTA would raise its exports consists of ornamental plants, vegetables and fruits, building on successful experiences already registered. Thus, many small and medium farmers in the Guatemalan highlands have the possibility of joining an incipient tendency to participate in supplying the U.S. market (Mellor, 2003). This will be benefiting the Guatemalan population strata that today as well as years ago, are

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lagging behind. The central point to be emphasized is that there is a wide range of topics to be addressed to facilitate the transition towards an international competitiveness. This gives special meaning to the Central American integration, which can help supporting this transition, for example, through the spread of "best practices" in any country in the region to other countries.

In summary, the author argues that Central America was not an option on whether or not it wished to participate in the process of globalization. However, if would be accessible to the countries of the region more proactive policies to connect with the potential that globalization offers and to take certain measures to protect themselves from risks. The truth is that the realities of global economic performance would not admit old schemes, as the return of high protective tariffs, exchange control regimes, and macroeconomic management that undermines financial stability. Like it or not, the quest to conquer markets and access to financing (and technologies that accompany such funding) does not leave much room for maneuver. That is the context in which to place the test hoist, the Central American integration, the signing of DR-CAFTA and the link between both processes.

5.2 Inclusion into the global economy and central American integration

One could argue that the agenda for free trade agreements for new generation (those concluded after 198814) is the same agenda of globalization, at least in regard to the trade regime. In that sense, the debate on DR-CAFTA is a microcosm of the debate about globalization, and most of the Treaty rules derived from the rules of the World Trade Organization (WTO). It was not always so, the Central American integration process, whose formative years occurred in the late fifties and especially after the signing of the General Treaty on Central American Economic Integration in December 1960, was designed among other things, as a functional process of industrialization.

Reasoning, right at that time, was that markets were at a too small scale to promote efficient industrialization; as opposed to import substitution based regional market, economies of scale that would allow reasonably. They also adopted the figure of regulated monopolies, under the Convention on the Regime for Central American Integration Industries. Some designated industries were free trade granted for a certain period. At the end, this instrument

14 Free Trade Agreement between Canada and the United States of America in 1988, which opened doors for the NAFTA in 1994)

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was used only in rare cases due to stiff opposition from the Government of the United States of America to the excessive state intervention that this mechanism assumed. But the remarkable thing here is that Central American integration reflected the paradigm in vogue in the fifties: the creation of tariff barriers to protect rising industries, with a healthy dose of state intervention in support of industrialists. This support took the form of protection, tax incentives, financing and development of physical infrastructure to support the production and trade in Central America.

From the second half of the eighties, and more pronounced throughout the nineties with the signing of the Protocol to the General Treaty (Protocol of Guatemala) in December 1993, economic policy at the internal level each Central American country and regional level, reveals a gradual but steady transition to the new paradigm of globalization. In particular, it enters a period of tariff reduction and economic policies that favor the export outside the region even more than the intra-trade. This effort to combine regional integration with the "openness" should be seen as an ongoing process not yet concluded.

The General Agreement is a reflection of the "old school integration" open regionalism while postulating a functional integration to globalization, that is, an effort to reconcile the interdependence basically driven by market signals resulting trade liberalization in general (the effect of globalization) with those born under special preferential status. What is pursued with the "modern integration is the integration and complimentarily of explicit policies to be consistent with policies to improve international competitiveness.

Central American integration today contains elements of both models - the "old", compatible with import substitution and to a much greater proportion of the "modern", compatible with globalization-. It is characterized by an incomplete process of trade liberalization, external tariff items with few but important outstanding uniformity, and pressure groups resistant to wear this transformation to its logical model. Moreover, they warn into different positions in the region about the speed with which is desirable to move towards the establishment of a customs union.

Then perhaps, it should be said that while progress has been moving forward in direction to achieve the Central American integration to adapt to the requirements of globalization, that adaptation process is not complete. One of the main questions that raised the entry into force of DR-CAFTA was whether its provisions would become sources of tension to advance this process of alignment, causing disruption to the interior of Central American

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integration, or whether, on the contrary, would serve as incentive for the alignment process to be completed.

5.3 The DR-CAFTA in the globalization context

Under the past paradigm, under which the Central American Common Market was established, would have been an unthinkable part of a free trade area with any industrialized country, much less with the United States of America, the larger economy on the planet . The economic thought of the time claimed that there were significant asymmetries between developing and industrialized economies, and that the only way to overcome these asymmetries was partially through the protective tariff and non tariff, supplemented by non-reciprocal preferential treatment by industrialized countries for developing countries. It was argued with some logic, that the emerging Central and weak industries would be literally destroyed if they had to compete without protection, with similar U.S. firms, operating with much greater economies of scale, not to mention their ability to organize and access to knowledge, technology and financing. It was also argued that industrialization was necessary to remedy an international division of labor in comparative advantages supported by the Central American countries relegated to the role of producing commodities for which demand in world markets was volatile and low dynamism, insufficient to support a level of decent life for all people.

