Central America and the Dominican Republic in the Context of the Free Trade Agreement (DR-CAFTA) with the United States
Released: 2005-10-24T00:00:00

Introduction(1)

On October 1, 2002, the Bush Administration notified Congress of the intention to enter intonegotiations leading to a free trade agreement with five Central American countries (Costa Rica, ElSalvador, Guatemala, Honduras, and Nicaragua). Negotiations for a U.S.-Central America FreeTrade 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 withCosta Rica continued in early January 2004, and were completed on January 25, 2004. On February20, 2004, President Bush notified Congress of his intention to sign the CAFTA pact, and it wassigned on May 28, 2004. In August 2003, the Administration notified Congress of plans to negotiatea free trade agreement with the Dominican Republic and to incorporate it into the free tradeagreement with Central American countries. Negotiations with the Dominican Republic began inJanuary 2004, and were completed on March 15, 2004. The new pact, to be known as the UnitedStates-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), was signed byall 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 thecountries 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 ofyears following independence in 1821. Two other countries in Central America have distinctivebackgrounds. Panama was a part of Colombia until it achieved independence in 1903, and hadspecial links to the United States because of the Panama Canal. Belize was a British territory knownas British Honduras until it achieved independence in 1981, and has close ties to theEnglish-speaking countries of the Caribbean Community (Caricom).

In a first wave of regional integration in the 1960s, the five core countries formed the CentralAmerican 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 and1980s as the countries, many with military-controlled regimes, were embroiled in long and costlycivil conflicts that exacerbated the region's economic and social problems.

A second wave of regional integration developed in the 1990s, following peace initiativesin El Salvador, Nicaragua, and Guatemala that eventually led to peace accords and democraticallyelected governments. In 1991 and 1993, the presidents of the Central American countries, includingPanama, signed two protocols that created a new integration mechanism known as the CentralAmerican Integration System (SICA) that is designed to facilitate the creation of a customs unionamong the countries and to encourage cooperation in a range of activities. Belize joined the regionalintegration system in December 2000, and the Dominican Republic became an associate member inDecember 2003. (3)

The DR-CAFTA partner countries are basically small countries with limited population andeconomic resources, with some differences in level of development (see Table 1). They range insize from El Salvador (with just over 8,000 square miles) to Nicaragua (with over 50,000 squaremiles). The combined population of the countries is 45 million, ranging from Costa Rica with apopulation of 4.1 million to Guatemala with a population of 12.6 million.

Table 1. Central American Countries and the DominicanRepublic: Size, Population, and Major Economic Variables,2004

Sources: Area in square miles from State Department Background Notes; population; GrossNational Income (GNI) and Gross Domestic Product (GDP) data from World Bank DevelopmentReport 2005, World Bank Data Profile Tables, and World Bank Country at a Glance Tables.

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 capitaterms, the countries range from Nicaragua with a GNI per capita of $790, which the World Bankclassifies as a low-income country, to Costa Rica with per capita income of $4,670, which isclassified as an upper middle-income country. The rest of the countries are classified as lowermiddle-income countries by the World Bank. In terms of rates of growth, Nicaragua, Costa Rica andHonduras experienced growth in 2004 ranging from 3.7% to 4.6%, while El Salvador, DominicanRepublic, and Guatemala experienced growth ranging from 1.7% to 2.7%. In per capita terms, theresults were more modest with three of the countries generating less than 1% growth, while theothers experienced growth ranging from 1.4% to 2.7%.

Turning to some key developmental indicators, Table 2 shows that, with the exception ofCosta Rica (which performs at higher levels), the countries generally have similar levels ofperformance, and that performance falls below the Latin America and Caribbean regionalaggregates. Using the United Nations Development Program's Human Development Index, whichmeasures achievements in terms of life expectancy, educational attainment, and adjusted realincome, Costa Rica is classified as having high human development, and is ranked as 47th in theworld. The other countries are classified as having medium human development, and have rankingsthat 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 countriesare among the lowest performers in Latin America and the Caribbean.

Table 2. Central American Countries and the DominicanRepublic: Key Development Indicators, 2004

Sources: Human Development Index from UNDP's Human Development Report 2005; all otherdata from World Bank's World Development Indicators database, April 2005, and World BankCountry 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 hadclose, sometimes controversial, ties to the regions for many years. For these regional countries, theUnited States has always been the dominant market, as well as the major source of investment andbilateral assistance, while recent U.S. interest in Central America has been fairly sustained for morethan two decades.

