Central America and the Dominican Republic in the Context of the Free Trade Agreement (DR-CAFTA) with the United States

CRS Report for Congress
Central America and the Dominican Republic in
the Context of the Free Trade Agreement
(DR-CAFTA) with the United States
Updated October 24, 2005
K. Larry Storrs, Coordinator
Specialist in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Clare Ribando, Lenore Sek, Mark P. Sullivan,
Maureen Taft-Morales, and Connie Veillette
Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

Central America and the Dominican Republic in the
Context of the Free Trade Agreement (DR-CAFTA)
with the United States
This report explains the conditions in five countries in Central America (Costa
Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and one country in the
Caribbean (Dominican Republic) that will be partners with the United States in the
U.S.-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA)
signed in August 2004. All of the signatory countries except Costa Rica have
approved the pact. The agreement will enter into force for the approving countries
on an agreed date, tentatively January 1, 2006. In U.S. approval action, the House
and Senate passed the required implementing legislation (H.R. 3045) on July 27 and

28, 2005, and the President signed it into law (P.L. 109-53) on August 2, 2005.

The DR-CAFTA partners are basically small countries with limited populations
and economic resources, ranging in population from Costa Rica with a population of
4.1 million to Guatemala with a population of 12.6 million, and ranging in Gross
National Income (GNI) from $4.5 billion for Nicaragua to $26.9 billion for
Guatemala. While El Salvador, Guatemala, and Nicaragua experienced extended
civil conflicts in the 1970s and 1980s, all of the countries have had democratically
elected presidents for some time, and several of the countries have experienced recent
electoral transitions. For each of the countries the United States is the dominant
market as well as the major source of investment and foreign assistance, including
trade preferences under the Caribbean Basin Initiative (CBI) and assistance following
devastating hurricanes.
The Bush Administration and other proponents of the pact argue that the
agreement will create new opportunities for U.S. businesses and workers by
eliminating barriers to U.S. goods and services in the region. They also argue that
it will encourage economic reform and strengthen democracy in affected countries.
Many regional officials favor the pact because it provides new access to the U.S.
market and makes permanent many of the temporary one-way duty-free trade
preferences currently in place. Critics argue that the environmental and labor
provisions are inadequate, that the pact will lead to the loss of jobs for workers in the
United States and for subsistence farmers in Central America, and that provisions
relating to textiles/apparel and sugar will be harmful to U.S. producers. In the
context of legislative action, the Bush Administration promised to limit sugar
imports, to make some adjustments for textile industries, and to support multi-year
assistance to strengthen regional enforcement of labor and environmental standards.
Related information may be found in CRS Report RL31870, The Dominican
Republic-Central America-United States Free Trade Agreement (DR-CAFTA), by
J.F. Hornbeck; CRS Report RL32110, Agriculture in the U.S.-Dominican Republic-
Central American Free Trade Agreement, by Remy Jurenas; CRS Report RS22164,
DR-CAFTA: Regional Issues, by Clare Ribando; and CRS Report RS22159, DR-
CAFTA Labor Rights Issues, by Mary Jane Bolle.

In troduction ......................................................1
Regional Characteristics........................................1
Relations with the United States..................................4
Major Pact Provisions and Issues..................................5
Status of Pact Approvals.......................................11
Costa Rica......................................................13
Political Situation.............................................13
Economic Conditions..........................................14
Relations with the United States.................................16
DR-CAFTA-Related Issues.....................................17
Dominican Republic..............................................22
Political Situation.............................................22
Economic Conditions..........................................24
Relations with the United States.................................26
DR-CAFTA-Related Issues.....................................27
El Salvador......................................................30
Political Situation.............................................30
Economic and Social Conditions.................................32
Relations with the United States.................................34
DR-CAFTA-Related Issues.....................................36
Guatemala ......................................................39
Political Background..........................................39
Socio-Economic Background...................................41
Relations with the United States.................................43
DR-CAFTA-Related Issues.....................................47
Honduras .......................................................53
Political Situation.............................................53
Economic Conditions..........................................55
Relations with the United States.................................56
DR-CAFTA-Related Issues.....................................58
Nicaragua .......................................................64
Political Situation.............................................64
Economic Conditions..........................................67
Relations with the United States.................................68
DR-CAFTA-Related Issues.....................................72
Appendix 1. U.S. Economic and Military Assistance to Central America
and the Dominican Republic, FY1977-FY2004.....................76
Appendix 2. Map Showing DR-CAFTA Pact Partners....................77

List of Tables
Table 1. Central American Countries and the Dominican Republic:
Size, Population, and Major Economic Variables,2004................2
Table 2. Central American Countries and the Dominican Republic:
Key Development Indicators, 2004................................3
Table 3. Central American Countries and the Dominican Republic:
Total Trade and Trade with the United States, 2004...................5

Central America and the Dominican
Republic in the Context of the Free Trade
Agreement (DR-CAFTA) with
the United States
On October 1, 2002, the Bush Administration notified Congress of the intention
to enter into negotiations leading to a free trade agreement with five Central
American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua).
Negotiations for a U.S.-Central America Free Trade Agreement (CAFTA) were
launched in January 2003 and were completed on December 17, 2003, although
Costa Rica withdrew from the negotiations at the last minute. Negotiations with
Costa Rica continued in early January 2004, and were completed on January 25,
2004. On February 20, 2004, President Bush notified Congress of his intention to
sign the CAFTA pact, and it was signed on May 28, 2004. In August 2003, the
Administration notified Congress of plans to negotiate a free trade agreement with
the Dominican Republic and to incorporate it into the free trade agreement with
Central American countries. Negotiations with the Dominican Republic began in
January 2004, and were completed on March 15, 2004. The new pact, to be known
as the United States-Dominican Republic-Central America Free Trade Agreement
(DR-CAFTA), was signed by all seven countries on August 5, 2004.2
Regional Characteristics
The term “Central America” is often used as a geographical term to apply to all
of the countries in the Central American isthmus, and it is also used to apply to five
core countries — Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica —
long associated with each other. These five countries were linked during colonial
times and formed a confederation for a number of years following independence in

1821. Two other countries in Central America have distinctive backgrounds.

Panama was a part of Colombia until it achieved independence in 1903, and had
special links to the United States because of the Panama Canal. Belize was a British
territory known as British Honduras until it achieved independence in 1981, and has
close ties to the English-speaking countries of the Caribbean Community (Caricom).

1 Prepared by K. Larry Storrs, Specialist in Latin American Affairs.
2 For details on the DR-CAFTA agreement, see CRS Report RL31870, The Dominican
Republic-Central America-United States Free Trade Agreement (DR-CAFTA), by J.F.

In a first wave of regional integration in the 1960s, the five core countries
formed the Central American Common Market (CACM) in 1960 to encourage
economic growth. The CACM performed extremely well in the first decade of its
existence, but it largely collapsed in the 1970s and 1980s as the countries, many with
military-controlled regimes, were embroiled in long and costly civil conflicts that
exacerbated the region’s economic and social problems.
A second wave of regional integration developed in the 1990s, following peace
initiatives in El Salvador, Nicaragua, and Guatemala that eventually led to peace
accords and democratically elected governments. In 1991 and 1993, the presidents
of the Central American countries, including Panama, signed two protocols that
created a new integration mechanism known as the Central American Integration
System (SICA) that is designed to facilitate the creation of a customs union among
the countries and to encourage cooperation in a range of activities. Belize joined the
regional integration system in December 2000, and the Dominican Republic became
an associate member in December 2003.3
The DR-CAFTA partner countries are basically small countries with limited
population and economic resources, with some differences in level of development
(see Table 1). They range in size from El Salvador (with just over 8,000 square
miles) to Nicaragua (with over 50,000 square miles). The combined population of
the countries is 45 million, ranging from Costa Rica with a population of 4.1 million
to Guatemala with a population of 12.6 million.
Table 1. Central American Countries and the Dominican
Republic: Size, Population, and Major Economic Variables,2004
GDP per
Area inPopulationGNI, $GNI perGDP growthcapita
Countrysquarein millions,billions,capita, $rates,growth
miles2004200420042004 (%)rates, 2004
Costa Rica19,6524.119.04,6704.22.7
Dominican 18,704 8.9 18.4 2 ,080 2.0 0 .6
El Salvador8,2606.715.62,3501.7-0.2
Guatemala 42,000 12.6 26.9 2 ,130 2.7 0 .1
Ho nd uras 43,270 7.1 7 .3 1,030 4.6 2 .1
Nicaragua 50,446 5.6 4 .5 790 3.7 1 .4
To tal 182,332 45.0 91.7
Sources: Area in square miles from State Department Background Notes; population; Gross National
Income (GNI) and Gross Domestic Product (GDP) data from World Bank Development Report 2005,
World Bank Data Profile Tables, and World Bank Country at a Glance Tables.

3 See “Central American Integration System” in The Europa World Yearbook 2003, Vol. I;
and various notices on the website of the General Secretariat of the SICA, available online
at [http://www.sgsica.org].

With a combined national income of about $92 billion, the Gross National
Incomes (GNI) of the countries range from $4.5 billion for Nicaragua to $26.9 billion
for Guatemala. In per capita terms, the countries range from Nicaragua with a GNI
per capita of $790, which the World Bank classifies as a low-income country, to
Costa Rica with per capita income of $4,670, which is classified as an upper middle-
income country. The rest of the countries are classified as lower middle-income
countries by the World Bank. In terms of rates of growth, Nicaragua, Costa Rica and
Honduras experienced growth in 2004 ranging from 3.7% to 4.6%, while El
Salvador, Dominican Republic, and Guatemala experienced growth ranging from
1.7% to 2.7%. In per capita terms, the results were more modest with three of the
countries generating less than 1% growth, while the others experienced growth
ranging from 1.4% to 2.7%.
Turning to some key developmental indicators, Table 2 shows that, with the
exception of Costa Rica (which performs at higher levels), the countries generally
have similar levels of performance, and that performance falls below the Latin
America and Caribbean regional aggregates. Using the United Nations Development
Program’s Human Development Index, which measures achievements in terms of life
expectancy, educational attainment, and adjusted real income, Costa Rica is classified
as having high human development, and is ranked as 47th in the world. The other
countries are classified as having medium human development, and have rankings
that are fairly similar: Dominican Republic (95), El Salvador (104), Nicaragua (112),
Honduras (116), and Guatemala (117). Except for Haiti, which ranks even lower, the
DR-CAFTA countries are among the lowest performers in Latin America and the
Table 2. Central American Countries and the Dominican
Republic: Key Development Indicators, 2004
Lif e Inf a nt Child Illit era cy Huma n
Countryexpectancyat birthmortality rate(per 1,000malnutrition(% of children(% ofpopulationDevelopment
(years)live births)under 5)age 15+)Index
Costa Rica798540.838
Dominican 67 29 5 1 2 0 .749
El 70 32 10 20 0.722
Nicaragua 69 30 10 23 0.690
Ho nd uras 66 32 17 20 0.667
Guatemala 6 6 3 5 2 3 3 1 0 .663
La tin
America &71289130.797
Sources: Human Development Index from UNDP’s Human Development Report 2005; all other data from
World Banks World Development Indicators database, April 2005, and World Bank Country at a Glance tables,
with most recent estimates.

Relations with the United States
In view of the proximity of Central America and the Caribbean, the United
States has had close, sometimes controversial, ties to the regions for many years. For
these regional countries, the United States has always been the dominant market, as
well as the major source of investment and bilateral assistance, while recent U.S.
interest in Central America has been fairly sustained for more than two decades.
In the early 1980s, with a revolutionary regime in Nicaragua and a threatening
insurgency in El Salvador, Congress responded to President Reagan’s 1982 call for
a Caribbean Basin Initiative by increasing economic assistance to the Central
American and Caribbean region, and by providing one-way duty-free trade
preferences for the region for 12 years in the Caribbean Basin Economic Recovery
Act (CBERA).
In the mid-1980s, responding to the 1984 report of the National Bipartisan
[Kissinger] Commission on Central America, Congress dramatically increased
assistance to Central America over the next several years (see Appendix 1) As a
result of these programs, the United States provided more than $11 billion in
economic and military assistance to the Central American region from FY1978 to
FY1990, especially assistance to El Salvador.4
In 1990, Congress responded to continuing concerns in the region by passing the
Caribbean Basin Trade Partnership Act (CBTPA) that expanded and extended the
original CBI legislation. In 1999, Congress responded again, by providing over a
billion dollars of assistance to deal with Hurricane Mitch in Central America and
Hurricane Georges in the Caribbean.5
In part because of the CBI legislation, the United States is by far the most
important trading partner of the regional countries, representing the most important
source of imports and the major market for exports (see Table 3). With regard to
exports, the relationship ranges from Costa Rica where 23% of its exports are U.S.-
bound, to the other countries that send more than 50%, up to the Dominican Republic
that sends 79% of its exports to the United States. With regard to imports, the
relationship ranges from Nicaragua that receives 25% of total imports from the
United States, to Honduras that depends upon the United States for 49% of its

4 CRS Report 89-374, Central America: Major Trends in U.S. Foreign Assistance, Fiscal
1978 to Fiscal 1990, June 19, 1989, by Jonathan E. Sanford (out of print; for copies, contact
the author at 7-7682).
5 See CRS Report 98-1030, Central America: Reconstruction After Hurricane Mitch, Oct.
12, 1999, by Lois McHugh, Coordinator; and Mission Accomplished: The United States
Completes a $1 Billion Hurricane Relief and Reconstruction Program in Central America
and the Caribbean, Agency for International Development, 2003.

Table 3. Central American Countries and the Dominican
Republic: Total Trade and Trade with the United States, 2004
TotalExportsExportsto U.S.TotalImportsImportsfrom U.S.
CountryExports,to U.S.,as % ofImports,from U.S.,as % of
$ millions$millionsTotal$ millions$ millionsTotal
Costa Rica14,0413,18523%11,3613,63432%
Dominican 5,330 4,216 79% 9,181 4,342 47%
El Salvador3,3811,92057%5,9892,05434%
Guatemala 5 ,562 3,054 55% 8,958 2,803 31%
Ho nd uras 5,511 3,458 63% 6,885 3,384 49%
Nicaragua 1,484 936 63% 2,611 650 25%
To tal 35,309 16,769 47% 44,985 16,867 37%
Source: International Monetary Funds Direction of Trade Statistics Quarterly, June 2005.
Major Pact Provisions and Issues
Completion of Negotiations. The United States announced the conclusion
of a U.S.-Central America Free Trade Agreement (CAFTA) with El Salvador,
Guatemala, Honduras, and Nicaragua on December 17, 2003, keeping to the
originally announced schedule. The delegation from Costa Rica withdrew from the
negotiations in the last few days to seek further consultations with their government
and were not part of the December agreement. The Costa Rican delegation resumed
negotiations in early January 2004 and the United States and Costa Rican delegations
announced that they had reached agreement on January 25, 2004. President Bush
notified Congress of his intention to sign the pact with the Central American
countries on February 20, 2004, and the CAFTA pact was formally signed on May6

28, 2004.

Negotiations with the Dominican Republic began in mid-January 2004, and
were completed on March 15, 2004, with the idea that the agreement would be linked
to the CAFTA pact and that a single legislative package would be submitted to
Congress for approval under the terms of the Trade Promotion Authority in the Trade
Act of 2002. The Administration notified Congress of its intention to sign the
agreement on March 25, 2004, and it could have signed the agreement any time after
June 24, 2004. Representatives of the seven countries met in Washington, D.C. and
signed the agreement, to be known as the United States-Dominican Republic-Central
America Free Trade Agreement (DR-CAFTA), on August 5, 2004.

6 See the USTR webpage [http://www.ustr.gov/Trade_Agreements/Bilateral/CAFTA/
Section_Index.html] for the press releases and texts of the agreement and the reports of the
Trade Advisory Groups.

Overview of Provisions. Under the pact, over 80% of U.S. consumer and
industrial products will receive duty-free treatment from regional countries
immediately, and that percentage will rise to 85% within five years and to 100%
within ten years. More than 50% of U.S. farm products will have immediate duty
free status, and tariffs on more sensitive products will be phased out within 15-20
years. Textile and apparel will be duty-free and quota-free if they meet the rules of
origin. Consumer and industrial goods from regional partners already entering the
United States duty free under the Caribbean Basin Trade Partnership Act will have
consolidated and permanent treatment so that nearly all industrial goods will enter
the United States duty free immediately. The agreement also contains provisions on
services, intellectual property rights, government procurement, and labor and
environmental protections.7
Views of the agreement vary considerably. According to U.S. Trade
Representative Zoellick, the original CAFTA agreement “will streamline trade;
promote investment; slash tariffs on goods; remove barriers to trade in services;
provide advanced intellectual property protections; promote regulatory transparency;
strengthen labor and environmental conditions; and, provide an effective system to8
settle disputes.” The U.S. Business Roundtable said that “this agreement can serve
as a model of how developing and industrial nations can work together to find9
consensus on trade liberalization.” In early January 2005, the National Association
of Manufacturers in announcing its agenda for the 109th Congress urged approval of
the DR-CAFTA agreement. On January 26, 2005, 151 companies and associations
forming the Business Coalition for U.S. Central America Trade sent letters to House
and Senate leaders urging action on the pact to provide “full and reciprocal access”
for U.S. producers, rather than the unilateral access that presently exists.10 In

7 For more details, see CRS Report RL31870, The Dominican Republic-Central America-
United States Free Trade Agreement (DR-CAFTA), by J.F. Hornbeck. For details of the
agreement and estimates of the impact on the U.S. economy, see the report by the U.S.
International Trade Commission, “U.S.-Central America-Dominican Republic Free Trade
Agreement: Potential Economywide and Selected Sectoral Effects,” Investigation No. TA-

2104-13, Publication 3717, Aug. 2004, available at [http://www.usitc.gov].

8 See “U.S. & Central American Countries Conclude Historic Free Trade Agreement,”
USTR Press Release, Dec. 17, 2003; “Free Trade with Central America: Summary of the
U.S.-Central American Free Trade Agreement,” USTR Trade Facts, Dec. 17, 2003; “U.S.
and Dominican Republic Conclude Trade Talks Integrating the Dominican Republic into
the Central American Free Trade Agreement,” USTR Press Release, Mar. 15, 2004;
“Adding Dominican Republic to CAFTA,” USTR Trade Facts, Mar. 15, 2004; and
“Dominican Republic Joins Five Central American Countries in Historic FTA,” USTR Press
Release, Aug. 5, 2004, for information on the provisions of the agreements. More recent
information can be found in the CAFTA Briefing Book available on the USTR website
under Bilateral Agreements/Dominican Republic-Central America FTA.
9 See USTR Policy Brief “CAFTA Facts — Broad Support for CAFTA” (Feb. 5, 2005), on
the USTR website, at [http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/
Briefing_Book/asset_upload_file808_7184.pdf]; and “U.S. Officials, Industry Groups Hail
Conclusion of Dominican Republic FTA Talks,” on the website for Inside Trade.
10 See “NAM Urges 109th Congress to Tackle Trade Barriers in WTO, Approve CAFTA,”
and “Business Coalition Underlines DR-CAFTA Benefits in Hastert Letter” on the Inside

testimony before the Senate Finance Committee and the House Ways and Means
Committee in mid-April 2005, Acting USTR Peter F. Allgeier restated
Administration arguments that the agreement involved small countries with large and
important markets, and USTR-nominee Rob Portman reiterated those arguments in
his confirmation hearing before the Senate Finance Committee on April 21, 2005.
They also argued that the agreement will strengthen economic reform and democracy
in the affected countries.
On the other hand, labor and environmental groups and some members of
Congress found the labor and environmental provisions to be inadequate.11 The
Alliance for Responsible Trade, a coalition of non-governmental organizations,
criticized the CAFTA for having weak labor and environmental provisions while
containing strong investor and intellectual property rights for businesses.12 The
Dominican Participation and Consultation on Free Trade, a coalition of Dominican
church and cultural groups in New York City, expressed similar concerns about the
integration of the Dominican Republic into the CAFTA agreement.13 On the eve of
the signing of the CAFTA pact with Central American countries on May 28, 2004,
several Democratic Members from the House and the Senate criticized the labor and
environmental provisions of the agreement.14 About the same time, presumptive
Democratic presidential candidate John F. Kerry indicated that he would renegotiate
the agreement if he were elected President to strengthen the labor and environment
provisions.15 In mid-December 2004, a number of labor unions and non-
governmental organizations filed petitions with the USTR claiming that Central
American countries should be denied GSP benefits because of the failure to respect
internationally recognized labor rights.16 More recently, Representative Sander Levin
and Senator Jeff Bingaman argued that the reports of the International Labor Rights
Fund, funded by the U.S. Department of Labor, demonstrate that the countries’ labor
protections fall short of ILO standards, but the Department of Labor countered that
the reports were biased.17

10 (...continued)
Trade website.
11 See “Key House Democrats Fault USTR’s Labor Proposals for CAFTA,” International
Trade Reporter, Oct. 30, 2003; and “U.S. Central American Countries Ink Deal; Senator
Says Green Provisions Inadequate,” International Environment Reporter, Jan. 14, 2004.
12 See the Alliance for Responsible Trade press release of Mar. 23, 2004, and the study
entitled “Why We Say No to CAFTA” on the ART website [http://www.art-us.org].
13 See the statement of June 22, 2004, on the Inside U.S. Trade website.
14 See “Zoellick Floats Lame-Duck CAFTA Vote, Levin Seeks Labor Report,” Inside U.S.
Trade, May 28, 2004.
15 See “Kerry Vows to Renegotiate CAFTA, Costa Rica Leaves Option Open,” Inside U.S.
Trade, June 4, 2004.
16 See “Labor Groups Press for USTR to Review Central American FTA Partners’ GSP
Eligibility” on the Inside Trade website.
17 See “Levin Charges Reports Prove CAFTA Laws Fail to Reflect ILO Standards,”
“Bingaman Says ILRF Report Raises Significant Problems with CAFTA Labor Rights,” and

Major Issues. The four most contentious issues when Congress considered
the agreement were agriculture, apparel/textiles, and the labor and environment
Agriculture. Under the agreement, more than 50% of U.S. farm products will
have immediate duty free status in Central American markets, and tariffs on more
sensitive products will be phased out within 15-20 years. For white corn, recognized
as the most sensitive product for Central America because it is produced by
subsistence farmers and is used as a staple in the making of tortillas, a quota equal
to the current import level will increase about 2% each year, while the high over-
quota tariff will remain in force. While nearly all Central American farm products
will have permanent duty-free status in U.S. markets, quotas for more sensitive
products (sugar, beef, peanuts, dairy products, tobacco, and cotton) will increase
gradually. For sugar, recognized as the most sensitive product for U.S. negotiators,
the regional countries received an immediate 107,000 metric tons increase in their
current sugar quota and regular yearly increases, but the high over-quota tariffs
remain fully in force. USTR notes that the permitted increases in sugar imports from
regional countries would be equal to about 1.3% of U.S. sugar production in the first
year, and would grow to only 1.9% in 15 years. While many U.S. commodity
organizations support the DR-CAFTA agreement, the U.S. sugar industry opposes
it on grounds that the increase in the quota sets a precedent for other free trade
agreements and would result in a substantial increase in sugar imports that would be
damaging to U.S. producers.18 In mid-June 2005, the Administration offered to
consider ways to ameliorate any possible damage to sugar producers, but major sugar
growers associations announced on June 23, 2005, that no acceptable agreement had
been achieved.19 Other critical groups argue that it is unfair to pit highly subsidized
U.S. agricultural interests against the poor subsistence farmers in Central America,
and they argue that the result will be that these rural farmers will lose their
livelihoods as they did in Mexico under NAFTA.20 On January 27, 2005, the
Ranchers-Cattlemen Action Legal Fund United Stockgrowers of America (R-CALF
USA) representing cattleman and ranchers in 46 states joined the Americans for Fair
Trade in calling for Congress to reject the DR-CAFTA pact, primarily because the
agreement lacks safeguard provisions for U.S. producers in the event of a rapid
increase in Central American imports. In conjunction with the votes in the relevant
committees and in the Senate in late June 2005, the Administration promised to take
measures to limit sugar imports from the region and to study the feasibility of using

17 (...continued)
“Labor Department Criticizes Reports Assessing DR-CAFTA Countries’ Labor Laws,” May

3-4, 2005, on Inside U.S. Trade website.

