Guatemala’s Kafta-esque Year

CAFTA went into effect a year ago in Guatemala and a number of regrettable things have happened since. To mention a few examples: 195 million Guatemalan Quetzals (equivalent to US$25 million) have been diverted from Ministry of Education funds to the civil aviation authority to extend an airport, which speaks volumes about the priority of transporting goods over educating children. Then there was the case of the vicious assassination of three El Salvadoran Congressmen and their driver by members of the Guatemalan police force, led by the chief of the Organized Crime Unit.

The political climate is deteriorating rapidly. It would be easy to go on about government scandals, but the focus of this article is international economics. One year after the implementation of CAFTA, the reality seems totally at odds with the prediction made by U.S. Ambassador, James Derham: "Guatemala will be seen as a more attractive nation for investors after July 1 [2006]."1

Where’s the Investment?

Signing CAFTA did not bring about those foreign investments. PRONACOM, the Guatemalan Program for National Competition, reports, without detailing its sources, that Guatemala received US$839.5 million in foreign investment, creating 17,000 jobs.

Could it be that they are confusing new debt with investment? Their figures do not concur with those of the Bank of Guatemala, nor do they concur with figures from the private sector. They contradict the daily news reports of industries going bankrupt and unemployment.

One thing that has resulted from CAFTA is legal demands from foreign tribunals. Some of these are from foreigners who were in the country before CAFTA was even signed. CAFTA Article 10.16, 1b retroactively protects foreign investments made before it came into force, even when made in established national companies.

Consider the case of Railroad Development Corporation (RDC) against Guatemala in the name of "Ferrovarías de Guatemala" (FEGUA). In 1997 RDC was granted a 50-year concession with the provision that they restore railroads to operation. The company is now demanding US$65 million—US$15 million that it supposedly already invested and $50 million in future profits. It filed this claim having failed in over a decade to restore the railroad to full operation.

The basis of the claim is indirect expropriation. Guatemalan President Berger declared that the use of 12 of the old FEGUA locomotives was damaging the environment. President Berger made this demand the month that CAFTA was signed.

It is a strange coincidence that President Berger became concerned about the old locomotives just as CAFTA came into force, considering his lack of concern before CAFTA. The decision was a stroke of luck for the RDC, which was suffering financial losses. RDC operates on a small scale in the United States. It also operates in Argentina, Estonia, Peru, Malawi, and Mozambique. It has a history of such cases. In Estonia, RDC was forced to withdraw its complaint in a settlement.2

Thanks to CAFTA—the Decade’s First Deficit

On the first anniversary of CAFTA, the reality does not resemble what was promised by its promoters: AGEXPRONT, the American Chamber of Commerce, VESTEX, FEDEFARMA, Camagro, and CIG, to name the most vocal among them. Under CAFTA, Guatemala’s fortunes have demonstrated an abrupt reversal, with its first trade deficit in a decade. This is exactly what was predicted by the groups who were not consulted at the time—the citizens’ organizations that were shot at by police and blackballed by the press where newspapers gave them precious few column inches to voice their opinions.

Trade between Guatemala and the United States

Imports and Exports between Guatemala and the United States (1997-2006)
Year	Imports	Exports	Balance
2007 (4 months)	1,256.5	1,058.5	-198.1
2006	3,511.4	3,102.3	-409.1
2005	2,835.4	3,137.4	302.0
2004	2,551.3	3,154.0	602.7
2003	2,263.4	2,946.8	683.4
2002	2,044.4	2,796.4	752.0
2001	1,869.7	2,588.6	718.9
2000	1,900.7	2,607.5	706.8
1999	1,811.8	2,265.2	453.4
1998	1,937.8	2,071.6	133.8
1997	1,729.7	1,990.1	260.4

Source: U.S. Census Bureau, Foreign Trade Division, Data Dissemination Branch, Washington, DC.

The above table shows that the commercial balance between Guatemala and the United States was in Guatemala’s favor until the year 2006 when the relationship showed a deficit of US$409.1 million. In the first four months of 2007, the deficit with the United States is already at US$198 million and is projected to exceed US$800 million. It is obvious that the unfavorable commercial balance is the result of signing CAFTA.

The figures presented come from U.S. sources but the press continues to promote the positive side of CAFTA, speaking of the increase in the country’s exports to the United States. This is inaccurate PR.

