Central America Free Trade Agreement and Beyond Seizing the Opportunities and Addressing the Challenges

May 19, 2003

The Hon. Sander M. Levin
Ranking Democrat
Subcommittee on Trade, Ways and Means Committee

Speech before the Center for Strategic and International Studies


(Washington D.C.)-  Thank you, Sherman Katz and CSIS for hosting this gathering today.  I have appreciated your interest in allowing me to address various aspects of U.S. trade policy over the years and I have very much enjoyed the back-and-forth discussion on these issues.

 Today I would like to discuss the Central America Free Trade Agreement (CAFTA) currently being negotiated by the United States Trade Representative (USTR) and the implications for other agreements to expand international trade.

 There are many different sets of trade negotiations going on right now, as well as other legislative and trade policy matters.  I am focusing on the CAFTA negotiations because I think they are of critical importance, not only for the U.S. economic relationship with the CAFTA countries, but also as a source of momentum and as an opportunity to tackle important issues for other U.S. free trade agreements, including the Free Trade Area of the Americas.

 During the April Congressional Recess I decided to spend five days in Central America experiencing the situation on the ground and gaining some first hand information for myself.  I did this same type of trip to China as Congress began to consider granting China Permanent Normal Trade Relations (PNTR) and I found the experience to be invaluable to my work on that issue.

Observations from Fact-Finding Visit to CAFTA Countries

 I visited El Salvador, Nicaragua and Guatemala.  I was joined by Sandra Polaski of the Carnegie Endowment in two of the countries.  My trip consisted of 30 meetings with the American Embassy and various representatives of the three Governments, members of the National Assembly, leaders in the business community and labor movement, site visits and conversations with workers.  We discussed a number of key issues relating to current trade negotiations, including agriculture, environment, aspects of the operation of free markets and in particular the role and rights of workers in the three countries.

 In recent years the major industrial growth in each of the three nations that I visited has been in the maquilas, assembling apparel in free trade zones.  A few basic facts about these maquilas from my direct discussions and observations:

  100,000 to 150,000 people work in the garment maquilas of each nation.
  75-85% of the workers on average are women.
  The average age is 18-25.
  Most of the women have 2-3 children.
  A majority of the women are the sole source of income for themselves and their children.
  By law, the work week is supposed to be 44 hours, with overtime hours on a voluntary basis within a limited number of hours.
  The typical worker receives about 65 to 75 cents per hour.  If paid by piece the average could be around $1 per hour.

 As you know, almost every nation in the world has agreed through a Declaration sponsored by the International Labor Organization (ILO) to respect five core labor standards: prohibitions on child labor and forced labor, non-discrimination, and the rights to associate and to bargain collectively.  In the garment maquilas, where child labor does not seem to be an issue unlike the agriculture or the informal sector, clearly the most salient to the conditions of the workers are the rights to associate and organize and to bargain collectively. 

 It is important when we consider the rights to associate and to bargain collectively that we not project conceptions of labor- management relations in the United States in 2003.  In the context of Central America today, the basic labor-management dynamic in these countries is more like the United States at the turn of the last century.  

 What follows are just some examples from my meetings, discussions and first-hand observations about the realities concerning the rights to associate and organize and to bargain collectively in the three countries:

 In  Nicaragua and El Salvador, an employer can fire any employee whom it believes is sympathetic to an organizing effort simply by paying severance.

 In one plant I visited in Nicaragua workers had quite recently been working 70- to-80 hours (apparently for the same $100 a month); in some cases they were working 24 hour shifts.  Protests finally forced new management, but the new management acknowledged that they were  still working people longer than permitted in the law.

 In Guatemala, we talked with a worker who had personally witnessed other employees who had been trying to organize being beaten with bats at work, and the witness believed that the bats used in the incident could have only been provided by management.

 In  Nicaragua and Guatemala, we heard numerous reports of employers using the criminal process in order to break up unions in maquilas and other sectors.

 In El Salvador, we visited a free trade zone in which a plant was shut down to avoid its workers being able to organize.  We heard highly credible evidence that the leaders of the organizing effort were subsequently blacklisted as they sought other employment in the garment sector.

 In Guatemala, it is not legally possible for a union to attempt to organize within an entire industry, like the garment industry, without having in advance 50 percent plus one of the workers signed up and registering with the government.

 In Nicaragua and Guatemala, employees cannot undertake a work stoppage or strike without approval of the government.

