Roaring to a finish: what should Central America expect from U.S. free trade? Change, and lots of it.

With the clock rapidly ticking down on free-trade talks between Central America and the United States, people from Guatemala to Costa Rica are watching the terms of the potential US$23 billion trade pact closely.

Five chapters closed in the first eight rounds of the U.S.-Central American Free Trade Agreement, known as CAFTA. The final negotiations are scheduled to end by mid-December, including closing several chapters on some of the most sensitive topics--agriculture, labor, environment, telecommunications and textiles.

Despite the amount of work left, trade negotiators remain confident that CAFTA will be concluded on time. Anabel Gonzalez, Costa Rica's head trade negotiator, says that important progress was made during earlier rounds, "The advances of CAFTA should not be measured in the number of chapters closed, but by what work is remaining," she says. "We are advancing very well and making good progress."

Central America could gain a lot with free trade, at least in macroeconomic terms. One need only look at the big numbers on the North American Free Trade Agreement (NAFTA) between Mexico, the United States and Canada, 10 years old next month. In 1993, two way trade between Mexico and the United States totaled $81 billion dollars; by 2002, it nearly tripled to $232 billion dollars--10 times current Central American trade with the United States.

Trade traffic across the 2,000-mile U.S.-Mexico border has rocketed, Imported consumer goods fill Mexican supermarkets. NAFTA has been so successful in encouraging trade in North America that 88% of Mexico's exports now go to the United States, "In the last 20 years, Mexico has changed from being one of the most closed economies in the world to one of the most open. NAFTA was the big turning point," says James Callahan, President of the American Chamber in Mexico and of BankBoston Mexico.

U.S. trade with Central America has been steadily rising even without a deal, to more than $25 billion estimated for 2003 from $12 billion in 1994. U.S. investment over the same period, however, has declined, U.S. investment in Mexico and Central America was virtually the same until 1999, then Mexico boomed to $58 billion dollars per year while Central American investment waned to below 1997 levels, to $23 billion. And no one knows how much business Central Americans have lost for lack of open trade terms with the world's largest economy.

Some pretty tough issues remain. Salvadoran agricultural workers are asking when the United States is going to discuss its own sensitive issues, namely sugar. The Sugar Growers Association of El Salvador has demanded a "complete opening" of the U.S. market, which currently imports an annual quota of 126,400 metric tons of Central American sugar. U.S. price supports guarantee its farmers refined sugar at $0.22 per pound while world prices are closer to $0.06 per pound--essentially a 300% tax paid by U.S. consumers to keep its farmers safe from low world prices.

The United States has not wanted to discuss sugar during the first rounds of trade talks, hut U.S. Trade Representative Robert Zoellick hinted during his Central American tour that the United States would be willing to negotiate sugar, even though U.S. sugar growers have asked to be excluded from CAFTA.

Rules of origin. Another big question mark heading into the final rounds of talks is the future of Central America's textile industry, which employs more than 1.5 million and represents a majority of exports from Guatemala, Honduras, El Salvador and Nicaragua. The region's textile and apparel sector remains uncertain as U.S. and Central American trade negotiators have yet to agree on rules of origin for imported fabrics and the future of current bilateral market-access quotas. Coupled with the liberation of Chinese quotas in 2005, some industry leaders fear that the Central American textile industry could be coming apart at the seams.

U.S. negotiators have not been slay about throwing their weight around. The United States reportedly pressured Costa Rica and Guatemala to drop out of the G21, a group of developing nations led by Brazil and which includes third-world giants China and India. The group handed together at the World Trade Organization (WTO) meeting in Cancun to pressure the United States and Europe to reduce agricultural subsidies, in compliance with the 2001 Doha Accord.

El Salvador dropped out of the G21 shortly before the Cancun round, and Costa Rica announced its resignation one week after a visit from Zoellick, although Costa Rica denied its decision was due to U.S. pressure. Ecuador is seeking free trade talks with the United States while staying in the group, but Colombia, Peru and Guatemala have left.

In Costa Rico, intense debate swirled around Instituto Costarricense de Electricidad (ICE), Costa Rica's state monopoly on telecom, electricity and the Internet. Such is the power of this autonomous state institution that it crippled the administration of former President Miguel Angel Rodriguez by organizing a nationwide strike in March 2000 to defeat a privatization initiative.

Zoellick warned Costa Rica that it must open ICE if it hopes to be included in CAFTA. Following Honduras' recent decision to open its telecom market, now operated by state-owned Hondutel, by next year, Costa Rica remains the only Central American country to maintain state control over telecommunications and electricity.

Costa Rican President Abel Pacheco said he will not negotiate ICE, but Zoellick told Costa Rica that it has to put all of its cards on the tame. "We need to open up the services market [in Costa Rica]," Zoellick told reporters on Oct. 1 at Costa Rica's Casa Presidential, following a meeting with Pacheco, who was notably absent from the press conference held in his own home. "That is necessary for me to bring back a trade agreement. The Central American neighbors are all working to do that, but we need some more movement from Costa Rica." Pacheco later buckled and agreed to partially open ICE.