18 See “CAFTA Supporters Worry About Absence of Costa Rica ... While Sugar Groups
Decide to Oppose CAFTA Pact,” Congress DailyPM, Dec. 18, 2004; and “U.S. Sugar
Companies Urge Bush to Eliminate CAFTA Sugar Concessions,” International Trade
Reporter, Jan. 22, 2004.
19 See “White House Signals Willingness to Discuss Sugar in CAFTA,” Congress Daily
AM, June 15, 2005; and “There is No CAFTA Sugar Deal,” June 23, 2005, on Inside U.S.
Trade website.
20 See the WOLA Issue Guide entitled Fair Trade or Free Trade: Understanding CAFTA,
on WOLA’s website at [http://www.wola.org/economic/brief_cafta_labor_april04.pdf].

sugar for the production of ethanol, but the sugar industry reasserted its opposition
to the agreement.21
Apparel/Textiles. Under the agreement, textiles and apparel will be duty-free
and quota-free immediately under more liberal rules of origin, and the coverage will
be retroactive to January 1, 2004. Duty-free treatment will be accorded to some
apparel produced in Cental America and the Dominican Republic that contains
certain fabrics from NAFTA partners Mexico and Canada, or from other countries
in the case of fabrics and materials deemed to be in “short supply” in the United
States and Central America. Some U.S. textile groups announced early on that they
would oppose DR-CAFTA because of the more liberal rules of origin that, in their
view, would lead to the closure of more textile mills in the United States.22 In early
May 2005, with indications from the USTR of modifications in provisions dealing
with pocketing and linings, the National Council of Textile Organizations voted to
support DR-CAFTA. In conjunction with the late July vote in the House, the
Administration promised more favorable provisions for apparel and sock producers.23
Labor. According to the USTR, DR-CAFTA labor provisions go beyond the
provisions in the Chile and Singapore free trade agreements to create a three-part
strategy to strengthen worker rights. Under the agreement, the countries are required
to enforce their own domestic labor laws and that obligation is enforceable through
the regular dispute resolution procedures. In addition, the countries agree to work
with the International Labor Organization (ILO) to improve existing laws and
enforcement, and technical assistance is provided to enhance the capacity of Central
American countries to monitor and enforce labor rights. The Emergency Committee
for American Trade, composed of leading U.S. international business enterprises,
argues that the labor rights protections in the CAFTA pact are as strong or stronger
than those found in the U.S.-Jordan FTA.24
The AFL-CIO has argued that the FTA labor provisions are deficient, because
they would require only the enforcement of current domestic labor laws, which are
viewed as woefully inadequate, and would lead to continuing job losses in the United
States. The U.S. labor organization argues that the provisions in the agreement are
weaker than the existing beneficiary requirements under the Generalized System of
Preferences and the Caribbean Basin Trade Promotion Act that require that a country

21 See “CAFTA Heads for Uncertain House Vote,” CQ Weekly, July 4, 2005.
22 See CRS Report RL31870, The Dominican Republic-Central America-United States Free
Trade Agreement (DR-CAFTA), by J.F. Hornbeck; USTR, “Free Trade with Central
America: Summary of the U.S.-Central American Free Trade Agreement,” Dec. 17, 2003;
and “Trade Deal Still Under Attack; Textile Groups Say CAFTA Unfairly Favors Workers
from Outside the U.S.,” Greensboro News Record, Dec. 24, 2003, p. B8.
23 See “Bush Secures CAFTA Vote in Last Hours with Renewed Textile Pledge,” Inside
U.S. Trade, July 29, 2005.
24 Emergency Committee for American Trade, “ECAT Releases Analysis of Labor and
Dispute Settlement Provisions in the CAFTA and U.S.-Jordan FTA,” on the ECAT website:
[ h t t p : / / www.ecat t r ade.com] .

be taking steps to afford workers “internationally recognized worker rights.”25 A
number of members of Congress have argued that the agreement should include an
enforceable commitment by the countries to implement internationally recognized
labor standards.26
Seeking to bridge the gap between the critics and the proponents, a scholar at
the Center for Global Development has argued for greater enforcement of existing
laws while continuing to strengthen workers rights.27 In keeping with this approach,
the Ministers responsible for trade and labor in the DR-CAFTA countries met in
Washington, D.C. on July 13, 2004, and committed to strengthen and enhance labor
law compliance and enforcement.28 With assistance from the Inter-American
Development Bank, the U.S. Department of Labor, and USAID, the countries are
striving to build labor and environmental law enforcement capacity through a $20
million assistance package provided by the United States.
In mid-December 2004, a number of labor unions and non-governmental
organizations filed petitions with the USTR claiming that Central American countries
should be denied GSP benefits because they had failed to make progress in respecting
internationally recognized labor rights.29 More recently, as indicated above,
Representative Sander Levin and Senator Jeff Bingaman argued that the reports of
the International Labor Rights Fund, funded by the U.S. Department of Labor,
demonstrate that the countries’ labor protections fall short of ILO standards, but the
Department of Labor countered that the reports were biased.30 In conjunction with
the votes in the relevant committees and in the Senate in late June 2005, the
Administration promised to support assistance of $40 million per year in FY2006
through FY2009 for regional countries to strengthen the enforcement of labor and
environmental standards as well as assistance for regional farmers who might be
adversely affected by the pact.31

25 See the Statement by AFL-CIO President John Sweeney on Central American Trade
Agreement, Dec. 17, 2003; the Testimony of Thea M. Lee, Assistant Director for
International Economics; and other material on CAFTA on the AFL-CIO website at
[http://www.aflcio.or g/issuespolitics/gl obaleconomy/ ].
26 See “Key House Democrats Fault USTR’s Labor Proposals for CAFTA,” International
Trade Reporter, Oct. 30, 2003; and “Zoellick Floats Lame-Duck CAFTA Vote, Levin Seeks
Labor Report,” Inside U.S. Trade, May 28, 2004.
27 See Kimberly Ann Elliott, “Trading Up: Labor Standards, Development, and CAFTA,
CGD Brief, May 2004.
28 See “CAFTA Ministers Unveil Program to Boost Labor Standards,” on the Inside U.S.
Trade website.
29 See “Labor Groups Press for USTR to Review Central American FTA Partners’ GSP
Eligibility” on the Inside Trade website.
30 See “Levin Charges Reports Prove CAFTA Laws Fail to Reflect ILO Standards,”
“Bingaman Says ILRF Report Raises Significant Problems with CAFTA Labor Rights,” and
“Labor Department Criticizes Reports Assessing DR-CAFTA Countries’ Labor Laws,” May

3-4, 2005, on Inside U.S. Trade website.

31 See “CAFTA Heads for Uncertain House Vote,” CQ Weekly, July 4, 2005.

Environment. USTR claims that DR-CAFTA contains an innovative
environmental chapter that goes beyond the Chile and Singapore agreements to
develop “a robust public submission process to ensure that views of civil society are
appropriately considered.” It also includes provisions on cooperative actions and the
establishment of an Environmental Cooperation Commission. A number of members
of Congress have argued that the environmental provisions are weaker than those
found in the NAFTA pact, and they have been arguing for a more effective citizen
petition process that could be used to encourage a country’s compliance with32
environmental laws. Seeking to strengthen environmental monitoring, the seven
DR-CAFTA countries signed two supplemental agreements in February 2005, one
to establish an independent multilateral secretariat to administer public submissions
under the pact, and the other an Environmental Cooperation Agreement (ECA) to33
encourage regional cooperation on environmental matters. As indicated above, the
U.S. Congress approved $20 million in FY2005 assistance to enhance the capacities
of the DR-CAFTA countries to strengthen and enforce labor and environmental
standards, and the Administration promised in June 2005 to support assistance of $40
million per year in FY2006 through FY2009 for the same purposes.
Status of Pact Approvals
Early Approvals of Pact. Following the signing of the pact, the regional
presidents were required to submit the agreement to their respective legislatures for
approval, and three of the six countries approved the pact before action by the United
States. The Salvadoran legislature approved the pact, 49-35, on December 17, 2004;
the Honduran legislature approved it, 124-4, on March 3, 2005; and the Guatemalan
legislatures approved it, 126-12, on March 10, 2005. In the other three countries
there was enough opposition that the leaders were reluctant to press for a vote until
it was clear that the pact would be approved by the United States.
U.S. Approval of Pact. The Bush Administration was reluctant to submit the
implementing legislation to Congress before the November 2004 election because of
the crowded legislative calendar and the contentiousness of the issue, but it
reemerged as an important issue following President Bush’s re-election in November
2004 and his re-inauguration in January 2005. Submission was complicated as well
by U.S. disputes with the Dominican Republic and Guatemala and by the vacancy in
the leadership of the USTR when Ambassador Robert Zoellick became the Deputy
Secretary of State. The dispute with the Dominican Republic over the country’s
October 2004 tax on soft drinks sweetened with imported high fructose corn syrup
(HFCS) was resolved in early January 2005 when that tax was repealed. The dispute
with Guatemala over a December 2004 law that limited test data protection for
pharmaceutical products was resolved in early March 2005 when the Guatemalan
Congress modified the legislation. The vacancy in the leadership of the USTR was

32 See “Senate Dems Warn Zoellick on CAFTA Environment Provisions,” Congress Daily,
Nov. 21, 2003; “U.S. Central American Countries Ink Deal; Senator Says Green Provisions
Inadequate,” International Environment Reporter, Jan. 14, 2004.
33 See “Environment: DR-CAFTA Countries Sign Two Pacts to Boost Environmental
Cooperation,” International Trade Reporter, Feb. 24, 2005, p. 305.

resolved when the Senate approved, on April 28, 2005, President Bush’s nominee
Representative Rob Portman of Ohio as the new USTR.
Under the new circumstances, the President pressed for passage of DR-CAFTA
in mid-2005 as a top priority for his Administration and as a key step in future trade
negotiations. Hearings on the agreement were held by the Senate Finance Committee
on April 13, 2005, and by the House Ways and Means Committee on April 21, 2005,
with a range of witnesses presenting supportive and critical perspectives. Hoping
to encourage support for the agreement, the Presidents of the DR-CAFTA countries
visited various U.S. cities in mid-May 2005, ending with meetings with
congressional leaders and President Bush in Washington, D.C., on May 11-12,


In informal “mock” markups in mid-June, the agreement was approved 11-9 in
the Senate Finance Committee on June 14, 2005, and it was approved 25-16 in the
House Ways and Means Committee on June 15, 2005, after most efforts to add
amendatory language were rejected. The President met with bipartisan leaders from
former administrations and with Central American diplomats on June 23, 2005, to
urge congressional support for the implementing legislation (S. 1307/H.R. 3045) as
it was submitted by the Administration and introduced in Congress. S. 1307 was
approved by voice vote by the Senate Finance Committee on June 29, 2005, and it
was approved 54-45 by the Senate on June 30, 2005. H.R. 3045 was approved 25-16
by the House Ways and Means Committee on June 30, 2005, and it was approved
217-215 by the House in the late evening of July 27, 2005. Since finance measures
must originate in the House, H.R. 3045 was returned to the Senate, where it was
approved 55-45 on July 28, 2005. The measure was signed into law (P.L. 109-53)
by President Bush on August 2, 2005, in the presence of legislators and regional
ambassadors. In conjunction with the late June votes in the relevant committees and
in the Senate, the Administration agreed to take measures to limit sugar imports, to
study the feasibility of using sugar for the production of ethanol, and to support
multi-year assistance to regional countries to strengthen the enforcement of labor and
environmental standards and to assist regional farmers who might be adversely
affected by the pact.35 In conjunction with the late July vote in the House, the
Administration promised more favorable provisions for apparel and sock producers,
and the House leadership facilitated approval of a bill (H.R. 3283) that established
requirements for closely monitoring alleged unfair Chinese trading practices.36

34 See “USTR Seeks CAFTA Passage by Mid-Year, Zoellick to Consult Congress,” Inside
U.S. Trade, Nov. 12, 2004; and ‘Trade Policy: President Bush to Continue Pursuing Free
Trade Pacts, Pushing Global Trade Talks,” International Trade Reporter, Nov. 11, 2004;
“Central American Free Trade Pact a Top U.S. Priority, Rice Says,” U.S. Department of
State Information Programs, Apr. 30, 2004, at [http://usinfo.state.gov/xarchives/
display.html]; “Trade: Central American Leaders Pitch CAFTA to Dems, Bill Clinton,”
Congress Daily AM, May 12, 2005; and “Central America: Bush Backs CAFTA,”
LatinNews Daily, May 13, 2005.
35 See “CAFTA Heads for Uncertain House Vote,” CQ Weekly, July 4, 2005.
36 See “House Leadership Sets DR-CAFTA Vote for Mid-Week, Still Seeks Votes,” and
Textile Talks with House GOP Members Shrouded in Questions,” Inside U.S. Trade, July

Later Approvals of Pact and Projected Entry into Force. Following
U.S. approval of the pact, two other countries acted to approve the agreement,
leaving Costa Rica as the only non-approving country. In the Dominican Republic,
the Senate approved the measure 27-2 in late August 2005, and the Chamber of
Deputies approved it 118-4 on September 6, 2005. In Nicaragua, the legislature
approved the pact 49-37 on October 11, 2005. In Costa Rica the pact remains
controversial and President Pacheco has been reluctant to press for approval with
presidential elections approaching in February 2006. According to press reports, the
partner countries have tentatively agreed that the agreement will enter into force on
January 1, 2006, for approving countries.37
Costa Rica38
Political Situation
Costa Rica is considered the most politically stable and economically developed
nation in Central America. Since its independence in 1848, the country has
developed a tradition of political moderation and civilian government despite having
some interludes of military rule. A brief civil war that ended in 1948 led to the
abolition of the Costa Rican military by President Jose Figueres, and continuous
civilian governments since then. The Constitution, in effect since 1949, prohibits the
creation of a standing army. The Ministry of Public Security and the Ministry of the
Presidency share responsibility for law enforcement and national security with a
police force including Border Guard, Rural Guard, and Civil Guard, of approximately

8,400 officers.

The United Nations’ Human Development Report for 2004 ranks Costa Ricath

47 out of 177 countries based on life expectancy, education, and income levels.

This puts the country far ahead of its Central American neighbors. Life expectancy
at birth is 77.9 years. Its population, 4 million in 2004, is the best educated in
Central America, with a literacy rate of 95%. Both the literacy rate and life
expectancy are higher than the Latin American average. Some 42% of the country’s
land is devoted to agriculture and cattle raising, while 38% consists of jungle, forest
or natural vegetation. Its National Protected Areas Scheme encompasses 22% of the
total land area, and contributes to Costa Rica’s growing reputation as an ecotourism
destination. The country is considered a transit point for illegal drugs from South
America destined for the United States and Europe, although Costa Rica cooperates
with the United States on drug interdiction issues. It has low levels of corruption by
regional standards, but during the last year, several previous presidents, and the
current president, have been subject to legal proceedings on corruption charges.

36 (...continued)

22, 2005; and “House Approves China Trade Bill in Advance of CAFTA Vote,” CQ Today,

July 27, 2005, “Close Trade Vote Breaks Bush’s Way,” CQ Today, July 28, 2005.
37 See “U.S., CAFTA Negotiators Wrestle with Duty Refunds, Implementation, Inside U.S.
Trade, Sept. 30, 2005.
38 Prepared by Connie Veillette, Analyst in Latin American Affairs.

The current president, Abel Pacheco, was inaugurated in May 2002 to a
four-year term. A leader of the center-right Social Christian Unity Party (PUSC),
Pacheco won the election in a second round of voting against Rolando Araya of the
National Liberation Party (PLN). Pacheco ran on an anti-corruption, good
governance platform, but has since become embroiled in his own corruption charges,
forcing him to admit to having received illegal campaign contributions from a
Taiwanese businessman, and several related businesses. During Pacheco’s term, he
has been plagued with a large number of changes in his cabinet, some resulting from
disagreements on economic and fiscal policies. Public opinion polls show that his
support fell precipitously, with 17% of Costa Ricans characterizing his
administration as “good” or “very good.”39
In April 2003, the Constitutional Court, the country’s highest court, ruled that
an existing prohibition on the non-consecutive re-election of presidents was
unconstitutional. This change will benefit former President Oscar Arias, who
governed from 1986 to 1990, winning the Nobel Peace Prize in 1987 for his work on
the peace process in Central America. Arias won the candidacy of the National
Liberation Pary on January 15, 2005, for the presidential election scheduled for
February 2006. Other candidates include Otton Solís of the Citizens Action Party,
Ricardo Toledo of the governing Social Christian Unity Party, and Antonio Alvarez
Desanti of the Union for Change Party. Although Arias is the current front-runner,
there are a significant number of undecided voters, according to recent polls.40 Arias
supports CAFTA, while the other candidates have criticized it.
Relations with the other nations of Central America are close. This is due in
part to their attempts at economic integration that date from the creation of the
Central American Common Market in 1960, to the more recent CAFTA negotiations.
During guerrilla conflicts that characterized much of Central America in the 1980s,
Costa Rica often served as mediator. Some tensions still remain with Nicaragua over
navigation rights on the San Juan River and the growing number of Nicaraguan
immigrants attracted to Costa Rica’s better economic climate.
Economic Conditions
With its stable democracy, relatively high level of economic development, and
highly educated population, Costa Rica has been cited as the most attractive
investment environment in Central America.41 Until the 1980s, Costa Rica followed
a social-democratic development model that saw a greater role for the state in
economic development. The state held a monopoly on banking, insurance, telephone
and electrical services, railroads, ports, and refineries. During a regional recession
in the 1980s, Costa Rica borrowed heavily, to the point that it defaulted on its foreign

39 Costa Rica Country Report, Dec. 2003; Cost Rica Country Outlook, Economist
Intelligence Unit, Apr. 27, 2004; and “Costa Rica: Pacheco’s Popularity at Lowest Point,”
Latinnews Daily, Aug. 23, 2005.
40 “Poll: Oscar Arias Frontrunner in Costa Rican Presidential Race,” EFE News Service,
Sept. 19, 2005.
41 Global Insight, [http://www.globalinsights.com], 2003, accessed Dec. 15, 2003.

debt in 1983. Succeeding structural adjustment agreements with the International
Monetary Fund and other international financial institutions brought about a
liberalization of the economy, and the privatization of most of its state-owned
enterprises. However, insurance, telecommunications, electricity distribution,
petroleum distribution, potable water, sewage, and railroad transportation industries
are still state-owned sectors.
State monopolies of telecommunications and insurance posed difficulties in
Costa Rica’s participation in CAFTA, and led to Costa Rica withdrawing from the
negotiations on December 16, 2003. In January 2004, bilateral negotiations between
the United States and Costa Rica resumed, and on January 25, then U.S. Trade
Representative, Robert Zoellick, announced that an agreement had been reached to
include Costa Rica. Under the agreement, Costa Rica committed to opening its
private network services and Internet services by January 2006, and its cellular phone
market by 2007. Liberalization of the insurance market is targeted to begin in phases
to be completed by 2011.
Costa Rica invested about 6.9% of gross domestic product (GDP) between 1990
and 1998 in public health, one of the highest rates in the developing world. Costa
Rica also developed a more equitable distribution of income than its neighbors, a
situation that exists to this day. In recent decades, the country has pursued foreign
direct investment, the development of its export sector, and diversification from
agriculture-based exports. GDP amounted to $18.5 billion in 2004, with a growth
rate of 4%, despite a downturn in prices for two of its major agricultural exports —
bananas and coffee — and a decrease in demand for computer components. The
country has developed a thriving computer sector in recent years since attracting U.S.
companies to locate manufacturing plants there. In 2001, more than half of US
foreign direct investment in Central America was in Costa Rica. The country’s
unemployment rate in 2004 was 6.5%. Manufacturing represents nearly 21% of
GDP, with agriculture contributing 9% and services and utilities 66%.42
Costa Rica is the world’s second largest banana exporter after Ecuador. Coffee
is its second most important agricultural export. Both are grown on small- and
medium-sized farms. Apparel exports are not as important to Costa Rica as to its
Central American neighbors. The country has been successful in attracting foreign
high technology companies to locate operations in Costa Rica through the
establishment of free trade zones. In 1998 and 1999, Intel constructed two plants to
assemble computer chips, providing the country with a major export generator that
has attracted additional foreign direct investment. Intel announced in November
2003 that it would invest $110 million more in its Costa Rican operations, increasing
its employment from 1,900 to 2,400. Intel expected its operations at these two plants
to generate $1.2 billion in exports in 2003.43 In 2001, Microsoft awarded a major
software development project to a Costa Rican firm, Artinsoft, and several other

42 “Business Outlook: Costa Rica,” Economist Intelligence Unit - Country Monitor, June 14,
2004, and “Costa Rica Risk: Forecast Data,” Economist Intelligence Unit - Riskwire, May

6, 2004.

43 “U.S. Intel Exports from Costa Rica to Reach $1.2 bln in 2003,” Spanish News Digest,
July 15, 2003, La Prensa Grafica, July 14, 2003.

Costa Rican firms have strategic alliances with major U.S. and European companies.
The export of high technology electronics grew by 52.8% in 2003, earning $1.4
billion in revenues, and representing 22.5% of the country’s total export earnings.
Microprocessor exports account for about 15% of the country’s exports. The export
of medicine and medical equipment is also important, representing 10.4% of total
exports.44 Other industries that are important to the economy are food processing,
chemical products, textiles, and metal processing.
Relations with the United States
Relations with the United States have been strong. President Pacheco supported
the U.S. military mission in Iraq, despite Costa Rica’s traditional neutrality. He came
under severe criticism from the public and previous presidents for this support.
Former President Oscar Arias, who is running for the presidency in 2006, was
especially vocal in his criticism of U.S. policy in Iraq.45 Costa Rica initially joined
the G20 group of nations whose opposition to the U.S.-EU positions precipitated the
collapse of the WTO Ministerial Conference in Cancun, Mexico, September 2003,
but it subsequently withdrew in October, as did El Salvador and Guatemala. Soon
after Cancun, U.S. Trade Representative Robert Zoellick traveled to Central America
where he suggested that if Costa Rica did not open its service sector, specifically its
telecommunications and insurance sectors, it could be left out of CAFTA. As
discussed below, privatization of the telecommunications and electricity monopoly
is opposed by most Costa Ricans, and Zoellick’s comments were not well received.46
On December 16, 2003, one day before a CAFTA agreement was announced, Costa
Rica withdrew from the negotiations, citing a lack of resolution on these sensitive
issues. Subsequent negotiations between the United States and Costa Rica in January

2004 produced an agreement to include Costa Rica in the regional pact.

Costa Rica is not a major U.S. aid recipient. It received some economic
assistance during the early 1990s, averaging about $25 million from 1990 to 1996.
Since 1997, economic assistance has averaged less than $1 million per year. In
FY2003, it received less than $400,000 in International Military Education and
Training (IMET) funds. Although Costa Rica has no military, IMET funds are used
to train law enforcement officers and coast guard personnel. In FY2004 and FY2005,
Costa Rica received no IMET funds. For FY2006, the Administration has requested
$50,000. The Peace Corps has an active program in Costa Rica. The country receives
no direct, bilateral U.S. counterdrug funds, although State Department regional
programs support strengthening law enforcement capabilities. In response to recent

44 Costa Rica Industry: Manufacturing Update, Economist Intelligence Unit, Mar. 23, 2004,
and “Business Outlook: Costa Rica,” Economist Intelligence Unit - Country Monitor, June

14, 2004.

45 “Costa Ricans Defend Neutral Tradition Against Pacheco,” Noticen: Central American
& Caribbean Affairs, Apr. 10, 2003.
46 Tim Rogers, “Markets Must Open, U.S. Warns,” The Tico Times, Weekly Edition, Vol.
VIII, No. 86, San Jose, Costa Rica, Oct. 3-9, 2003. Oscar Núñez Olivas, “Indignación Y
Repudio en Costa Rica por Declaraciones de Zoellick Sobre TLC,” Agence France Presse,
Oct. 2, 2003.

floods that have also affected other countries in Central America, the United States
announced that it would provide Costa Rica with $50,000 in disaster assistance.
U.S. Trade and Investment. The United States is Costa Rica’s major
trading partner. It annually sends approximately 50% of its exports to the United
States and imports 53%. A sizeable portion of U.S. investment in Central America
is found in Costa Rica. The stock of U.S. foreign direct investment (FDI) totaled
$.1.8 billion in both 2002 and 2003, invested largely in the manufacturing sector.47
Despite the country’s efforts to attract foreign investment, a World Bank report notes
that Costa Rica has heavier regulation of business than many other developing
countries, which causes inefficiency, delays, higher costs, and opportunities for
corruption.48 As of December 2003, Costa Rica temporarily halted the importation
of U.S. beef in response to a case of Bovine Spongiform Encephalopathy (BSE) in
the United States. In May 2004, Costa Rican officials indicated that some imports
could be resumed, but Costa Rica’s plant-by-plant inspection and certification
requirements have prevented their effective resumption, according to the Office of
the U.S. Trade Representative.
Major U.S. companies currently invested in Costa Rica include the following
by sector.49 In the agriculture sector, companies include Chiquita, Dole, Standard
Fruit, Fresh Del Monte. Manufacturing companies include 3M, Unilever, Colgate-
Palmolive, Gillette, Eaton, Novartis Consumer Health, Heinz, Kimberly-Clark,
Xerox, Bridgestone Firestone, Alcoa, Conair, H.B. Fuller, and Phillip Morris. There
are also a number of producers of medical products and pharmaceuticals, such as
Abbott Laboratories, Baxter Health Care, GlaxoSmithKline, and Eli Lilly. The high
technology sector has located several facilities in the country and include Intel,
Microsoft, Hewlett Packard, Cisco Systems, Lucent, Oracle and Unisys. Other
companies from other sectors such as business services, chemicals and tourism
include Deloitte & Touche, KPMG, Price Waterhouse Coopers, DHL, FedEx, UPS,
Citibank, Ernst & Young, Procter & Gamble, Bristol-Myers Squibb, H.B. Fuller,
Monsanto, Marriott, Radisson, and Hampton Inns.
DR-CAFTA-Related Issues
Costa Rican leaders across the political spectrum generally support liberalized
trade, even while there has been internal debate on the benefits of CAFTA. Since the
conclusion of negotiations, approval of the agreement in Costa Rica has been
problematic. Disagreements with the United States with regard to opening the state-

47 Information on U.S. aid funding levels is from U.S. Agency for International Development
Green Book, 2003, and U.S. State Department Budget Justification, FY2004. Information
on trade and investment is from The Economist Intelligence Unit Country Profile, 2003, and
Caribbean Rim Investment Initiative, Business Environment Report — Costa Rica, Inter
American Development Bank, and Foreign Trade Barriers Report, 2004, Office of the U.S.
Trade Representative.
48 See [http://rru.worldbank.org/DoingBusiness/default.aspx], accessed Oct. 8, 2003.
49 Costa Rican-American Chamber of Commerce Membership Directory & Business Guide,
[http://www.amcham.co.cr/membership_dir/], accessed Sept. 10, 2003. See also Department
of Commerce, U.S. Commercial Service, Costa Rica Country Commercial Guide 2002.

owned telecommunications and insurance sectors led Costa Rica to withdraw from
the initial CAFTA negotiations one day before the final agreement was announced.
Following bilateral negotiations between the United States and Costa Rica in January
2004, Costa Rica was included in the CAFTA agreement. Costa Rica also has signed
free trade agreements with Canada, Chile, Mexico, the Dominican Republic and the
Republic of Trinidad and Tobago. The countries of Central America now have tariff-
free access to the U.S. market on approximately three-quarters of their products
through the Caribbean Basin Trade Partnership Act (P.L. 106-200, Title II) which
expires in September 2008.50 The DR-CAFTA agreements would make the
arrangement permanent and reciprocal. While the five Central American nations
agreed to present a unified negotiating position to the United States, each had its own
interests and objectives. Costa Rica sought greater foreign investment in certain
strategic areas, such as electronics assembly, health care products and business
service centers. While agricultural products have been important to its economy,
their decreasing export value has meant that the focus instead has shifted to
manufacturing. Costa Rica also anticipated that an FTA with the United States
would have a positive impact both on tourism and the productivity of its export
sect or. 51
Telecommunications and Insurance. The telecommunications sector is
the most sophisticated in Central America, but unlike its neighboring countries, it is
state-owned, and proposals for privatization have been very controversial. The use
of the Internet and electronic commerce is relatively advanced, but the system is
inadequate given the demand. Although most of the country’s state-owned
companies were privatized in the 1990s, Costa Ricans strongly oppose privatizing the
Costa Rican Electricity Institute (ICE), which operates both power and
telecommunications. President Pacheco is interested in restructuring ICE in some
form in order to reduce its burden on the national budget and to modernize its
infrastructure to attract more high technology firms to the country. Intel’s General
Manager has stated that the lack of modernization, especially Internet connections52
and speed, were directly hindering the company’s growth in Costa Rica.
The U.S. negotiating position was that all suppliers of telecommunications and
insurance services be compatible and that there is non-discriminatory treatment
between domestic and foreign suppliers. Costa Rica’s has long resisted calls to
liberalize its telecommunications and insurance sectors. This disagreement came into
sharper focus during U.S. Trade Representative Robert Zoellick’s trip to the region
in early October 2003 during which he stated to Costa Rican officials that an open
telecommunications sector was necessary in order to conclude an agreement, and that
a CAFTA agreement could proceed without Costa Rica. These comments were met
with displeasure from both Costa Rican union leaders and business executives who
argued that the NAFTA agreement allows Mexico to maintain state ownership of oil

50 “Latin America Economy: What’s at Stake With CAFTA,” Economist Intelligence Unit,
May 14, 2003.
51 Agenda Integral de Cooperación, Ministry of External Trade, Government of Costa Rica,
[http://www.comex.go.cr/negociaciones/usa/default.htm], accessed Sept. 16, 2003.
52 Ibid., Global Insights.

and the U.S.-Chile Free Trade Agreement allows Chile the same privilege in regard
to copper. They contend that this sets a precedent for Costa Rica to keep its state
At the final round of CAFTA negotiations, Costa Rica decided that the
agreement, as it stood, was not in its best interests, and its negotiators withdrew.
Later comments from U.S. officials clarified that complete privatization of the
telecommunications sector would not be necessary as long as the private sector could
participate in some telecommunications activities, such as mobile phone and internet
service.53 The issue of insurance was not raised until the last round of negotiations,
and Costa Rica believed there was not enough time remaining to resolve differences.
The United States had called for total access to the insurance industry. The final
agreement between the United States and Costa Rica provides for access to private
network services and Internet services by January 2006, and to wireless services by
2007. Opening the insurance market would be accomplished in phases between 2008
and 2011.
Apparel. Costa Rica’s apparel industry is less important to its economy than
its neighbors. Nonetheless, Costa Rica supported the region’s single negotiating
position of wanting a more liberal rule than is now included in the Caribbean Basin
Trade Preference Act, which provides for a “yarn forward” rule in which U.S. made
fabrics must be from U.S. produced yarn. For a CAFTA agreement, the Central
Americans preferred that apparel makers could acquire yarn from the United States,
Central America, or third countries that have trade agreements with either. This
means that potential suppliers could also be from Mexico, Canada, or Chile. U.S.
negotiators proposed a rule allowing for the use of third country providers where
components are in short supply. The Central Americans wanted tariff preference
levels to provide duty-free access, under a negotiated cap, for apparel that is
assembled in the region from fabric that is made elsewhere. This position was
opposed by the U.S. textile industry.54
Agriculture. Agricultural issues presented some difficulties in negotiations,
as the Central Americans wanted the United States to address its farm subsidies,
while they wanted unhindered access to the U.S. market for their agricultural
products. Costa Rica’s two main agricultural exports, bananas and coffee, have
experienced declining prices on the world market in recent years. In the final
agreement, Costa Rica is to eliminate tariffs on nearly all agricultural products within
15 years, on chicken leg quarters within 17 years, and on rice and dairy products
within 20 years. Costa Rica also negotiated an increase in its sugar export quota that
will reach 14,860 tons by the 15th year of the agreement and won general protection
for fresh onions and potatoes in the agreement. Trade of these latter two products
will be liberalized through expansion of a tariff-rate quota.