 We discussed similar situations with banana workers in Guatemala and electrical workers in El Salvador.  The State Department Human Rights Report, and numerous other reports from groups like Human Rights Watch, confirm that the facts and incidents I saw or heard about are not isolated; they are the constant reality in these nations. 

 My second meeting in El Salvador was with Beatrice Alamanni de Carillo, a veteran judge and professor, who serves as Prosecutor for the Defense of Human Rights.  It is important to note that she was appointed by the National Assembly, with a majority from the conservative Arena Party.  Her comments later embodied in writing by her state:

 In the private sector an anti-union culture persists in great measure and for many years, employers have generated a climate that does not contribute to the promotion of worker organization in their workplace.  ...The Ministry of Labor and Social Welfare has not demonstrated a real will to guarantee in practice the rights of workers, either individually or collectively.  There is a very loud clamor that the authorities of that Ministry do not make their best efforts to adequately check working conditions in businesses, and, in addition, they tolerate and promote an anti-union culture in the country.

           In short, in each of the three Central American countries I visited, the rights to associate and organize and to bargain collectively are not realities.  Indeed, the opposite is true.  The laws themselves are inadequate and do not embody the five core labor standards.  And, even where there are laws on the books, they are not well enforced and are often used against workers trying to organize. 

 The proof that workers are not allowed to exercise their rights is evident in the results: as far as I could determine, there is not a single effective collective bargaining agreement in any of the garment maquilas of the three countries, though there are almost 400,000 workers.

           At a meeting in Guatemala, a leader of the union connected with the Christian Democrats put it this way: the problem is that employers have impunity; they make up their own laws; the work force feels like orphans.

CAFTA Negotiations Present Important Opportunities

From my description, you may jump to the conclusion that I came back discouraged.  That is not accurate.

           The CAFTA negotiations present both a genuine challenge and a major opportunity.  Too often we have viewed core labor standards only through a narrow lens of the specific labor-management relationship, falling into easy polarizations and focusing on stereotypes derived from domestic experiences.  But the issue of how to address core labor standards has much broader implications for a countrys economy and society as a whole, for the Central American region, and for international trade and competition. 

The opportunities presented by the CAFTA negotiations help demonstrate the important issues at stake.

 Opportunity to Improve The Dynamic Within Central American Nations

 If the issue of core labor standards is appropriately addressed in the CAFTA agreement by including a fully enforceable obligation to adopt and enforce these standards, it will have an important positive impact on broader socio-economic dynamics in these countries, including by helping to develop a middle class. 

 In the last decade the apparel/textile maquilas have been the major source of economic growth and new employment in each of the three nations I visited, and I understand the same is true in Honduras.  That is the prospect for the future.   Thus, the maquilas are a major reflection and test of the broader social dynamic within those nations.

 The realities within the maquilas today are built on a total imbalance in relationships between employer and employee.  The environment, the atmosphere, in the plants is that the management is master and the employee, not servant but highly subservient.  The vast majority of workers, young women, are particularly vulnerable, with overriding fear that for them losing a job means an end to the sole source of income for themselves and their children.

 Some view expanded trade as a magic wand that will resolve all of these problems automatically.  Others, like myself, view it as an essential tool that must be shaped.  It is essential in order to provide opportunities to the CAFTA countries to expand trade and strengthen commercial ties with the region.  It is equally essential that the rules of trade and investment be shaped in a way that maximizes the benefits to those countries and the United States. 

 Unless the basic imbalance of power changes in the CAFTA countries, all of the market access in the world is not going to alleviate poverty within these nations.  For workers to be able to break the cycle of poverty for themselves and for their childrens future, they need to have the ability to join together, to participate, to improve their economic status.  This is an antecedent to helping those workers use the potential of globalization to create, join, or expand the middle class.
 Workers organizing to participate, to grab a piece of the action, has been a key piece of the growth of middle classes virtually everywhere.  I was too young to see its breakthrough in Michigan.  But I saw the results workers able to buy the cars they produced and own starter homes.

 What was true in Michigan is true more broadly.  Hernando de Soto recently authored a thought-provoking book entitled, The Mystery Of Capital: Why Capitalism Succeeds In The West And Fails Everywhere Else, which helps explain the phenomenon.  The book posits that economies develop where property rights are formalized, are clearly and efficiently defined, are enforceable, and may be exercised by all; in this way all property can become capital.  Labor market standards help workers maximize a key property right the property in ones own labor.

 A recent New York Times article discussed the sustained support for President Chavez among the poverty-stricken in Venezuela, despite the fact that poverty has actually grown during his Presidency.  This sends a signal beyond Venezuela as to the need to develop within globalization a set of rules that help to address vast inequalities, persistent poverty, and the lack of economic and political power by large segments of the population.