In the early 1980s, with a revolutionary regime in Nicaragua and a threatening insurgencyin El Salvador, Congress responded to President Reagan's 1982 call for a Caribbean Basin Initiativeby increasing economic assistance to the Central American and Caribbean region, and by providingone-way duty-free trade preferences for the region for 12 years in the Caribbean Basin EconomicRecovery 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 Americaover the next several years (see Appendix 1) As a result of these programs, the United Statesprovided more than $11 billion in economic and military assistance to the Central American regionfrom FY1978 to FY1990, especially assistance to El Salvador. (4)

In 1990, Congress responded to continuing concerns in the region by passing the CaribbeanBasin Trade Partnership Act (CBTPA) that expanded and extended the original CBI legislation. In1999, Congress responded again, by providing over a billion dollars of assistance to deal withHurricane 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 tradingpartner of the regional countries, representing the most important source of imports and the majormarket for exports (see Table 3). With regard to exports, the relationship ranges from Costa Ricawhere 23% of its exports are U.S.-bound, to the other countries that send more than 50%, up to theDominican Republic that sends 79% of its exports to the United States. With regard to imports, therelationship ranges from Nicaragua that receives 25% of total imports from the United States, toHonduras that depends upon the United States for 49% of its imports.

Table 3. Central American Countries and the DominicanRepublic: Total Trade and Trade with the United States, 2004

Source: International Monetary Fund's Direction of Trade Statistics Quarterly, June 2005.

Major Pact Provisions and Issues

Completion of Negotiations. The United Statesannounced the conclusion of a U.S.-Central America Free Trade Agreement (CAFTA) with ElSalvador, Guatemala, Honduras, and Nicaragua on December 17, 2003, keeping to the originallyannounced schedule. The delegation from Costa Rica withdrew from the negotiations in the last fewdays to seek further consultations with their government and were not part of the Decemberagreement. The Costa Rican delegation resumed negotiations in early January 2004 and the UnitedStates 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 Americancountries on February 20, 2004, and the CAFTA pact was formally signed on May 28, 2004. (6)

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

Overview of Provisions. Under the pact, over80% of U.S. consumer and industrial products will receive duty-free treatment from regionalcountries immediately, and that percentage will rise to 85% within five years and to 100% withinten years. More than 50% of U.S. farm products will have immediate duty free status, and tariffs onmore sensitive products will be phased out within 15-20 years. Textile and apparel will be duty-freeand quota-free if they meet the rules of origin. Consumer and industrial goods from regional partnersalready entering the United States duty free under the Caribbean Basin Trade Partnership Act willhave consolidated and permanent treatment so that nearly all industrial goods will enter the UnitedStates duty free immediately. The agreement also contains provisions on services, intellectualproperty 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; promoteregulatory transparency; strengthen labor and environmental conditions; and, provide an effectivesystem to settle disputes." (8) The U.S. Business Roundtable said that "this agreement can serve as a model of how developing andindustrial nations can work together to find consensus on trade liberalization." (9) In early January 2005, theNational Association of Manufacturers in announcing its agenda for the 109th Congress urgedapproval of the DR-CAFTA agreement. On January 26, 2005, 151 companies and associationsforming the Business Coalition for U.S. Central America Trade sent letters to House and Senateleaders urging action on the pact to provide "full and reciprocal access" for U.S. producers, ratherthan the unilateral access that presently exists. (10) In testimony before the Senate Finance Committee and theHouse Ways and Means Committee in mid-April 2005, Acting USTR Peter F. Allgeier restatedAdministration arguments that the agreement involved small countries with large and importantmarkets, and USTR-nominee Rob Portman reiterated those arguments in his confirmation hearingbefore the Senate Finance Committee on April 21, 2005. They also argued that the agreement willstrengthen economic reform and democracy in the affected countries.

On the other hand, labor and environmental groups and some members of Congress foundthe labor and environmental provisions to be inadequate. (11) The Alliance for Responsible Trade, a coalition ofnon-governmental organizations, criticized the CAFTA for having weak labor and environmentalprovisions while containing strong investor and intellectual property rights for businesses. (12) The DominicanParticipation and Consultation on Free Trade, a coalition of Dominican church and cultural groupsin New York City, expressed similar concerns about the integration of the Dominican Republic intothe CAFTA agreement. (13) On the eve of the signing of the CAFTA pact with CentralAmerican countries on May 28, 2004, several Democratic Members from the House and the Senatecriticized the labor and environmental provisions of the agreement. (14) About the same time,presumptive Democratic presidential candidate John F. Kerry indicated that he would renegotiatethe 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 USTRclaiming that Central American countries should be denied GSP benefits because of the failure torespect internationally recognized labor rights. (16) More recently, Representative Sander Levin and Senator JeffBingaman 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)

Major Issues. The four most contentious issueswhen Congress considered the agreement were agriculture, apparel/textiles, and the labor andenvironment provisions.

