[NYTr] Guatemala's "Kafta-esque" Year

[All the News That Doesn't Fit]

Center for International Policy Americas Program - Aug 24, 2007
http://americas.irc-online.org/am/4495


Guatemala's Kafta-esque Year

by Umberto Mazzei

English translation by Tony Phillips

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.


TABLE 1: Trade between Guatemala and the United States:

Imports and Exports between Guatemala and the US (1997-2006)

[See: http://americas.irc-online.org/am/4495 ]

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.

TABLE 2: Quantities of some imports into the US in clothing, by origin
(in millions of US$)

[See URL above]

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.

[Umberto Mazzei is a PhD in Political Science from the University of
Florence, and has been a professor in international economics in
Colombia, Venezuela, and Guatemala. He is Director of the Institute of
International Economic Relations in Geneva
(http://www.ventanaglobal.info) and a member of the Mesa Global
coalition in Guatemala, as well as an analyst for the Americas Policy
Program at www.americaspolicy.org.]