Overview: Integration or Immigration?
The free trade agreement negotiated by Costa Rica, the Dominican Republic (DR), El Salvador, Guatemala, Honduras, and Nicaragua, with the United States (CAFTA) gained approval from the United States Congress though without solid acceptance. In the Senate, the treaty was approved by 54 votes against 46. The debates that one can read do not show a great vision on the part of the legislators but rather complacency from some constituents trying to defend blurred business interests.
CAFTA should be analyzed in a wider context than just a simple free trade agreement with five small and poor nations. CAFTA is a second stage to a larger integration purpose that was aimed as the Free Trade Area of the Americas (FTAA). CAFTA will add to what has already been established under NAFTA (the North American Free Trade Agreement between Canada, the US and Mexico).
At a time when the EU has so far failed to become the United States of Europe (with the adverse referendums in France and the Netherlands on approval of the European Constitution), and when China is growing solidly and quickly catching up as the largest economy on earth, the US does not have time for rhetoric if it wants to keep its prevailing business and economic role worldwide. There is no other action possible than to reinforce its economy by fully integrating the Americas.
The dilemma when considering any Free Trade Agreement is that the US must asks itself what it wants: economic integration to improve the conditions of living in such countries, or the maintenance of the status quo in these countries where often inhabitants have no better choice than immigrating to the US? It seems that the US, by a narrow margin, has taken the route of integration. Let us examine the business meaning of this.
Expanded Markets for American Companies
The Central American countries involved offer 44 million additional consumers to American companies. Prior to CAFTA, trade routes were only a ‘one way street’ because, on the grounds of the Caribbean and Central America Basin Initiative, all such countries had access to the US markets. Therefore, CAFTA will not make any practical difference in principle bringing more competition to US manufacturing, because they are already selling in the country. But CAFTA does open new market opportunities for US manufacturers and service providers.
All five economies heavily import oil, passenger cars, transportation equipment, medical and veterinarian pharmaceuticals, and telecommunications equipment. In addition, for the purpose of remanufacturing, they import electrical components, cotton, and textiles. These are large potential products for increasing sales of American companies.
The oil industry can increase its business and exports to such countries in exporting, marketing and distributing oil and its derivatives to CAFTA consumers. The automobile industry will also have new open opportunities to sell their products into CAFTA countries with lesser barriers. Large pharmaceutical corporations too will also be among the winners with the opening of markets for further pharmaceutical products, gaining momentum vis-à-vis their European competitors. IT and mobile telecommunications companies will be among the large winners in supplying telecommunications equipment, and one large IT firm has already established a large manufacturing facility in Costa Rica.
Access to Procure Cheaper Resources
US manufacturers can procure cheaper resources that for various reasons may not be obtained locally, without sacrificing job generation in the US. The key is to align training and continuous education processes within business and government agencies, to get the benefits of a better-educated US population while increasing productivity and labor capabilities with CAFTA countries’ labor force.
While the average US worker earns $29,807 per year, the average worker in Costa Rica earns $2,804 and in the Dominican Republic $1,850. Their productivities are, in order, 2.7, 2.5 and 4.7. With such ratio between labor cost and productivity, American business may decide how and where to procure cheaper resources to become more efficient.
However, this cheap procurement of resources is easy. On the contrary, it will demand a great adaptation process. While the openness of the economy will generate cheaper access to consumer goods, increasing the consumers’ welfare, new business will also improve the chances that workers can improve their income without leaving the country. But, as a recent study of the World Bank points out: “Even the best and most flexible regulatory framework cannot ensure that people will automatically change jobs or that capital will instantaneously reallocate to the most productive activities. Moreover, some workers could experience income losses greater than the gains in terms of lower prices of consumption goods. As highlighted by López (2002), since the marginal utility loss for the poor from a given loss of real income is greater than for the richer workers, then a countries’ overall national welfare will also depend on the ability of the economy to provide greater adjustment assistance to the poor, rather than the middle and upper echelons of the labor market”.
New Investment Opportunities
While sectors such as telecommunications and insurance services that were closed to foreign investment in countries, such as Costa Rica, will be open, the increased intraregional investment in the financial sector shows also a great potential for US players.
In the last two months, and in anticipation to CAFTA approval, GE Commercial Finance acquired BAC International, a Nicaraguan based bank with investment throughout Central America. Other major players, such as Salvadorian Banco Cuscatlan and Costa Rican Corporacion Interfin, have alarge presence within the Central American markets.
Another promising field for investment is the textile and clothing industry within the CAFTA countries. Economies of scale and competitiveness with China textile supply can be gained with carefully planned investments in such areas.
In infrastructure and professional services, there is great potential for foreign investments in sectors such as construction and engineering, law and accounting, and so forth. Even the agricultural sector represents an interesting field for new foreign investments. Large agricultural companies will have the chance to improve their competitive access to all their supply chain links.
Foreign investments in CAFTA countries are protected under the agreement, including enterprises, debt, concessions, contracts and intellectual property. Investors receive protection under CAFTA for due process as well as the right to receive a fair market value for property in the event of an expropriation (both direct and indirect expropriation, i.e. regulatory measures that may result in the material loss of value of any investment).
The CAFTA agreement also includes impartial procedures for dispute settlement (generally before the International Center for Settlement of Investment Disputes/ICSID or UNCITRAL arbitration panels) and explicit commitments to free and expediate transfers of profits, subject to non-discriminatory domestic regulations on the financial sector and the protection of creditor rights.
Conclusion
Closer integration seems the only sensible option for the Americas when looking at a potential future dominated by China or a single Europe. It is important to leverage on closer integration within the Americas to strengthen the US business environment. NAFTA was the first significant step in such a direction. CAFTA is another significant step.
However, as is the case of NAFTA, CAFTA will be meaningless if there is no strategic approach by US business to face the challenges of such markets and extract the benefits of their opportunities. The future will tell us just how well we can do this.