Agriculture. Under the agreement, more than 50%of U.S. farm products will have immediate duty free status in Central American markets, and tariffson more sensitive products will be phased out within 15-20 years. For white corn, recognized as themost sensitive product for Central America because it is produced by subsistence farmers and is usedas 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 Americanfarm products will have permanent duty-free status in U.S. markets, quotas for more sensitiveproducts (sugar, beef, peanuts, dairy products, tobacco, and cotton) will increase gradually. Forsugar, recognized as the most sensitive product for U.S. negotiators, the regional countries receivedan 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 insugar imports from regional countries would be equal to about 1.3% of U.S. sugar production in thefirst year, and would grow to only 1.9% in 15 years. While many U.S. commodity organizationssupport the DR-CAFTA agreement, the U.S. sugar industry opposes it on grounds that the increasein the quota sets a precedent for other free trade agreements and would result in a substantial increasein sugar imports that would be damaging to U.S. producers. (18) In mid-June 2005, theAdministration offered to consider ways to ameliorate any possible damage to sugar producers, butmajor sugar growers associations announced on June 23, 2005, that no acceptable agreement hadbeen achieved. (19) Othercritical groups argue that it is unfair to pit highly subsidized U.S. agricultural interests against thepoor subsistence farmers in Central America, and they argue that the result will be that these ruralfarmers will lose their livelihoods as they did in Mexico under NAFTA. (20) On January 27, 2005, theRanchers-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 forCongress to reject the DR-CAFTA pact, primarily because the agreement lacks safeguard provisionsfor U.S. producers in the event of a rapid increase in Central American imports. In conjunction withthe votes in the relevant committees and in the Senate in late June 2005, the Administrationpromised to take measures to limit sugar imports from the region and to study the feasibility of usingsugar for the production of ethanol, but the sugar industry reasserted its opposition to theagreement. (21)

Apparel/Textiles. Under the agreement, textiles andapparel will be duty-free and quota-free immediately under more liberal rules of origin, and thecoverage will be retroactive to January 1, 2004. Duty-free treatment will be accorded to someapparel produced in Cental America and the Dominican Republic that contains certain fabrics fromNAFTA partners Mexico and Canada, or from other countries in the case of fabrics and materialsdeemed to be in "short supply" in the United States and Central America. Some U.S. textile groupsannounced early on that they would oppose DR-CAFTA because of the more liberal rules of originthat, in their view, would lead to the closure of more textile mills in the United States. (22) In early May 2005, withindications from the USTR of modifications in provisions dealing with pocketing and linings, theNational Council of Textile Organizations voted to support DR-CAFTA. In conjunction with the lateJuly vote in the House, the Administration promised more favorable provisions for apparel and sockproducers. (23)

Labor. According to the USTR, DR-CAFTA laborprovisions go beyond the provisions in the Chile and Singapore free trade agreements to create athree-part strategy to strengthen worker rights. Under the agreement, the countries are required toenforce their own domestic labor laws and that obligation is enforceable through the regular disputeresolution procedures. In addition, the countries agree to work with the International LaborOrganization (ILO) to improve existing laws and enforcement, and technical assistance is providedto enhance the capacity of Central American countries to monitor and enforce labor rights. TheEmergency Committee for American Trade, composed of leading U.S. international businessenterprises, argues that the labor rights protections in the CAFTA pact are as strong or stronger thanthose found in the U.S.-Jordan FTA. (24)

The AFL-CIO has argued that the FTA labor provisions are deficient, because they wouldrequire only the enforcement of current domestic labor laws, which are viewed as woefullyinadequate, and would lead to continuing job losses in the United States. The U.S. labororganization argues that the provisions in the agreement are weaker than the existing beneficiaryrequirements under the Generalized System of Preferences and the Caribbean Basin Trade PromotionAct that require that a country be taking steps to afford workers "internationally recognized workerrights." (25) A numberof members of Congress have argued that the agreement should include an enforceable commitmentby 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 forGlobal Development has argued for greater enforcement of existing laws while continuing tostrengthen workers rights. (27) In keeping with this approach, the Ministers responsible fortrade and labor in the DR-CAFTA countries met in Washington, D.C. on July 13, 2004, andcommitted to strengthen and enhance labor law compliance and enforcement. (28) With assistance from theInter-American Development Bank, the U.S. Department of Labor, and USAID, the countries arestriving to build labor and environmental law enforcement capacity through a $20 million assistancepackage provided by the United States.