Snack man. Hugo Barrera, genera/director of the Productos Alimenticios Diana in El Salvador, predicts the pending trade pact will help his snack-food company expand into U.S. markets. Barrera notes that a small, "sentimental" market of Salvadorans living in California, Texas, New York and Washington, D.C. now buys most of his snack foods sold in the United States. With CAFTA, Barrera predicts, his company will be able to expand to non-traditional markets and compete with similar quality chips made by U.S. snack-food giant Frito-Lay.

According to the Salvadoran snack man, 95% of chips and cheese curls in the United States are sold in supermarkets. But the opposite is true in Central America, where the vast majority of bagged snacks are sold in independent corner stores, known as pulperias. After the free-trade pact goes into force, Barrera says, Diana will be able to, carve a supermarket niche of Central American-flavored snacks with U.S.-quality crunch. If the concept catches on with U.S. consumers, he says, mass marketing and advertising would follow.

Some Central American exporters say CAFTA ultimately will benefit Central American consumers. John Jenkins, general manager of Costa Rica's Bridgestone-Firestone plant, says that tires are normally marked up about 35% to 45% from the plant to the showroom. As the quality and durability of tires improve, tire manufacturers have been able to produce more than market demand in the United States calls for, Jenkins says. "Companies are getting extra capacity because tires last longer. And if they have two or three extra hours a day, they can find some place in Central America to flick off extra tires at a lower cost," Jenkins says.

Central Americans are still unsure what marriage to the $10 trillion U.S. economy might mean. Nevertheless, they have a pretty good guide in Mexico's 10-year experience with NAFTA. In short, there are winners and there are losers.

For Jose Orozco, an avocado grower in the heights of Jalisco, NAFTA was the best thing that ever happened, Soon after negotiators signed the accord, Orozco borrowed money to expand his farm so he could export avocados to the United States. In 10 years, Aguacates Orozco increased its annual output to 200 tons from 50 tons and its workforce has more than tripled to 80. "NAFTA changed my life. It has given me the chance to have things I would never have dreamed of," Orozco says.

For Vicente Ramirez, a sorghum farmer in the village of Santa Isabel Tepetzala, in Puebla state, NAFTA equals constant crisis. Since 1994, sorghum prices have dived. Ramirez blames cheap U.S. imports. "Prices are so low I cannot even afford to feed my family," says Ramirez, an activist in the local farmers' cooperative. "The government should throw the treaty into the garbage."

Throughout 2003, campesinos blocked roads and marched in the capital, often in their underwear, demanding the government renegotiate the deal, which they claim is destroying their livelihoods. Business chambers have nevertheless applauded President Vicente Fox as he toasted the success of the treaty that has tripled commerce between Mexico and the United States and created the biggest free trade area in the world.

Mexican output, meanwhile, grew to $637 billion in 2002, surpassing Brazil and posting almost two-and-a-half times Brazil's gross domestic product (GDP) per capita. Despite the cries of demonstrators, who burst into Mexico's Congress with horses and pigs in protest, the Mexican government, stands firmly behind the accord.

Turnaround. "Of course there are certain sectors and regions that have lost out, but overall NAFTA is an overwhelming success," says Angel Villalobos, Mexico's Undersecretary for Foreign Trade Negotiations. "The figures speak for themselves."

The center of Mexico City has been transformed. Towering new buildings provide offices for major corporations at monthly rents of up to $35 per square meter. Latin America's tallest building, the Torre Mayor, now sits on the capital's Reforma Avenue, built for $300 million dollars by Canadian construction company Reichmann International. "We have had a very positive experience doing business in Mexico. NAFTA really turned things around here," says Rick Ricker, Reichmann's general director in Mexico.

Reichmann is one of the growing number of Canadian companies that have been working in Mexico in the NAFTA era, making trade between the two countries shoot up to $15.1 billion dollars in 2002.

Critics of the trade accord argue that the lion's share of revenues from Mexico's NAFTA-driven exports have gone to a few world-class companies, most of them foreign-owned. "The real winners of NAFTA have been big corporations. It has been difficult for smaller companies to get a piece of the pie," says Elizabeth Gutierrez, an economist at Mexico's National University. In fact, 80% of Mexico's non-oil export revenues go to large firms, according to the National Association of Importers and Exporters. Mexico's biggest companies, such as baker Bimbo, beer giant Grupo Modelo and television network Televisa have all made substantial gains during NAFTA's first decade, stepping up exports and making acquisitions in the United States.

Many small and medium-sized companies, the backbone of Mexico's employment, have failed to get in on the action. Following the peso crisis of 1995, it has been very difficult for small businesses to get credit and expand in the market, says Gutierrez. High interest rates have suffocated many potential participants.

Enrique Bautista opened a clothing factory in Mexico state in 1990. Hoping to take advantage of NAFTA and to export to the United States, Bautista in 1993 took out $80,000 in bank loans to expand. Once the peso devalued in 1995, his payments doubled and Bautista was forced sell half of his assets to survive, limiting his production to the Mexican market.