The prevailing attitude was that in the international trade relations, when a small and weak country was facing a big and powerful country, the first had everything to lose. This contradicted the thinking of economists of the classical school, in the late eighteenth and early nineteenth centuries, including Adam Smith and David Ricardo, who argued that international trade benefits relatively more to small and weak economies, which had no the option to support their supply of goods and services in a large domestic demand, as occurred with the fastest-economic dimension. Today, in the context of globalization, argues that it makes sense that a rich country with a great capital would sign a trade agreement with a relatively poor country that has abundant labor as the complementary aspects of their economies are at sight, and contribute to the generation of new flows of investment and trade for the benefit of both parties, and their societies as a whole.

Whatever the case, the fact is that the demands of globalization led to developing countries, including Central America, a trade liberalization policy. The average nominal tariff in Central America went from 27% in 1986 to 7.2% in 2000 and today at 6.5%. A drastic way to consider the advisability of forming a free trade area with an industrialized country is to ask whether, having spent a mean

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protection level of 27.0% to 6.5% in a period of less than twenty years, would not be worth to go the extra mile, from 6.5% to virtually 0%, in exchange for a stable relationship to market access in that country - one of the larger markets of the world - as well as the possibility of attracting new investment. This question brings up many nuances, but underlines the fact that the tariff implicit in DR-CAFTA is not new, and that the extent of trade liberalization and treated since 1986 has been much higher than the rebate owed to the Treaty.

Since then, the average tariff of 6.5% still contains some scatter, with some zero or low tariffs and other still relatively high. But it is also true that the Treaty itself provides for long relief regimes, including some that include grace periods. It’s important to emphasize that the decision to conform a free trade area with highly developed countries is substantially less daring in the context of globalization than it would have been the case just a decade ago.

Moreover, from the American perspective, the stakes behind DR-CAFTA has three additional elements. In the first place, it means the consolidation of all the policies being applied in the region - with differences in content and scope from one country to another - designed to cope globalization in a successful way. The discipline of the DR-CAFTA to the conduct of economic policy and institutional arrangements undoubtedly mark an intensification of the trend in recent times regarding the implementation of policies consistent with globalization. Secondly, it means the opportunity to attract new investment, and to encourage not only the Central American-Dominican market, but the U.S. market itself. In that sense, it would reinforce the trend of globalization, which led many United States companies, for example, clothing, electronics and medical devices to install or outsource apparel clothing or assembly in Central America. The assumption would be that the stability conditions that provide a free trade area would enhance the interest of American businessmen to install some activities in the region to supply the U.S. market (and by extension, the global market), based on comparative advantages Central American countries, which include, for now, relatively cheap labor.

Third, the signing of DR-CAFTA does not limit the subscription of another treaty, as occurred with the Association Agreement between Central America and the European Union; this suggests that Central America should not put all its bets on one developed country. Indeed, the FTA with the United States of America and the Dominican Republic would cover a phenomenon that economists call "trade diversion" to prevent American importers entering the cheapest product on the market under artificial advantage to establish a regime of free trade for American goods, as opposed, for example, substitute products originating in Japan or Europe.

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It is worth mentioning that the concept of net profits through trade creation, partially offset by the costs of trade diversion, was raised around 1950 by Professor Jacob Viner, and generated a strong controversy academia. Today, in the context of globalization, the concept of trade diversion is less debated, and even some scholars consider it irrelevant. However, for arguments are handled in this paper, the distinction is still useful.

Chapter 6

The DR-CAFTA Political and Economical analysis

Developing countries have limited options to join the global economy. Not only are at a distinct disadvantage compared to developed countries, but are excluded from the overall markets and the global economy.

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The only path that remains to follow is that, if and only if, they are integrated into economic blocs.

In Central America, Guatemala is the largest market and the biggest economy of the region, with an estimated population of fourteen million inhabitants and a GDP of about thirty six thousand seven hundred eighty seven million seven hundred and fifty two thousand hundred and forty two American Dollars (36.787.752.142$)15.

This nation alone is not interesting or appealing to any other developed country, or any other global economic bloc.

The differences and disadvantages of all Central American countries such as Belize, Panama and the Dominican Republic, are obvious.

Even as an economic bloc they are unattractive to other regions.

The negotiations conducted with the United States of America known as the Free Trade Agreement (DR-CAFTA) has special features, starting with the market leading position of one of the parties and the way the negotiations were held.

The negotiation was never held as an economic bloc from Central America and Dominican Republic. Each of the smaller countries tried to negotiate and make trade preferences for certain products and services that are unique. Within the overall negotiating FTA bilateral negotiations were given by each of these countries and the United States of America, which were often made in a reserved manner, treating each one and all to gain advantages over their Central American peers.

The result is pretty obvious. The treaty as an instrument of economic development has not bore the fruits that the negotiators considered and proposed.

Within the negotiation and cited the example reference only to the predominant position of the United States of America, there are obligations for each of the small countries that even forced them to make legal reforms to its domestic law, as preconditions for the treaty to enter into force.

Undoubtedly we can say that the negotiations were never held on an equal footing and that the final result of the treaty is achieved

15 http://datos.bancomundial.org/pais/guatemala

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only by the acceptance of the small countries that joins the requirements and conditions of the economically dominant country.