In mid-December 2004, a number of labor unions and non-governmental organizations filedpetitions with the USTR claiming that Central American countries should be denied GSP benefitsbecause they had failed to make progress in respecting internationally recognized labor rights. (29) More recently, as indicatedabove, Representative Sander Levin and Senator Jeff Bingaman argued that the reports of theInternational Labor Rights Fund, funded by the U.S. Department of Labor, demonstrate that thecountries' labor protections fall short of ILO standards, but the Department of Labor countered thatthe reports were biased. (30) In conjunction with the votes in the relevant committees and inthe Senate in late June 2005, the Administration promised to support assistance of $40 million peryear in FY2006 through FY2009 for regional countries to strengthen the enforcement of labor andenvironmental standards as well as assistance for regional farmers who might be adversely affectedby the pact. (31)

Environment. USTR claims that DR-CAFTAcontains an innovative environmental chapter that goes beyond the Chile and Singapore agreementsto develop "a robust public submission process to ensure that views of civil society are appropriatelyconsidered." It also includes provisions on cooperative actions and the establishment of anEnvironmental Cooperation Commission. A number of members of Congress have argued that theenvironmental provisions are weaker than those found in the NAFTA pact, and they have beenarguing for a more effective citizen petition process that could be used to encourage a country'scompliance with environmental laws. (32) Seeking to strengthen environmental monitoring, the sevenDR-CAFTA countries signed two supplemental agreements in February 2005, one to establish anindependent multilateral secretariat to administer public submissions under the pact, and the otheran Environmental Cooperation Agreement (ECA) to encourage regional cooperation onenvironmental matters. (33) As indicated above, the U.S. Congress approved $20 million inFY2005 assistance to enhance the capacities of the DR-CAFTA countries to strengthen and enforcelabor and environmental standards, and the Administration promised in June 2005 to supportassistance of $40 million per year in FY2006 through FY2009 for the same purposes.

Status of Pact Approvals

Early Approvals of Pact. Following the signingof the pact, the regional presidents were required to submit the agreement to their respectivelegislatures for approval, and three of the six countries approved the pact before action by the UnitedStates. The Salvadoran legislature approved the pact, 49-35, on December 17, 2004; the Honduranlegislature 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 leaderswere reluctant to press for a vote until it was clear that the pact would be approved by the UnitedStates.

U.S. Approval of Pact. The Bush Administrationwas reluctant to submit the implementing legislation to Congress before the November 2004 electionbecause of the crowded legislative calendar and the contentiousness of the issue, but it reemergedas an important issue following President Bush's re-election in November 2004 and hisre-inauguration in January 2005. Submission was complicated as well by U.S. disputes with theDominican Republic and Guatemala and by the vacancy in the leadership of the USTR whenAmbassador Robert Zoellick became the Deputy Secretary of State. The dispute with the DominicanRepublic over the country's October 2004 tax on soft drinks sweetened with imported high fructosecorn syrup (HFCS) was resolved in early January 2005 when that tax was repealed. The dispute withGuatemala over a December 2004 law that limited test data protection for pharmaceutical productswas resolved in early March 2005 when the Guatemalan Congress modified the legislation. Thevacancy in the leadership of the USTR was 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-2005as a top priority for his Administration and as a key step in future trade negotiations. Hearings onthe agreement were held by the Senate Finance Committee on April 13, 2005, and by the HouseWays and Means Committee on April 21, 2005, with a range of witnesses presenting supportive andcritical perspectives. Hoping to encourage support for the agreement, the Presidents of theDR-CAFTA countries visited various U.S. cities in mid-May 2005, ending with meetings withcongressional leaders and President Bush in Washington, D.C., on May 11-12, 2005. (34)

In informal "mock" markups in mid-June, the agreement was approved 11-9 in the SenateFinance Committee on June 14, 2005, and it was approved 25-16 in the House Ways and MeansCommittee on June 15, 2005, after most efforts to add amendatory language were rejected. ThePresident met with bipartisan leaders from former administrations and with Central Americandiplomats on June 23, 2005, to urge congressional support for the implementing legislation( S. 1307 / H.R. 3045 ) as it was submitted by the Administration andintroduced in Congress. S. 1307 was approved by voice vote by the Senate FinanceCommittee 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 financemeasures must originate in the House, H.R. 3045 was returned to the Senate, where it wasapproved 55-45 on July 28, 2005. The measure was signed into law ( P.L. 109-53 ) by President Bushon August 2, 2005, in the presence of legislators and regional ambassadors. In conjunction with thelate June votes in the relevant committees and in the Senate, the Administration agreed to takemeasures 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 andenvironmental standards and to assist regional farmers who might be adversely affected by thepact. (35) In conjunctionwith the late July vote in the House, the Administration promised more favorable provisions forapparel and sock producers, and the House leadership facilitated approval of a bill ( H.R. 3283 ) that established requirements for closely monitoring alleged unfair Chinese tradingpractices. (36)

Later Approvals of Pact and Projected Entry intoForce. Following U.S. approval of the pact, two other countries acted to approvethe 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 approvedit 118-4 on September 6, 2005. In Nicaragua, the legislature approved the pact 49-37 on October11, 2005. In Costa Rica the pact remains controversial and President Pacheco has been reluctant topress for approval with presidential elections approaching in February 2006. According to pressreports, the partner countries have tentatively agreed that the agreement will enter into force onJanuary 1, 2006, for approving countries. (37)

Costa Rica(38)

Political Situation

Costa Rica is considered the most politically stable and economically developed nation inCentral America. Since its independence in 1848, the country has developed a tradition of politicalmoderation and civilian government despite having some interludes of military rule. A brief civilwar 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, prohibitsthe creation of a standing army. The Ministry of Public Security and the Ministry of the Presidencyshare responsibility for law enforcement and national security with a police force including BorderGuard, Rural Guard, and Civil Guard, of approximately 8,400 officers.