53 Diego Mendez, “Zoellick Pushes Trade Pact; Commerce Officials from Costa Rica
Demand that Telecommunications be Left Out of Treaty,” The Miami Herald, Oct. 3, 2003;
“Costa Rica Weighs Costs, Alternatives in Telecom Trade Clash,” EFE News Service, Oct.

3, 2003.

54 Martin Vaughan, “Textile Industry Reft Brews Over CAFTA Apparel Rules,” Congress
Daily, Aug. 13, 2003.

Environment. With the signing of two environmental agreements on February
18, 2005, at least one Costa Rican environmental organization, the Global Alliance
for Humane Sustainable Development, has endorsed the DR-CAFTA agreement.
According to a report by the Office of the U.S. Trade Representative, Costa Rica has
a full complement of domestic environmental laws. Legislation enacted in 1994
created the post of Environmental and Maritime Land Attorney, who is tasked with
taking legal action to guarantee a healthy and ecologically sound environment, and
to ensure the enforcement of international treaties and national laws. The 1995
Environment Act requires environmental impact studies for most construction
projects, including commercial and residential construction, and mining projects.
The government can halt projects and impose fines for non-compliance with
environmental laws. Costa Rica is party to 68 multilateral, regional and bilateral
environmental agreements, including the U.N. Convention on Biological Diversity,
the Convention on the International Trade in Endangered Species of Wild Flora and
Fauna, the U.N. Framework Convention on Climate Change, the Kyoto Protocol, and
the Montreal Protocol on Substances that Deplete the Ozone Layer.55 Costa Rica has
been a pioneer of “clean air exports” in which it sells credits to companies in
developed countries who need to offset their greenhouse gas emissions as part of the

1992 Rio Earth Summit and the 1997 Kyoto Protocol commitments.

Labor. The power of organized labor has declined since the 1980s. The
strongest unions represent civil servants, teachers, public utilities employees, and oil
refining and ports employees. According to the State Department’s Country Reports
on Human Rights Practices covering 2004, Costa Rican law guarantees the right of
workers to join unions, and workers are able to exercise this right. The report
estimates that 12% of the labor force is unionized, and that some 80% of all union
members are public sector employees. Unions operate independently of the
government. The International Labor Organization (ILO) noted delays in addressing
workers’ formal grievances and the enforcement of reparations. A recent report by
Central American trade officials reported that the Constitution and labor code
provide strong protections for fundamental labor rights.56 The Constitution and
Labor Code restrict public sector workers from striking, although a 2000 Supreme
Court ruling clarified that public sector strikes were allowed, but only if a judge
approved them in advance and found that necessary services for the public’s well-
being would not be affected. There are no restrictions on private sector unions being
able to bargain collectively or to strike, although few private sector employees belong
to unions.
The Constitution provides for a minimum wage that is set by a National Wage
Council, composed of representatives from government, business, and labor. The
Ministry of Labor was reported to have enforced minimum wages in the area of the
capital, San Jose, but was less effective in rural areas in 2002. The State Department
reports that the minimum wage was not sufficient to provide a worker and his family

55 Interim Environmental Review: U.S.-Central America Free Trade Agreement, Office of
the U.S.Trade Representative, Aug. 2003.
56 “The Labor Dimension in Central America and the Dominican Republic: A Report of the
Working Group of the Vice Ministers Responsible for Trade and Labor in the Countries of
Central America and the Dominican Republic,” Apr. 2005.

at the lower end of the wage scale with a decent standard of living. Costa Rican law
on health and safety in the workplace requires industrial, agricultural and commercial
firms with ten or more workers to establish a joint management-labor committee on
workplace conditions, and allows the government to inspect workplaces and to fine
employers. The State Department reports that insufficient resources have been
provided to the Ministry of Labor to enforce health and safety legal requirements.
In December 2004, the International Labor Rights Fund petitioned the Office of the
U.S. Trade Representative to review Costa Rica’s eligibility under the Generalized
System of Preferences (GSP) for violations of workers’ rights.
Intellectual Property. Costa Rica is party to the WTO Agreement on Trade-
Related Aspects of Intellectual Property (TRIPS) and has enacted or amended its
regulations to harmonize them with its international obligations. The U.S. Trade
Representative’s 2004 Foreign Trade Barriers Report noted that enforcement remains
a problem with regard to the protection of copyrights, patents, and trademarks and
that the country’s criminal code limits effective deterrence of intellectual property
crimes. Despite this, USTR placed Costa Rica on its less severe Special 301 Watch
List in 2002, 2003, and 2004. The International Intellectual Property Alliance, a
U.S.-industry organization, also cites Costa Rica’s insufficient enforcement activities
and levels of fines, which they argue do not deter the infringement of intellectual
property. The group estimates that trade losses due to piracy in Costa Rica totaled
$17.6 million in 2002, the latest year for which an estimate is provided.57
Approval Status. In September 2005, President Pacheco announced that he
would send the DR-CAFTA agreement to the unicameral Costa Rican Legislative
Assembly for consideration. The delay in sending the agreement to the legislature
was due to President Pacheco wanting a fiscal reform package of legislation to be
considered first.58 The reform bill has been stalled in the legislature for more than
two years. With low public opinion for his administration and approaching national
elections, Pacheco has run into difficulties in obtaining approval of his proposals.
There are groups in the country that oppose the agreement for fear that it will
negatively affect the agriculture and textile sectors and the environment. These
groups have been quite vocal and have held public demonstrations.59

57 Office of the U.S. Trade Representative, Foreign Trade Barriers Report, 2004;and
Special 301 Watch List, 2004. See also the International Intellectual Property Alliance’s

2003 Special 301 Report and 2004 Special 301 Report, online at [http://www.iipa.com].

58 “Pacheco Asegura Que No Perderá el Liderazgo en el Istmo a Pesar de las Dudas de un
Congresista de EEUU,” Europa Press - Servicio Internacional, Feb. 16, 2005.
59 “El CAFTA Divide a Costa Rica,” El Nuevo Herald, Feb. 22, 2005, and “Textileros en
Costa Rica Preocupados por CAFTA,” AP Spanish Worldstream, Feb. 24, 2005.

Dominican Republic60
Political Situation
President Leonel Fernández of the Dominican Liberation Party (PLD), who
served as president previously (1996-2000), took office on August 16, 2004.
President Fernández continues to enjoy relatively strong popular support and has
restored some confidence in the Dominican economy. On February 1, 2005, President
Fernández signed a new $665 million loan agreement with the IMF. During the first
half of 2005, GDP growth in the Dominican Republic reached 5.8%. Inflation has
declined, and the currency has regained most of its value. The Fernández
administration has struggled, however, to deal with high crime rates, corruption, and
persistent electricity shortages. Human rights organizations have criticized the
Dominican government for several recent massive repatriations of illegal Haitian
migrants. On September 6, 2005, the Dominican Republic approved the U.S.-
Dominican Republic-Central American Free Trade Agreement (DR-CAFTA).
Background. During the 1990s, the Dominican Republic underwent rapid
economic growth and developed stronger democratic institutions. The “Pact for
Democracy”in 1994 paved the way for free and fair elections by removing the aging
Joaquin Balaguer from power in 1996 after a shortened two-year term and preventing
consecutive presidential re-elections. Balaguer, a six-term president and acolyte of
the deceased dictator, Rafael Trujillo, dominated Dominican politics for decades until
his death in 2002. In 1996, Leonel Fernández of the PLD, a center-left party of
middle-class professionals, succeeded Balaguer and presided over a period of strong
economic growth. After top PLD officials were charged with misusing public funds,
Hipólito Mejía (2000-2004), an agrarian engineer of the populist Dominican
Revolutionary Party (PRD), easily defeated the PLD candidate by promising to
promote rural development. He lost popular support, however, by spending
excessively and deciding to bail out all deposit holders after three massive bank61
failures in 2003 at a cost of between 15 and 20% of GDP. Observers noted that
Mejía focused more on his re-election bid, which required a constitutional
amendment reinstating presidential re-election, than on resolving the country’s deep
economic crisis.62
2004 Presidential Elections. On May 16, 2004, Leonel Fernández won a
convincing first-round victory with 57% of the popular vote compared to Mejía
(PRD) receiving 34% and Eduardo Estrella of the Social Christian Reformist Party

60 Prepared by Clare Ribando, Analyst in Latin American Affairs, and Lenore Sek, Specialist
in International Trade and Finance. For additional information, see CRS Report RS21718,
Dominican Republic: Political and Economic Conditions and Relations with the United
States, by Clare Ribando, and CRS Report RS21868, U.S. - Dominican Republic Free-Trade
Agreement, by Lenore Sek.
61 Leo Goldstein, “Dominican Republic: A Look Ahead,” Citigroup, Aug. 18, 2004.
62 “Fernández Wins as Mejía Roundly Rejected,” Latin American Regional Reports, May

25, 2004.

(PRSC) receiving 9%. Record numbers of Dominicans turned out to support
Fernández, whom they associated with the country’s economic boom of the 1990s.
Fiscal Reform and DR-CAFTA. In September 2004, the Dominican
legislature, which is dominated by the PRD, passed the President’s fiscal package.
The fiscal bill contained important provisions, including an increase in sales taxes63
and a 20% cut in public spending. Its passage opened the way for negotiations that
resulted in a new $665 million stand-by agreement with the International Monetary
Fund (IMF), signed in January 2005. The 28-month agreement should pave the way
for additional multilateral disbursements of some $500 million per year. Although
the Dominican government has met most of the IMF’s fiscal targets, it has yet to
enact further tax reforms needed to compensate for the loss of tariff revenue that is
expected to result from DR-CAFTA.
Corruption. In October 2004, an official investigation found that Hipólito
Mejía was able to increase his personal wealth by $800,000 during his four-year
presidential term.64 Mejía, officials of all major political parties, and other individuals
reportedly received money and gifts from Ramon Baez, owner of the now defunct
Banco Intercontinental (Baninter).65 The Mejía government later took control of
Baninter’s associated companies, including Listin Diario, the country’s largest
publishing company, and fired many editors and management officials, even if they
were not party to the scandal. There are corruption cases pending against Mr. Baez
and other prominent Dominican bankers associated with the scandals. In late
November 2004, the Fernández administration charged 12 former PRD officials with
embezzlement, fraud, and misuse of public funds. In April 2005, following up on the
October 2004 forced retirement of 300 to 400 police officers, many of whom were
accused of misconduct, the Dominican state prosecutor started proceedings against
police and military officials accused of appropriating luxury cars for personal use.
Despite these apparent efforts to root out corruption, President Fernández has lost
popular support as of late for failing to improve the country’s extremely low
prosecution rate for officials accused of corruption.66
Human Rights. According to the State Department’s Country Report on
Human Rights Practices covering 2004, although the Dominican government has
made some progress, it still has a poor human rights record. Local press reports67
indicate that Dominican police killed 160 more people in 2004 than in 2003. In
addition to the continued use of torture and physical abuse, prison conditions range
from “poor to harsh” as 13,500 prisoners are currently being held in overcrowded
prisons designed to hold only 9,000 inmates. On March 7, 2005, rival gangs set a fire
in one Dominican prison that resulted in 133 deaths and 26 injuries. Finally, despite

63 “Poor Feel Pain of President’s Cure for Economic Ills,” Financial Times, Oct. 20, 2004.
64 “Former Dominican Leader Defends His Own Wealth,” Reuters, Oct. 22, 2004.
65 “Dominican Republic: Bank Bust,” Economist Intelligence Unit, May 26, 2003.
66 “Dominican Republic Politics: Fernández’s Popularity Wanes,” EIU Viewswire, Aug. 9,


67 “Killings by Police in the Dominican Republic Way up Over 2003,” EFE News Service,
Jan. 5, 2005.

the enactment of an anti-trafficking in persons law in August 2003, the State
Department has placed the Dominican Republic on a Tier 2 Watch List for failing to
arrest and prosecute those accused of human trafficking.
Status of Haitians and Dominican-Haitians. The Dominican government
continues to receive international criticism for its treatment of an estimated one68
million Haitians and Dominican-Haitians living within its borders. Each year
thousands of migrants, many without proper documentation, flock from Haiti, the
poorest country in the hemisphere, to the Dominican Republic. The Dominican
economy, especially the sugar and construction industries, has long profited from a
constant influx of cheap Haitian labor. More than 90% of the country’s seasonal
sugar workers and two thirds of its coffee workers are Haitians or Dominicans of69
Haitian origin. In 2002, the Dominican Directorate of Migration forcibly deported
more than 12,000 Haitians, including children born of Haitian parents in the70
Dominican Republic. According to most Dominican officials, including President
Fernández, the recent crisis in Haiti, which resulted in the removal of President Jean-
Bertrand Aristide in early 2004, has accelerated the level of illegal migrants heading
to the Dominican Republic and placed further strain on the struggling Dominican71
economy. Despite protests from NGOs and human rights organizations, the
Dominican government has asked the international community for help in securing
its border with Haiti and ordered two massive repatriations of Haitian illegal
immigrants. Some 4,000 individuals were repatriated in May and more than 1,00072
more in August 2005.
Economic Conditions
Fueled by rapid expansion in both the tourism and free-trade zone (FTZ) sectors,
the Dominican economy grew rapidly throughout the 1990s at an annual rate of 6-
8%. Despite the increased employment and earnings in those two sectors, mining
and agriculture continued to be the country’s highest export earners. Remittances
from Dominicans living abroad contributed an additional $1.5 billion per year to the
country’s stock of foreign exchange. Economic expansion was also facilitated by the
passage of several market-friendly economic reforms in the late 1990s by then
President Leonel Fernández. One critical reform was a 1997 law allowing the partial
privatization of unprofitable state enterprises. Since that time, several state-owned
entities have been privatized, including a flour mill, an airline, a hotel chain, sugar
mills, and three state-owned regional electricity distribution companies. Some

68 See Gerardo Reyes, “Esclavos en Paraíso,”El Nuevo Herald, Jan. 9, 2005.
69 Philip Martin, Elizabeth Midgley, and Michael S. Teitelbaum, “Migration and
Development: Whither the Dominican Republic and Haiti?” The International Migration
Review, New York: Summer 2002, Vol. 36.
70 U.S. Department of State, Country Reports on Human Rights Practices 2003: Dominican
Republic, Feb. 2004.
71 Alois Hug, “Somos el Patio Trasero de Estados Unidos, no Podemos Enfrentarnos,” El
Pais, July 19, 2004.
72 “Dominican Republic: Massive Repatriation of Haitians Resumes,” Latinnews Daily, Aug.

16, 2005.

observers criticized Fernández’s privatization of the electric sector, however, noting
that it failed to remedy power shortages and financial difficulties.73
The success of both tourism and export-processing zones is extremely
dependent upon the global economy. Although the Dominican tourism industry has
recovered since late 2002, it suffered a significant decline in 2001-2002, as a result
of the global recession, a weak euro, and the aftermath of the September 11, 2001
terrorist attacks. More significantly, the country’s free trade zones have had to
compete with cheaper goods coming from Central America and China. The trade
deficit of the Dominican Republic with the Central American countries stood at
$85.6 million in 2003.
In 2002, the Dominican economy, despite strong performance in the mining and
telecommunications sectors, entered a recession. The country’s public finances were
placed under strain after President Mejía elected to bail out the country’s third largest
bank in violation of the monetary code, Banco Intercontinental (Baninter), which
collapsed in May 2003 after a record fraud. The Baninter scandal was a direct result
of weak banking regulations that enabled bank executives to defraud depositors and
the Dominican government of U.S. $2.2 billion worth of account holdings — an
amount equal to almost 67% of the Dominican Republic’s annual budget. Ramon
Baez, the former president of Baninter, paid out more than $75 million worth of gifts
and payments to government officials, including President Mejía and Leonel
Fernández.74 The Mejía administration negotiated a $600 million loan from the IMF
in August 2003 to counter the effects of the Baninter bailout but only received $120
million before failing to comply with conditions. A renegotiation in February 2004
allowed a disbursement of an additional $66 million but the administration soon fell
out of compliance with targets. In addition to the failure of Baninter, two other
commercial banks were bailed out in late 2003, resulting in approximately $700
million in losses to the Dominican Central Bank.
By the end of 2003, inflation reached 42%, unemployment stood at 16.5%, and
the peso had lost more than half of its value. Since August 2004, the peso has more
than regained its pre-crisis value, inflation has decelerated, and a late recovery
helped the economy grow 2% in 2004. The fiscal bill should help cut the budget
deficit, but measures of austerity that will be necessary to meet fiscal targets that may
have deleterious consequences on the country’s poor and middle classes, especially
the elimination of a subsidy on propane gas, have been postponed. Moreover,
electricity providers, saddled with dollar-denominated debts, are still struggling to
provide service to a Dominican populace angry at expensive power bills and
continued blackouts. Although the National Salary Council recently negotiated a 25%
salary increase for private sector employees below a certain wage cap, this increase
will not compensate for the purchasing power they have had in the past year due to

40% inflation. Public sector wage increases are unlikely to occur until later in 2005.

In FY2004, the U.S. Coast Guard intercepted some 5,014 undocumented Dominican

73 Bacho Perez, “Widespread Blackouts Leave President Scrambling to Boost Power,”
Agence France-Presse, Feb. 8, 2000.
74 Jose de Cordoba, “Caribbean Cloud,”Wall Street Journal, June 30, 2003.

migrants at sea en route to Puerto Rico, providing further evidence of the severity of
the economic crisis.75
Relations with the United States
The Dominican Republic enjoys a strong relationship with the United States that
is evidenced by extensive economic, political, and cultural ties between the two
nations. The Dominican Republic is one of the most important countries in the
Caribbean, because of its large size, diversified economy, and close proximity to the
United States. Reforms of the Dominican justice system, as well as a number of
market-friendly economic laws, were well received by the U.S. government. Despite
these reforms, and the country’s strong economic performance during the 1990s, the
Baninter scandal, the economic crisis in 2003, and the recent rise in crime against
foreign tourists have concerned investors and policy-makers in the United States.
Although the Dominican Republic withdrew its contribution of 300 troops to the
coalition in Iraq in May 2004, the Bush Administration has expressed appreciation
to the Dominican government for its participation. The United States hopes to assist
the Fernández Administration in restoring economic prosperity through free trade,
building solid democratic institutions, fighting crime and corruption, and promoting
regional stability.
Foreign Aid. The United States is the largest bilateral donor to the Dominican
Republic, followed by Japan, Venezuela, and Germany. For FY2005, the United
States allocated an estimated $29 million to the Dominican Republic, and the
Administration has requested $28 million in assistance for FY2006. These amounts
include support for a variety of Development Assistance and Child Survival and
Health Programs, a Peace Corps staff of some 185 volunteers, and a small military
aid program. In response to a May 24, 2004, flood that left 414 dead and more than
1,600 families homeless in the Dominican-Haitian border region of Jimani, USAID
donated a total of $300,000 to various NGOs, such as World Vision and the Red
Counter-Narcotics Issues. In September 2005, President Bush designated
the Dominican Republic a major drug transit countries in the Caribbean, with 8% of
all the cocaine entering the United States flowing through the Dominican Republic.
To counteract those illicit activities, the Dominican government, acting with U.S.
officials, has stepped up drug-related seizures, arrests, and extraditions. The
Dominican Republic is also on the State Department’s list of major money-
laundering countries. In 2002, the Dominican Republic enacted a tough anti-money-
laundering law aimed at combating drug trafficking, corruption, and terrorism. In
September 2004, the Dominican government adopted a new Criminal Procedure
Code based on an accusatory system aimed at speeding up the processing of criminal
Trade and Investment. The United States is the Dominican Republic’s main
trading partner. The United States exported $4.3 billion in goods to the Dominican

75 FY2004 U.S. Coast Guard Migrant Interdictions, see [http://www.uscg.mil/hq/g-o/g-opl/
AMIO/Migrant_Stats/FY04/USCG_04.htm] .

Republic in 2004, with apparel and clothing (12%) and textiles (13%) among the
leading items. In the same year, the United States imported $4.5 billion in goods,
almost the same value as exports. Just under half (45%) of U.S. imports were
apparel and clothing, and the majority (57%) of all imports entered under Caribbean
Basin Initiative-related programs. The Dominican Republic has benefitted more
from its involvement in CBI than any other Caribbean country. It was also one of the
first countries in the region designated to participate in the expanded trade benefits
of the Caribbean Basin Trade Partnership Act (CBTA) of 2000. It has a U.S. sugar
quota of 180,000 tons, the largest of any of our trading partners. More than 254 U.S.
companies operate in the Dominican Republic’s 51 free trade zones (FTZs), which
were the engine for the country’s rapid growth throughout the 1990s. By signing
DR-CAFTA, the Dominican Republic hopes to improve access for its exports to the
U.S. market and to encourage new investment in its FTZs. It is also likely to increase
trade with the Central American nations that are party to the agreement: Costa Rica,
El Salvador, Guatemala, Honduras, and Nicaragua.
DR-CAFTA-Related Issues
On March 15, 2004, the United States and the Dominican Republic concluded
a free-trade agreement (FTA) that would integrate the Dominican Republic into the
recently concluded CAFTA. Negotiations were held in three rounds in January,
February, and March 2004. The Dominican Republic signed the DR-CAFTA
agreement on August 5, 2004 in Washington, D.C.
In a Fact Sheet on the Dominican Republic FTA, the USTR explained that the
Dominican Republic is the largest economy in the Caribbean and notes that adding
the Dominican Republic to CAFTA “will become the second largest U.S. export
market in Latin America.”76 Under the market access provisions of the FTA, 80%
of U.S. exports of consumer and industrial goods would become duty-free
immediately, with the remaining tariffs phased out over 10 years. More than half of
current U.S. agricultural exports would become duty-free immediately, and tariffs on
most U.S. agricultural products would be phased out over 15 years, with total
elimination by 20 years. Sugar exports from the Dominican Republic would have a
higher U.S. quota, but the increase would be less than for Central American sugar
exports. Most Dominican products already enter duty-free under CBERA.
Corn Syrup Tax and DR-CAFTA. A controversial issue in U.S.-Dominican
relations in 2004 was the Dominican tax on drinks containing high fructose corn
syrup (HCFS), a major U.S. product. The HCFS tax appeared to be a measure to
protect Dominican sugar producers. Enacted in September 2004 as part of a fiscal
bill containing reforms necessary to restart the suspended IMF agreement, the HCFS
tax threatened the country’s chances of being included in DR-CAFTA. On December
27, 2004, the Dominican Chamber of Deputies voted to repeal the tax after a
unanimous vote against the tax in the Senate. President Fernández signed the
measure into law on December 28, 2004. The Dominican government must now find
a way to appease the country’s sugar producers, who employ some 80,000 people
(mostly undocumented Haitian immigrants) without jeopardizing the country’s

76 Office of the USTR. “Zoellick Statement at Signing of U.S.- D.R.- Central America
FTA,” Press Release. Aug. 5, 2004.

finances. In 2003, there were 531 companies in the Dominican Republic’s free-trade
zones (FTZs) that employed some 173,379 people. Employment in FTZs is the
Dominican Republic’s second largest employer after the tourism industry.
Manufacturers in the FTZs are strongly in favor of DR-CAFTA.77
Textiles and Apparel. Under the FTA, textile and apparel products would be
traded duty-free and quota-free immediately, if they met the rules of origin. The
Dominican Republic would fall under the CAFTA cumulation provisions, which
provide benefits for incorporating Mexican or Canadian inputs, as long as certain
conditions are met. One of the chief benefits of an FTA to the Dominican Republic
would be to ensure U.S. preferential treatment for textiles and apparel. This benefit
is important, since the Dominican Republic has reportedly lost U.S. market share to
China since global textiles were eliminated on January 1, 2005. Dominican
authorities recently estimated that 19,000 Dominican textile workers in the FTZs78
have lost their jobs since November 2004 as a result of the quota elimination.
An unresolved issue would be apparel made under co-production arrangements
with Haiti. CBTPA benefits expire the earlier of (1) September 30, 2008; or (2) the
date on which the FTAA or another FTA as specified enters into force between the
United States and a CBTPA beneficiary country (P.L. 106-200, Section 211). Thus,
if the FTA between the Dominican Republic and the United States enters into force,
articles co-produced by Haiti and the Dominican Republic might no longer qualify
under CBTPA. The Administration said it would work with the Congress so that
Haiti could continue to be eligible under CBTPA for apparel with inputs from the
Dominican Republic.
Environment. The Dominican Republic is party to a number of multilateral
agreements related to the environment, including the Convention on Biological
Diversity, the Convention on the International Trade in Endangered Species of Wild
Flora and Fauna, the Vienna Convention, and the Kyoto Protocol. Although erosion
and deforestation were major problems during the 1980s, the Dominican government
and civil society took steps to expand public awareness on environmental issues
during the 1990s. This process culminated in the passage of the Environmental Law
(64-00) and the establishment of the Secretariat for the Environment in late 2000.
Despite this progress, a new National Parks bill that was passed in July 2004, despite
protests from environmental groups, a number of foreign embassies and the
dissenting PLD may open up to 20% of the country’s protected areas to foreign
tourism developers.79 In addition, observers have noted that the disastrous floods that
resulted in hundreds of deaths in Jimani in June may have resulted from deforestation
in Haiti and the building of towns on dry riverbeds in the Dominican Republic.