It is obvious that under these conditions and circumstances in each country's internal approval, since the treaty and amendments needed a resolution from its Parliaments, it claimed in many cases an ideological tinge and, in every country is born then a front of opposition.

The approval process in the case of Guatemala was not easy. The objections made by social groups who saw the treaty entirely unfavorable for the country conditions and adverse consequences for the economy and especially for the agricultural area; and for some conditions such as actual loss of jobs as opposed to the possible creation of new employment sources; it generated a slow process full of contradictions that at the end resulted in an urgent approval of the Treaty in the Congress and consequently the arose of manifestations of rejection from employment sectors.

As I mentioned earlier in this chapter, small countries have no choice. Although conditions of treaties and economic blocs’ integrations are not entirely favorable, it is the only way to travel. Either that or face a slow but assured economic death and therefore condemn to more underdevelopment, poverty, extreme poverty and hopeless conditions to the settlers.

We all understand that a free trade agreement will always seek benefits for each country, but I think it requires a system and method of trading in equity and compensation rules that the result of these agreements actually enable countries with small economies to join the world market with positive and tangible results that help raise the standard of living of those underdeveloped and poor regions of the world.

In the past five years, the globalization of markets for goods, services and capital has increased, creating more interdependence between countries and regions. This requires, in particular, from small countries like Guatemala to raise their competitiveness and to achieve a better integration into the global market, and thus achieve a sustainable process of economic growth and development. It is necessary to have strategies to harness the benefits of globalization in general and free trade in particular. In this vein, in the present research paper are described and analyzed the government's plans of two political parties such as the Gran Alianza Nacional (GANA) and Unidad Nacional de la Esperanza (UNE), with the express purpose to compare these plans, governmental actions undertaken in this area, and the proviso that only the first year of government administration of UNE has been analyzed.

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Indeed, the United States of America is the world's leading economic power, which is still the economic slowdown is the biggest world market, and in the case of Guatemala, is still the main trading partner. In this context, Guatemala in conjunction with other Central American countries and the Dominican Republic signed a Free Trade Agreement with the United States of America, popularly known as DR-CAFTA, with the aim of strengthening trade preferences granted in previous agreements. The implications of this treaty in the commercial area were also studied and analyzed in this paper.

To evaluate the progress and a forecast on the impact to this date of the free trade agreement (DR-CAFTA) in Guatemala, it is also necessary to note the economic conditions prevailing in the region, which can be summarized as presented below.

6.1 External Environment

The international scene during the first half of 2010 was slightly more optimistic than expected in late December 2009 and was characterized by an improvement in economic growth projections of the major economies, except those of the Euro Zone, associated with uncertainty generated by the fiscal problems of some of their economies and a strong economic recovery in Latin America. This while taking into consideration that there is uncertainty in some countries that are being forced to withdraw early tax and monetary incentives implemented in the most difficult times of financial crisis, which is a risk to sustainable recovery process in a global economy.

The United States of America continue showing signs of recovery, perception indicators have stabilized, while industrial production and consumer confidence and business continue to improve and there is evidence of some improvements in financial and credit conditions; however, the weakness of labor markets, banking systems and fiscal conditions, moreover, the housing market remains depressed, continues subtracting dynamism to the process of recovery.

The Euro Zone, in the third quarter of 2009, showed positive growth after five quarters of contraction. However, fiscal sustainability problems were observed in Portugal, Ireland, Italy, Spain and Greece which have been reflected in a loss of confidence by investors in a depreciation of the euro and in some cases in a review of grades sovereign risk, it has forced the adoption of agreements within the European Union countries aimed at implementing austerity programs and reduction of public deficits in order to restore confidence and avoid a reversal in the process of economic recovery. Due to the above, the International Monetary Fund (IMF) announced downward

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risks in forecasts. In the short term, the main risk is an escalation of tensions and financial contagion, due to growing concern about sovereign risk. This could contribute to additional increases in funding costs and a weakening of the balance sheets of banks and, therefore, higher credit constraints, a deterioration of business and consumers confidence, and strong variations in exchange rates.

Given the trade and financial linkages, this could effect a considerable reduction in global demand. Regarding economic activity, with the latest International Monetary Fund estimates (IMF) 1, Latin America is expected to show a growth rate of 4.8% in 2010 (-1.8% in 2009) and the States economy to grow 3.3% in 2010 (-2.4% in 2009).

The International trade, after the sharp fall recorded in 2009, begins to show a more favorable trend, registering to April 2010, according to the Netherlands Bureau of Economic Analysis, an increase in volume of 17.2%, which means a substantial improvement, after showing negative changes in 2009.

The international prices of oil and its derivatives have shown a slight increase in the first half of 2010. For the average price of oil, an increase of 8.2% was shown over the same period last year, associated, among other things, to the gradual recovery in global economic activity. Furthermore, international prices of corn and wheat have less volatility and a downward trend.

Financial markets had shown better conditions in the first quarter of the year, assisted by the spread of corporate earnings that beat expectations and confirming the improved performance of global economic growth. However, from May, this evolution has been marked by tensions arising from the fiscal situation of some European economies, which has caused an increase in the perception of risk in both sovereign and corporate instruments.