The United Nations' Human Development Report for 2004 ranks Costa Rica 47th out of 177countries based on life expectancy, education, and income levels. This puts the country far aheadof its Central American neighbors. Life expectancy at birth is 77.9 years. Its population, 4 millionin 2004, is the best educated in Central America, with a literacy rate of 95%. Both the literacy rateand life expectancy are higher than the Latin American average. Some 42% of the country's land isdevoted 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 toCosta Rica's growing reputation as an ecotourism destination. The country is considered a transitpoint for illegal drugs from South America destined for the United States and Europe, althoughCosta Rica cooperates with the United States on drug interdiction issues. It has low levels ofcorruption by regional standards, but during the last year, several previous presidents, and the currentpresident, have been subject to legal proceedings on corruption charges.

The current president, Abel Pacheco, was inaugurated in May 2002 to a four-year term. Aleader of the center-right Social Christian Unity Party (PUSC), Pacheco won the election in a secondround of voting against Rolando Araya of the National Liberation Party (PLN). Pacheco ran on ananti-corruption, good governance platform, but has since become embroiled in his own corruptioncharges, forcing him to admit to having received illegal campaign contributions from a Taiwanesebusinessman, and several related businesses. During Pacheco's term, he has been plagued with alarge number of changes in his cabinet, some resulting from disagreements on economic and fiscalpolicies. Public opinion polls show that his support fell precipitously, with 17% of Costa Ricanscharacterizing his administration as "good" or "very good." (39)

In April 2003, the Constitutional Court, the country's highest court, ruled that an existingprohibition on the non-consecutive re-election of presidents was unconstitutional. This change willbenefit former President Oscar Arias, who governed from 1986 to 1990, winning the Nobel PeacePrize in 1987 for his work on the peace process in Central America. Arias won the candidacy of theNational Liberation Pary on January 15, 2005, for the presidential election scheduled for February2006. Other candidates include Otton SolÃ­s of the Citizens Action Party, Ricardo Toledo of thegoverning 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 havecriticized it.

Relations with the other nations of Central America are close. This is due in part to theirattempts at economic integration that date from the creation of the Central American CommonMarket in 1960, to the more recent CAFTA negotiations. During guerrilla conflicts thatcharacterized much of Central America in the 1980s, Costa Rica often served as mediator. Sometensions still remain with Nicaragua over navigation rights on the San Juan River and the growingnumber of Nicaraguan immigrants attracted to Costa Rica's better economic climate.

Economic Conditions

With its stable democracy, relatively high level of economic development, and highlyeducated population, Costa Rica has been cited as the most attractive investment environment inCentral America. (41) Until the 1980s, Costa Rica followed a social-democratic development model that saw a greater rolefor the state in economic development. The state held a monopoly on banking, insurance, telephoneand 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 debt in 1983. Succeedingstructural adjustment agreements with the International Monetary Fund and other internationalfinancial institutions brought about a liberalization of the economy, and the privatization of most ofits state-owned enterprises. However, insurance, telecommunications, electricity distribution,petroleum distribution, potable water, sewage, and railroad transportation industries are stillstate-owned sectors.