77 “Dominican Legislators Repeal Tariff that Jeopardized Free-Trade Agreement with
United States,” Associated Press, Dec. 27, 2004.
78 “19,000 Dominicans Jobless With Textile Quota Cancellation,” EFE News Service, Mar.

4, 2005.

79 Nancy San Martin, “Dominican Bill is Being Called a ‘Mortal Blow’ to Environment,”
The Miami Herald, May 22, 2004.

Labor. The Constitution of the Dominican Republic and its 1992 Labor Code
provide for broad worker rights, but there are problems with putting these rights into
practice. In a 2004 report on human rights practices, the U.S. Department of State
states that although workers in the Dominican Republic are free to organize labor
unions, the penalties for violating worker rights were insufficient to prevent
employers from firing union organizers or using intimidation to prevent union
activity, especially in the FTZs. It also explained that collective bargaining is legal,
but continued that the International Labor Organization considered the requirements
for collective bargaining rights to be excessive. It mentioned the same situation —
a guarantee of legal rights, with problems in practice — for court action on labor
disputes. On child labor, the State Department report said “the Labor Code prohibits
employment of children less than 14 years of age and places restrictions on the
employment of children under the age of 16; however, child labor was a serious
problem.” According to data in the report, almost one-fifth of children ages 5 to 17
work, primarily in the informal economy, small businesses, sugarcane fields, and in
forced prostitution. The Ministry of Labor is working with the ILO and other
international organizations to combat child labor.
Representatives of the AFL-CIO and the Dominican labor group Consejo
Nacional de Unidad Sindical (CNUS) have testified that there are serious violations80
of worker rights in the Dominican Republic. They point out that the most serious
violations are in the export processing zones and that there are problems also in the
sugar industry. The AFL-CIO representative claimed that reviews under unilateral
U.S. programs, such as the Generalized System of Preferences, helped to monitor
labor practices and that this oversight would be lost under an FTA. Human Rights
Watch reports that women “who become pregnant are routinely fired from jobs and
shut out of employment in the Dominican Republic’s export-processing sector,” and
such abuses of workers would be allowed to continue, because CAFTA does not81
prohibit workplace discrimination. Workers’ groups also fear the loss of
protections under current U.S. unilateral trade programs such as CBI.82
Proponents of DR-CAFTA have responded to these criticisms by noting that the
agreement has provisions providing for the enforcement of domestic labor laws and
creating cooperative ways to bring those laws up to international standards. For
example, on July 14, 2004, the Dominican Republic’s Ministers of Trade and Labor,
along with their counterparts from the other DR-CAFTA countries, formed a
Working Group that, with support from the Inter-American Development Bank, is
working to ensure that progress is made on improving labor standards in the region.
On April 5, 2005, the Ministers met again in order to endorse the strategy developed
by that Working Group to strengthen labor law compliance and improve the capacity
of labor institutions in the DR-CAFTA countries.

80 Testimonies of Thea M. Lee, AFL-CIO, and of Maribel Batista Matos, CNUS) on a U.S.-
Dominican Republic FTA before the Trade Policy Staff Committee. Oct. 8, 2003.
81 Human Rights Watch, “Dominican Republic: U.S. Trade Pact Fails Pregnant Women,”
Press Release. Apr. 22, 2004. Available at [http://hrw.org/doc/?t=news].
82 See AFL-CIO, “Central American Unions Speak Out Against CAFTA,” Available at
[http://www.aflcio.or g/issuespolitics/gl obaleconomy/ upload/CAFT A_CA_unions3.pdf].

Intellectual Property. Annually from 1998 through 2002, the Dominican
Republic was put on the USTR’s Special 301 “Priority Watch List,” which is a mid-
level list of countries that, according to the USTR, deny adequate protection of
intellectual property rights. In 2003, the Dominican Republic was moved to the
lower-level “Watch List,” where it remained in 2004. The USTR notes that although
the Dominican Republic has relatively strong legislation and an adequate regulatory
framework to enforce intellectual property rights, “United States industry
representatives continue to cite lack of IPR enforcement as a major concern.”83 The
International Intellectual Property Alliance (IIPA), a coalition of trade associations
representing the copyright industries, estimates that total U.S. industry losses due to84
piracy in the Dominican Republic totaled $16.3 million in 2004.
Approval Status. On August 14, 2004, former President Mejía sent DR-
CAFTA to the Dominican Congress. President Fernández came out in support of the
DR-CAFTA agreement soon after taking office on August 16, 2004. After a series
of public hearings and several months of deliberation, the Senate of the Dominican
Republic approved DR-CAFTA on August 26, 2005, by a vote of 27-2. The
Chamber of Deputies followed by approving the measure on September 6, 2005, by
a vote of 118 to 4. The Dominican government must now find a way to appease the
country’s sugar producers without jeopardizing the country’s finances.
El Salvador85
Political Situation
El Salvador achieved notable stability and economic growth in the 1990s, but
its growth has stagnated for the past five years, making it increasingly dependent on
remittances from citizens living abroad.86 A 1992-negotiated peace accord brought
the country’s protracted 12-year civil war, which had resulted in 75,000 deaths, to an
end. The agreement formally assimilated the former guerrilla forces, the FMLN, into
the electoral process. The current president, Antonio (Tony) Saca, was elected in
March 2004, along with Ana Vilma de Escobar, El Salvador’s first female Vice
President, and was inaugurated as President on June 1, 2004 for a five-year term. He
is the fourth consecutive, democratically-elected president from the conservative
ARENA party that has governed the country since 1989.

83 U.S. Trade Representative. 2005 National Trade Estimate Report on Foreign Trade
84 International Intellectual Property Alliance, 2005 Special 301 Report: Dominican
Republic, Available at [http://www.iipa.com/rbc/2005/2005SPEC301DOMREP.pdf].
85 Prepared by Clare Ribando, Analyst in Latin American Affairs, Foreign Affairs, Defense,
and Trade Division.
86 El Salvador, is among a handful of Latin American countries currently relying on
remittances for more than 10 % of its GDP. “All in the Family: Latin America’s Most
Important International Financial Flow,” Inter-American Dialogue, January 2004.

In March 2004, Saca (ARENA), a well known businessmen and sports
announcer, won the Salvadoran presidential election handily with 57.7% of the vote.
He soundly defeated his nearest rival, Shafick Handal, an aging former guerrilla and
Communist party member, of the FMLN who obtained 35.7% of the vote. The
failure of either of the two third party candidates to receive even 5% of the vote
reflected the continuing polarization of the country between the FMLN and ARENA.
Throughout the campaign, Handal vocally opposed ARENA’s free market economic
policies, including various privatization schemes, the dollarization of the economy,
participation in DR-CAFTA, and the sending of Salvadoran troops to Iraq.
Throughout the campaign, Shafick Handal vocally opposed ARENA’s
privatization schemes, the dollarization of the economy, participation in DR-CAFTA,
and sending Salvadoran troops to Iraq. President Saca’s first round victory was a
serious setback and cause for assessment for the FMLN that had gone into the
campaign with high expectations based on the party’s strong performance in the
March 2003 legislative and municipal elections. In those elections, the FMLN won
more seats in the Legislative Assembly than ARENA, the mayoralty of San Salvador
for the third consecutive time, and 7 of the 14 departmental capitals. Despite
Handal’s poor electoral showing, his orthodox faction of the FMLN, led by ex-
guerilla Medardo Gonzalez, prevailed over a more moderate candidate (the mayor of
Santa Tecla, Oscar Ortiz) in the party’s internal leadership elections on November
7, 2004. Tensions within the party have resulted in mass defections from the FMLN
and the creation of a new party, the Democratic Revolutionary Front (FDR), which
now claims 7 seats in the Assembly.87
President Saca is maintaining the free market economic policies of his
predecessors, but is also looking for ways to increase tourism and to build up his
country as a logistical hub in order to boost employment and economic growth. At
his inauguration, boycotted by the FMLN, he called for dialogue to achieve
consensus and invited the FMLN to the presidential palace for a meeting. Less than
three weeks after his inauguration, President Saca crafted an agreement that led to the
passage of the long-stalled 2004 budget, largely by agreeing to spend more funds on
health and education sectors and to channel a larger share of the funds to the
municipalities. The budget approval was followed quickly by an increase in the
country’s minimum pension, and, in late July, by the unanimous approval of the
“Super Firm Hand” package of anti-gang reforms. Designed along the lines of
former President Flores’s “Firm Hand” plan passed in July 2003, the package
includes reforms stiffening the penalties for gang membership and especially gang
leadership. The anti-gang legislation was approved despite vocal criticisms by the
United Nations and other religious and humanitarian groups that its tough provisions,
especially those allowing convictions of minors under 12 years of age, violate
international human rights standards.88

87 “Salvadoran Leftist Party Rocked by Defections as Elections Near,” EFE News Service,
Sept. 9, 2005.
88 Stephen Temple, “Legislative Success for El Salvador’s New President as Anti-Criminal
Gang Reforms Passed,” WMRC Daily Analysis, July 30, 2004.

Although some 54% of Salvadorans approve of President Saca’s overall job
performance, he will face a number of significant challenges in 2005. In October
2004, the FMLN, withdrew its support from the multiparty commission developed
by President Saca to discuss important national social, economic, and political issues.
On December 17, 2004, Saca was able to muster enough support in the legislature
from small parties to ratify the DR-CAFTA agreement over FMLN objections. On
January 27, 2005, the country’s 2005 budget was finally approved. The budget had
stalled in El Salvador’s Legislative Assembly amidst FMLN opposition to its
provisions for increased foreign borrowing. Although the FMLN is also likely to
oppose any proposals for further privatization, or to change El Salvador’s public
health or education programs, with only 24 of 84 seats in the Assembly, the party
does not pose as big an obstacle to President Saca’s agenda as it did before.
Economic and Social Conditions
In the 1990s, El Salvador adopted a “neo-liberal” economic model, cutting
government spending, privatizing state-owned enterprises, and adopting the dollar
as its national currency. El Salvador is considered the 12th most open economy in the
world.89 The economy averaged an annual growth rate of 4.5% between 1990 and
2001 but registered only 2% growth the past few years. While remittances and
reconstruction projects remained steady in 2004, high oil prices and a slump in the
maquiladora sector (large assembly plants operating in free-trade zones) kept growth
at a modest 1.8% in 2004. Remittances now contribute 15% of El Salvador’s annual
GDP, and the country’s economic success has become increasingly dependent on the
success of the global economy.
El Salvador’s recent economic stagnation may be linked to disruptions that
resulted from Hurricane Mitch in 1998, two major earthquakes in 2001, a decline in
coffee prices, and the slowdown in the U.S. economy following September 11, 2001.
The earthquakes in particular caused the country significant damage, leaving more
than 100,000 people homeless and tens of thousands without jobs. Total damage
estimates were placed as high as $3 billion.90 This series of natural disasters occurred
as El Salvador’s coffee industry was recording record losses when international
coffee prices fell nearly 70% since 1997. Since the United States is El Salvador’s
most important trading partner, the U.S. recession and sluggish recovery in 2001-
2002 lowered the demand for Salvadoran exports. Although the U.S. economy has
recovered since 2003, increasing competition for access to the U.S. market from
Asian and other producers has limited the demand for Salvadoran exports.
Although El Salvador has fared better than other countries in the hemisphere,
when population increases are taken into account, the country’s modest growth,
averaging 2% or less for the past four years, is not enough to produce dramatic
improvements in standards of living. With 48% of the population living in poverty
and more than 25% reportedly feeling they must migrate abroad in search of work,
some critics have argued that the average Salvadoran household has not benefitted

89 “El Salvador Lags Despite Trade Winds,” Chicago Tribune, Mar. 24, 2005.
90 USAID, “El Salvador Earthquakes: Final Fact Sheet (FY2001),” Sept. 7, 2002.

from neoliberalism.91 Dollarization has raised the cost of living while its primary
benefits, lower interest rates and easier access to capital markets, have not resulted
in an overall decline in poverty levels. Between 1989 and 2004, poverty levels
actually rose from 47% to 51%.92 With prices rising, privatization has been
vigorously opposed. A nine-month doctors’ strike, the longest in the country’s
history, ended in June 2003, when the privatization of the country’s social security
system was halted. Finally, the fruits of stable economic growth have not been
equitably distributed as the income of the richest 10% of the population is 47.4 times
higher than that of the poorest 10%.93
Gangs and Violence.94 Pervasive poverty and inequality, combined with
15% unemployment and significant underemployment, have contributed to the
related problems of crime and violence that have plagued El Salvador since its civil
war. As many as 30,000 Salvadoran youth belong to maras (street gangs).95 In 2004,
the Salvadoran National Police estimated that 2,756 homicides were committed in
the country, 60% of which were gang-related.96 These gangs are increasingly
involved in human trafficking, drug trafficking, and kidnaping, and pose a serious
threat to the country’s stability. The Salvadoran government reported that its “Super
Firm Hand” anti-gang legislation led to a 14% drop in murders in 2004. However,
El Salvador recorded a total of 1,715 murders in the first six months of 2005, 36.5%97
more than during the same period in 2004. In February 2005, El Salvador’s
Legislative Assembly passed an amendment tightening gun ownership laws,
especially for youths, to complement its existing anti-gang measures. On March 18,
2005, President Saca of El Salvador and President Oscar Berger of Guatemala agreed
to set up a joint security force to patrol gang activity along their common border.
Although most of El Salvador’s anti-gang initiatives have focused on improving law
enforcement and stiffening penalties for gang activities, NGOs have urged the
Salvadoran government to focus more on rehabilitation of gang members and less on
enacting tough measures that criminalize youth and may violate human rights.

91 Joseph Contreras, “A Country’s Rebirth,” Newsweek International, July 21, 2003; U.S.
Embassy San Salvador, “El Salvador’s Economic Update: Second Quarter 20002,” Sept. 16,


92 “Election 2004: El Salvador’s Ruling Party Maintains Narrow Lead Over Former Rebel
Leftists,” WMRC Daily Analysis, Feb. 18, 2004.
93 United Nations, Human Development Report 2004.
94 For more information on gangs, see CRS Report RS22141, Gangs in Central America, by
Clare Ribando.
95 Christ Kraul, “El Salvador Comes to Grips with Gangs,” Los Angeles Times, Dec. 13,


96 “2,576 Homicidios en el 2004 en El Salvador,” Agence France Presse, Jan. 5, 2004.
97 “El Salvador: Army Reservists and Police Cadets Enlisted Against Crime,” Latin America
Weekly Report, Aug. 2, 2005.

Relations with the United States
Throughout the last two decades, the United States has maintained a strong
interest in the political and economic situation in El Salvador. During the 1980s, El
Salvador was the largest recipient of U.S. aid in Latin America as its government
struggled against the armed FMLN insurgency. After the 1992 peace accords were
signed, U.S. involvement in El Salvador shifted towards helping the government
transform the country’s struggling economy into a model of free-market economic
development. Since that time, successive ARENA governments have maintained a
close relationship with the United States. On December 17, 2003, El Salvador,
signed the CAFTA, which later was changed to now include the Dominican Republic
and is referred to as “DR-CAFTA,” that should strengthen the economic linkages
between all parties to the agreement. On December 17, 2004, despite strong
opposition from the FMLN, El Salvador became the first country in Central America
to ratify DR-CAFTA. El Salvador has maintained a troop presence in Iraq since 2003
despite protests from the FMLN and terrorists threats against the ARENA
government from an extremist group claiming to be linked to Al-Qaeda.98 The
United States is in the process of establishing an International Law Enforcement
Academy (ILEA) based in El Salvador to train police officials from across Latin
U.S. Foreign Aid. In the 1990s, total U.S. foreign assistance to El Salvador
declined from wartime levels ($570.2 million in 1985), and shifted from military aid
towards development assistance and disaster relief. Military aid to El Salvador
reached a peak of $196.6 million in 1984, but fell to $0.4 million a decade later. The
United States provided $37.7 million in assistance to El Salvador following
Hurricane Mitch in 1998 and an additional $168 million in reconstruction assistance
since the two earthquakes in 2001. For FY2005, Congress appropriated an estimated
$40.2 million for El Salvador, and the Administration has requested $42.5 million
in assistance for FY2006. These amounts support a wide variety of Development
Assistance and Child Survival and Health Programs, as well as 169 Peace Corps
Counter-Narcotics Issues. Not a major producer of illicit drugs, El
Salvador serves as a transit country for narcotics, mainly cocaine and heroin,
cultivated in the Andes and destined for the United States. El Salvador, along with
Ecuador, Aruba, and the Netherlands Antilles, serves as a Forward Operating
Location for U.S. anti-drug forces. In 2004, El Salvador’s National Police seized
2,703 kilograms of cocaine, 20% more than in 2003. Also in 2004, the FOL facilities
helped seize 2.2 metric tons of narcotics and prevented the deliver of 71 metric tons
of narcotics to the rest of the region.99
Support for U.S. Military Operations in Iraq. El Salvador immediately
supported the United States following the September 2001 terrorist attacks and sent

98 “El Salvador: Troops Head to Iraq Amid Threats from Extremists,” Latin American
Regional Report, Aug. 17, 2004.
99 U.S. Department of State, International Narcotics Control Strategy Report 2004, Mar.


a first contingent of 360 soldiers to Iraq in August 2003 and a replacement contingent
of 380 soldiers in February 2004. While all other Spanish-speaking countries have
withdrawn their troops, a third contingent of 380 Salvadoran troops departed for Iraq
on August 19, 2004. Despite the fact that 60% of Salvadorans surveyed oppose their
country’s involvement in Iraq, President Saca sent a fourth contingent of troops to
Iraq on February 10, 2005.100
Migration Issues. The United States responded to the recent natural disasters
in El Salvador by granting Temporary Protected Status (TPS) to an estimated
290,000 undocumented Salvadoran migrants living in the United States. On January
6, 2005, the U.S. government extended the TPS of undocumented Salvadoran
migrants living in the United States until September 9, 2006. TPS is an important
bilateral issue for El Salvador, whose migrants living in the United States sent home
roughly $2.5 billion in remittances in 2004. The exodus of large numbers of poor
migrants to the United States has also eased pressure on the Salvadoran social service
system and labor market.
U.S. Trade and Investment. For the past decade, the United States has
played a pivotal role in helping El Salvador develop a market-friendly economy
based on the principles of privatization, foreign investment, and free trade. Few
sectors remain under government control, the U.S. dollar is the country’s legal tender,
and tariffs on foreign goods average just 7.4%.
The United States is El Salvador’s main trading partner, purchasing 60% of its
exports and supplying 50% of its imports. More than 300 U.S. companies currently
operate in El Salvador, many of which are based in the country’s 17 free trade zones.
The composition of U.S. imports from El Salvador have changed dramatically since
the gradual expansion of the Caribbean Basin Initiative (CBI) trade preference
system. In 2000, El Salvador, along with the other countries of Central America, got
duty free access to the U.S. market on approximately three-quarters of its products
as a result of the Caribbean Basin Trade Partnership Act or CBTPA (P.L. 106-200,
Title II), which expires in September 2008.101 In 1990, traditional products, such as
coffee and spices, accounted for the bulk of the $237.5 million worth of Salvadoran
exports to the United States. By 2002, however, exports jumped to $1.98 billion,
with apparel products accounting for 79% of that total.
DR-CAFTA would make permanent and reciprocal the duty- and quota-free
treatment status provided by CBTPA for apparel made in Central America from U.S.
fabrics formed from U.S. yarns. The agreement would relax the CBTPA’s “yarn
forward” provision, which limits duty free access to Central American apparel made
with U.S. materials, by extending that status to garments made from materials
originating in either the United States or Central America. Finally, for some products
(boxers, nightgowns), duty-free access would be given for apparel that is assembled
in the region from imported fabric.

100 “El Salvador: Saca Flying High,” Latin American Regional Report, Feb. 2005.
101 “Latin American Economy: What’s at Stake With CAFTA,” Economist Intelligence Unit,
May 14, 2003.

By vigorously supporting DR-CAFTA, El Salvador hopes to promote greater
U.S. investment into developing its local capacity to produce paper/paperboard,
plastic materials/resin, and processed foods. Because of its interest in securing U.S.
investment, some observers maintain that El Salvador folded to pressure from the
United States when it withdrew from the G-20 group of developing countries at the
World Trade Organization’s meeting in Cancun in September 2003. These reports
were denied, however, by El Salvador’s Economy Minister, Miguel Lacayo, who
stated, “El Salvador responds to its own interests, and the consensus of G-21 did not
respond to its interests.”102 The G-20 group, which includes powerful countries such
as Brazil, India, and China, challenged the United States and European countries to
remove agricultural subsidies as part of the trade negotiations.
DR-CAFTA-Related Issues
President Flores tried to develop favorable markets for El Salvador’s non-
traditional exports. Accordingly, El Salvador has signed bilateral free trade
agreements (FTAs) with Mexico, Chile, Panama, and the Dominican Republic, and
is in the process of negotiating a larger FTA with Canada and four other countries in
the region. As noted above, El Salvador is one of the leading proponents of DR-
CAFTA. On December 17, 2004, El Salvador became the first country in the region
to ratify the agreement. However, critics within the country warn that without
adequate safeguards, DR-CAFTA may make El Salvador’s small farmers more
vulnerable to downturns in the global economy, and that those farmers may be unable
to compete against highly subsidized producers in the United States. Others note that
given the high level of liberalization already present in the country, El Salvador
stands the least to gain from DR-CAFTA of any country in Central America.103 A
number of sensitive issues arose in the negotiations, which are summarized below.
Apparel. The bulk of exports from El Salvador to the United States are apparel
or related goods. In 2004, apparel and related goods comprised some 85% of El
Salvador’s $2.1 million worth of exports to the United States. The government of
El Salvador reportedly fears that although it would still benefit from the CBTPA and
its proximity to the United States, fierce Asian competition could overtake its nascent
textile industry. To date, CBTPA has had a minimal effect on the Salvadoran apparel
sector.104 Early predictions that surrounded the legislation — 150,000 new jobs to be
created, 25% growth in the maquila industry, and the establishment of a larger local
textile industry — never materialized. Salvadoran officials hope that DR-CAFTA,
combined with favorable external circumstances, can help achieve some of the lofty
targets previously predicted for CBTPA and protect the apparel sector from Chinese
competition. El Salvador also seeks to develop its textile industry beyond simple
cutting and sewing operations into firms capable of producing finished goods.