Regarding to foreign exchange markets in the period under review, one of the most important is the appreciation of U.S. Dollar against the Euro, mainly due to the uncertainty surrounding the economic situation in Portugal, Ireland, Italy, Spain and Greece, while in the major economies of Latin America the U.S. currency has a tendency to depreciate. Regarding inflation, during the year it displays a widespread but very moderate rebound and associated, in part to higher international prices of oil and its derivatives and the reactivation of economic activity. Inflation expectations in Latin American economies begin to show an increase for 2010 and maintained an upward trend. In this sense, central banks have continued the gradual removal of non-conventional measures of monetary policies; however, decisions on changes in interest rate

37

monetary policy have been mixed, showing some pause in the process of adjustment due to uncertainty in international markets. In Latin America, Brazil was the first to start the cycle of raising interest rates a cumulative 150 basis points increase in a context where the trend of inflation and inflation expectations keep rising. Then the central banks of Peru and Chile increased its interest rates (50 basis points each). Market expectations about future increases in policy rates, particularly in the major developed economies are postponed and in some cases even until next year, given the possibility that problems in Europe will intensify or spread, affecting the global economic recovery. In accordance with the foregoing, the Committee on Open Market Operations of the Federal Reserve of the United States of America, in their most recent decision not to change the interest rate target federal funds, argued that economic conditions including low rates of resource utilization, the trend of inflation contained and stable inflation expectations to justify their exceptionally low levels of the federal funds rate for an extended period.

6.2 Internal Environment

After the worst economic crisis in recent history, we began to notice a change in expectations of economic agents in the country on the national economic outlook for 2010, reflected primarily that tax revenues have been showing a positive trend since the last quarter of 2009, that indicators such as the generation and electricity demand have continued to show positive behavior during the past six months, the declining trend shown by the exports and imports of goods are reversed from the last quarter of 2009 and the remittances behavior begins to show a slight recovery. In addition, net flows of private capital have been more dynamic and the private sector credit is reversing the downward performance that had been observed since the last quarter of 2008. Furthermore, the interpretation of employers regarding the behavior expected about the production volumes from the manufacturing industry are more favorable for the first half of 2010, according to the results of the Survey of Business Opinion, in addition to the banking system not only showed resistance to the crisis in 2009, but the expectations of both rating agencies and economic agents is to maintain adequate levels of liquidity, solvency and solidity, which would contribute to sustaining the recovery, if the conditions are not externally reversed.

Meanwhile, the Monthly Index of Economic Activity also continued showing signs of recovery, registering to May 2010 a variation of 2.85%, higher than that observed in the same month in 2009 (2.20%).

With regard to foreign trade, the declining trends shown by the exports and imports of goods during the period January to

38

September 2009 were reversed from the last quarter of this year. In May 2010, exports and imports, according to preliminary figures showed growth rates of 17.7% and 21.6% respectively, reflecting the economic recovery not only of the country but also of the main trading partners.

In the described context, it is important to mention that the new information available from short-term indicators of trade associations, chambers and associations of business opinion survey, as well as possible global economic outlook allowed the registration of the growth rate and GDP in real terms, which is estimated to be located between 1.7% and 2.5%, higher than the estimated growth rate for 2009 of 0.6%. Within this dimension, in late May of this year were two natural phenomena which impacted negatively on the country's economic activity, as it was Tropical Storm Agatha (between 29 and 30 May) and the eruption of Pacaya Volcano ( May 27.) In this regard, at the request of the Guatemalan Government, a multidisciplinary mission led by the Economic Commission for Latin America and the Caribbean (ECLAC), conducted an assessment of damages and losses caused by these phenomena, using the methodology contained in the Manual for Estimating the Socioeconomic Effects of Natural Disasters developed by the institution. According to the report, the losses would impact a reduction in 2010 GDP of 0.5 percentage points. It is inferred that the negative impacts of the eruption of Pacaya Volcano and Tropical Storm Agatha could be offset by the higher dynamism represented, but his is something that will be determined upon completion of the survey to approximately 1,200 manufacturing companies.

Public finances continued to experience significant challenges in the first half of the year. While tax revenues registered a growth of 9.0%, reflecting in general a more dynamic economic activity and particularly the recovery of imports, until May prevailing uncertainty regarding the financing of fiscal deficits, forcing the central government to make adjustments to budget allocations, in this context, public expenditure grew in a dynamic manner in the first two months of the year (20.1%), slowed from March (14.2%) and April (4.4%) and began to accelerate again in May, after approval of the issuance of treasury bonds for Q4,500.0 million, growth rates were registered for 12.6% in May and 14.9% in June. The fiscal deficit observed at that time reached Q3,135.4 million, equivalent to 1.0% of Gross Domestic Product (GDP) higher than in the same period last year, which was Q1,903.1 million and 0.6% in terms of GDP. Operating expenses were charged with much more dynamism, increasing by 19.4% during the first half, while investment expenditure recorded a moderate increase of only 2.3%. The need for emergency response and to finance a reconstruction program after the damage caused by the two recent natural disasters, in the

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context of a tax burden already weak and increasing fiscal spending, poses new challenges for public finances in the remainder of the year and for subsequent years, and requires a monetary policy to remain vigilant to take appropriate action in a timely manner that will maintain anchored inflation expectations of economic agents.

