In 2006, Guatemala finds itself in a critical situation that continues to worsen. Over half the population (56%) is poor, and 21% live in extreme poverty. Sixty-three percent of the GDP is concentrated in the hands of 20% of the population (GINI Index) and 80% of the population is not covered by health care.1 Unemployment is on the rise, increasing crime and insecurity. Conflicts over land, education, health, and the environment are tense.

Under these conditions, on July 1 Guatemala became the fourth Central American country to sign on to the Central American Free Trade Agreement (CAFTA). The nation seems to have no awareness of where this will lead. There was no negotiation, but rather, compliance to a text drafted in Washington along a one-size-fits-all model. The only thing that changes is the condition for free trade of a particular product. The agreement was accepted, praised, and declared without any prior research into its consequences.

Guatemala's Congress did recognize that CAFTA would have negative social effects, but did not specify how. The promise to legislate compensatory measures was an empty gesture to get the measure passed. To date, no studies have been carried out or legislation passed, but Congress continues to comply with Washington's demands.

Life Under CAFTA

The passing months provide some colorful examples of how things have been managed under the agreement. The solution to these problems should have been studied before implementation; now we are scrambling behind with makeshift measures.

Chicken

The deregulation of chicken imports has caused a row in the business community over who should get the candy from the piñata. The dumping of North American chicken on the Guatemalan market is damaging to some and beneficial to others in the private sector.

The negative consequences of buying subsidized chicken are felt by all those who depend on any part of the productive chain of raising chickens.

The benefit, in theory, is that dumping lowers the price for the consumer. But to assume this ignores two facts: a) competition is not always something importers want, and b) between importation and retail are highly controlled and monopolized distribution channels.

Chicken requires a refrigerated distribution system, and that cannot be improvised. In Guatemala, the system belongs to the already-established importers, so all 21,800 metric tons (MT) of imports under the duty-free quota end up with them. The auction really only divvied up the first half among the same old clients.

At 0.25 Guatemalan Quetzals per pound (US$0.03), the pushing and shoving for the 10,900 MT is justified because it is sold to the public at seven Quetzals a pound. These healthy profits have already inspired the curious ‘Portillo decree,' prohibiting producers or people related to them from importing chicken. Federico Polá, who opposed this, set the record for the shortest stint as Economy Minister.

Now President Berger whispers threats of denouncing the dumping at the World Trade Organization (WTO), but a dumping case requires proof of damage to the producer. This can be difficult if the producer is also an importer and even retails to restaurants.

Even more interesting is to examine why Guatemala can't export its chicken breasts to the United States. U.S. chicken producers get such a high price for the breasts that they raise chickens just to sell the breasts and throw away the rest at us. Since Guatemala already adopted, and later translated, the U.S. sanitary inspection norms, what is approved for consumption in Guatemala should be fine for consumption there. One would think.

Textiles

The way in which the United States applies CAFTA preferences, staggering their application as more countries join—without a transitory equivalence to the current preferences under the Caribbean Basin Initiative—has generated confusion in the application of the rules of origin for textiles. The effect is to fragment Central American production as a whole as well as its complementary nature to North American industry—two basic strategic requirements to confront Chinese competition.

According to the U.S. Department of Commerce, in the first trimester of 2006 textile exports from Guatemala fell by U.S. $51 million. This was due to a delay in integrating their inputs into the agreement, in turn due to a delay in legislative implementation of new North American demands that are not contained in the text of the agreement.

Changes made in the rules of origin after they were signed, engineered by the Bush Administration in exchange for support from members of congress, are not based on competitive and industrial logic. In August, one year and three months after the signing of the agreement, the United States continues to impose changes. According to the written rules of origin, the lining material for pockets could be imported from third countries who sell it cheaper; now it must be bought from “a CAFTA country,” meaning, the United States. It was a unilateral decision by the United States, in exchange for some non-specified compensation.