State monopolies of telecommunications and insurance posed difficulties in Costa Rica'sparticipation 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 agreementhad been reached to include Costa Rica. Under the agreement, Costa Rica committed to opening itsprivate network services and Internet services by January 2006, and its cellular phone market by2007. 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 1998in public health, one of the highest rates in the developing world. Costa Rica also developed a moreequitable distribution of income than its neighbors, a situation that exists to this day. In recentdecades, the country has pursued foreign direct investment, the development of its export sector, anddiversification from agriculture-based exports. GDP amounted to $18.5 billion in 2004, with agrowth rate of 4%, despite a downturn in prices for two of its major agricultural exports -- bananasand coffee -- and a decrease in demand for computer components. The country has developed athriving computer sector in recent years since attracting U.S. companies to locate manufacturingplants there. In 2001, more than half of US foreign direct investment in Central America was inCosta Rica. The country's unemployment rate in 2004 was 6.5%. Manufacturing represents nearly21% 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 secondmost important agricultural export. Both are grown on small- and medium-sized farms. Apparelexports are not as important to Costa Rica as to its Central American neighbors. The country hasbeen successful in attracting foreign high technology companies to locate operations in Costa Ricathrough the establishment of free trade zones. In 1998 and 1999, Intel constructed two plants toassemble computer chips, providing the country with a major export generator that has attractedadditional foreign direct investment. Intel announced in November 2003 that it would invest $110million more in its Costa Rican operations, increasing its employment from 1,900 to 2,400. Intelexpected its operations at these two plants to generate $1.2 billion in exports in 2003. (43) In 2001, Microsoftawarded a major software development project to a Costa Rican firm, Artinsoft, and several otherCosta Rican firms have strategic alliances with major U.S. and European companies. The export ofhigh technology electronics grew by 52.8% in 2003, earning $1.4 billion in revenues, andrepresenting 22.5% of the country's total export earnings. Microprocessor exports account for about15% 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 foodprocessing, 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 criticismfrom the public and previous presidents for this support. Former President Oscar Arias, who isrunning for the presidency in 2006, was especially vocal in his criticism of U.S. policy in Iraq. (45) Costa Rica initially joinedthe G20 group of nations whose opposition to the U.S.-EU positions precipitated the collapse of theWTO Ministerial Conference in Cancun, Mexico, September 2003, but it subsequently withdrew inOctober, as did El Salvador and Guatemala. Soon after Cancun, U.S. Trade Representative RobertZoellick traveled to Central America where he suggested that if Costa Rica did not open its servicesector, specifically its telecommunications and insurance sectors, it could be left out of CAFTA. Asdiscussed below, privatization of the telecommunications and electricity monopoly is opposed bymost 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 UnitedStates and Costa Rica in January 2004 produced an agreement to include Costa Rica in the regionalpact.

Costa Rica is not a major U.S. aid recipient. It received some economic assistance duringthe early 1990s, averaging about $25 million from 1990 to 1996. Since 1997, economic assistancehas averaged less than $1 million per year. In FY2003, it received less than $400,000 inInternational 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 andFY2005, 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 strengtheninglaw enforcement capabilities. In response to recent floods that have also affected other countries inCentral America, the United States announced that it would provide Costa Rica with $50,000 indisaster assistance.

U.S. Trade and Investment. The United Statesis Costa Rica's major trading partner. It annually sends approximately 50% of its exports to theUnited States and imports 53%. A sizeable portion of U.S. investment in Central America is foundin Costa Rica. The stock of U.S. foreign direct investment (FDI) totaled $.1.8 billion in both 2002and 2003, invested largely in the manufacturing sector. (47) Despite the country's efforts to attract foreign investment, aWorld Bank report notes that Costa Rica has heavier regulation of business than many otherdeveloping countries, which causes inefficiency, delays, higher costs, and opportunities forcorruption. (48) As ofDecember 2003, Costa Rica temporarily halted the importation of U.S. beef in response to a case ofBovine Spongiform Encephalopathy (BSE) in the United States. In May 2004, Costa Rican officialsindicated that some imports could be resumed, but Costa Rica's plant-by-plant inspection andcertification requirements have prevented their effective resumption, according to the Office of theU.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 companiesinclude 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 AbbottLaboratories, Baxter Health Care, GlaxoSmithKline, and Eli Lilly. The high technology sector haslocated 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, chemicalsand 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, evenwhile there has been internal debate on the benefits of CAFTA. Since the conclusion ofnegotiations, approval of the agreement in Costa Rica has been problematic. Disagreements withthe United States with regard to opening the state-owned telecommunications and insurance sectorsled Costa Rica to withdraw from the initial CAFTA negotiations one day before the final agreementwas announced. Following bilateral negotiations between the United States and Costa Rica inJanuary 2004, Costa Rica was included in the CAFTA agreement. Costa Rica also has signed freetrade agreements with Canada, Chile, Mexico, the Dominican Republic and the Republic of Trinidadand Tobago. The countries of Central America now have tariff-free access to the U.S. market onapproximately 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 arrangementpermanent and reciprocal. While the five Central American nations agreed to present a unifiednegotiating position to the United States, each had its own interests and objectives. Costa Ricasought greater foreign investment in certain strategic areas, such as electronics assembly, health careproducts and business service centers. While agricultural products have been important to itseconomy, their decreasing export value has meant that the focus instead has shifted tomanufacturing. Costa Rica also anticipated that an FTA with the United States would have apositive impact both on tourism and the productivity of its export sector. (51)

Telecommunications and Insurance. Thetelecommunications sector is the most sophisticated in Central America, but unlike its neighboringcountries, it is state-owned, and proposals for privatization have been very controversial. The useof the Internet and electronic commerce is relatively advanced, but the system is inadequate giventhe 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 operatesboth power and telecommunications. President Pacheco is interested in restructuring ICE in someform in order to reduce its burden on the national budget and to modernize its infrastructure to attractmore high technology firms to the country. Intel's General Manager has stated that the lack ofmodernization, especially Internet connections and speed, were directly hindering the company'sgrowth in Costa Rica. (52)