102 “Region Feels Pressure of Free-Trade Disagreements with U.S.,” Central American &
Caribbean Affairs, Oct. 2, 2003.
103 David Holiday, “El Salvador’s “Model Democracy,” Current History, Feb. 2005.
104 U.S. Embassy- San Salvador, Caribbean Basin Investment Survey, El Salvador, July 2,


Environment. In May 1997, the government of El Salvador passed an
Environmental Law to complement its existing domestic environmental provisions
protecting the country’s remaining flora and fauna. El Salvador is also a signatory
of more than 51 international environmental agreements, including the Convention
on Biological Diversity, the Convention on the International Trade in Endangered
Species of Wild Flora and Fauna, and the Kyoto Protocol. Despite these
conservation measures, some observers argue that El Salvador has the worst
environmental situation in Central America.105 According to this report, El Salvador
is the second most deforested country in Latin America, 90% of its river water is
contaminated, soil erosion is pervasive, and air pollution is increasing. A lack of
forest cover has increased El Salvador’s vulnerability to natural disasters, evidenced
by the disastrous effects of Hurricane Mitch and the earthquakes of 2001. El
Salvador’s environmental problems are exacerbated by the fact that it is the most
densely populated country in the region.
As in the Chilean free trade agreement, DR-CAFTA requires countries to
enforce their own environmental laws. Observers note that this type of
environmental provision may be inadequate, however, as many countries in the
region do not effectively enforce their environmental laws. On February 18, 2005, El
Salvador, along with the other signatories of DR-CAFTA, signed an Agreement on
Environmental Cooperation and an Understanding Regarding the Establishment of
a Secretariat for Environmental matters to enforce the environmental provisions of
the agreement.
Labor. El Salvador has ratified the International Labor Association’s (ILO)
conventions against discrimination, forced labor and child labor. It has not, however,
signed the ILO conventions protecting trade union rights. As a result, Human Rights
Watch reported that, as of December 2003, only 5% of the labor force in El Salvador
is unionized, and even those that are unionized are minimally protected by a weak
Ministry of Labor (MOL) and a corrupt judicial system.106 In June 2001, the ILO
Committee on Freedom of Association noted that the country’s existing labor code
restricts freedom of association.107 The labor code requires burdensome union
registration procedures, prohibits union formation and strikes among public sector
employees, and does not require the reinstatement of workers unfairly dismissed.108
Unions are weakest in the Export Processing Zones (EPZs), as factories have no
collective bargaining agreements in place with the 18 unions active in that sector.
The State Department’s Country Report on Human Rights Practices covering 2004
asserts that “workers in a number of plants reported verbal abuse, sexual harassment,
and, in several cases, physical abuse,” and that the Ministry of Labor, which is

105 David Begg, “El Salvador: An Environmental Disaster,” Concern USA, Jan. 18, 2001.
106 “Deliberate Indifference: El Salvador’s Failure to Protect Worker’s Rights,” Human
Rights Watch, Vol. 15, No. 5(B), Dec. 2003.
107 International Labor Organization, Complaint Against the Government of El Salvador
Presented by Communications International (CI), Report No. 313, Case No. 1987, Vol.
LXXXII, 1999, Series B, No. 1, para 117 (a).
108 International Confederation of Trade Unions (ICTFU), Annual Survey of Violations of
Trade Union Rights, 1999-2002.

responsible for enforcing the country’s labor laws, has “insufficient resources to
cover all the EPZs.”
Opponents of DR-CAFTA point out that the agreement may serve to perpetuate
these abuses as its weak provisions merely require signatories to enforce their
existing labor laws, rather than reforming those laws to meet international standards.
They further assert that the penalties for countries not enforcing their labor laws are
relatively weak. In December 2004, the International Labor Rights Fund (ILRF)
submitted a petition to the Office of the USTR questioning El Salvador’s eligibility
for trade preferences under the Generalized System of Preferences (GSP) given its
weak labor laws.109
On November 5, 2004, Gilberto Soto, a Salvadoran-born U.S. union leader was
murdered outside his mother’s home in El Salvador. Mr. Soto was scheduled to meet
with port workers in El Salvador the following week. On December 4, 2004, the
Salvadoran government arrested Soto’s mother-in-law and two accomplices in
connection with the murder. Some local and international human rights
organizations, as well as the AFL-CIO, have expressed concern that the government
of El Salvador has failed to investigate the possibility that Mr. Soto’s murder was
connected to his union activities. On December 27, 2004 the Salvadoran human
rights prosecutor’s office complained of irregularities in the government’s
investigation of the case including the accused’s accusations that they were
“subjected to illegal interrogations and physical and psychological torture.”110 Labor
and human rights advocates have noted that this case may have serious repercussions
for workers’ human rights in El Salvador.111
Despite these obstacles, there have been some positive successes for the
Salvadoran workforce in recent years, some of which may have been hastened by the
CAFTA negotiations. Following the publication of an internal report on the
deplorable conditions in the maquila sector written in August 2000 by the MOL, the
Salvadoran government acknowledged the problems in the maquila sector and
stepped up its monitoring efforts. A second positive step for the Salvadoran labor
force occurred when El Salvador was selected as one of the first countries to get
Department of Labor funding (through the ILO) for a program to stop the worst
forms of child labor. On July 14, 2004, El Salvador’s Ministers of Trade and Labor,
along with their counterparts from the other DR-CAFTA countries, formed a
Working Group that, with support from the Inter-American Development Bank,
would ensure that progress is made on improving labor standards in the region. On
April 5, 2005, the Ministers met again in order to endorse the strategy developed by
that Working Group to strengthen labor law compliance and improve the capacity of
labor institutions in the DR-CAFTA countries.

109 “Labor Groups Press for USTR to Review Central American FTA Partners’ GSP
Eligibility,” World Trade Online, Dec. 16, 2004. See [http://www.insidetrade.com/secure/
110 “El Salvador Human Rights Prosecutor Blasts Soto Murder Probe,” EFE News Service,
Dec. 28, 2004.
111 Human Rights Watch, “El Salvador: Investigate Trade Unionist Assassination,” Nov. 23,


Intellectual Property Rights. El Salvador is party to the WTO Agreement
on Trade-Related Aspects of Intellectual Property (TRIPS) and a bilateral intellectual
property agreement with the United States. The government of El Salvador passed
an Intellectual Property and Promotion and Protection (IPR) Law in 1993 and was
subsequently removed from the U.S. Trade Representative’s (USTR) Special 301
Priority Watch List in 1996. The Law of Trademarks and Other Distinctive Signs
(2002) was established in order to bring El Salvador into better compliance with
TRIPS. The Attorney General’s office is charged with enforcement of these laws,
conducting periodic raids against manufacturers and distributors of pirated goods.
As of 2002, the focus of these raids has shifted from software to pirated CDs.
Despite better laws protecting intellectual property and increased raids, U.S.
companies in El Salvador incurred trade losses of $4.0 billion in 2003 due to112
software privacy and $1.5 million because of music piracy. These substantial
losses continue to occur due to a lack of expeditious court proceedings and tough
punishments for pirates in either the criminal or civil courts in El Salvador. These
violations provide a significant barrier impeding increased U.S. trade and investment
in El Salvador.
Approval Status. On December 17, 2004, the Legislative Assembly of El
Salvador ratified DR-CAFTA despite strong objections from the FMLN. After more
than 19 hours of floor debate and a brief takeover of the chamber by protestors, DR-
CAFTA was approved by a vote of 49-35.113 A simple majority of 43 was all that
was needed to pass the agreement. Pro-CAFTA votes were cast by delegates from
ARENA, the National Conciliation Party (PCN), the Christian Democratic Party
(PDC), and one member of the FMLN. President Saca signed the bill ratifying DR-
CAFTA on January 25, 2005.
Guatemala 114
Political Background
Since the 1980s, Guatemala has been consolidating its transition from a
centuries-long tradition of mostly autocratic rule toward representative government.
A democratic constitution was adopted in 1985, and a democratically-elected civilian
government inaugurated in 1986. Eighteen years later, democratic institutions remain
fragile. Of all the conflicts that ravaged Central America in the last decades of theth
20 century, Guatemala’s conflict lasted the longest. Guatemala ended its 36-year
civil war in 1996, with the signing of the Peace Accords between the government and
Guatemalan National Revolutionary Unity (Unidad Revolucionaria Nacional
Guatemalteca, URNG), a group created in 1982 from the merger of four left-wing

112 United States International Trade Commission, “U.S. Central America - Dominican
Republic Free Trade Agreement: Potential Economywide and Selected Sectoral Effects,”
Aug. 2004.
113 “El Salvador First to Ratify CAFTA, But Followers May be Few,” Noticen: Central
American and Caribbean Affairs, Jan. 6, 2005.
114 Prepared by Maureen Taft-Morales, Specialist in Latin American Affairs.

guerrilla groups. Some of these groups were inspired by the ideologies of the Cuban
and Nicaraguan revolutions and by liberation theology. Some had bases in the
highlands with mostly indigenous populations and incorporated the historical
grievances of the Mayans into their agendas for social and economic reform.
The Peace Accords not only ended the civil conflict but constituted a blueprint
for profound political, economic, and social change to address the conflict’s root
causes. Embracing 10 other agreements signed from 1994 to 1996, the accords called
for a one-third reduction in the size and budget of the military; major investments in
health, education, and other basic services to reach the rural and indigenous poor; and
the full participation of the indigenous population in local and national decision
making. They required fundamental changes in tax collection and government
expenditures, and improved financial management. The accords also outlined a
profound restructuring of state institutions, especially of the military, police, and
judicial system, with the goal of ending government security forces’ impunity from
prosecution and consolidating the rule of law. While noting that insufficient
enactment of peace accord reforms are mainly the responsibility of the government,
the United Nations Verification Mission in Guatemala (MINUGUA) states that civil
society also shares the blame, such as for failing to support tax increases to fund
social programs.
Former Guatemala City mayor Oscar Berger, of the center-right coalition Great
National Alliance, won free and fair elections with 54% of the vote in November

2003. The new president was inaugurated on January 14, 2004, for a four-year term.

Since taking office, Berger has launched major initiatives to fight corruption, reduce
and modernize the military, enact fiscal reforms, and implement the Peace Accords.
He has pursued corruption charges against his predecessor, Alfonso Portillo of the
Guatemalan Republican Front (FRG), whose administration was widely criticized for
inadequate implementation of the peace process, increased human rights violations,
increases in drug trafficking and common crime, extensive corruption, and the slow
pace of economic growth. Berger’s economic reforms include new income tax rates
and a temporary tax to fund programs related to the peace process.
Despite his decisive loss in the first round presidential elections, retired General
Efrain Rios Montt of the FRG remains a destabilizing force. Rios Montt was military
dictator from 1982-1983, while the army carried out a counter-insurgency campaign
resulting in what is now characterized as genocide of the Mayan population.
Berger’s top defense official, General Otto Perez, resigned in May 2004 to protest
negotiations between Berger officials and the FRG, of which Rios Montt is still
leader. Perez charged that Berger offered to protect Rios Montt from prosecution in
exchange for his party’s support of fiscal reform legislation (Associated Press,
5/24/04). Berger has been noncommittal about whether his administration will
prosecute the former dictator. On April 4, 2005, however, Rios Montt’s grandson
was sentenced to over three years in prison for racial discrimination in a case
involving verbal abuse of indigenous leader Rigoberta Menchu.

Socio-Economic Background115
Guatemala has the largest population in Central America with 12 million
people. Approximately half the population is indigenous, with about 23 different
ethno-linguistic groups. The indigenous population is economically and socially
marginalized and subject to significant ethnic discrimination. Distribution of income
and wealth remains highly skewed in Guatemala. According to the World Bank’s
Poverty Assessment of Guatemala, Guatemala ranks among the more unequal
countries of the world, with the top 20% of the population accounting for 54% of
total consumption. Indigenous people, constituting about 50% of the population,
account for less than 25% of total income and consumption.
According to the World Bank’s report, past free market policies have resulted
in the exclusion and impoverishment of the indigenous population. Massive land
expropriations, forced labor, and exclusion of the indigenous from the educational
system all served to develop coffee as Guatemala’s primary export crop yet inhibit
development among the indigenous rural population. By 1960, Guatemala had
double the per capita GDP of neighboring Honduras and Nicaragua, but lower social
indicators, a situation that continues into the present.
Guatemala’s per capita GDP is $3,630, in the mid-range internationally. Its total
GDP, $20.5 billion, is the largest in Central America. Yet the World Bank says data
suggest that poverty is higher in Guatemala than in other Central American countries.
Estimates of the portion of Guatemala’s population living in poverty vary: the U.S.
State Department reports that 80% of Guatemalans live in poverty, with two-thirds
of that number living in extreme poverty. The World Bank reports that 54% of the
population lives in poverty.116 Poverty is highest in rural areas and among the
indigenous: 75% of all people living in the countryside live in poverty, and 25% in
this category live in extreme poverty. Poverty is significantly higher among
indigenous people, 76% of whom are poor, in contrast to 41% of non-indigenous
Guatemala’s GDP for 2003 was $24 billion. GDP growth rate was 3.3% in
2000, but low worldwide coffee prices contributed to Guatemala’s slowed growth
over the last couple of years. GDP growth rate was 2.4% in 2003. Despite the
downturn in commodity prices, traditional exports such as coffee and sugar continue
to lead Guatemala’s economic growth. Over the last decade, non-traditional exports,
such as assembled clothing, winter fruits and vegetables, furniture, and cut flowers,
have grown dramatically. Tourism also has grown, though continued growth may
depend on the government’s ability to address security issues. Problems limiting
growth include illiteracy and low levels of education, high crime rates, and an
inadequate capital market.

115 Socio-economic data in this section are primarily from Guatemala Poverty Assessment,
The World Bank, February 2003; and Background Note: Guatemala, U.S. Department of
State, Sept. 2003.
116 The difference in the figures is probably due to methodology.

Guatemala’s social indicators continue to be among the worst in the hemisphere.
Its malnutrition rates are among the worst in the world. Its infant mortality rate is 43
per 1,000 live births, and its under-5 mortality rate is 58 per 1,000 children.117
Guatemala’s illiteracy rate is extremely high: at 31%, only Nicaragua and Haiti have
worse levels in the hemisphere. The average level of schooling is an extremely low
4.3 years; among the poor it is less than two years. Schooling is lowest among
women, indigenous people, and the rural poor. As a result of malnutrition, 44% of
children under five years of age have stunted growth. Drought and low coffee prices
triggered a rural economic crisis beginning in 2001, which has caused severe
malnutrition among the rural poor.
Implementation of the elements of the Peace Accords relating to improving the
living conditions and the rights of indigenous people and women are far behind
schedule. Access to education, according to the Inter-American Commission on
Human Rights, is “still far from becoming a reality.” MINUGUA reported in 2003
that the amounts allocated to key social ministries “remained extremely low in
relation to the needs of the country.” The indigenous population and women continue
to face limited opportunities and discrimination in the labor market. According to
the World Bank’s Poverty Assessment, “The indigenous appear limited to lower-
paying jobs, primarily in agriculture,” which, the report says, is “unlikely to serve as
a major vehicle for poverty reduction.” Other obstacles hindering social and
economic advancement among the indigenous poor, which the report says the
government still must address, are: higher malnutrition rates, less coverage by basic
utility services, wage discrimination, and discriminatory treatment by public officials
and other service providers.
International donors and others have criticized Guatemala for not increasing the
tax base to the minimum target of 12% of GDP agreed upon in the Peace Accords.
Guatemala’s 2003 tax base, at about 10% of GDP, was one of the lowest in Latin
America.118 At a May 2003 meeting of the Consultative Group for Guatemala, donors
told the Guatemalan government it needed to increase its tax revenue, decrease
spending on the armed forces, and increase social spending as mandated in the
accords. The Consultative Group is made up of over 20 donor countries and
international organizations, including the U.S., Canadian, and Japanese governments,
the World Bank, and the IDB. In its report prepared for that meeting, MINUGUA
said the organized private sector shares the responsibility for inadequate social
budgets because it systematically opposes efforts to increase taxes, thereby limiting
funding available for key social ministries and institutions of justice.
The Berger Administration has taken steps toward implementing the goals set
forth by the Peace Accords and the Consultative Group. It has developed a more
inclusive development strategy. It dramatically cut the military budget, and is
shifting those funds to education and health programs. In June 2004, the Congress
passed a tax package which included a Temporary Tax to Support the Peace

117 Guatemala Country Profile, The World Bank Group, Aug. 2003.
118 “Central America Pins Hopes on Free Trade,” Euromoney, London, June 2004.

Agreements. Despite the government’s commitment to increase tax revenues to 12
%of GDP by year’s end, tax revenues were expected to remain at 10.3% for 2004.119
Relations with the United States
U.S. policy objectives in Guatemala, as set forth by the State Department,
include strengthening democratic institutions and implementation of the Peace
Accords; encouraging respect for human rights and the rule of law; supporting broad-
based economic growth, sustainable development, and mutually beneficial trade
relations; combating drug trafficking; and supporting Central American integration
through resolution of territorial disputes.120 Relations between Guatemala and the
United States have traditionally been close, but strained at times by human rights and
civil-military issues. The Bush Administration repeatedly expressed concerns over
the failure of the Portillo Administration to implement the Peace Accords, a
perceived high level of government corruption, and lack of cooperation in counter-
narcotics efforts.121 The Bush Administration says that the change of government in
Guatemala “affords an important opportunity to reverse negative trends in the
country. Donor support will remain essential, however, to keep Guatemala on the
positive democratic path and avoid any fall towards a failing state so near to U.S.
U.S. Assistance. From 1997 through 2003, U.S. assistance to Guatemala
centered on support of the Peace Accords, providing almost $400 million to support
their implementation. There is no longer a project in direct support of the
Implementation of the Peace Accords as of FY2004. Some activities, such as the
development of justice centers, and efforts to support increased transparency of
Guatemalan government institutions, and to reduce corruption, will continue in other
programs. U.S. assistance to Guatemala has declined by over a third in the past four
years, from almost $60 million in FY2002, to just under $40 million requested for
FY2006. The estimate for FY2005 includes $11.6 million in Child Survival and
Health Programs funds; $10.9 million in development assistance, $6 million in
Economic Support funds, and $18 million in P.L. 480 Title II food assistance
programs. The request for FY2006 includes $9.9 million in Child Survival and
Health Programs funds; $9.7 million in development assistance, $4 million in
Economic Support funds, and $16.3 million in P.L. 480 Title II food assistance

119 U.S. Embassy in Guatemala, Guatemala: Country Commercial Guide FY2005, July 2004.
Sec. 2, C.
120 Background Note: Guatemala, U.S. Department of State, Sept. 2003, p.9.
121 See, for example, testimony of U.S. officials at hearing on Drug Corruption and Other
Threats to Democratic Stability in Guatemala and the Dominican Republic, before House
Committee on International Relations’ Subcommittee on the Western Hemisphere, Oct. 10,
2002; and Ambassador Michael Kozak, State Dept. Bureau for Democracy Human Rights
and Labor, Congressional Human Rights Caucus Members’ Briefing: Guatemala: A Human
Rights Update, Oct. 16, 2003.
122 USAID Budget Justification to Congress FY2005, “Guatemala.”

programs. The Administration has provided $5 million following the devastation of
the hurricane that demolished entire towns in October 2005.123
From the inauguration of a democratically-elected government in 1986 to 1990,
Congress placed conditions related to democratization and improved respect for
human rights on military assistance to Guatemala. It also prohibited the purchase of
weapons with U.S. funds. In 1990, the George H. W. Bush Administration
suspended military aid because of concerns over human rights abuses allegedly
committed by Guatemalan security forces, especially the murder of a U.S. citizen.
Congress has continued to prohibit foreign military financing (FMF) to Guatemala
since then, although it has allowed some International Military Education and
Training (IMET) assistance. Currently, Congress allows Guatemala only expanded
IMET, which is training for human rights, and of civilian personnel in defense
matters, and requires notification to the Appropriations Committees prior to
allocation. For FY2006, the House-passed version of the Foreign Operations
appropriations bill (H.R. 3057, H.Rept. 109-152) would remove restrictions on IMET
but would retain the prohibition of FMF. In recent years Congress has also asked
federal agencies to expedite the declassification and release of information related to
the murder of U.S. citizens in Guatemala.
Human Rights. The first of the Peace Accords was the Comprehensive
Agreement on Human Rights, which was signed and became effective in 1994. The
Peace Accords established a Historical Clarification Commission, commonly referred
to as The Truth Commission, to investigate human rights violations and acts of
violence that occurred during the armed conflict from 1960 to 1996. In its 1999
report, “Guatemala: Memory of Silence,” the Commission reported that more than

200,000 people died or disappeared because of the armed conflict, and that over 80%

of the victims were indigenous Mayans. The Commission concluded that the
systematic direction of criminal acts and human rights violations at the civilian
Mayan population amounted to genocide. The Commission attributed responsibility
for 93% of the violations to agents of the state, principally members of the army, and
stated: “The majority of human rights violations occurred with the knowledge or by
order of the highest authorities of the State.” The Commission concluded that,
although much of the state’s actions were taken in the name of counterinsurgency
efforts, “[t]he magnitude of the State’s repressive response” was “totally
disproportionate to the military force of the insurgency...,” and that the vast majority124
of the state’s victims were not guerrilla combatants, but civilians.
Regarding respect for human rights, Guatemala has made enormous strides, but
significant problems remain. The armed conflict has definitively ended, and the state
policy of human rights abuses has been ended. Civilian control over military forces
has increased. On the other hand, security forces reportedly continue to commit gross
violations of human rights with impunity, and Guatemala must still overcome a
deeply embedded legacy of racism and social inequality. The U.N., the OAS, and the

123 “US Aid to Guatemalan Storm Victims Stands at $5 Million,” EFE News Service, Oct.

17, 2005.

124 Commission for Historical Clarification, Guatemala: Memory of Silence, Conclusions
and Recommendations, at [http://shr.aaas.org/guatemala/ceh/report/english/toc.html].

United States have all expressed concern that human rights violations have increased
over the past several years, and that previous Guatemalan governments have taken
insufficient steps to curb them or to implement the Peace Accords. President Berger
has made implementing the Peace Accords a top priority. He has slashed the size of
the military and its budget by more than that required by the Peace Accords and is
modernizing defense policy. He has also initiated programs to improve the rights of
women and of the indigenous population.
The previous Guatemalan administration agreed to the establishment of a U.N.
High Commissioner for Human Rights in December 2003, but it has still not been put
in place. The Berger Administration is working to resolve legal obstacles to the
establishment of the UN Commission for the Investigation of Illegal Groups and
Clandestine Security Organizations (CICIACS), whose mission will be to investigate
and prosecute clandestine groups, through which many military officers allegedly
engage in human rights violations, drug trafficking, and organized crime. CICIACS
was approved by the Portillo Administration but has yet to be approved by the
Guatemalan Congress. The UN Verification Mission in Guatemala (MINUGUA)
closed in November 2004, after verifying compliance with the Peace Accords for ten
years. In September 2004, UN Secretary General Kofi Annan said that Guatemala’s
political process had matured to the point where the country should now be able to
deal peacefully with all of its unresolved issues.
A climate of security remains elusive, however, as violent crime has increased
in recent years. President Berger has called the lack of security the most important
problem facing his administration. He initiated a “national crusade against violence”
in July 2004.125 Some have criticized the effort for removing security forces from
one area to increase protection in others. Following the murder of a judge on April
25, 2005, the Guatemalan Supreme Court adopted a plan to protect 25 judges who
have received death threats. In recent months, suspected gang members are being
killed by what appear to be new clandestine vigilante groups conducting “social
cleansing” and that, according to the Human Rights Prosecutor’s office, may involve
police and military officers.126
Narcotics. Guatemala is a major drug-transit country for both cocaine and
heroin en route from South America to the United States and Europe. According to
the State Department , up to half of all cocaine on its way to Mexico and the United
States passes through Guatemala, the preferred country in Central America for the
storage and consolidation of northward bound cocaine. In January 2003, President
Bush designated Guatemala as one of three countries in the world that “failed
demonstrably” during the previous year to fulfill its international counter narcotics
obligations. He granted a national interest waiver to allow continued U.S. assistance
to be provided to Guatemala, however.Eight months later, in September 2003, the
President determined that Guatemala had made efforts to improve its counter

125 “Violence in Guatemala Up 13 [stet] Percent in First Half of 2004,” EFE News Service,
Aug. 1, 2004. Note: Numbers cited calculated to be 15% increase.
126 “Nine Youths Kidnapped, Slain in Guatemala over Past 5 Days,” EFE News Service, Oct.
15, 2005, and Sergio de Leon, “Killings, Disappearances of Gang Members Spark Rumors
of ‘Social Cleansing’ in Guatemala,” Associated Press, Oct. 17, 2005.

narcotics practices, and did not include it in the “failed demonstrably” list. Among
the steps taken were passage by the Guatemalan Congress in August 2003 of a
measure allowing U.S. security forces to enter Guatemalan airspace and waters
during joint counter narcotics operations or when in pursuit of suspected drug
In July 2004, the Financial Action Task Force, an intergovernmental
organization dedicated to enhancing international cooperation in combating money-
laundering, removed Guatemala from its list of non-cooperative countries .127
Guatemala had been on the list of nine countries — the only one in the Americas,
during the Portillo Administration.128 The Task Force welcomed progress made by
Guatemala in enacting and implementing anti-money laundering legislation. In its
March 2005 International Narcotics Control Strategy Report, the Bush
Administration reported that “In spite of substantial counternarcotics efforts by the
Government of Guatemala in 2004, large shipments of cocaine continue to move
through Guatemala by air, road, and sea.”
Guatemala has a growing domestic drug abuse problem. According to the State
Department, the Guatemalan government has an aggressive demand reduction
U.S. Trade and Investment. Guatemala and the United States signed a
framework agreement on trade and investment in 1991, through which they
established a bilateral Trade and Investment Council. The signing of the Guatemalan
Peace Accords in 1996 removed a major obstacle to foreign investment there.
Guatemala was certified to receive export trade benefits in 2000 under the Caribbean
Basin Trade and Partnership Act (P.L. 106-200, Title II), which gives preferential
tariff treatment, and also benefits from access to the U.S. Generalized System of
Preferences. The United States is Guatemala’s top trade partner. Guatemala’s
primary exports are coffee, sugar, bananas, fruits and vegetables, cardamom, meat,
apparel, petroleum, and electricity; 55.3% of Guatemalan exports go to the United
States. Primary import commodities are fuels, machinery and transport equipment,
construction materials, grain, fertilizers, and electricity; 32.8% of Guatemalan
imports are from the United States.129 The U.S. trade deficit with Guatemala was
$758 million in 2002, with U.S. exports to Guatemala at $2.0 billion, and U.S.
imports from Guatemala at $2.8 billion. Guatemala is the 40th largest export market
for U.S. goods.
U.S. foreign direct investment in Guatemala was $907 million in 2000, and
dropped by almost half, to $477 million, in 2001; it is concentrated in the

127 “FATF Tackles Terrorism Financing, Delists Guatemala,” Financial Action Task Force,
July 2, 2004.
128 Financial Action Task Force on Money Laundering, Annual Review of Non-Cooperative
Countries or Territories, June 20, 2003. Paris, France.
129 Figures for 2001, The World Factbook, “Guatemala.” Central Intelligence Agency,
updated Aug. 1, 2003.