Opportunity to Shape the Economic Relations Between and Competition among Central American Nations

 A key reason to seek a minimum floor of respect for the five core, internationally-recognized labor standards is to ensure that the CAFTA countries will not compete in a race to the bottom in their efforts to promote trade and attract investment.  Some argue that the race to the bottom is a myth, that income levels will rise when trade and investment flows increase, and all domestic standards will rise as income levels increase.  These arguments ignore the fact that, as with all other economic factors, investment dollars are scarce and there is fierce competition to attract those dollars.  When the competition is over labor-intensive industries like agriculture and textiles and apparel, one of the key points of competition is undoubtably the labor market pool.

 A New York Times article from about two years ago described labor market conditions in the textiles and apparel industry in Central America.  The article quoted the President of El Salvador regarding intra-regional competition, who stated, The difficulty in this region is that there is labor that is more competitively priced than El Salvador.

 Another article from about one year ago in the Washington Post described the interesting changes in patterns in banana trade, with Ecuador attracting an increasing share of international banana trade.  The explanation for the trend, according to one major fruit company executive, The costs in Ecuador are so much lower.  There are no unions, no labor standards, and the pay is as low as two dollars a day.  

 If the promise of expanded trade increased incomes and lower levels of income inequality is to be realized, it is important that the CAFTA countries not compete with each other based upon abuse of core labor standards.  The best way to do that is to establish over a reasonable period of time a floor adopting the five core labor standards as rules of competition in this critical economic area in the FTA itself just as we establish floors through rules of competition in other areas like intellectual property, investor rights, and tariff levels.

 I left all of the maquilas convinced that there is a real opportunity to be seized by the Central American nations.  They do not need to suppress their workers in order to compete.  Indeed, there is an opportunity to build an economic structure based on implementation of core labor standards so that garments from those nations could bear a label reading made under internationally recognized labor standards, which many competing goods will not possess. 

 The alternative is likely to be a sustained, indeed increasing effort by consumer groups in the United States, the destination of a significant majority of garments assembled in the Caribbean, to encourage boycotts of companies that purchase garments made under conditions that violate these standards. 

 Efforts by American retailer-purchasers to promulgate and implement private business codes will not make up for a lack of a basic governmental and societal structure, a view reinforced by my meetings in the three nations with the American entrepreneurs and the active entrepreneurs from Taiwan and Korea.  In the New York Times article quoted above, an official from a major American retailer said it very well, We cant be the whole solution.  The solution has to be labor laws that are adequate, respected, and enforced. 

 Opportunity to Tackle the Tough Market Access Issues with the United States
 By addressing core internationally-recognized labor standards in the CAFTA negotiations, it is more likely that the domestic coalition necessary to tackle the tough market access issues with the United States can be assembled.

 There is already a significant economic and trading relationship between the five Central American nations and the United States.  Total two-way trade between the United States and the CAFTA countries is about $20 billion.  Combined, the CAFTA countries constitute the 18th largest export market for the United States and about half of all foreign direct investment in these countries comes from the United States.  

         Beyond the current relationship, the United States is seeking better market access for goods and service providers, protection for investors, and improved intellectual property protection from the CAFTA countries.  These countries are seeking more investment and more U.S. market access, primarily in the textiles and apparel and agriculture sectors.  Otherwise, CAFTA will provide no significant benefits to Central America beyond those provided by the Caribbean Basin Initiative (CBI).

 I joined with several others in helping to shape the enhanced market access in textiles and apparel when we expanded the CBI a few years ago.  The result has been a move toward a more integrated Caribbean-area textile and apparel market.  I believe that further integration is necessary.  If not, once quotas are removed in 2005 much more of this market will be lost to goods from other areas, especially China and other Asian nations.

 But enhancing the integrated market with increased market access will not be done easily.  One of the keys to increased market access will be squarely facing up to the core labor standards issue.  When we considered the expansion of CBI, the core labor standards issue was directly addressed by heightening the labor standards criterion in the CBI program.  Under that criterion, the United States may unilaterally judge whether a nation is implementing the core labor standards.  With the negotiation of CAFTA, and the consequent elimination of the CBI labor standards criteria, addressing the core labor standards issue in the CAFTA agreement by including a fully enforceable obligation to adopt and enforce the five core labor standards is even more important.

 The further integration in apparel and textile, as well as agriculture, means some further displacement in the United States.  Comparative advantage is sound economics, but the distortion of the labor market by suppression of workers to create this advantage is unsound as an economic and policy matter, is unnecessary, and will only deepen opposition from competing workers and businesses in the United States.

