Magazine

Central America Is Holding Its Breath


In 1979, when Manuel Meza was a boy in El Salvador, a bloody civil war erupted and he and his coffee-growing family sought refuge in the U.S. Meza finished high school and college in Washington, D.C. Thirteen years ago, after a peace accord ended the 12-year conflict, Meza returned home to San Salvador, where the government was attempting to erase the scars of the devastating civil war by rebuilding its shattered economy. On the outskirts of the capital, not far from where leftist insurgents and right-wing death squads used to dump their victims, Meza opened a factory that makes dress shirts for export. Today he employs 600 people who stitch 1.5 million shirts annually for a variety of customers, including Wal-Mart Stores Inc. (WMT). He's proud of the palm-shaded factory, its day-care center, school, and subsidized cafeteria. Sales last year were $5 million.

Meza, however, is worried. He's concerned that China will grab the textile and garment business that El Salvador and other Central American countries have built up over 15 years. And he's doubly anxious because the region's best hope for fending off that competition -- a free-trade agreement with the U.S. -- faces stiff opposition in Congress. "If the trade pact is approved, it will open up big opportunities for us and trigger so much new investment," says Meza, 36. "But if it fails, there's a strong chance we'll lose half our export factories and half the jobs."

It has been 13 months since Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic, and the U.S. signed CAFTA-DR, the Central American-Dominican Republic Free Trade Agreement. The U.S. Senate Finance Committee hopes to start hearings on the trade pact in mid-June, the first step toward a long-delayed ratification vote in the House and Senate. But the outcome is far from certain. Concern over job losses and aggressive anti-CAFTA campaigns by U.S. sugar farmers and the AFL-CIO, plus a climate of confrontation between Republicans and Democrats, threaten to derail the agreement. "At this point, it's clear the votes just aren't there," says Norman Orenstein, a congressional analyst at the American Enterprise Institute, a Washington think tank.

MIXED SIGNALS?

For President George W. Bush, CAFTA is a key component of his international political and economic strategy. It's also viewed as a way of reducing poverty in Central America so that fewer economic migrants end up in the U.S. And by entering into an economic partnership with countries that faced down leftist insurgencies with U.S. help more than a decade ago and have struggled mightily to rebuild, Washington would take a big step toward restoring its tattered influence in Latin America. CAFTA, said Bush in a June 6 speech to the Organization of American States, "is a signal of the U.S. commitment to democracy and prosperity for our neighbors."

CAFTA is no less important to Central America's struggling regimes. Just ask Salvadoran President Elías Antonio Saca, who is banking on CAFTA to revive his country's economy, which despite bold reforms has grown an average of just 1.2% a year over the past decade. Saca last month barnstormed California and Washington, D.C., to drum up support for the pact -- but got a mixed reception. "This region has believed in democracy and in free trade, and if we don't achieve free trade with the largest market in the world, that would send a very bad signal to Central America," he says.

But is CAFTA enough to save the Central American and Caribbean textile and apparel industries from oblivion? Analysts say China's costs are so low that few companies anywhere can compete. But by permanently eliminating tariffs, CAFTA could encourage textile makers from around the world to invest millions in state-of-the-art, capital-intensive mills in Central America. Producing more quality fabric locally would allow apparel makers to get their products to the U.S. faster than from China and at little extra cost. Shipping time from El Salvador is already just five days, vs. four weeks from China. That means makers of time-sensitive seasonal fashions -- a key segment of the industry -- would prefer to stay in this hemisphere. "The time factor is our only way to compete with China," says Luis Gadala, a director of the Salvadoran Association of the Garment Industry.

While each of the six Latin countries would benefit differently from CAFTA, El Salvador is emblematic of the promise and challenge of free trade. The Massachusetts-size nation of 6 million was crippled in the 1980s by a brutal conflict that left 70,000 dead. After the 1992 truce, El Salvador began to rebuild. But then it was hit by a series of disasters, including Hurricane Mitch in 1998 and two devastating earthquakes in 2001.

Despite these travails, the government forged ahead with free-market reforms advocated by Washington -- privatizing banks, telecommunications, and pensions and welcoming foreign investment. It even adopted the U.S. dollar as its official currency in 2001. By 2003, more than 290 export factories, or maquiladoras, had located in El Salvador, employing 87,000 people. Throughout the region, more than 400,000 have found jobs in "maquilas," most of them making clothing for export to the U.S.

Nearly 40% of El Salvador's people nevertheless remain mired in poverty, many living in the violent slums of the capital. Thousands migrate illegally to the U.S., where some 2.5 million Salvadorans live. They send home about $2.5 billion a year -- 16% of the country's gross domestic product.

What little prosperity there is, however, depends not just on remittances but also on the continued growth of export manufacturing. That growth is already threatened by the Chinese juggernaut. Even before Jan. 1, when international quotas on textile and clothing exports expired, El Salvador was losing jobs to Asian rivals. In the last 18 months a dozen Salvadoran maquilas have closed, throwing 9,000 people out of work. The same thing is happening throughout Central America, keeping many factory workers on edge. "I worry about losing my job," says Barbie Cisneros, 30, a single mother and high school graduate who earns $32 a week after taxes sewing blue jeans and sports jerseys for Adidas (ADDDY), Nike (NKE), and Reebok (RBK) at a Taiwanese-owned factory in San Salvador. "If these jobs disappear, there won't be others for people like me."

Indeed, the year-long delay in ratification of CAFTA has many worried. Meza says he has lost half a dozen highly trained workers in the past two months. "They told me they have relatives already living in the U.S. who had jobs waiting for them," Meza says. "I think if CAFTA isn't approved, we'll see an explosion of migration."

That's something Washington doesn't want. Already, an estimated 11 million illegal migrants live in the U.S., the majority of them from Latin America. But CAFTA opponents who argue it will take away American jobs and undermine important industries appear to have the upper hand. "We should not be promoting a race to the bottom, which is what this agreement is," says Representative Sander Levin (D-Mich.). "American workers will have to compete with those whose rights are suppressed."

CAFTA backers contend that the pact would benefit U.S. companies by immediately eliminating tariffs on 80% of the products they sell to the region -- everything from Heinz (HNZ) ketchup to Caterpillar (CAT) tractors. Those exports already add up to $15.7 billion annually -- more than the U.S. sends to Russia, India, and Indonesia combined.

Deputy Secretary of State Robert B. Zoellick, who as U.S. Trade Representative spearheaded the first negotiations on CAFTA, often cites the example of Chile when arguing for the agreement. A 2004 free-trade pact between Chile and the U.S. has expanded exports by both countries more than 30% in the first year.

Not all Central Americans, however, are convinced CAFTA is the way to go, since it could touch off an avalanche of imported U.S. goods. "Many Salvadoran companies are not equipped to take full advantage of free trade, and for them it's going to be a real challenge to survive," says Roberto Vega, who heads the San Salvador office of TechnoServe, a U.S. nonprofit group that helps small companies modernize. In Costa Rica, legislators, concerned that under CAFTA they may be forced to privatize some government services, may not ratify the agreement until early next year.

Still, many in the region believe the pact is their best, and possibly last, shot at future growth. "We know it won't produce an economic miracle," says the garment industry's Gadala. "But without CAFTA it would take a miracle for our industry to survive." And not many miracles have happened in Central America lately.

By Geri Smith in San Salvador, with Paul Magnusson in Washington


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