These circumstances resulted in a juicy anecdote.2 The United States offered to give each country a concession in exchange for the pockets, and the Guatemalan Ambassador to Washington, Guillermo Castillo, a great free trade negotiator3 and shareholder of the Guatemalan beer producing company, proposed a 15 year delay for the liberalization of ... beer.

Another amusing situation is the way CAFTA socks are made. Bush promised Congressman Robert Aderholt (R-IL), in exchange for his support of CAFTA, a 10-year delay in the liberalization of socks or a change in their rules of origin. Bush recently declared that the future law will include a measure (Section 1634(e)) about socks, “that will be consistent with the Presidential authority to decide the international affairs of the country.”4 A little arrogant for socks, but Aderholt wants them to be knit in the United States and that only the finishing seams be done by other partners. The sock paranoia began when Honduras increased their exports by 20% in the first half of 2006.

Investments

As noted, there would be no reason to expect new investments for trade reasons since not much has changed, but there could possibly be new investment because of concessions of public services. In this area the information is contradictory.

The general manager of Invest in Guatemala, Rodolfo Batres, assures that new capital entering Guatemala so far this year is up to U.S. $290 million (Q2,204 million). But the Bank of Guatemala statistics reveal a negative balance in the movement of private capital of US$720 million (Q5,472 million). The income reaches US$1,091.4 million (Q8,294.6 million) and the expenditures US$1,812 million (Q13,771 million)”.5 It looks like capital flight. In national balances there is a line for Direct Foreign Investment, so either the Bank is behind in its calculations or Mr. Batres is adding up ghost figures.

There are other dubious findings. Juan Carlos Paiz, president of the Agexpront (Association of Non-traditional Exporters), speaks about the new U.S. investment in the region in conjunction with a proposal to push Guatemala as a logistical center to supply Mexico and the Caribbean. “Some companies already do it, as is the case of Bimbo Bread, that works in that manner.” And here we thought that Bimbo was a Mexican company, which recently moved from Guatemala to El Salvador.

In Prensa Libre6 the Executive Director of the American Chamber in Guatemala, Carolina Castellanos, declares that investment “will not arrive if law and order, and text of the agreement, are not respected.” Her statement makes it sound like it has not yet arrived—and if they wait for law and order, they will wait even longer.

Taxes

Finance Secretary Maria Antonieta de Bonilla recently announced that the tariffs that will no longer be recovered due to CAFTA create a fiscal deficit of Q400 million. She adds that this shortfall will have to be filled with new taxes.7 It seems that the decrease in customs revenue with CAFTA surprised the Berger administration. His government seems to have the perverse certainty that this deficit, which produces a profit for U.S. exporters and national importers, should be filled by Guatemalan taxpayers.

Conclusion

Two months is not much time, but we can sense that life in CAFTA's universe will provide material for Guatemalan satire. Imports increase and exports decrease; no evidence on new investment, but there are new taxes in sight. Business continues in the hands of the same people as always.

Endnotes

1. Carlos Barrada, DR-Cafta Imposition and poverty in Guatemala; Monitoring Report: www.stopcafta.org.
2. Inside US Trade; July 14, 2006. “Guatemala to delay pocket lining change until beer deal done”
3. He negotiated, as Vice-Secretary of the Economy, the FTA with Mexico. He participated in the negotiation of CAFTA as a member of the CENCIT (CACIF).
4. Inside US Trade, August 25, 2006; “Bush statement undercuts sock provision in pension bill”
5. Beatriz Lix, Siglo 21, 18/09/2006; Q2,204 million have been invested.
6. Prensa Libre, 15/09/06
7. Prensa Libre, 13/09/06. Eduardo Smith explains that the secretary did not mean to say that, she meant to say the same thing.

Umberto Mazzei is Director of the Institute for International Economic Relations in Geneva (www.ventanaglobal.info) and member of the Mesa Global coalition in Guatemala. This article was originally published in the magazine Este País, October 2006 edition.

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