 Facing the issues surrounding core labor standards is not a vehicle for protectionism.  Indeed, it is an opportunity for expanded trade. 

Those who say the opposite are missing the real dynamic, and the motivation of  not all, but most of us with clearly internationalist perspectives.

Only a coalition that is far broader and solidly bipartisan, much more so than the narrow votes in the U.S. House achieved by last minute concessions to narrow interests, can be the basis for working out decisions on the tough issues of apparel and textiles and agriculture in CAFTA, and beyond.  I suggest that anyone who believes differently look at the issues involved in these sectors and where votes would have to come from for any major breakthroughs in CAFTA. 

 CAFTA Can Serve as a Building Block for Future Trade Agreements

 One of the arguments for bi-lateral and smaller regional FTAs is that they can build momentum for expanded trade, in part by allowing parties to address issues that cannot be as effectively or as promptly addressed in broader negotiations.

           I support this concept.  The CBI program was a building block toward a CAFTA.  On a related point, this makes it all the more important that we consider the impact of a CAFTA on Caribbean nations covered by CBI but  not included in the present negotiations of  CAFTA, especially the Dominican Republic which would like to become a participant and will be significantly affected by the course of the negotiations.

 More broadly, CAFTA can and should be a building block towards effective negotiation of an FTAA.

 The CAFTA negotiations present the opportunity for the United States to negotiate fully enforceable core labor standards, combined with a phased-in compliance period, a significant and ongoing commitment of U.S. technical assistance to the countries to help them achieve compliance before and in the initial years of the agreement, and positive market access incentives for countries that improve their laws and enforcement record (for instance, by accelerating implementation of market access phase-ins or by providing improved access than required by the terms of the FTA).  The goal of those of us who seek to establish rules in this area is to expand trade, not shut it off.

 When considering potential building blocks, however, it is vital to make distinctions.  No two agreements will be the same.  We must take into account similarities and differences. 

 There are many similarities between Central American nations and those in the rest of Latin America.  Where there are, what is negotiated in CAFTA will matter.  That will be true, for example in investment, intellectual property, customs obligations, and labor standards.

 Where there are differences, perhaps the most serious mistake can be to use an agreement for one country as a model for another. 

 In these cases a provision is not a building block, but becomes a stumbling block. 

 This is what seems to be evolving as to use of the Chile and Singapore agreements for negotiations in CAFTA.  Last week USTR tabled in the CAFTA negotiations a proposal on core labor standards using the Chile and Singapore provisions as a model.  Use of a standard of enforcing ones own laws is viable where a nations laws embody the five ILO core labor standards and there is a record of enforcement of those laws.  The laws of Chile and Singapore do embody the five core labor standards and these are enforced in practice.  The opposite is true in the Central American nations I visited; the standard of enforce your own laws would be a backward step in the CAFTA and benefit those with the worst laws.

 USTRs attempt to use Chile and Singapore as a model sparked the letter last week to Ambassador Zoellick from the Democratic leadership of the House and Mr. Rangel, Mr. Matsui and myself.   We said:

 We write as supporters of negotiations for a U.S.-Central American free trade agreement...  That said, we are not supportive of proposed U.S. draft text for the FTAs labor chapter...  The current version of this text does not adequately address the economic and individual impact of the egregious conditions for workers in the region, and should not be the starting point for consideration of these issues.

USTRs current course, ignoring the critical differences between the CAFTA countries and Chile and Singapore, is a serious mistake.  It threatens the ultimate success of the CAFTA and misses all of the opportunities presented by the CAFTA that I have outlined above. 


 It is important that we address the challenges presented by CAFTA given the stakes.  The success or failure of the CAFTA negotiations will impact other U.S. FTAs.  Given the problems facing the WTO and FTAA negotiations, successful negotiation of CAFTA could be an important source of momentum in trade expanding efforts. 

 Moreover, inclusion of a core labor standards provision in the CAFTA, and in future trade agreements, will help answer arguments of those who complain that globalization is harmful to the poor and anti- the little guy. 

 I came home from my trip to Central America with a real sense of urgency for the region.  These nations need the economic potential created by a CAFTA.  I also came home with a positive view of the opportunities that can be achieved, but only if we address the significant challenges.  A key challenge is to place core labor standards in a broader perspective, and to understand that it is vital to the future of each Central American nation, the Central American region, the integration of the hemispheric market and the future of U.S. trade policy.