After struggling for six more years, Bautista closed shop in 2001. Cheap imports from Asia, he says, make it impossible to stay in business. "I was just dreaming. It is almost impossible for the little guy in this country to make it," Baustista says.

For some, adjusting to economic cycles has been rough. Many of the factories on the Mexico-U.S. border that characterized NAFTA prosperity in the 1990s slashed their workforces at the dawn of the new century, putting some 500,000 out of work. "Over commitment to the U.S. economy has made Mexico vulnerable," says Jorge Garcia, a partner at Mexico City consultants Diecsa. "When the United States sneezes, Mexico catches the flu."

Niche play. A vanguard of small and medium-sized Mexican companies have bucked the trend, however, and succeeded in capturing a chunk of the lucrative U.S. market.

Artesanias del Sur has made pewter and ceramic handicrafts from a workshop in Mexico City since 1990. When NAFTA took effect, the company concentrated on exporting to the United States, where handicrafts can be sold at double the price. Over ten years, revenue tripled, due largely to exports, and its workforce doubled to 40. "Many small businesses have failed because they have been unoriginal. You need to find a niche in the market," says Artesanias Director Rodrigo Rios.

Another success story is Walmi Transformer, which employs 300 to makes filters for export to the United States, where they are brought by clients such as Ingersoll-Rand, While NAFTA was on the drawing board, Walmi moved from the town of Lerma in central Mexico to Saltillo on the U.S. border. The move paid off, and Walmi's business grew by 30% during NAFTA's first decade, receiving Mexico's National Export Prize in 1997.

"You have to adapt to a changing scenario," says Alberto Covarrubias, Walmi's owner and president. "Mexican companies need to be resourceful and look hard for the opportunities."

In no other sector have feelings about NAFTA been as passionate as in agriculture. Arguments over exports of sugar, corn, poultry and other food products have made up a large chunk of the accord's disputes. But agriculture is far more significant to Mexico than the small percentage of commerce it makes up, says Armando Paredes, president of Mexico's biggest farming lobby, the National Agricultural Council.

Farming income supports twenty million people, a fifth of the Mexican population, says Paredes. "When the United States increased subsidies to its farmers in 2002, it affected a lot of Mexicans and produced a lot of anger," he says.

The council advocates a common agricultural policy in North America, similar to that of the European Union. The proposed policy would include shared technology and a common agricultural fund for the three NAFTA partners. Greater integration into the U.S. economy would protect Mexican farmers from South American competition, which Paredes fears will flood Mexico if an eventual Free Trade Area of the Americas is created.

But Paredes says there is no turning back. In fact, the trade accord should be widened, "NAFTA cannot be repealed," he says. "We need greater integration with the United States."

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Man of the Cloth

As the countries of Central America negotiate with the United States to open the isthmus, the textile industry faces some of the toughest challenges in adpating to global trade, not the least of which is cheap Asian imports and illegal, pirated textiles which wash up on its shores by the container-load. Miguel Schyfter, president of the Central American Council for the Textile industry talks with LATIN TRADE Reporter Benedicte Constans about fixing what ails the rag trade.

To what degree are pirated goods affecting the textile Industry?

The piracy problem has various causes. First, under-invoicing or under-valuation, when damaged clothing of lesser value is sold at the same price as new clothing, creating unfair competition. Second, we are greatly affected by the problem of used clothing, which is not pirated but is rapidly turning into a criminal operation since often new clothing is sold mixed together with used clothing, which is sold through widespread channels and is difficult to control. Used clothing is priced so low that nobody values new clothing. Thirdly, Costa Rica is very sensitive to pirated goods because of its geographic position, being very close to the Panama Canal. This is the center of circulation for containers and trailers whose origins and the price of their contents are very difficult to control.

What solutions has Costa Rica proposed to end piracy?

The piracy problem is much bigger than simply the textile industry. It has to do with tax evasion across all of Latin America, in all industrial sectors. Such evasion is so immense, it can hardly be measured anymore. So the solution to the problem is similarly complex. They have tried for 20 years to solve it, but it continues to be the biggest problem facing the Costa Rica government today. The solution is not specific to the textile sector. A single fact demonstrates the problem: Fifty percent of the Costa Rican economy is underground.

Is a U.S.-Central America Free Trade Agreement (CAFTA) the solution?

The Central American market is too small for industries to survive alone. So the future of the textile industry in the region can only be considered viable with CAFTA. Under conditions that favor us. And, on the other hand, the United States is an important chance for to develop our industrial base, whether textiles or not.

What point would you likely defend in the final rounds?

A specific point that I would like to defend is the flexibility of rules of origin in the United States. Because it would help Central America enter the U.S. market in a competitive way. And to face China.

Does China's growing economic potential in the coming years frighten you?

Of course China is the greatest danger for Central American and for all small countries that export textiles to the world. If in 2005 China's quotas are lifted, the competition will be fierce. The only way to fight against this threat is through CAFTA. We have already seen that the FTAA [Free Trade Area of the Americas] is not forthcoming, so CAFTA is the only thing we have in our hands to fight against the danger that is coming closer: In less than 14 months, the earthquake hits. CAFTA is the only window to the growth in the textile market for our country and all of Central America.

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