When U.S. President George W. Bush passed through Guatemala in March, he visited Mariano Canú, President of the Association of Mayan Farmers, who grow vegetables in the Chimaltenango region. Smiling for the camera while loading boxes of lettuce, Bush pointed to Canú, father of six, as an example of someone who had benefited from the CAFTA agreement by building a dynamic export business that exports vegetables to the United States.

As it turns out, Canú does export vegetables—but to El Salvador. In an interview this year, Canú explained that he had not, to date, managed to export his products to the U.S. market.

Textiles

VESTEX, a Guatemalan textile and clothing company, was the most active promoter of CAFTA in its sector. The company now blames the poor results of the agreement on the fact that it was signed by member countries on different dates—El Salvador, Honduras, and Nicaragua approved the agreement before Guatemala. They claim that created uncertainty and delays to investment in Guatemalan projects, but VESTEX insists that CAFTA will still eventually fulfill its promises.

The explanation does not hold water because before CAFTA the export preferences of the CBI (The Caribbean Basin Initiative Agreement) were in place, a treaty that provides all participating nations the same access to the North American market. El Salvador and Honduras, which entered CAFTA earlier, have also not received new investments in the sector, and have experienced job losses. The only demonstrable growth in textile exports is found in Nicaragua: but because Nicaraguan producers have different sourcing rules under CAFTA that allow them to use more raw materials from outside the zone. In Guatemala, the textile exports that did grow do not export under CAFTA rules—something that VESTEX is aware of but chose not to mention.

Quantities of some imports into the U.S. in clothing, by origin (in millions of US$)
Country	2005	2006	% change 2005-2006	% change April 06-April 07
Total imports into U.S.	68,713	71,630	4.25	8.53
Guatemala	1,816	1,666	– 8.26	-10.04
Costa Rica	482	465	– 3.53	-7.51
Mexico	6,078	5,297	-12.85	-13.58
China	15,143	18,518	22.23	47.91

Source: OTEXA, June 2007

The table shows that the U.S. textile market grew little and that imports from China grew far more (in relative terms) than the market itself. This growth displaced products which benefit from trade agreements with the United States. The main local input is cheap labor, which gives companies an insubstantial edge in competing while assuring widespread poverty.

Agriculture

One year after CAFTA the imports of grains grew, as did prices to the consumer. This hurts the agricultural sector and the consumer, but greatly benefits the importer. From 2005 to 2006 imports grew: wheat grew from US$55 million to US$125 million, corn from US$77 to $99.6 million, and rice from US$17.9 to $20.9 million.

Since 2005 the price of bread to consumers has gone up 23.6%, corn 26.2%, and rice 10.5%.

Intellectual Property

The first victim of CAFTA was the Guatemalan generic pharmaceuticals industry in a suit filed by Pfizer against Guatemalan firm Biocrós over Viagra. Biocrós uses the active ingredient, sildenafilis, in their "Laris" product. In Guatemala there are nine products that use sildenafilis, in Venezuela 14, in Colombia 31, and in Ecuador 15. Pfizer has never been able to prevent this because it never filed a molecular patent. Only Guatemala gave in to their demands. Biocrós won on appeal, but the case demonstrated the latest industrial property law promoted by the United States facilitates abuses.

Only a short time ago the democrats in the U.S. Congress stated that they would travel to Panama to confirm that Panamanian law upholds the labor provisions of the proposed U.S.-Panama free trade agreement. United States Trade Representative (USTR) Susan Schwab told them that "to require that a sovereign nation change their laws unilaterally would constitute a fundamental break with jurisprudence, the policies, and the practices of the United States."

Guatemalans remember well that over a two-year period its Congress was obliged to approve a series of no less than five different industrial intellectual property laws, because none of them satisfied the increased requirements required by USTR.

One has to agree with Ms. Schwab’s objection to meddling, but her scruples are selective and not based on fact, because requiring unilateral regulation changes is the policy and practice of her office.

End Notes

1. Prensa Libre, 06/29/2007
2. "Arbitration claims withdrawn after Estonia pays to renationalize railway", ITN, Feb.1, 2007, available online at: http://www.iisd.org/pdf/2007/itn_feb1_2007.pdf.