The inflation rate was in the first three months of an upward trend (1.43% in January, 2.48% in February and 3.93% in March) explained by the increase in international prices of raw materials (mainly oil and derivatives) and the drought that hit the country in 2009, which affected the prices of some vegetables and legumes, the adjustments in the rate of electrical energy and further adjustments in the price of sugar also explain this development. In April and May, the pace slowed from 3.75% to 3.51%, respectively, these slight variations are associated with negative inter reducing oversupply, prices for some vegetables and legumes, and tomato and onion. In June, as expected from the effects of Tropical Storm Agatha, price increases were generated mainly by the division of food, beverages and meals at public places, which showed a variation of 1.12%, which had an impact on the year-one-year variation in the CPI that reached a 4.07%.

The core inflation had a moderate growth and lower than overall inflation, which, joined with the behavior of bank credit to private sector as the output gap still remains negative, evidencing that inflationary pressures on the side of aggregate demand have internal state, in general, contained in the first half of 2010. Although the effect of the Tropical Storm Agatha caused an increase in inflation in June, it was smaller than the expected amount, so that forecasts and inflation expectations by this year's end will be located within the range goal.

In regard to the money market, it is noted that although there are still excess liquidity in the economy, as evidenced by the available liquid assets of the banking system and the behavior of the broad monetary base, the still low dynamism of domestic aggregate demand would not anticipate additional inflationary pressures.

Regarding the exchange market, the nominal exchange rate was a trend toward appreciation, particularly in February, which would have obeyed two main factors: first, an increase in private capital flows, a situation which is denoted in fact that some people, individuals or corporations, would have been liable to pay off debts in dollars, particularly in the case of large corporations that have direct access to foreign credit. Secondly, the expectations of appreciation of the economic agents, resulting from a change in the trend of nominal exchange rate and a better perception about the performance of a global and national economy. Since March, the

40

behavior of the exchange rate has been stable and consistent with its seasonality. In this context, the intercessions of the National Bank in the exchange market have been limited and, in general, have been made only to activate the regulation, having only used the discretionary faculty only once.

In short, during the first half of 2010 the implementation of monetary policy was held in an external environment slightly more optimistic, projections for economic growth and moderate inflation with global expectations, with signs of economic recovery, a slight growth of bank credit to private sector, a slight appreciation of the nominal exchange rate, and an increase in actual inflation and inflation expectations. When performing a prospective analysis of inflation it can be seen the continuing latent risks, both external and internal environment, which suggest caution and gradualism in monetary policy actions. In particular, if it is considered that the forecasts and inflation expectations for 2010 and 2011 confirms that the space for a relaxed monetary policy stance would be gone. Moreover, the uncertainty of public finances and the need to shore up the country's economic recovery require a firm stance of fiscal and monetary policies, consistent with the Stand-By Arrangement with the IMF so as to continue meeting the monetary, fiscal and structural goals. In this context of caution, the Monetary Board in the first half of 2010, decided to maintain unmovable the level of the leading interest rate.

Chapter 7

Government Commercial Policy Plans and the Relationship between Guatemala and the United States of America

The analysis of the DR-CAFTA is ambitious for two reasons: first, it only had passed a short time since it was signed, and that makes difficult to display clear commercial trends: second, free trade agreements depends on the decisions taken by the State to maximize their profits, predominantly based on policies aimed at long term, and not all focused on a purely commercial sense: such is the case that it can take several years without observing significant changes. It should also be borne in mind that the DR-CAFTA is a

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multilateral treaty that can contribute to greater regional integration. In this prospect is not surprising that companies that, instead of presenting significant growth in its exports to the United States of America, they increased them to any other country in Central America or Dominican Republic.

DR-CAFTA has consolidated the access for companies that already had business relationship with the United States of America. In this vein, it was understandable that the export sector made emphasis on an early ratification of the Treaty, given that firms first seek nearby markets to export their products, in this case Central America, to subsequently expand to more distant places such as the United States of America and Europe.

7.1 Beneficiary sectors

As I mentioned in previous chapters, it is not an easy task to confirm that the DR-CAFTA opened the doors for diversification of export production of Guatemala. However, it is feasible to identify the sectors that in 2008 were shown as promising, by observing their growth rates.

Period: from July 2006 to June 2008Product Annual average growth rate

Non-monetary gold 967.3%

Non-ferrous metals 441.0%

Crude rubber 159.9%

Industrial machinery 82.5%

Organic chemicals 48.6%

Drinks 43.1%

Oil 31.8%

Waste metals 25.9%

Wood and Cork 23.1

Prefabricated structures 16.9%Source: United States International Trade Commission.

The first impression noted above, is that most of the products that represented important growth after the entry into force of DR-CAFTA are goods that were dynamically growing many years ago. These include gold, crude rubber, scrap metals, drinks, and organic chemicals. By this it can be said that the Treaty has not altered the

42

existing commercial trend. Also, since these goods have a high variability, depart from low export volume and international relatively small markets, is difficult for them to become products of great relevance within the structure of exports, except the case of the "gold16”.