manufacturing and finance sectors.130 Major U.S. companies operating in Guatemala
include ACS, American Cyanamid Co., Avon Products, BellSouth, Cargill, Citibank,
Coastal Power, Colgate Palmolive, Constellation Power, Exxon, Gillette, Goodyear
Tire and Rubber, Kellogg Co., Kimberly Clark Corp., Levi Strauss and Co., Marriott
Hotels, 3M, Phillip, Morris, Inc., Proctor and Gamble, Railroad Development Corp.,
Ralston Purina, Sabritas-Frito Lay, TECO Power Services, Texaco, Warner Lambert,
and Xerox.131 President Berger has made attracting domestic and foreign investment
a priority, believing it will revive the economy and create jobs.
DR-CAFTA-Related Issues
The Guatemalan government supports the DR-CAFTA agreement as a further
step toward economic integration with its neighbors. It established a free trade area
with El Salvador, Honduras, and Nicaragua in 1993, to which the Dominican
Republic was later added. Negotiations to add Chile to the group are underway.
Along with El Salvador and Honduras, Guatemala implemented a free trade
agreement with Mexico in 2001. Guatemala signed a customs agreement with El
Salvador in March 2004 as part of a strategy to improve trade within the region.
Some observers believe that Guatemalan groups with concerns about possible
negative outcomes of DR-CAFTA, such as small farmers, were limited in their
opposition because of the secretive nature of the CAFTA negotiations.132
Despite a foreign investment law passed in 1998 to facilitate foreign investment,
under the Portillo administration, “time-consuming administrative procedures,
arbitrary bureaucratic impediments, corruption, and a sometimes anti-business
attitude...[were] a reality,” according to a U.S. government report.133 A World Bank
report listed Guatemala as one of nine countries that regulate businesses the most
heavily. The report concluded that those countries also had the weakest systems for
enforcing the laws and were therefore susceptible to bribery and corruption as well.134
Agriculture. Those who support DR-CAFTA argue that the agreement will
help farmers, especially those who grow non-traditional crops not grown in the
United States. They also argue that it will help slow migration to the United States
of Central American farm laborers seeking work.
Others are not so sure. Central American governments wanted to negotiate the
elimination of U.S. farm subsidies as part of CAFTA talks. They feared that small
subsistence farmers will be unable to compete against subsidized, and therefore

130 U.S. Trade Representative, 2003 National Trade Estimate Report on Foreign Trade
Barriers, “Guatemala,” p. 140.
131 U.S. & Foreign Commercial Service and U.S. Department of State, Guatemala Country
Commercial Guide FY2003, Sept. 2003, pp.66-67.
132 Tim Rogers, “Blind Man’s Bluff,” Latin Trade, Sept. 2003.
133 Ibid, p.60.
134 “Poor Nations Have Most Business Red Tape- World Bank,” Reuters News, Oct. 7, 2003.

lower-priced, U.S. commodities. They acquiesced to the U.S. position that the issue
should be addressed in the World Trade Organization. The executive director of the
Central American and Caribbean Agricultural Federation, a Guatemalan, says that
Guatemalan farmers “are afraid [CAFTA] is going to be like NAFTA, which
massacred the campesinos in Mexico.” Whether or not NAFTA has hurt subsistence
farmers is disputed, however. A recently-released World Bank report says that
NAFTA “has probably had little impact on small farmers in the Southern [Mexican]
states who have suffered a long history of social, political and economic neglect...”135
Other analysts are concerned that opening basic food production in Central
America to competition from U.S. imports will have a negative impact on Central
American food security and employment rates. The Central American governments
agreed to include all of these staple food crops in the concluded agreement, however.
The agreement establishes quotas on sensitive agricultural commodities imported
from the U.S. that will increase over time; by the year 2020, most quotas and tariffs
will be eliminated. White corn, however, will receive some protection in perpetuity.
Although a quota on U.S. white corn imports will increase annually, the high tariffs
on white corn imports above the quota level will remain in place indefinitely.
Also of concern to Guatemala was how sugar would be treated in CAFTA.
Currently, the U.S. allows a quota of 126,400 metric tons of sugar to enter duty free
from the five Central American countries every year. About 2/5 of that amount, or
50,546 metric tons, is allocated to Guatemala. Central American sugar growers
wanted CAFTA to guarantee an expansion of the quota. As concluded, the
agreement establishes an additional quota of 32,000 metric tons for Guatemala, one-
third of the additional access granted to the five Central American countries, for
sugar exported to the United States. The quota will increase annually in perpetuity,
but the tariff on any shipments over that quota will remain prohibitively high.136
Apparel. There are 13 free trade zones operating in Guatemala, with 7 more
authorized to be created. The most frequent beneficiaries of Guatemala’s free
trade/maquiladora laws are textile assembly operations. In 2000 the Caribbean Basin
Initiative was enhanced to give more benefits to the textile industry. Whereas
previously garments could only be sewn in Guatemala in order to be shipped back
into the United States tariff free, since the enhancement, textiles can be cut, sewn,
and finished in Guatemala and still receive those tariff benefits. These benefits
would become permanent under DR-CAFTA. Some U.S. producers have objected
to DR-CAFTA for this reason, saying it will harm their businesses.

135 “NAFTA is Positive for Mexico but Not Enough, Says New World Bank Report,” World
Bank News Release no. 2004/188/LAC, Dec. 17, 2003.
136 For further information on agricultural issues, see CRS Issue Brief IB95117, Sugar
Policy Issues, by Remy Jurenas.

Corruption.137 In recent years, the U.S. government, international
organizations, and independent watchdog organizations criticized Guatemala for
extensive corruption, which allegedly increased under the Portillo Administration.
The Bush Administration called corruption “the number-one obstacle to increasing
the effectiveness of all USG[ovt.] programs in Guatemala.” Transparency
International said Guatemala was perceived as the 33rd most corrupt country out of
133 countries in 2003. According to U.S. government reports, “corruption is a
serious problem that companies may encounter at nearly any level,” in Guatemala,
and which has tended to be most pervasive in customs transactions. A semi-
autonomous Superintendency of Tax Administration was established in 1999 to
improve customs operations, but under the previous administration corruption
apparently increased instead. In 2001, Guatemala ratified the Inter-American
Convention against Corruption.
President Berger has made improving governance and attacking corruption
priorities. His administration introduced a code of ethics for cabinet members and
is actively investigating corruption under the previous FRG government. The former
Vice President, Finance Minister, Comptroller General, and Superintendent of Tax
Administration are in jail awaiting trial. Former President Portillo, also under
investigation for embezzlement, fled the country in February 2004, the day after his
immunity from prosecution was lifted. Partly in response to ongoing investigations,
11 FRG legislators have left the legislature. The Berger Administration is making
government finances — including, for the first time, the military budget —
transparent, enacting reforms such as making procurement processes publicly
available online.
Environment.138 Guatemala is party to 57 multilateral, regional, and bilateral
agreements related to the environment. It is the only Central American country not
to have ratified the Cartagena Protocol on Biosafety, and one of two not to have
signed the Rotterdam Convention on Prior Informed Consent for Certain Hazardous
Chemicals and Pesticides in International Trade. It is part of the Central American
Commission on Environment and Development, established in1989 to enhance the
development of regional environmental initiatives. According to an environmental
review by the U.S. Trade Representative, “Guatemala has not passed a wide spectrum
of environmental laws, and lacks specific laws dealing with the major issues of
water, forests, solid wastes, biodiversity, etc. that many of the other [Central
American] countries possess.” A general Law for Environmental Protection and
Improvement was passed in 1986, and a forestry law was passed in 1996. There is

137 Sources include Hearing on Drug Corruption and Other Threats to Democratic Stability
in Guatemala ... op. cit., testimony of Asst. Sec. Of State for Western Hemisphere Affairs
Otto Reich; Transparency International Corruption Perceptions Index 2003, at
[http://www.transparency.org/cpi/2003/cpi2003.en.html]; Guatemala Country Commercial
Guide op. cit.; U.S. Trade Representative, op. cit.
138 Sources for this section include Interim Environmental Review: U.S.-Central America
Free Trade Agreement, Office of the U.S. Trade Representative, Aug. 2003; John Audley,
The Art of the Possible: Environment in the Free Trade Area of the Americas, Issue Brief,
Carnegie Endowment for International Peace, Nov. 2003; and CAFTA’s Environmental
Chapter, Quixote Center/Quest for Peace, in WOLA, op. cit.

a Ministry of Environment and Natural Resources, and an Environmental Attorney
within the Human Rights Commission to ensure compliance with constitutional
articles related to the environment. As the U.S. Trade Representative report noted,
however, the Central American nations’ “ability to effectively implement and enforce
environmental laws is limited by the lack of fiscal and human resources.”
Water pollution and deforestation are among Guatemala’s greatest
environmental problems, and are exacerbated by poverty in the densely populated
central highlands. Forest loss over the past 10 years has averaged almost 2%
annually. Guatemala’s tourism sector now contributes more to the economy than the
coffee sector. While Guatemala’s natural environment is an important aspect of
tourism, expansion of tourism-based development can add to the degradation of the
environment. Tourism-related threats to ecosystems include air and water pollution,
solid waste disposal, land degradation, loss of wildlife habitats and species, and
increased demand for limited supplies of fresh water (i.e. for hotels and swimming
pools). In October 2005, flooding from a hurricane caused landslides that destroyed
entire Mayan villages and washed out roads near the tourist area of Lake Atitlan.
Labor.139 Legally, Guatemalans’ right to freedom of association and to form
and join trade unions are protected by the Constitution and the Labor Code.
Practically, however, those rights are inadequately protected by the government.
According to the State Department’s Human Rights report covering 2003, employees
in all sectors of the economy hesitate to exercise their right of association for fear of
reprisals by employers, the most common reprisal being the dismissal of workers for
unionizing activities. The report said that “the weakness of labor inspectors, the
failures of the judicial system, poverty, the legacy of violent repression of labor
activists during the internal conflict, the climate of impunity, and the deep-seated
hostility of the business establishment toward independent and self-governing labor
associations constrained the exercise of worker rights.” The Guatemalan legislature
passed two sets of reforms to the national Labor Code in 2001. Many of the reforms
were seen by the labor movement as a “significant step forward” in the protection of
workers’ rights. Other so-called reforms, such as the requirement that one-half plus
one of the workers in an industry must join a union before it can be legally
recognized, is seen by labor activists as a practically insurmountable obstacle to the
formation of new industrial unions.
Critics argue that the labor provisions under DR-CAFTA are less stringent than
those currently in place under U.S. preferential trade arrangements. Under the
Caribbean Basin Initiative and the General Agreement on Preferences, the United
States may withdraw trade benefits if Central American governments do not take
steps to meet international labor standards. Under DR-CAFTA, critics, such as the
AFL-CIO, argue that governments would only be required to enforce their existing,
flawed laws, but not to reform laws to meet international labor standards.

139 Sources include Country Reports on Human Rights Practices 2002: Guatemala, U.S.
Dept. of State, Mar. 2003; Stronger Labor Provisions Needed in CAFTA, AFL-CIO, in
WOLA, op. cit.

Advocates of DR-CAFTA argue that accompanying technical cooperation
programs will help improve the enforcement of labor laws in the region. In October
2003, the U.S. Trade Representative announced a $6.75 million grant to educate the
public in CAFTA countries about labor laws and to ensure that workers’ rights are
respected, saying that the four-year grant is designed to complement CAFTA.140
While acknowledging the importance of such technical assistance, the AFL-CIO
maintains that it is insufficient to “change deep-seated indifference and hostility
towards workers’ rights.”
Labor rights groups filed a petition in December 2004 with the USTR to review
Guatemala’s eligibility under the Generalized System of Preferences for violation of
internationally recognized workers’ rights. The groups argue that the review process
initiated in 2003 has “failed to bring about meaningful progress” in the areas under
review: “judicial impunity with regard to threats and violence against trade unionists
in Guatemala, the systematic failure of the government to enforce existing labor laws,
and the need for further reforms to the country’s labor laws in order to bring it into
full compliance with international standards.”141
Although Guatemala’s constitution prohibits children under 14 years of age
from working without written permission from the Ministry of Labor, MINUGUA
reported in 2000 that just over a third of children 7 to 14 years old worked. Most
children were employed in the informal economy, including household chores,
subsistence agriculture, and family-run enterprises. In November 2002, then-
President Portillo created a National Commission for the Elimination of Child Labor
to coordinate the implementation of the National Plan to Eradicate Child Labor.
Intellectual Property. Piracy of copyrighted material, especially for business
software applications, is widespread in Guatemala. Guatemala has taken steps to
address the piracy issue. It is a member of the World Intellectual Property
Organization, and recently ratified two of the organization’s agreements. In 2000,
the Guatemalan legislature passed laws to increase the protection of intellectual
property rights, including providing patent protection for pharmaceutical and
agricultural products for the first time. In 2001, the government appointed a special
prosecutor responsible for pursuing intellectual property rights violations. In 2002,
Guatemala passed intellectual property rights legislation. The U.S. Trade
Representative called the laws “greatly improved,” but noted that a month after its
passage further legislation suspended the processing of pharmaceutical and chemical
patents until 2005 and otherwise weakened the protection of intellectual property142
rights. According to the U.S. State Department’s Country Commercial Guide,

140 “USTR Announces Grant to Improve Central American Labor Conditions,” Washington
File, Oct. 2, 2003.
141 International Labor Rights Fund, Asociacion Servicios de Promocion Laboral, “Petition
to Review Guatemala’s Country Eligibility Under the Generalized System of Preferences
(GSP) for Violation of Internationally Recognized Workers’ Rights,” to Chairman, GSP
Subcommittee, Office of the U.S. Trade Representative. Dec. 13, 2004.
142 U.S. Trade Representative, 2003 National Trade Estimate Report on Foreign Trade
Barriers, “Guatemala,” pp. 140-141.

enforcement of intellectual property rights and prosecution of their violation remains
inadequate in Guatemala.
In December 2004, the Guatemalan Congress repealed a law that provided for
test data protection for pharmaceutical products and passed a new law that limits the
protection foreign companies get for pharmaceutical test data and allows other
companies to use that data to attain approval for, and to produce, generic drugs. Both
UNICEF and the Pan American Health Organization publicly supported the earlier
law’s repeal. In early January 2005, the Bush Administration said the new law
violated the terms of DR-CAFTA and would cause the process to stall. On January
26, 2005, 11 Democratic Members of the U.S. Congress opposed Administration
efforts to force Guatemala to adopt test data protection provisions, arguing in a letter
that such provisions undermine the “Doha Declaration” of the Trade Promotion
Authority Act of 2002, which was meant “to ensure that trade rules on intellectual
property do not interfere with the ability of developing countries to take ‘measures
to protect public health ... and to promote access to medicines for all.’”143 The letter
went on to say that the data protection provisions could be “especially dangerous” for
Guatemala, where over 1% of Guatemala’s population is infected with HIV/AIDS.
The international medical aid agency Doctors Without Borders also believes that the
new intellectual property regulations will have a negative impact on local access to
HIV/AIDS and other essential medicines and notes that 6,000 new cases of
HIV/AIDS are reported annually in Guatemala.144
The Administration says its side letter on public health to DR-CAFTA upholds
the Doha Declaration, although the Guatemalan government would have to declare
a public health emergency in order to waive the data protection requirement.
President Berger promised to make Guatemala compliant with its DR-CAFTA
obligations quickly. The Guatemalan Congress approved legislation to protect
confidential test data for agro-chemicals and pharmaceuticals on March 9, opening
the way for DR-CAFTA to be voted on.
Approval Status. Guatemala became the third nation to ratify DR-CAFTA
on March 10. The voting was delayed earlier in the week by large protests calling for
a referendum on the agreement that prevented legislators from reaching their
chambers. The unicameral Congress has 158 members. A simple majority was
needed to pass the DR-CAFTA; it passed 126 in favor and 12 against. The
Guatemalan Congress held a series of seminars to educate its members about DR-
CAFTA related issues. Public sessions for civil society were also held. Farmers,
union members, students, and social and indigenous groups are among those who
have continued protests against the agreement around the country since it was passed.
Clashes with police led to arrests, injuries, and at least one death. Opposition leaders

143 Hilda L. Solis, Henry A. Waxman, et al, letter to Honorable Robert B. Zoellick, U.S.
Trade Representative, Jan. 26, 2005.
144 Encarna Nunez-Diaz, “Prevalence of HIV/AIDS Continues to Rise in Guatemala,”
WMRC Daily Analysis, Apr. 22, 2005.

maintain it favors capital over labor.145 In response to the ongoing protests, Berger
promised a series of measures to offset any negative impact from CAFTA. One of
these measures is a concessions bill to regulate private sector investment in
infrastructure development and social service delivery. This legislation has in turn
drawn protests from critics who worry the legislation could lead to privatizing public
services such as healthcare and education. Berger has invited the opposition to meet
with him to air counter proposals.
Honduras 146
Political Situation
Honduras has enjoyed 23 years of uninterrupted civilian democratic rule since
the military relinquished power in 1982 after free and fair elections. In the
November 2001 presidential elections, National Party candidate Ricardo Maduro
defeated his Liberal Party rival Rafael Pineda Ponce 52-44%, a wider margin than
some had anticipated, although neither of the two major parties gained a majority in
the 128-member unicameral Congress. For most of this century, the Liberal and
National parties have been the two dominant political parties. Both are considered
center-right parties and there appear to be few major ideological differences between
the two. In the electoral campaign, Maduro — a Stanford University-educated
economist and businessman — ran on a strong anti-crime platform, which appealed
to many Hondurans concerned about the dramatic increase in gang violence in the
country over the past several years. Maduro’s own son was kidnaped and murdered
in 1997.
When he was inaugurated to a four-year term in January 2002, Maduro became
the 6th elected president since the country’s return to civilian rule. President Maduro
has faced enormous challenges in the areas of crime, human rights, and improving
overall economic and living conditions in one of the hemisphere’s poorest countries.
The next presidential elections are scheduled for November 27, 2005, but the
campaign has been underway for some time. Political parties held primaries on
February 20, 2005, with the National Party nominating Porfirio Lobo, the current
head of the Honduran Congress, and the Liberal Party nominating Manuel Zelaya, a
rancher and former head of the Honduran Social Investment Fund. President Maduro
will not be a candidate since under the Honduran Constitution, anyone who has
served as president may not be re-elected.
Crime and Human Rights. Upon taking office, crime and related human
rights issues were some of the most important challenges for President Maduro.
Kidnaping and murder had become common in major cities, particularly in the

145 U.S. Southern Command Daily Open Source Information Overview, “One Dead in
Guatemala Protests against Trade Deal with U.S.,” Mar. 16, 2005.
146 Prepared by Mark P. Sullivan, Specialist in Latin American Affairs. For additional
information see CRS Report RS21103, Honduras: Political and Economic Situation and
U.S. Relations.

northern part of the country. Youth gangs known as maras147 terrorized many urban
residents, while corresponding vigilantism increased to combat the crime, with
extrajudicial killings increasing. Honduras, along with neighboring El Salvador and
Guatemala, has become fertile ground for gangs, which have been fueled by poverty,
unemployment, leftover weapons from the 1980s, and the U.S. deportation of
criminals to the region.148 President Maduro, who campaigned on a zero-tolerance
platform, increased the number of police officers and cracked down on delinquency.
The Maduro government signed legislation in July 2003 making maras illegal and
making membership in the gangs punishable with 12 years in prison. While the
crackdown has reduced crime significantly (for example, an 80% decline in
kidnapping and a 60% decline in youth gang violence149) and is popular with the
public, some human rights groups have expressed concerns about abuses and the
effect of the crackdown on civil liberties. There also have been concerns that poor
conditions in already overcrowded prisons will be exacerbated. In May 2004, 104
inmates — predominately gang members — were killed in a fire in an overcrowded
San Pedro Sula prison.
On December 23, 2004, a massacre of 28 people on a public bus in San Pedro
Sula shocked the Honduran nation. The Mara Salvatrucha (MS-13) gang was
reportedly responsible for the killings and a number of arrests have been made.
Honduran officials maintain that the massacre was a gang response to the
government’s zero-tolerance policy. In late July 2005, a U.S. Drug Enforcement
Administration agent was killed by two youth gang members in a bungled robbery
in Tegucigalpa.
Security concerns appear to be dominating the 2005 presidential election
campaign, with Porfirio Lobo of the National Party calling for tougher action against
youth gangs by reintroducing the death penalty (which was abolished in 1957) and
increasing the prison sentence of juvenile delinquents. Manuel Zelaya of the Liberal
Party is opposed to reinstating the death penalty and emphasizes that a more
comprehensive approach is needed, taking into account the social conditions that
contribute to crime.
The Maduro government has reportedly advocated the concept of a Central
American regional battalion that would help respond to such threats as natural
disasters, gangs, and the trafficking of drugs and migrants. Some Central American
nations, however, have questioned the mission of such a force, and some observers
have raised concerns about militarizing law enforcement functions.150

147 For further background, see CRS Report RS22141, Gangs in Central America, by Clare
148 Kevin Sullivan, “Spreading Gang Violence Alarms Central Americans,” Washington
Post, Dec. 1, 2003, p. A1.
149 John Authers and Sara Silver, “Death of Son Persuades Honduran to Take Political
Stage,” Financial Times, Aug. 11, 2004.
150 Juan O. Tamayo, “Leaders Contemplate Multinational Force,” Miami Herald, October

14, 2005; Pablo Bachelet, “Regional Force to Be Discussed,” Miami Herald, Oct. 9, 2005.

Economic Conditions
Another significant challenge for President Maduro has been his ability to
improve the overall state of the Honduran economy and living conditions.
Traditional agriculture exports of coffee and bananas are still important for the
Honduran economy, but nontraditional sectors, such as shrimp farming and the
maquiladora, or export-processing industry, have grown significantly over the past
decade. With a per capita income of $970 (2003, World Bank estimate), Honduras
remains one of the poorest countries in the hemisphere. Among the country’s
development challenges are: an estimated poverty rate of 64%; an infant mortality
rate of 34 per 1,000; chronic malnutrition (33% of children under five years); an
average adult education level of 5.3 years; and rapid deterioration of water and forest
resources, according to the U.S. Agency for International Development.151 Honduras
also has a significant HIV/AIDS crisis, with an adult infection rate of 1.8%.152 The
Garifuna community (descendants of freed black slaves and indigenous Caribs from
St. Vincent) concentrated in northern coastal areas has been especially hard hit by the
Honduras was devastated by Hurricane Mitch in October 1998, which killed
more than 5,000 people and caused billions of dollars in damage. Amid the country’s
hurricane reconstruction efforts, Honduras signed a poverty reduction and growth
facility (PRGF) agreement with the International Monetary Fund (IMF) in 1999 that
was extended through 2002. The agreement imposed fiscal and monetary conditions
requiring Honduras to maintain firm macroeconomic discipline and to develop a
comprehensive poverty reduction strategy. In February 2004, Honduras signed a
three-year PRGF agreement with the IMF that, as of April 2005, made Honduras
eligible for about $1 billion in debt relief under the IMF and World Bank’s Highly
Indebted Poor Countries (HIPC) Initiative. The IMF acknowledged that broad public
support for the PRGF program is crucial for its success. At times, street
demonstrations against economic reforms have made it politically costly for the
government. In late August 2003, some 12,000 protestors blocked entrances to the
capital and forced their way into Congress. The government has faced the dilemma
of balancing the IMF’s calls for reducing public expenditures and the public’s
demands for increased spending. The IMF, in its most recent review of Honduras’
PRGF agreement, maintained that the government’s economic program is continuing
to deliver results and emphasized the importance of Honduras maintaining consensus
on the program through the November 2005 election and transition to a new
government in order to protect higher growth gains and social progress.153

151 U.S. Agency for International Development. Budget Justification to the Congress, Fiscal
Year 2006, p. 427.
152 For more information, see CRS Report RL32001, AIDS in the Caribbean and Central
America, by Mark P. Sullivan.
153 International Monetary Fund, “Statement by an IMF Staff Mission to Honduras,” Press
Release No. 05/198, Sept. 2, 2005.