The U.S. negotiating position was that all suppliers of telecommunications and insuranceservices be compatible and that there is non-discriminatory treatment between domestic and foreignsuppliers. Costa Rica's has long resisted calls to liberalize its telecommunications and insurancesectors. This disagreement came into sharper focus during U.S. Trade Representative RobertZoellick's trip to the region in early October 2003 during which he stated to Costa Rican officials thatan open telecommunications sector was necessary in order to conclude an agreement, and that aCAFTA agreement could proceed without Costa Rica. These comments were met with displeasurefrom both Costa Rican union leaders and business executives who argued that the NAFTAagreement allows Mexico to maintain state ownership of oil and the U.S.-Chile Free TradeAgreement allows Chile the same privilege in regard to copper. They contend that this sets aprecedent for Costa Rica to keep its state monopoly.

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. officialsclarified that complete privatization of the telecommunications sector would not be necessary as longas the private sector could participate in some telecommunications activities, such as mobile phoneand internet service. (53) The issue of insurance was not raised until the last round of negotiations, and Costa Rica believedthere was not enough time remaining to resolve differences. The United States had called for totalaccess to the insurance industry. The final agreement between the United States and Costa Ricaprovides for access to private network services and Internet services by January 2006, and to wirelessservices by 2007. Opening the insurance market would be accomplished in phases between 2008and 2011.

Apparel. Costa Rica's apparel industry is lessimportant to its economy than its neighbors. Nonetheless, Costa Rica supported the region's singlenegotiating position of wanting a more liberal rule than is now included in the Caribbean BasinTrade Preference Act, which provides for a "yarn forward" rule in which U.S. made fabrics must befrom U.S. produced yarn. For a CAFTA agreement, the Central Americans preferred that apparelmakers could acquire yarn from the United States, Central America, or third countries that have tradeagreements with either. This means that potential suppliers could also be from Mexico, Canada, orChile. U.S. negotiators proposed a rule allowing for the use of third country providers wherecomponents are in short supply. The Central Americans wanted tariff preference levels to provideduty-free access, under a negotiated cap, for apparel that is assembled in the region from fabric thatis made elsewhere. This position was opposed by the U.S. textile industry. (54)

Agriculture. Agricultural issues presented somedifficulties in negotiations, as the Central Americans wanted the United States to address its farmsubsidies, 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 priceson the world market in recent years. In the final agreement, Costa Rica is to eliminate tariffs onnearly all agricultural products within 15 years, on chicken leg quarters within 17 years, and on riceand dairy products within 20 years. Costa Rica also negotiated an increase in its sugar export quotathat will reach 14,860 tons by the 15th year of the agreement and won general protection for freshonions and potatoes in the agreement. Trade of these latter two products will be liberalized throughexpansion of a tariff-rate quota.

Environment. With the signing of twoenvironmental agreements on February 18, 2005, at least one Costa Rican environmentalorganization, the Global Alliance for Humane Sustainable Development, has endorsed theDR-CAFTA agreement. According to a report by the Office of the U.S. Trade Representative, CostaRica has a full complement of domestic environmental laws. Legislation enacted in 1994 createdthe post of Environmental and Maritime Land Attorney, who is tasked with taking legal action toguarantee a healthy and ecologically sound environment, and to ensure the enforcement ofinternational treaties and national laws. The 1995 Environment Act requires environmental impactstudies for most construction projects, including commercial and residential construction, andmining projects. The government can halt projects and impose fines for non-compliance withenvironmental laws. Costa Rica is party to 68 multilateral, regional and bilateral environmentalagreements, including the U.N. Convention on Biological Diversity, the Convention on theInternational Trade in Endangered Species of Wild Flora and Fauna, the U.N. FrameworkConvention on Climate Change, the Kyoto Protocol, and the Montreal Protocol on Substances thatDeplete the Ozone Layer. (55) Costa Rica has been a pioneer of "clean air exports" in whichit sells credits to companies in developed countries who need to offset their greenhouse gasemissions as part of the 1992 Rio Earth Summit and the 1997 Kyoto Protocol commitments.