The only traditional product in the list of products with higher growth rates is oil, whose dynamism is associated with price increases rather than increases in the exported volume.

Thus, it is also wise to observe the behavior of imports from the United States of America with a higher growing, which are detailed in the following table.

Period: July 2006-June 2008

Product Annual average growth rate Non-ferrous metals 205.7%Iron and steel 116.6%Transport equipment 42.5%Oil 35.0%Cereals 34.1%Plastics 33.1%Fertilizer 27.2%Metals manufacturing 24.7%Machinery in general 23.7%Scientific team 21.5%

Source: United States International Trade Commission.

Within the rubric of imports, it stands out the loss of dynamism of textile fibers as a result of more flexible rules of origin concerning use material originated in Central America, and under certain circumstances Canada and Mexico, in the production of textile articles.

In contrast, cereals, mostly yellow corn and wheat had a dynamic behavior. The growth recorded by the petroleum and fertilizers, were also important, products with sustained hikes in their prices in the analyzed period.

At this point it is appropriate to express that the benefits expected by the entry into force of DR-CAFTA are associated with exports; an interesting case is the clothing sector, main export sector

16 Because they have a great market, derived from that still represents a means of wealth, hoarding especially in contexts of economic crisis.

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that while receiving benefits, it has failed to take off, moreover it has become a sector in decline; due to its importance, the national economic activity suffers what any events may occur in this industry.

In that vein, the decline in the clothing sector attached to the economic crisis in the United States of America it has had adverse global effects, impacting significantly on employment. This because the maquila industry is characterized by an intensive labor, capable of generating important occupational places necessary in the current recessive context. On the other hand, there are a large number of sectors of economic activity that have not been benefited by the Treaty, such is the case of vehicles, equipment and machinery, chemicals, rubber and tobacco, which either by its own volatility or because they are non-core assets, and rather specific, were not eligible to be included in trade agreements.

In conclusion it could be argued that the beneficiaries of DR-CAFTA in the area of imports are the clothing area, as well as the sector of cereals, which obtained a decrease in the rate of customs duty, or was completely liberated.

7.2 Analysis of important beneficiary sectors of the DR-CAFTA

At the ratification and entering into force of the DR-CAFTA in July 2006, it was expected that not all productive sectors of the country would benefit, since this would have required the implementation of various policies short-term oriented to training for the workforce, the diversification of the exportable supply in areas susceptible to it, credit support and assistance to the small and medium businesses, the regularization of land within a framework of resources and capacity to make productive land tenure. By such reason, sectors that could take advantage of DR-CAFTA since its inception are those which before that date already claimed an economic relationship with the North neighbor; among others, clothing, fruits and vegetables, sugar, coffee and oil on the exports side and yellow corn on the import side.

Clothing The most notable achievements of DR-CAFTA, outstands the

permission to textile maquilas to the use other raw materials which were not of American origin. However, two years after entry into force of the Treaty, it can be observed that this sector declined its share of total exports, which since is not strange that in recent years many maquilas have closed operations in Guatemala, due to competition that they face from the economies of Asia, which can operate with lower costs of inputs, such as electricity and labor.

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The previous situation, accentuated by the end of the ATC17 (in spanish ATV18) in December 2004, has allowed Asian countries, especially China, access to world markets. Therefore we can say that after 2005, Guatemala passes from a business model based on limiting export quotas to a business whose main comparative advantage is the geographical location model, due to the proximity to the United States of America; such matter explains the need to upbraid this sector to focus on the so-called full Package and Package Speed19 systems.

Source: United States International Trade Commission.

Review of the rates of growth allows us to observe the decrease in the sector of Guatemalan clothing departing from the year 2005, with falls increasingly higher. In contrast, China has been increasing steadily their participation in the American market observable by high growth rates that posted its clothing exports.

 Fruits and vegetables, coffee, oil and sugar

17 Agreement on textiles and clothing, established in 1995, replacing the Multifibre Agreement dating from 1974, a transitional instrument whose purpose was to regulate the global trade in textiles and clothing. Under this agreement the advanced countries import quotas were removed in four stages over a period of ten years ended December 31, 2004.

18 Acuerdo Sobre Textiles y el Vestido19 These systems allow delivering products in a third, or

half the time with those coming from Asia, though its price is higher.

United States of America: Growth Rates of Clothing Imports

-20,00%

-10,00%

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

2003 2004 2005 2006 2007

Year

Cha

nge

Rat

e

ChinaGuatemala

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 With the entry into force of DR-CAFTA has been observed as from the year 2002 there has been sustained growth of exports of fruit and vegetables, coffee, sugar and oil. Also it highlights how exports of fruit and vegetables have gained ground in the United States of America, which went from a 17% in 2005 to a 21% in 2008. In this particular case the increase may be attributable to DR-CAFTA since the United States of America freed 89% of tariff headings of agricultural goods in the first year of validity. Also, exports of fruit and vegetables had passed in recent years to those derived from traditional products as evidence of a small diversification of export production.