Relations with the United States
The United States has had close relations with Honduras over the years,
characterized by significant foreign assistance, an important trade relationship, a
military presence in the country, and cooperation on a range of transnational issues,
including counternarcotics efforts, environmental protection, and most recently the
fight against terrorism. The bilateral relationship became especially close in the

1980s when Honduras returned to democratic rule and became the lynchpin for U.S.

policy in Central America. At that time, the country became a staging area for U.S.-
supported excursions into Nicaragua by anti-Sandinista opponents known as the
contras. Today, overall U.S. policy goals for Honduras include a strengthened
democracy with an effective justice system that protects human rights and promotes
the rule of law, and the promotion of sustainable economic growth with a more open
economy and improved living conditions. If approved, DR-CAFTA would lead to
increased U.S.-Honduran economic linkages. The Bush Administration views DR-
CAFTA as a means of solidifying democracy in Honduras and promoting safeguards
for environmental protection and labor rights in the country, while those opposed
question whether the agreement would lead to improvements in the protection of the
environment and labor rights.
U.S. Foreign Aid. The United States has provided considerable foreign
assistance to Honduras over the past two decades. In the 1980s, the United States
provided about $1.6 billion in economic and military aid to Honduras as the country
struggled amid the region’s civil conflicts. In the 1990s, U.S. assistance to Honduras
began to wane as regional conflicts subsided and competing foreign assistance needs
grew in other parts of the world. Hurricane Mitch changed that trend as the United
States provided almost $300 million in assistance to help the country recover from
the devastation of the storm. As a result of the new influx of aid, U.S. assistance to
Honduras for the 1990s amounted to around $1 billion.
With Hurricane Mitch funds expended by the end of 2001, U.S. foreign aid
levels to Honduras declined, but will rise once again because of assistance under the
Millennium Challenge Account (MCA). Foreign aid funding amounted to $41
million for FY2002, $53 million for FY2003, $43 million for FY2004, and an
estimated $41 million for FY2005. The Bush Administration requested almost $37
million for FY2006. These amounts include support for a variety of development
assistance projects, HIV/AIDS assistance, food aid, and a large Peace Corps presence
with over 250 volunteers. In 2004, Honduras became eligible to compete for MCA
funding, and on May 20, 2005, the Millennium Challenge Corporation approved a
five-year $215 million compact for the country with assistance targeted for rural
Military and Counternarcotics Issues. The United States maintains a
troop presence of about 550 military personnel known as Joint Task Force (JTF)
Bravo at Soto Cano Air Base. JTF Bravo was first established in 1983 with about

1,200 troops, who were involved in military training exercises and in supporting U.S.

counterinsurgency and intelligence operations in the region. Today, U.S. troops in
Honduras support such activities as disaster relief, medical and humanitarian
assistance, counternarcotics exercises, and search and rescue operations that benefit
Honduras and other Central American countries. Regional exercises and deployments

involving active and reserve components provide training opportunities for thousands
of U.S. troops. In the aftermath of the Hurricane Mitch in 1998, U.S. troops provided
extensive assistance in the relief and reconstruction effort and were involved in
delivering relief supplies, repairing bridges and roads, rebuilding schools, and
operating medical clinics. More recently, in mid-October 2005, a disaster response
team from Joint Task Force Bravo was sent to Guatemala to help relief efforts after
landslides caused by Hurricane Stan.
While Honduras is not a significant producer of illicit drugs, the country is a
transshipment point (via air, land, and sea) for cocaine from South America destined
to the United States. The State Department’s March 2005 International Narcotics
Control Strategy report noted that cocaine seizures in 2004 were down from the
record high level of the previous year but also noted that Honduras disrupted one of
the most active drug trafficking organizations in the country. The State Department
report also asserted that corruption continues to hamper law enforcement efforts.
Honduras was among the coalition of the willing supporting U.S. military
operations in Iraq, and in July 2003, Honduras began providing a military contingent
of 370 troops to Iraq, joining other contingents from El Salvador, Nicaragua, and the
Dominican Republic. The Maduro government’s proposal to send the troops was
approved by the Honduran Congress, but the narrow margin of 66-62 reflected strong
opposition by some sectors, including the opposition Liberty Party.154 The Honduran
troops served under a brigade commanded by Spain, but when Spain decided to bring
home its troops, Honduras followed suit and removed all its troops by June 1, 2004.
Migration Issues. A significant issue in bilateral relations has been the
migration status of some 82,000 undocumented Hondurans living in the United
States. In the aftermath of Hurricane Mitch in 1998, the United States provided
temporary protected status (TPS) to the undocumented Hondurans, protecting them
from deportation, because the Honduran government would not be able to cope with
their return. Originally slated to expire in July 2000, TPS status for undocumented
Hondurans has been extended four times — most recently on November 1, 2004 —155
and is now scheduled to expire in July 2006. The undocumented Hondurans send
back millions of dollars annually in remittances to their families in Honduras.
U.S. Trade and Investment. U.S. trade and investment linkages with
Honduras have increased since the early 1980s. In 1984, Honduras became one of
the first beneficiaries of the Caribbean Basin Initiative, the one-way U.S. preferential
trade arrangement providing duty-free importation for many goods from the region.
In the late 1980s, Honduras benefitted from production-sharing arrangements with
U.S. apparel companies for duty-free entry into the United States of certain apparel
products assembled in Honduras. As a result of these production sharing
arrangements, maquiladoras or export-assembly companies flourished, with some 36
industrial parks now operating in the country, most concentrated in the north coast

154 “Debate on Sending Central American Soldiers to Iraq,” Inforpress: Central America
Report, July 18, 2003.
155 For more on TPS, see CRS Report RS20844, Temporary Protected Status: Current
Immigration Policy and Issues, by Ruth Ellen Wasem and Karma Ester.

region. The passage of the Caribbean Basin Trade Partnership Act (P.L. 106-200,
Title II), which provides Caribbean Basin nations with NAFTA-like preferential tariff
treatment, is expected to further boost Honduran maquiladoras, as is DR-CAFTA.
The United States is by far Honduras’ major trading partner, and is the
destination of about two-thirds of Honduran exports and the origin of about half of
its imports.156 In 2004, U.S. exports to Honduras amounted to about $3.1 billion,
with knit and woven apparel inputs accounting for a substantial portion. U.S.
imports from Honduras amounted to about $3.6 billion, with knit and woven apparel
(assembled products from the maquiladora sector) accounting for the lion’s share.
Other Honduran exports to the United States include bananas, seafood, electrical
wiring, gold, tobacco, and coffee.157
According to USTR, the stock of U.S. foreign investment in Honduras in 2003
amounted to $270 million, up almost 50% from 2002.158 The two countries have a
bilateral investment treaty that entered into force in July 2001. There are more than
100 U.S. companies in Honduras, with many concentrated in the maquiladora or
export assembly sector, including such companies as Cross Creek, Hanes, Jockey,
Levi Strauss, Osh Kosh B’Gosh, and Wrangler. Other investments are in such
economic activities as banana and other fruit production (especially Chiquita and
Standard Fruit), tourism, energy generation, shrimp farming, cigar manufacturing,
insurance, brewing, food processing, fuel distribution, and furniture manufacturing.
In addition, a number of U.S. fast-food restaurants, hotels, and stores have licensing
agreements to operate franchises in Honduras, including such companies as
Applebee, Best Western, Burger King, Church’s Chicken, Domino’s Pizza, Holiday
Inn, McDonald’s, Pizza Hut, Popeye’s, Price Smart, Ruby Tuesday, Star Mart,
Subway, TGI Friday, and Wendy’s.159
DR-CAFTA-Related Issues
Over the past decade, Honduras has moved toward closer economic integration
with its Central American neighbors and has negotiated, or is in the process of
negotiating, free trade agreements with several nations as a means of stimulating
economic development. It joined with Guatemala, El Salvador, and Nicaragua to
establish a free trade area in 1993; the four countries signed an agreement with
Dominican Republic and are currently negotiating one with Chile. In 2000,
Honduras joined with Guatemala and El Salvador in signing a free trade agreement
with Mexico that entered into force in 2001.
Honduras views DR-CAFTA as a way to make the region more attractive for
investment, as a way to protect the existing preferential trade arrangement for exports

156 Direction of Trade Statistics Yearbook 2004, International Monetary Fund.
157 Trade statistics are from the Department of Commerce, as presented by World Trade
158 Office of the United States Trade Representative. 2005 Foreign Trade Barriers, p. 248.
159 A partial listing of U.S. firms and franchises operating in Honduras can be found in the
Commerce Department’s “Honduras Country Commercial Guide, FY2005.”

to the United States, and as a mechanism to help transform the country’s agricultural
sector. There have been concerns in Honduras about the adverse effects of the
regional agreement in opening the Honduran market to U.S. agricultural products,
especially for several sensitive products such as corn, rice, beef, poultry, and pork.
As a result, in the final agreement, most tariffs for sensitive products into the
Honduran market have longer phase-out periods, with some ranging as high as 15-20
years. For white corn, the agreement includes a tariff rate quota that would increase
2% annually into perpetuity; there would be no tariff reduction for the out of duty
quota.160 Honduran officials are also concerned about the loss of jobs, which could
led to social unrest if not addressed properly through long-term investment to help
transform the agricultural sector to make it more competitive.
Apparel. Honduras is the third largest exporter of apparel to the United States
after Mexico and China. The maquiladora or export assembly industry in Honduras
developed in the 1980s and 1990s under special access programs for eligible apparel
products under production sharing arrangements associated with the Caribbean Basin
Initiative. In 2000, the Caribbean Basin Trade Partnership Act (CBTPA) provided
NAFTA-like benefits to Caribbean Basin countries to ensure that Mexico’s trade
benefits under NAFTA did not result in a substantial advantage over the trade
benefits of Caribbean Basin countries. The benefits under CBTPA are scheduled to
expire in September 2008 or upon entry into force of the Free Trade Area of the
Americas, whichever comes first. Honduran officials have fears of not being able to
compete with China and other Asia apparel producers after the January 2005
phaseout of quotas under the WTO Agreement on Textiles and Clothing. Because
of its large maquiladora sector (which employed almost 124,000 people at the end
of 2003161), Honduras is interested in DR-CAFTA to ensure that its apparel trade
benefits under CBTPA are continued beyond September 2008. In the CAFTA
negotiations, the Central Americans advocated liberalizing the rules of origin for
apparel to allow the duty-free export of apparel made with yarn from third countries
as well as special quotas for apparel assembled in the region from fabric imported162
from third countries. Liberalized rules of origin and the special quotas would be
especially significant for Honduras because of its large export-assembly sector.
The CAFTA agreement completed in December 2003 included provisions that163
would liberalize the rules for apparel trade. According to USTR, “an
unprecedented provision will give duty-free benefits to some apparel made in Central164

America that contains certain fabrics from NAFTA partners Mexico and Canada.”
160 United States Trade Representative. “CAFTA — Agriculture, Specific Fact Sheet,” Feb.

10, 2004.

161 “Honduras Industry: Maquila Leads Manufacturing Growth,” EIU ViewsWire, Apr. 22,


162 “Central America./U.S.: CAFTA Talks Advance,” Oxford Anlaytica, Apr. 8, 2003.
163 For more, see CRS Report RL31870, The Dominican Republic-Central America-United
States Free Trade Agreement (DR-CAFTA): Challenges for Sub-Regional Integration, by
J. F. Hornbeck.
164 Office of the United States Trade Representative, “Trade Facts: Free Trade with Central

Liberalized rules of origin also allow duty-free entry for certain apparel (boxer shorts,
pajamas, and nightwear) made from third-country fabric; brassieres would also be
duty-free with third country fabric if it was cut and sewn in Central America.165
Apparel deemed to include certain content in short supply could also qualify for duty-
free treatment. Another provision allows limited amounts of third-country content
fabric to go into CAFTA apparel.
The president of the Honduran Textile and Apparel Manufacturers Association,
Jesus Canahuati, asserts that CAFTA would enable his country to better compete
with producers such as China, even with the elimination of global quotas on textile
and apparel. Canahuati maintains that various foreign companies, largely from the
United States, will invest about $300 million in Honduras with approval of the
agreem ent . 166
Environment. According to a report by the Office of the U.S. Trade
Representative, Honduras “has a more limited slate of domestic environmental167
legislation” than its Central American neighbors. Honduras passed a general
environmental law in 1993, and the Ministry of Natural Resources and Environment
is the agency ensuring compliance with environmental law and coordinating
environmental policies. Honduras is party to 54 bilateral, regional, and multilateral
agreements, including the Convention on Biological Diversity and the Kyoto
The most significant environmental challenges facing Honduras include
deforestation and forest degradation and proper watershed management. The
devastation caused by Hurricane Mitch in 1998 highlighted poor watershed
management. With regard to deforestation, illegal logging by lumber companies has
been a problem in eastern Honduras. In May 2003, death threats against Father José
Andrés Tamayo, who has been vocal in criticizing forest product companies and has
called for a moratorium on forest exploitation, prompted President Maduro to
increase security for the forests in eastern Honduras and to initiate plans for
developing a new forestry policy.168 Father Tamayo led a second national “March for
Life” protest in June 2004 calling for an end to illegal logging in Olancho province.
In response, President Maduro promised to set up committees (with government and169

environmental representatives) to evaluate petitions to ban logging in some areas.
164 (...continued)
America, Summary of the U.S.-Central America Free Trade Agreement,” Dec. 17, 2003.
165 “CAFTA Textile Rules Pave Way for Increase in Foreign Fabric Use,” Inside U.S. Trade,
Dec. 19, 2003.
166 “Honduran Textile Industry Sees CAFTA as Key to Competing in 2005,” Inside U.S.
Trade, Dec. 24, 2004.
167 Office of the United States Trade Representative, Interim Environmental Review, U.S.-
Central America Free Trade Agreement, Aug. 2003.
168 “Honduras: Activist Demand End to Logging,” Central America Report, June 27, 2003.
169 Catherine Elton, “Honduran Marchers Decry Logging,” Miami Herald, July 5, 2004;
“Honduran President Maduro Vows To End Danger to Nation’s Forests,” ACAN-EFE,

Several environmental groups in Central America expressed support for the
environmental provisions in the DR-CAFTA agreement. This includes the Honduran
Ecologist Network for Sustainable Development (REHDES), which consists of six
environmental non-governmental organizations.170 In contrast, a number of other
Central America environmental groups actively oppose CAFTA.171 This includes the
Environmental Movement of Olancho, a coalition of subsistence farmers and
religious leaders opposed to uncontrolled commercial logging, which is led Father
Tamayo noted above. Tamayo, who received the 2005 Goldman Environmental Prize
for his work, maintains that the Honduran government does not have the political
will to enforce environmental protection laws.172
On February 18, 2005, Honduras and other DR-CAFTA signatories concluded
two additional accords at strengthening the trade agreement’s environmental
provisions. The first, an understanding, called for the establishment of a secretariat
to administer a submission process in order to allow citizens to petition whether a
country is not enforcing environmental laws effectively. The second agreement, an
Environmental Cooperation Agreement, would guide environmental cooperation in
the region.173
Labor.174 About 7.3% of the Honduran work force is unionized, according to
the State Department’s February 2005 human rights report, with public sector unions
having more strength than those in the private sector. Overall, the economic and
political influence of unions reportedly has diminished in recent years. Honduras has
three major labor confederations: the Confederation of Honduran Workers (CTH),
the General Workers’ Central (CGT), and the Unitary Confederation of Honduran
Workers (CUTH). The growth of “solidarity” associations in private companies, an
alternative to unions that provide credit and other services to workers, has been
criticized by organized labor as employer-dominated and an attempt to stop the
growth of independent unions.
Workers in both unionized and non-unionized companies are covered by the
Labor Code, with the right to seek redress from the Ministry of Labor. The Labor

169 (...continued)
Panama City, July 2, 2004.
170 “Environmental Groups in Central America Back Environmental Provisions of DR-
CAFTA,” International Trade Reporter, Feb. 10, 2005; Office of the United States Trade
Representative, “CAFTA Facts: Support from Environmental Groups,” Feb. 2005.
171 “CAFTA, Letter to U.S. Congress from Environmental Groups,” May 11, 2005, Global
172 Agostino Bono, “Honduran Priest Cites Dangers of Illegal Logging,” National Catholic
Reporter, May 6, 2005.
173 “DR-CAFTA Countries Sign Two Pacts to Boost Environmental Cooperation,”
International Trade Reporter, Feb. 24, 2005.
174 Material in this section is drawn from U.S. Department of State. “Honduras Country
Report on Human Rights Practices, 2004,” Feb. 2005; and Office of the United States Trade
Representative, “Fourth Report to Congress on the Operation of the Caribbean Basin
Economic Recovery Act,” Dec. 31, 2001.

Code prohibits blacklisting, but according to the Department of State’s human rights
report, there is credible evidence that blacklisting has occurred in the maquiladoras
because of employees’ union activities. USTR reported in 2001 that there were
widespread reports of dismissal and other reprisals against workers for their union
activities. USTR and the Ministry of Labor signed a memorandum of understanding
in 1995 that had recommendations to enforce the Labor Code and resolve disputes.
Labor unions maintain that the ministry has not made sufficient progress toward
enforcing the Labor Code, including inspections of the maquiladora industry. Over
350,000 children work illegally in Honduras, occurring mainly in rural areas and in
small companies. The illegal employment of children in the maquiladora sector has
occurred in isolated cases, according to the Department of State. The Honduran
Labor Minister maintains that some 10 years ago, the maquiladora sector had a
problem with child labor, but that now it does not exist in the sector.175
There has been substantial criticism of labor sector conditions in Honduras by
U.S.-based labor groups and the International Federation of Free Trade Unions
(ICFTU). A report by the AFL-CIO asserts that the “Honduran government tolerates
a broad and systematic pattern of worker rights violations, particularly in
maquiladoras producing apparel for export to the U.S. market.”176 The ICFTU
maintains that while Honduran law recognizes the right to form and join trade unions,
there are a number of restrictions. It further asserts that in practice “workers are
harassed and even sacked for trade union activities, and some unionized workers are
blacklisted in the export processing zones.”177
In late October 2003, the New York-based National Labor Committee began a
campaign focusing attention on alleged worker rights violations at a Honduran
maquiladora factory producing shirts for the fashion company of hip-hop performer
Sean P. Diddy Combs. The owner of the factory called the charges a total
fabrication, and the Honduran Ministry of Labor maintains that an inspection of the
factory did not uncover abuses alleged by the labor activists.178 Critics of the
National Labor Committee argue that the group specializes in campaigns involving
celebrities whether the allegations are true or not.179
In December 2004, two labor groups — the International Labor Rights Fund and
the Association of Labor Promotion Services (Asociación Servicios de Promocíon
Laboral) — submitted a petition to USTR to review Honduran labor practices

175 Rossella Brevetti, “Honduran Labor Minister Says Any Changes to CAFTA Labor
Chapter Must Be Reasonable,” International Trade Reporter, Dec. 23, 2004.
176 “Central America: Labor Rights and Child Labor Reports, Pursuant to the Trade Act of
2002, Section 2102(c)(8)-(9), AFL-CIO, Union of Needletrades, Industrial and Textiles
Employees (UNITE!), June 5, 2003
177 International Federation of Free Trade Unions. “Annual Survey of Violations of Trade
Union Rights (2003): Honduras.”
178 Steven Greenhouse, “A Hip-Hop Star’s Fashion Line is Tagged with a Sweatshop Label,”
New York Times, Oct. 28, 2003; “Honduran Officials Inspect Sean John Shop,” Associated
Press, Oct. 31, 2003.
179 “Review and Outlook (Editorial),” Wall Street Journal, Nov. 4, 2003.

regarding the country’s continued eligibility for General System of Preferences (GSP)
trade benefits. The groups alleged that Honduras has done nothing since 2000 to
fully implement a 1995 memorandum of understanding with USTR regarding
improvement of Honduran labor practices.180
The trade and labor ministers of Honduras and other DR-CAFTA countries met
in July 2004 under the sponsorship of the Inter-American Development Bank (IDB)
to develop recommendations for actions needed to strengthen labor law compliance
and enforcement. In April 2005, the countries followed up and unveiled a so-called
white book that endorsed a work plan to strengthen enforcement of labor laws in the
region. The recommendations included projects to improve trade union rights,
increase labor inspections, provide better protections for women in the workplace,
increase the capacity of labor ministries and labor courts, and end the worst forms of
child labor.181
Some Members of Congress assert that Central American labor laws fall short
of ILO standards so that better enforcement of standards will be insufficient. They
maintain that Honduras has burdensome requirements for union recognition, the right
to strike, and other restrictions on union leadership. They also note that Honduras has
not provided adequate sanctions for anti-union discrimination.182
Intellectual Property Rights. In 1998, Honduras’s Caribbean Basin183
Initiative and Generalized System of Preferences (GSP) benefits were partially
suspended for several months because of the piracy of U.S. televison broadcasts and
videos. The benefits were restored after Honduras took action to stop the piracy.
Today, the Office of the United States Trade Representative (USTR) maintains that
Honduras has largely complied with the WTO Agreement on Trade-Related Aspects
of Intellectual Property Rights (TRIPS), but notes that the Honduran Congress has
yet to enact reforms related to integrated circuit designs and plant variety protection
to be in full compliance with TRIPS. In the DR-CAFTA, Honduras agreed to
provide effective patent protection for plants or to ratify or accede to the International
Convention for the Protection of New Varieties of Plants. According to USTR, the
piracy of books, sound and video recordings, compact disks, and computer software
is widespread in Honduras because of limited enforcement capacity. The United
States and Honduras initialed a bilateral intellectual property rights agreement in

1999, but both parties agreed to fold the provisions into CAFTA and DR-CAFTA.

USTR maintains that the agreement would strengthen intellectual property rights

180 “Labor Groups Petition USTR to Review FTA Partners’ GSP Eligibility,” Inside U.S.
Trade, Dec. 24, 2004.
181 “The Labor Dimension in Central America and the Dominican Republic, Building on
Progress: Strengthening Compliance and Enhancing Capacity,”A Report of the Working
Group of the Vice Ministers Responsible for Trade and Labor in the Countries of Central
America and the Dominican Republic, Apr. 2005.
182 Rosella Brevetti, “House Democrats Outline Shortcomings in Labor Laws of CAFTA-DR
Countries,” International Trade Reporter, Apr. 7, 2005.
183 GSP is a U.S. preferential trade program providing duty-free treatment to certain products
from designated developing countries.

protection to conform with or exceed WTO norms. The illegal registration of well
known trademarks has also been a problem in Honduras, although USTR maintains
that the DR-CAFTA’s enforcement provisions are designed to help reduce trademark
pi racy. 184
Approval Status. The Honduran Congress approved the DR-CAFTA
agreement on March 3, 2005, by a final vote of 124-4, demonstrating broad support
for the agreement by both the Liberal and National parties. Only members of the185
small leftist Party of Democratic Unity (PUD) voted against the agreement. Active
opponents of the agreement included some government sector employees. The
Popular Block and National Coordinator of Popular Resistance (CNRP), consisting
of workers, teachers, and peasants, and the Civic Council of Honduran Popular and
Indigenous Organizations (COPINH) organized protests against the agreement. As
noted above, some environmental groups, such as the Environmental Movement of
Olancho, also opposed the agreement.
Nicaragua 186
Political Situation
Nicaragua began a transition to democracy in 1990 after a decade-long struggle
between a leftist regime and U.S.- backed counter-revolutionary forces. A country
plagued by generations of dictatorial rule, civil war and poverty, Nicaragua has
begun to develop democratic institutions and create a framework for economic
development. Progress has been made in key social sectors, as the country’s infant
and child mortality rates, total fertility rates, and malnutrition levels have declined.
Nicaragua recently received substantial debt relief under the International Monetary
Fund’s heavily indebted poor countries (HIPC) initiative, and has signed the free
trade agreement with the United States, its Central American neighbors, and the
Dominican Republic. It has also been selected as one of only three Latin American
countries to receive a substantial injection of foreign aid under the Millennium
Challenge Account, a new program which rewards poor countries for curbing
corruption and improving governability. Nonetheless, Nicaragua remains poor and
its institutions weak. Over the last couple of years, a growing political crisis has
threatened its current government, though it appears the political impasse has been
overcome for now.
The most recent, and consequential, international demonstration of support for
the beleagured current President, Enrique Bolaños, was a visit from U.S. Deputy
Secretary of State Robert Zoellick October 4 -5, 2005. While in Managua, Zoellick

184 Office of the United States Trade Representative. 2005 Foreign Trade Barriers, pp. 251-


185 Information provided by telephone, U.S. Department of State, Desk Officer for Honduras,
Mar. 4, 2005.
186 Prepared by Maureen Taft-Morales, Specialist in Latin American Affairs, and Clare
Ribando, Analyst in Latin American Affairs.

said that Nicaragua’s future was “threatened by a creeping coup. It’s threatened by
corruption, it’s threatened by a clique of caudillos,” using the Spanish term for
political bosses to refer to Sandinista leader Daniel Ortega and former President
Arnoldo Aleman. Zoellick went on to say that Nicaragua faced losing millions of
dollars in U.S. assistance if the opposition continued to move towards removing
Bolaños from office. In the following two weeks, the Nicaraguan National Assembly
had agreed to postpone implementing constitutional amendments that transferred
executive powers to the legislative branch until after Bolaños completed his term in
December 2006 and had ratified CAFTA and until the political pact that had driven
opposition to Bolaños had been broken.
The ongoing political tensions in Nicaragua have been shaped by power
struggles between three prominent political figures: President Enrique Bolaños and
former Presidents Daniel Ortega and Arnoldo Aleman. President Bolaños, of the
Liberal Constitutionalist Party (PLC), was elected to a five-year term in November
2001, in elections widely regarded as being free and fair. Bolaños, a businessman in
the agricultural sector, defeated Daniel Ortega, a prominent figure in Nicaraguan
politics for over 25 years. During the 1980s, Bolaños’s farm service company was
nationalized, and he was jailed for his opposition to the Sandinista government.
During the 2001 presidential campaign, Bolaños emphasized the importance of
maintaining positive relations with the United States. He faces the challenges of
stimulating economic growth in the hemisphere’s second poorest country, and
promoting democratic reform while pursuing prosecutions for corruption in the
previous administration. The Bush Administration has praised and supported
Bolaños’s anti-corruption efforts. Others have criticized Bolaños for employing a
“confrontational route” of fighting corruption by going after top officials, including
Aleman, rather than seeking allies who would help him make long-term reforms in
the country’s corrupt political system.187
Daniel Ortega was a leader of the Sandinista National Liberation Front (FSLN)
when it overthrew the Somoza dictatorship in 1979. He served as President from
1985-1990, having won elections which much of the international community
deemed fair, but which were boycotted by much of the opposition and deemed unfair
by the Reagan Administration. Ortega’s administration was marked by a bloody civil
war with the U.S.-backed “contras,” and charges of corruption. In the context of the
Central American Peace Plan, Ortega’s Sandinista government agreed to
internationally monitored democratic elections in February 1990. Ortega ran for
president, and lost, in 1990, 1996, and 2001. The Sandinistas control 38 of the 92
seats in the National Assembly. They appear to have capitalized on divisions
between President Bolaños and the PLC, which is controlled by imprisoned former
president Arnoldo Aleman, to garner important victories in the municipal elections
held on November 7, 2004. The Sandinistas swept those polls, winning some 87 of
152 municipal seats. In March 2005 the FSLN named Ortega its candidate for 2006
presidential elections.
In 2003, President Bolaños took the landmark step of prosecuting former
President Arnoldo Aleman (1997-2002) and 13 of his associates for embezzling

187 Marcela Sanchez, “Crucifying Nicaragua’s Redeemer,” Washington Post, Dec. 9, 2004.

about $100 million in public funds while in office. The United Nations recently
named Aleman as one of the world’s five most corrupt living ex-leaders.188 The
effort is particularly notable, because Bolaños and Aleman not only belong to the
same political party, but Bolaños also served as Aleman’s Vice-President until he
stepped down to run for president. Aleman was sentenced to 20 years in prison in
December 2003 for fraud and money-laundering; he is currently under house arrest.
His supporters are still trying to negotiate his release, however. The PLC is
promoting an amnesty bill that would revoke all convictions for misuse of public
funds and electoral crimes committed after 1990. Bolaños’ moves against Aleman
have left him increasingly isolated, however.
The opposition has repeatedly brought charges of electoral fraud against
Bolaños, alleging that former President Aleman laundered public funds into his
party’s election campaign and that Bolaños knowingly benefitted from those funds.
President Bolaños denies those charges, and the legislative committee dropped its
initial investigation. In October 2004, the Comptroller General’s office, whose panel
consists of members of the Sandinista and Liberal parties in opposition to Bolaños,
issued a report renewing charges of fraud against the President. The opposition has
used the report to promote impeachment efforts, despite the Supreme Electoral
Council’s having earlier certified that Bolaños had not committed election finance
irregularities. In June 2005, the national assembly named a special commission to
study the possibility of removing Bolaños’ immunity from prosecution so he could
be tried on charges of failing to disclose sources of his campaign funds.
Aleman and Ortega, once longtime political foes, negotiated a power-sharing
agreement known as “el pacto” in 1998 that had defined national politics until now.
In late 2004, renegotiation of the pact included a demand for Aleman’s release. In
January 2005, their two parties adopted a series of constitutional amendments that
transferred presidential powers to the legislature and further divided up government
institutions as political patronage. The Central American Court of Justice ruled the
amendments illegal. The ruling is non-binding, and the Nicaraguan Supreme Court,
which is dominated by pacto party members, ignored it. After meeting with
President Bolaños, Daniel Ortega announced on October 16, 2005, that he had broken
the pact with the Aleman faction of the Liberal party.189 The announcement followed
the visit to Managua by Deputy Secretary Zoellick, who had met with several leaders
who have broken with the Liberal and Sandinista parties over the pact, which they
see as corrupt, and who are gaining support for the upcoming elections. Ortega’s
political strength has relied in part on divisions within the Liberal party.
The U.S. State Department said it “stands firmly with the democratically elected
government of President Bolaños” and “deplore[s] recent politically motivated
attempts, based on dubious legal precedent, to undermine the constitutional order in

188 “Fujimori, Nicaragua’s Aleman on World Corruption List,” EFE News Service, Aug. 4,


189 “Ortega Makes Move to End Political Crisis,” Chicago Tribune, Oct. 16, 2005.

