21st century Dollar Diplomacy.

Taiwan lavishes Central America with money but freely exploits its workers.

IN 1912, U.S. PRESIDENT WILLIAM HOWARD Taft decided "dollars instead of bullets" was a better policy toward Latin America than Teddy Roosevelt's "big stick." The resulting dollar diplomacy emphasized corporate investments over military force. In 2001, the United States obviously still wields much economic influence. But there are new ugly Americans in the region.

In recent years, Taiwan has set up scores of maquilas in specially created duty-free zones in Central America. According to the Central American Integration Office, Taiwanese businesses invested almost US$300 million in 1998, generating 30,000 jobs.

Bowing to pressure from China, many countries shy away from Taiwan's money and investments, making it a rich kid with few playmates. But the seven Central American nations sit among only 29 nations that maintain diplomatic ties with Taiwan. And as part of this relationship, leaders look the other way when Taiwanese investors ruthlessly exploit local workers.

"Given the amount of money that exchanges hands with these tiny local governments, Taiwan gets enormous leeway in violating basic labor laws," charges Charles Kernaghan of the New York-based National Labor Committee, a prominent activist group that has studied Taiwan investment in the region since 1992.

Union leaders have no concrete proof of government collusion. Taiwan, however, has chalked up some of the most egregious labor violations in Central America's maquilas, including obligatory overtime, physical abuse and pregnancy tests as a condition for employment. Kernaghan contends the close relationship with government officials became clear last year when he and three U.S. religious leaders were deported from Nicaragua after meeting with workers who had filed a lawsuit against Taiwanese company Chentex Garment S.A., the world's biggest manufacturer of blue jeans.

According to court documents, conditions for some of Chentex's 2,000 workers seemed like material for a Dickens novel. Foremen ignored safety regulations, used dangerous equipment, abused workers verbally, intimidated employees who wanted to join unions and paid subsistence wages--20 cents for every $20 pair of jeans. (The jeans go to major retailers including J.C Penny, Target, Sears, Kmart and Wal-Mart.) That works out to about 30 cents an hour, or $60 a month.

Fired. When workers who churn out 25,000 pairs of pants a day asked for an 8 cents hourly pay hike, management responded by firing four union leaders and 700 others affiliated with a union lobbying for the salary increase.

"We worked from 7 a.m. until 7 or 9 at night," Zenayda Torres, a plaintiff in the lawsuit who was fired last year for asking for a raise, said in court testimony. "Often, they wouldn't give you permission to go to the bathroom."

Chentex, owned by the Nien Hsing Textile Co., also reportedly hired goons to terrorize workers. Sixty-eight U.S. congressmen wrote a letter to then-President Bill Clinton asking him to order the U.S. Embassy in Managua to investigate. They also asked him to consider sanctions against factories that violate recognized labor rights, seeing that Nicaraguan President Arnoldo Aleman did virtually nothing.

To be sure, Taiwanese firms are following in the footsteps of many U.S. maquilas, which also tale advantage of low wages, tax breaks and lax government enforcement of labor and environmental laws. Nien Hsing, for example, doesn't pay a single cent of tax to Nicaragua.

But U.S. factories tend to be less abusive since they are under constant scrutiny by nongovernmental organizations and liberal politicians at home. In Taipei, there is little such pressure.

Despite its political muscle, Chentex lost its lawsuit. In May, the highest court in Nicaragua demanded the immediate reinstatement of the fired Chentex employees, the first time a maquila in Latin America has ever been ordered by a court to reinstate fired union workers. "Other companies are now frightened," says Kernaghan, who is barred from entering Nicaragua.

And well they should be. This is the 21st century, not the dawn of the industrial revolution. Poverty is no reason to turn back the clock--and it certainly should not be an invitation to allow rich investors to skirt labor rights. The court victory is an important wakeup call. Even dollar diplomacy has limits.