 Contrary to what it has been thought, the production of fruits and

vegetables is done in both small and large plantations20; This aggregation hides various particularities in the cultivation and marketing of such products. For this reason in principle it cannot be expected that the simple entry into force of the free trade agreement will generate rural development; for such a goal it is required active public policies coordinated with the private sector so that small farmers diversify its exportable supply within spaces generated by DR-CAFTA, to achieve a better international insertion and to use the opportunities arising from globalization.

 In this context, it is worthy of pointing that experiences of productive and commercial success has had always some sort of promotion from the public sector in the country. The production of vegetables for export, usually in the hands of small producers in some municipalities which has happening for the last 20 years, has its origins in an ambitious program of productive reconstruction of the 1980’s, in which the public sector and the export sector organized together with technical cooperation from the United States of America and Northern European countries have actively supported the productive diversification with infrastructure, credit and training techniques.

 As a result of the increase in the price of traditional products, it is observed according to statistics from the United States International Trade Commission a modest increase in exports of coffee in the period 2002-2007, as well as it also indicates how it has managed to position itself for good quality in the American market.

20 Fradejas, A. and S. Gauster (2006). “Prospects for Guatemala peasant family economy in a context of DR-CAFTA.” Guatemala p. 58 (translation into english by author)

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 It is important to mention that coffee enjoyed free access prior to the CBTPA.

Gold  In the range of Guatemalan exports the export of gold - new

product - according to statistics from the United States International Trade Commission this product has come to represent 3% of the total exports in 2008 to United States of America. This is the result of the settlement of the extractive industries of gold, which were attracted to Guatemala, because of its high price in the international market and also because of the legal framework offered by DR-CAFTA.

Yellow corn As mentioned above, imports of cereals was one of the lines that

took a notable increase with the Treaty, among these it is important to study the behavior of yellow corn, main cereal imported together with wheat and key input for poultry and swine industries.

 It should be noted that DR-CAFTA has accelerated the trend that had been used to happen since the 1990s towards a greater import of yellow corn, which has replaced the national production; this fact is corroborated by the Food Administration Organization of the United Nations (FAO), showing that since 1990 the national production of yellow corn has been in a frank decline21.

21 http://faostat.fao.org/site/567

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Chapter 8Critical Analysis of the four principal rules of the DR-CAFTA

The regulatory framework under which are built the foundations of trade between the United States of North America, Central America and the Dominican Republic, rest on four basic rules:

• First, the recognition of the importance of opening markets through the reduction and elimination of major barriers to trade such as: tar-iffs and other nontariff measures, while allowing countries to protect domestic production especially in the most sensitive items such as agricultural goods, against competition from imported goods. Some of the mechanisms used were:

a. Fee application,b. Long tax exemptions periods, which can reach up to

twenty years, to give an opportunity for the most vulnerable sectors to make the necessary adjustments to become more competitive.

Analysis: In general terms, the rule applied in this treaty is effective, because is seeking through the elimination or reduction of tariffs a smooth transit of goods, enabling countries with less economic capacity to achieve new export fields.

The rule also allows to those products with less economic competitiveness to maintain the protection for longer periods in order to give the chance to smaller economies to grow and to be in a position to compete respectively to products at the beginning of the

48

treaty importing them would mean a high risk of losing production or local industry.

• The second important rule is the certainty and stability that occurs in relationships, by explicitly forbidding the adoption of unilateral measures which may affect bilateral trade. This is reflected in standards ranging from the prohibition of increasing tariffs that have been eliminated, except in special cases as in the application of a safeguard measure, the effect of a measure adopted in the framework of dispute settlement, antidumping or countervailing duties, and a commitment to publish and notify all the measures that countries adopt and somehow have or may have an impact on imports of another member country.

Analysis: The provision generally prohibits unilateral action by the parties in the free trade agreement is an appropriate rule to maintain trust and good faith in the agreement. This rule keeps the effects of the treaty and agreements for longer than a business relationship without a party who considers itself injured or disagrees with the effects of the agreement or decides to take action to break the agreement.

It also suggests that this rule helps to keep the dialogue within the treaty and the amicable resolution of disputes without recourse to third parties or courts of arbitration. This rule is itself a declaration of trust between trading partners.

• The third rule is called "national treatment" which requires each country to give equal treatment to goods imported than domestic goods, once they have entered the market after fulfilling the requirements of customs of the border. For example, it is forbidden to tax the imported goods with excise taxes higher than those applied to similar domestic products. The national treatment principle also applies to trade in services.Analysis:

This is basically a rule that protects the activities developed in the text of the agreement as binding upon the parties, once the goods are imported and admitted or the mechanisms for service are delivered, the agreed conditions can not be changed to the detriment deciding whoever utilizes the treaty, plan and execute any type of business or service.

This rule allows to give stability to the activities within the free trade agreement, giving confidence to investors since planning is made for the activity or service and it may not be adversely affected by unilateral or arbitrary rules or contrary to good faith that should report these arrangements, In the case of analysis of States or

49

Parties to the treaty there are not only two but several parties bounded by the pact.

• The fourth rule is an innovation within the preferential trade instruments that Guatemala has signed and is related to how the treaty will be applied. This is a "plurilateral" rule and applies according to the provisions of this Treaty that have applicability in the Central American trade, and is governed under the General Treaty on Central American Economic Integration, a system where both coexist and do not depend from each other. This will lead countries to seek a harmonization of trading arrangements in order to facilitate administration and implementation of treaties and agreements.