Nicaragua and his presidency.”190 The OAS sent a special mission to Nicaragua in
October 2004 to encourage all parties to preserve and follow democratic order there
and since then has become more involved in the escalating crisis there. On January
12, 2005, a mechanism was established for a national dialogue between Bolaños, the
Sandinistas, and the Liberals to strengthen governance.191 Tensions continued to
mount, however, with violent protests against an increase in public transportation
fares and calls for Bolaños’ resignation by the opposition-controlled mayors’
association in April. Some observers say these protests are orchestrated by the
opposition and not supported by public opinion. The government negotiated an end
to the fare increase protests in late April. Polls published in May (La Prensa, May

2, 2005) showed 68% of the population opposed the call for Bolaños’ resignation,

and the highest portion, almost 35%, believed Daniel Ortega was primarily
responsible for the violent protests in the capital.
International demonstrations of support for the beleagured current President
Enrique Bolaños included a visit from the head of the U.S. Southern Command,
General Bantz Craddock. The OAS Secretary General visited Nicaragua in June to
try to restart political dialogue, but no settlement was agreed upon. The OAS is
acting under the OAS Democratic Charter, through which a member government that
considers its democratic process or legitimate exercise of power to be at risk may
request assistance from the OAS to strengthen and preserve its democratic system,
and a “Declaration of Support for Nicaragua” was adopted at the OAS General
Assembly June 5-7, 2005. The most consequential visit, however, was from U.S.
Deputy Secretary of State Robert Zoellick October 4 -5, 2005, which led to the
passage of CAFTA, the agreement to let Bolaños complete his term without
implementing constitutional changes, and Ortega breaking the pact with the Liberal
The ongoing influence of both Aleman and Ortega in Nicaraguan politics has
made governing increasingly difficult for President Bolaños over the last two years.
After the intercession of the OAS and the United States, two items on Bolaños’
agenda were achieved: the passage of CAFTA and the suspension of constitutional
changes that would have stripped Bolaños of many executive powers. It remains to
be seen if recent concessions by Ortega and the National Assembly will continue to
make governance easier for the remainder of Bolaños’ term.
Economic Conditions
Nicaragua began free market reforms in 1991, after what the State Department
has described as “12 years of economic free-fall under the Sandinista regime.” The
Sandinista guerrillas led a coalition of forces that overthrew the four-decade-long
Somoza family dictatorship in 1979, inheriting a stagnant economy, a $1.6 billion
debt, and a country devastated by war. The FSLN shortly thereafter established a

190 “Statement on the Situation in Nicaragua,” Richard Boucher, spokesman, US Dept. of
State, Wash., DC, Oct. 16, 2004.
191 Organization of American States, “Support for a National Dialogue in Nicaragua,” Press
Release. Jan. 13, 2005.

pro-Soviet government that nationalized rural properties owned by the Somozas or
their associates, as well as financial institutions, which had gone bankrupt during the
war. Sandinista “state-led” economic policies, an eight-year civil war with U.S.-
backed contras, and U.S. economic sanctions all contributed to Nicaragua’s economic
In 1990, the first post-conflict democratic government was elected, and it
pursued significant democratic and economic reforms. Significant progress has been
made since then: the post-Sandinista governments have privatized 351 state
enterprises; reduced inflation from 13,500% prior to 1990 to 3.6% in 2002; and
substantially reduced foreign debt. In late January 2004, the IMF forgave 80% of
Nicaragua’s foreign debt of roughly $6.5 billion under the HIPC program, and in
May 2004 Nicaragua was one of only three Latin American countries selected to
receive increased foreign aid as part of the Millennium Challenge Account program.
Significant challenges remain, however. The country remains heavily dependent on
foreign aid (25% of GDP in 2001), and remittances sent from Nicaraguans living
abroad (15% of GDP).192 Its economy also remains extremely vulnerable to external
economic conditions and natural disasters. For example, economic growth faltered
in 2002 when a global recession, extreme drops in export coffee prices, and a drought
caused Nicaragua’s economy to retract to less than 1% growth.
These economic crises have also led to severe malnutrition in parts of
Nicaragua. Almost half of Nicaragua’s 5 million inhabitants live in poverty;
unemployment and underemployment rates remain as high as 40% to 50%; and
income distribution is extremely unequal. Per capita GDP in 2003 was only $470,
making Nicaragua the second poorest country in the Western Hemisphere after Haiti.
Although the Nicaraguan government has made a concerted effort to improve basic
health indicators and school enrollment rates, significant gaps exist. While close to
90% of children ages 7 to 12 now attend primary school, less than 50% of 13 to 18
year olds attend secondary school.193 The government aims to further social progress
with a World Bank loan of $75 million for social sector projects.
Relations with the United States
After the 1990 Central American Peace Plan was signed, U.S. involvement in
Nicaragua shifted from providing military support to the “contras” towards
pressuring the Nicaraguan government to enact political reforms. The United States
provided extensive foreign assistance to Nicaragua after Hurricane Mitch in 1998,
and has repeatedly extended the Temporary Protected Status (TPS) of some 6,000
Nicaraguans living within its borders. Recently the two countries have negotiated
agreements related to intellectual property, trade, and counter-narcotics efforts.
Nicaragua contributed 113 mine-clearing troops to the coalition forces in Iraq, and
has passed legislation giving President Bolaños the power to destroy anti-aircraft
missiles left over from its civil war as the U.S. has recommended. The main U.S.
policy goals for Nicaragua include reducing poverty, increasing economic growth

192 Global Insight, Nicaragua Country Report, Jan. 2004.
193 United States Agency for International Development, 2004 Budget Justification to

through free trade, strengthening democracy, and improving human capital
investments. Nicaragua enjoys debt relief under the HIPC initiative and was recently
selected to receive Millennium Challenge Account funding. In December 2003, the
Nicaraguan government signed CAFTA, and in August 2004, it signed DR-CAFTA,
which it hopes will provide expanded access to the U.S. market. The Nicaraguan
National Assembly ratified CAFTA on October 10, 2005.
U.S. Foreign Aid. The United States has provided Nicaragua with $1.2 billion
in assistance from 1990, when Violeta Chamorro defeated the Sandinistas in national
elections, to 2003. Since the mid-1990s, Congress has restricted U.S. assistance to
Nicaragua, pressuring the government there to make greater progress in such areas
as prominent human rights cases, resolution of property claims, and military, judicial,
and economic reforms. From 1999 through 2001, an additional $93 million was
provided to assist in reconstruction efforts following the massive destruction caused
by Hurricane Mitch. The Bush Administration states that strengthening democracy
is its first priority in Nicaragua. The United States provided $6.2 million dollars in
assistance to support the 2001 election process. The Administration provided about
$37.5 million to Nicaragua in FY2003, including $16 million in food aid, and
requested $39 million annually for FY2004 and FY2005. The Board of the newly
established Millennium Challenge Corporation announced on June 13, 2005, that it
had approved a five-year, $175 million compact with the government of Nicaragua.
In November 2004, President Bolaños had agreed to destroy approximately 1,000
Soviet-era missiles that the Bush Administration saw as a security threat. After the
Nicaraguan legislature stripped Bolaños of the power to deal with the stockpile, the
Bush Administration suspended U.S. military aid in March 2005. Those restrictions
were lifted the week of October 10, 2005.
Democratic Reform. The Bolaños Administration has committed itself to
attacking government corruption. It has already convicted the former chief tax
collector, and arrested over a dozen other high level officials in the previous
administration on fraud or corruption charges. This anti-corruption campaign
reached a climax in December 2003 as Bolaños’ predecessor, former President
Arnoldo Aleman, was sentenced to 20 years in prison for money laundering and other
crimes. As a former President, Aleman had received an automatic seat in the
legislature, along with legislative immunity from prosecution. In 2002, the
unicameral National Assembly voted to remove Aleman as its president and took the
historic step of stripping Aleman of his immunity from prosecution.
Bolaños’s reform efforts are being thwarted, however, as the Liberal party is
working against his government and is trying to obtain the former President’s release
and reduce Bolaños’ powers or remove him from office. The OAS and U.S. and other
foreign governments expressed concern that charges of electoral fraud made against
Bolaños and efforts to impeach him are threats to the constitutional order. The OAS
has sent several high-level delegations to Nicaragua since October 2004 and
continues to remain engaged there to “help preserve the country’s democratic
institutions.” In January 2005 the Central American Court of Justice called on the
Nicaraguan legislature to suspend proceedings for ratifying amendments to the
constitution that would transfer many presidential powers to the National Assembly,
which is dominated by the Liberal Constitutionalist (PLC) and Sandinista (FSLN)
parties in opposition to the government. An agreement was signed on January 12

establishing a mechanism for national dialogue to strengthen governance in
Nicaragua, but the process is stalled. The OAS has named a special envoy to promote
dialogue and democracy in Nicaragua.
Nicaragua is engaged in a structural reform program of the judicial system, but
the system remains weak and, according to the U.S. State Department’s human rights
report released February 28, 2005, “highly susceptible to corruption and political
influence.”194 President Bolaños has increased his criticisms of the Sandinista-
dominated judiciary in response to the recent conviction of one of his top allies on
charges of corruption. The U.S. Ambassador to Nicaragua, Barbara Moore, asserted
that recent judicial decisions have been “damaging” to the country’s reputation and
its ability to attract foreign investment.195
Human Rights. Under Nicaragua’s authoritarian regimes, and during its civil
war, human rights abuses were widespread. Since the end of the civil war in 1990,
however, respect for human rights has improved, and human rights observers no
longer accuse Nicaraguan governments of systematic human rights violations.
According to the State Department’s 2004 report on Human Rights Practices, the
Nicaraguan government “generally respected the human rights of its citizens;
however, serious problems remained....,” including allegations of extrajudicial
killings and torture by security forces The government punished some members of
security forces who committed human rights abuses, but, according to the report, “...a
degree of impunity persisted.” Other human rights problems include violence against
women and children, trafficking in women and girls for sexual exploitation; and
discrimination against indigenous people.
Labor-related human rights violations include violation of worker rights in free
trade zones, “widespread” sexual harassment in the workplace, and child labor. The
government worked with domestic and international organizations to get thousands
of children out of the workforce and into school. According to the report, “the
national minimum wage did not provide a decent standard of living for a worker and
family,” amounting to less than $141 a month, which is what the government
estimates is the cost of a basic basket of goods for an urban family. The report also
noted that although the Labor Code seeks to bring Nicaragua into compliance with
international standards for workplace hygiene and safety, the relevant ministry “lacks
adequate staff and resources to enforce these provisions and working conditions often
do not meet international standards.”
Resolution of Property Claims. During the 1980s, the Sandinistas
appropriated nearly 30,000 properties. Resolution of property claims by U.S. citizens
arising from those expropriations remains the most contentious area in U.S.-
Nicaraguan relations. The Nicaraguan National Assembly passed a law in November
1997 establishing new property tribunals with the goal of resolving longstanding
property disputes. The new property tribunals began accepting cases in July 2000.
Procedures of the new property tribunals include mediation, binding arbitration, and

194 U.S. Dept. Of State, Country Reports on Human Rights Practices 2004: Nicaragua, Feb.

28, 2005.

195 “Nicaragua” Bolaños Rages Against the Judiciary,” Latinnews Daily, Aug. 18, 2004.

expedited trials. Through technical assistance for judicial reform, U.S. assistance is
helping to improve the mechanism for settling property disputes. U.S. law prohibits
aid to countries that have confiscated assets of U.S. citizens, but since 1993, U.S.
administrations have granted annual waivers to allow Nicaragua to receive U.S. aid.
The National Assembly passed a new law recently creating a new land institute.
Critics are concerned that this institute will consolidate Sandinista land and property
expropriations, known as the “piñata,” made at the end of their term in power. The
new institute has not been established yet, however.
Narcotics and Arms Trafficking. According to the State Department’s
International Narcotics Control Strategy Report for 2004, Nicaragua is a transit
zone for narcotics traffic from South America to the United States and Europe.196
The report lists Nicaragua’s location; deep, endemic poverty; lack of government
presence throughout much of the country; “paucity” of government funds available
for law enforcement; and the number of people still well-armed from the 1980s civil
war as factors making Nicaragua attractive to drug traffickers. Its vulnerable banking
system makes it a potential target for money laundering as well. The State
Department describes Nicaragua as a strong ally in counternarcotics activities, whose
cooperation with the Drug Enforcement Administration has been “ongoing and
effective” since 1997. The Nicaraguan National Police have made significant
achievements in the seizure of cocaine and heroin and in operations against local
drug distribution centers. Nonetheless, their effectiveness is hampered by limited
resources and an ineffective and corrupt judicial system.
Gunrunning to guerrillas in Colombia is also a problem in Nicaragua, as it is
in many Central American countries and in Mexico. In November 2001, arms
supposedly exchanged between the Nicaraguan and Panamanian police forces ended
up in the possession of right-wing paramilitaries in Colombia. The Organization of
American States (OAS) reported in January 2003 that Nicaraguan police and military
officers were negligent in not verifying that those conducting the transition were
indeed Panamanian police, as was presumed. After receiving the OAS report,
Bolaños reportedly told former U.S. Ambassador Morris Busby, the report’s author,
about steps his government would take to close loopholes in Nicaraguan arms control
legislation that contribute to regional arms smuggling. Also in January 2003,
President Bolaños proposed a disarmament process in Central America, to reduce the
number of arms in the region.
The Bush Administration expressed concern last year about a stockpile of
approximately 1,000 Soviet-era missiles that it saw as a security threat. In November
2004, President Bolaños had agreed to destroy them. After the Nicaraguan legislature
stripped Bolaños of the power to deal with the stockpile, the Bush Administration
suspended U.S. military aid in March 2005. The Bush Administration lifted the
restriction the week of October 10, 2005. U.S. Defense Secretary Donald Rumsfeld

196 U.S. Dept. Of State, International Narcotics Control Strategy Report 2005: Nicaragua,
Mar. 2005.

said he was convinced the Nicaraguan military had secured the missiles well enough
to keep them out of the hands of terrorists.197
U.S. Trade and Investment. The success of the Nicaraguan economy is
highly dependent upon its external trade relationship with the United States. Trade
and investment linkages between the two countries began developing in the early
1980s as Nicaragua gained duty free access to the U.S. market for the majority of its
products under the Caribbean Basin Initiative. These linkages were strengthened by
the passage of the Caribbean Basin Trade Partnership Act (P.L. 106-200, Title II),
which provides Caribbean Basin nations with NAFTA-like preferential tariff
Nicaraguan exports, which consist primarily of traditional products like coffee,
shrimp, seafood, beef, and gold, are primarily destined to the United States (32%)
and other Central American nations (37.8%). Most of the country’s imports (27.4%
of the total), such as machinery and transport equipment, industrial raw materials,
and consumer goods, originate in the United States. About 25 wholly or partly
owned subsidiaries of U.S. companies operate in Nicaragua. In 2002, U.S. exports
to Nicaragua amounted to $438 million, with the largest category being machinery
and transport equipment (23% of that total). U.S. imports totaled $679 million, with
apparel accounting for 26% of all import categories. Those totals are likely to
increase substantially if the free trade agreement is approved.198 Major U.S.
companies operating in Nicaragua include Esso Standard Oil, E.D. and F. Man
(agricultural supply and financing firm), Bellsouth, Texaco Caribbean, Pepsi-Cola,
Kraft Foods-Nabisco, Gulf King (shrimp boat fleet), Coca-Cola, and Cinemark
DR-CAFTA-Related Issues
Although agriculture continues to be one of the most important sectors of the
Nicaraguan economy, the country’s nascent maquiladora industry, which primarily
manufactures apparel products and whose success is extremely reliant on favorable
external trade conditions, is rapidly expanding. Accordingly, the Nicaraguan
government has become a major proponent of free trade, having signed and ratified
bilateral investment agreements with the United States, Spain, Taiwan, Denmark, the
United Kingdom, the Netherlands, Korea, and Ecuador. Nicaragua is among the most
open economies in Central America. It has recently taken further steps to foster
regional integration by joining the Central American customs union, also comprised
of Guatemala, El Salvador and Honduras. The Nicaraguan negotiating team for the
recently signed free trade agreement with the United States believes that the outcome
of the negotiations are highly positive for the country.199

197 “Rumsfeld Satisfied Soviet Missiles Safe; Aid to Nicaragua Resumes,” FDCH Regulatory
Intelligence Database, Oct. 13, 2005.
198 Trade statistics and information drawn from Global Insight, Nicaragua Country Report,
January 2004; United States International Trade Administration, 2003 Trade Report.
199 Economist Intelligence Unit, Nicaragua Country Report, Jan. 2004.

Evidence of this positive outcome includes the fact that Nicaragua gained duty-
free access to the U.S. market for 68% of its farm products and 100% of its industrial
products, while ensuring significant protection for its domestic farmers against U.S.
imports. DR-CAFTA would afford Nicaraguan rice farmers a 28-year period of
adjustment before they would be subjected to full competition with U.S. producers.
Nicaragua was also allowed to implement the strictest quotas on imports of U.S. corn
of any of the five Central American countries. In addition, Nicaraguan textile
exporters were the only such exporters in Central America to receive permission to
use up to 100 million square meters per year of cloth from non-U.S., non-Central
American suppliers to make apparel products that would still enjoy duty free access
to the U.S. economy.
Despite these positive observations, skeptics have noted that Nicaraguans had
little bargaining leverage in the CAFTA negotiations.200 Moreover, despite some
protections for Nicaraguan farmers, U.S. producers will be able to export 10 times
as much yellow corn to Nicaragua than in years past. Unable to compete against
competition from capital and technology-intensive U.S. farmers, unemployment in
the agricultural sector in Nicaragua will increase in the short term and must be
replaced by new employment in the manufacturing sector. A number of specific
sensitive issues arose in the negotiations, which are summarized below:
Environment. Nicaragua has a significant amount of environmental legislation
in place, anchored by a general law on the Environment and Natural Resources
passed in 1996. The Nicaragua Ministry of Environment and Natural Resources
(MARENA) regulates national policy on the management and protection of the
country’s natural resources. Additionally, Nicaragua is a party to 57 multilateral,
regional and bilateral environmental agreements, which include the Convention on
Biological Diversity, the Convention on the International Trade in Endangered
Species of Wild Flora and Fauna, and the Kyoto Protocol. Despite these
conservation efforts, and the fact that Nicaragua’s environment benefits from
relatively abundant forest reserves and a low population density, deforestation and
lake contamination threaten its environment. Between 1990 and 2000, Nicaragua had
the second highest rate of deforestation among its Central American neighbors.
Deforestation, resulting in soil erosion, has increased the country’s vulnerability to201
natural disasters, such as Hurricane Mitch (1998), and periodic droughts.
Conditions in the country’s major freshwater lake, Lake Nicaragua, the world’s
twentieth largest aquifer, deteriorated in the nine years between 1994 and 2003 at a
“rate equivalent to that normally observed in European lakes over a period of 150202
to 200 years.” Critics of CAFTA have questioned whether merely requiring
countries to enforce their existing laws is enough to ensure adequate environmental

200 Bruce Stokes, “Will Free Trade Help Nicaragua?” National Journal, June 5, 2004.
201 Office of the United States Trade Representative, Interim Environmental Review, U.S.-
Central America Free Trade Agreement, Aug. 2003.
202 Javier Rayo, “Nicaraguan Mayors Seek to Halt Death of World’s 20th Largest Lake,” EFE
News Service, Oct. 5, 2003.

Labor. The Nicaraguan labor force, comprised of roughly 2.25 million
workers, is largely rural-based and unskilled. An estimated 45% of those workers are
employed in the agricultural sector, 42% in services, and 15% in manufacturing.
Though it expanded by 2.3% in 2003, the Nicaraguan economy continues to be
plagued by unemployment and underemployment rates as high as 40% to 50%.
Along with declining confidence in union leaders, this has eroded the strength of the
Nicaraguan labor movement. Half of the unionized labor force belongs to militant
Sandinista labor unions.
Nicaragua is a party to 54 International Labor Organization conventions and
agreements, including the 1998 Declaration of Principles and Fundamental Labor
Rights. Although the 1996 Labor Code removed many restrictions on trade union
rights, the Nicaraguan Labor Ministry acknowledges that it still takes about six
months for a union to go through all the procedures necessary to hold a legal strike.203
As a result, there has only been one legal strike since 1996, and companies continue
to exact severe reprisals against “illegal” union activities. The worst labor rights
violations in Nicaragua reportedly occur in the export processing zones (EPZs) where

62 EPZ companies, or maquilas, employ 52,000 people, only 3% of whom are204

unionized. An estimated 9,500 workers in Chinandega, Nicaragua have spent the
last five years pursuing million-dollar lawsuits against international banana
conglomerates for health damages caused by pesticide exposure. Some critics of the
free trade agreement fear that as companies arrive in pursuit of cheap labor, “the
vulnerability of the maquila and farming ... could lead the way to greater exploitation
of workers, and greater exposure to unsafe working conditions.”205
Intellectual Property. Nicaragua signed a bilateral agreement on intellectual
property protection with the United States in January 1998, the first of its kind in
Central America and only the fourth in Latin America. Since that time, the
Nicaraguan legislature has enacted modern laws on copyrights, transmission of
satellite signals, plant variety protection, integrated circuit systems, patents, and
trademarks. The government launched two major efforts to crack down on music
recording privacy in 2001, and is now targeting software piracy in public offices.
Despite these efforts, the Business Software Alliance estimates that Nicaragua had
a 77% piracy rate in 2002, following a 78% record in 2001. Estimated losses from
piracy reached $2.6 million in 2002, down from $3.3 million in 2001.206 These
losses, though significant, were not enough to put Nicaragua on the U.S. Trade
Representative’s “Special 301” list of countries with inadequate protection of
intellectual property rights. Nicaragua took further steps to protect intellectual
property rights in 2002 by signing the World Intellectual Property Organization’s
“Internet Treaties.”

203 International Labor Organization, Nicaragua: Annual Survey of Violations of Trade
Union Rights (2003).
204 “Denuncian Violaciones a Derechos Laborales en Maquilas en Nicaragua,” Agencia
Mexicana de Noticias, Nov. 25, 2003.
205 “Central America: Working Can Be Hazardous to Health,” Inter Press Service, Nov. 29,


206 “Nicaragua: Licensing and Intellectual Property,” EIU Viewswire, Jan. 26, 2004.

Approval Status. The unicameral Nicaraguan National Assembly ratified
CAFTA on October 10, 2005, by a vote of 49 to 37. President Bolaños had
submitted the bill for ratification on October 5, 2004. On May 4, 2005, the
committee of jurisdiction issued a report, moving the process along one step further.
Since then, some members of the Liberal and Sandinista parties had opposed
CAFTA. U.S. Deputy Secretary of State Zoellick visited Nicaragua and said that the
continuation of the pact between Aleman and Ortega “will lead Nicaragua to lose the
Millennium Challenge Account Assistance, to lose the opportunity of CAFTA....”
Shortly afterward, Daniel Ortega, who is running for President in 2006, withdrew the
Sandinistas’ opposition to CAFTA, allowing it enough votes to pass.

Appendix 1. U.S. Economic and Military Assistance
to Central America and the Dominican Republic,
(in $U.S. millions, current)
Costa Domi ni can El Guat e mal a H ondur as N i c a r a g ua T ot al
Rica R e publ i c S a l vador
1977 17 16 7 21 15 6 82
1978 9 7 11 11 20 14 72
1979 18 49 11 25 31 19 153
1980 16 59 64 13 57 39 248
1981 15 42 149 19 45 60 330
1982 54 88 264 16 112 6 540
1983 219 70 327 30 154 0 800
1984 179 104 413 20 173 0 889
1985 231 179 570 107 296 0 1 ,383
1986 165 106 444 122 198 0 1 ,035
1987 183 41 574 193 259 0 1 ,250
1988 121 60 396 142 198 0 917
1989 122 82 388 157 129 4 882
1990 96 28 328 118 214 223 1,007
1991 45 24 295 93 157 219 833
1992 27 24 291 62 96 75 575
1993 28 26 226 69 63 150 562
1994 12 91 57 68 48 93 369
1995 6 16 64 40 30 31 187
1996 2 14 79 37 26 27 185
1997 0 15 32 62 29 27 165
1998 1 18 41 83 22 54 219
1999 1 34 49 102 106 66 358
2000 1 18 34 67 38 32 190
2001 1 43 91 65 43 52 295
2002 1 22 91 68 41 47 270
2003 2 27 40 61 45 42 217
2004 2 31 41 54 46 46 220
Total 1 ,574 1,334 5,377 1,925 2,691 1,332 14,233
Source: AID, U.S. Overseas Loans and Grants. Data for FY2003 are estimated amounts and for FY2004 are
the requested amounts.

Appendix 2. Map Showing DR-CAFTA Pact Partners

M i s s i s s i ppi Alabam a Georgia
TexasLouisianaCentral America
Atlanticand the Caribbean
FloridaOceanDR-CAFTA Pact
Gulfpartner countries
://wikiCaribbean SeaGulf ofTehuantepec
Oc ean
Source:Map Resources. Adapted by CRS. (K.Yancey 9/24/04)