This involves the commitment of governments to intensify their efforts to streamline its procedures and build the facilities for traders and business community that requires engaging in knowledge of new rules that govern the markets.

Analysis: The existence of a free trade in Central America, Panama and the Dominican Republic, the systems of integration and the regional integration bodies, requires the existence of this rule within DR-CAFTA, because all countries of the area are obliged to respect in bilateral or multilateral trade in the region the same rules of analysis and implementation of the agreement.

If in the ratio of two or three of the countries were conflicts of any nature, it will affect the functioning of the general treaty and within a short time this could became inoperative or into a system of different rules for each and every activity or services.

ConclusionOverall analyzed the four rules are agreed on the basis of trust, goodwill and good intentions of the parties to the treaty and mean for each of the states a guarantee in the planning and implementation strategies for both the State itself and persons engaged in such business relationships.

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Conclusions and Reflections

Conclusions

The negotiation process of DR-CAFTA highlights the political vulnerability of Central American counterparts, which finally came to accept the proposal by the United States without major counter-proposals. The relevance of the Treaty for the Americans is based on the policy agenda toward the region, focusing on corruption, drug trafficking and migration, which was a great door of opportunity for economic concessions for Central America, and that the United States of America.

The main feature of trade between Central America and the United States is asymmetric. Despite the signing of DR-CAFTA, the dynamism of exports to the United States has been lower than in the rest of the world, mainly due to sustained contraction of the clothing sector. However, the Treaty has served to strengthen the opening of the U.S. market, allowing saying that if the treaty had not been ratified, exports to the United States would surely have fallen.

Among the main potential benefits of DR-CAFTA is the investment. The direct determinants of investment include economic policy variables, uncertainty and political and social stability as well as investment in physical and human capital, government expenditure and macroeconomic stability.

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The progress in the diversification of markets has led to the progressive loss of importance of U.S. as Guatemala's main trading partner.

The institutional framework that was created to support state policies, which attend efforts of both public and private sectors, has to be acknowledged although its limitations.

The areas most benefited by the DR-CAFTA are the ones that had a higher pre-commercial relationship with the United States, with the exception of clothing, which has lagged for their loss of competitiveness against other regions. The export sector that has more benefited items is mainly commodities such as coffee, sugar, fruits and vegetables, and gold. On the side of imports from the United States of America stands out cereals such as corn and some inputs such as petroleum products, although for the latter case its importance is due to rising prices, the effect of the latest economic expansion.

Another area benefited is in the sugar industry, which achieved a substantial increase in membership fees to the U.S. market, ranging from 32.000 metric tons for the first year to 49.820 for 15 years and an annual increase further after this Last year, 940 metric tons.

In relation to pharmaceuticals and agrochemicals, data protection requirements limit industrial production of some generic drugs, in employment there would not be a very large impact, since the sectors are relatively small, but some lines can make expensive agricultural chemicals and medicines that address chronic diseases.

The industrial sector's high exposure to competition resulting from the DR-CAFTA is the beverage and food processing. But more than a risk is considered that the domestic sector has all the potential to respond to increased competition resulting from tariff reduction, because it shows evidence of oligopolistic structured way, which could be generating extra income that would give space to compete on price.

Reflections and Recommendations

In general terms, the topics on the FTA related to services are an adoption of requirements not only to improve access for investment in any of these areas (telecommunications, financial services and other border services), but a matching agenda policy (monitoring, competition, etc..) to ensure access to markets more safely and without any discrimination on the side of the incumbent operator.

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The Treaty reflects the need for develop important domestic reforms. Reforms of policy and institutional base to take positive benefits that the Treaty could offer. These reforms are related to: a) political stability (economic performance), b) implementing policies to raise productivity, c) strengthen institutions, d) governance; e) improving the investment climate; f) to adopt an adequate system of innovation; g) improve the level of human resources (education policy), h) improve the legal and regulatory measures to strengthen investor protection; i) progress in reform and labor market flexibility.

It should be emphasized; in general, for all service sectors that the country should not wait for institutional improvements. The country must work in advancing the reform agenda that the treaty requires. In this area the country's politics will have a key role, especially legislators, and regulators, since these are new challenges for those who will make the market conditions that truly promote competition and attract investment.

It is generally thought that the countries compete when actually only the businesses do so. That is why some mistakenly believe that exports and competitiveness are the same. However, the competitiveness of a country can be seen by the size of enterprises, export performance and economic growth.

It is essential to support the State to meet the minimum elements of a country's development agenda and an agenda to promote exports.

Other important elements for insertion into the world economy and to maximize favorable conditions for access to key markets like the United States of America, are the efforts to improve financial services, offset tax costs, facilitate access to market information, instead of supporting specific sectors, as in previous years.

International trade can be a permanent source of growth if it operates as a channel of assimilation of new knowledge and technologies, and as a stimulus for continuous improvement in productivity.

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SIECA (2005), Estado de la Integración Económica de Centroamérica, http://www.sieca.org.gt/SIECA.htm

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