Labor. The power of organized labor hasdeclined since the 1980s. The strongest unions represent civil servants, teachers, public utilitiesemployees, and oil refining and ports employees. According to the State Department's CountryReports on Human Rights Practices covering 2004, Costa Rican law guarantees the right of workersto join unions, and workers are able to exercise this right. The report estimates that 12% of the laborforce is unionized, and that some 80% of all union members are public sector employees. Unionsoperate independently of the government. The International Labor Organization (ILO) noted delaysin addressing workers' formal grievances and the enforcement of reparations. A recent report byCentral American trade officials reported that the Constitution and labor code provide strongprotections for fundamental labor rights. (56) The Constitution and Labor Code restrict public sector workersfrom striking, although a 2000 Supreme Court ruling clarified that public sector strikes wereallowed, but only if a judge approved them in advance and found that necessary services for thepublic's well-being would not be affected. There are no restrictions on private sector unions beingable 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 wasreported to have enforced minimum wages in the area of the capital, San Jose, but was less effectivein rural areas in 2002. The State Department reports that the minimum wage was not sufficient toprovide a worker and his family 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 andcommercial firms with ten or more workers to establish a joint management-labor committee onworkplace conditions, and allows the government to inspect workplaces and to fine employers. TheState Department reports that insufficient resources have been provided to the Ministry of Labor toenforce health and safety legal requirements. In December 2004, the International Labor RightsFund petitioned the Office of the U.S. Trade Representative to review Costa Rica's eligibility underthe Generalized System of Preferences (GSP) for violations of workers' rights.

Intellectual Property. Costa Rica is party to theWTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) and has enacted oramended its regulations to harmonize them with its international obligations. The U.S. TradeRepresentative's 2004 Foreign Trade Barriers Report noted that enforcement remains a problem withregard to the protection of copyrights, patents, and trademarks and that the country's criminal codelimits effective deterrence of intellectual property crimes. Despite this, USTR placed Costa Rica onits less severe Special 301 Watch List in 2002, 2003, and 2004. The International IntellectualProperty Alliance, a U.S.-industry organization, also cites Costa Rica's insufficient enforcementactivities 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, thelatest year for which an estimate is provided. (57)

Approval Status. In September 2005, PresidentPacheco announced that he would send the DR-CAFTA agreement to the unicameral Costa RicanLegislative Assembly for consideration. The delay in sending the agreement to the legislature wasdue to President Pacheco wanting a fiscal reform package of legislation to be considered first. (58) The reform bill has beenstalled in the legislature for more than two years. With low public opinion for his administration andapproaching national elections, Pacheco has run into difficulties in obtaining approval of hisproposals. There are groups in the country that oppose the agreement for fear that it will negativelyaffect the agriculture and textile sectors and the environment. These groups have been quite vocaland have held public demonstrations. (59)

Dominican Republic(60)

Political Situation

President Leonel FernÃ¡ndez of the Dominican Liberation Party (PLD), who served aspresident previously (1996-2000), took office on August 16, 2004. President FernÃ¡ndez continuesto enjoy relatively strong popular support and has restored some confidence in the Dominicaneconomy. On February 1, 2005, President FernÃ¡ndez signed a new $665 million loan agreement withthe 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 FernÃ¡ndezadministration has struggled, however, to deal with high crime rates, corruption, and persistentelectricity shortages. Human rights organizations have criticized the Dominican government forseveral recent massive repatriations of illegal Haitian migrants. On September 6, 2005, theDominican Republic approved the U.S.-Dominican Republic-Central American Free TradeAgreement (DR-CAFTA).

Background. During the 1990s, the DominicanRepublic 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 agingJoaquin Balaguer from power in 1996 after a shortened two-year term and preventing consecutivepresidential re-elections. Balaguer, a six-term president and acolyte of the deceased dictator, RafaelTrujillo, dominated Dominican politics for decades until his death in 2002. In 1996, LeonelFernÃ¡ndez of the PLD, a center-left party of middle-class professionals, succeeded Balaguer andpresided over a period of strong economic growth. After top PLD officials were charged withmisusing public funds, HipÃ³lito MejÃ­a (2000-2004), an agrarian engineer of the populist DominicanRevolutionary Party (PRD), easily defeated the PLD candidate by promising to promote ruraldevelopment. He lost popular support, however, by spending excessively and deciding to bail outall deposit holders after three massive bank failures in 2003 at a cost of between 15 and 20% ofGDP. (61) Observersnoted that MejÃ­a focused more on his re-election bid, which required a constitutional amendmentreinstating presidential re-election, than on resolving the country's deep economic crisis. (62)

2004 Presidential Elections. On May 16, 2004,Leonel FernÃ¡ndez won a convincing first-round victory with 57% of the popular vote compared toMejÃ­a (PRD) receiving 34% and Eduardo Estrella of the Social Christian Reformist Party (PRSC)receiving 9%. Record numbers of Dominicans turned out to support FernÃ¡ndez, whom theyassociated with the country's economic boom of the 1990s.

Fiscal Reform and DR-CAFTA. In September2004, the Dominican legislature, which is dominated by the PRD, passed the President's fiscalpackage. The fiscal bill contained important provisions, including an increase in sales taxes and a20% cut in public spending. (63) 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 January2005. The 28-month agreement should pave the way for additional multilateral disbursements ofsome $500 million per year. Although the Dominican government has met most of the IMF's fiscaltargets, it has yet to enact further tax reforms needed to compensate for the loss of tariff revenue thatis expected to result from DR-CAFTA.

Corruption. In October 2004, an officialinvestigation found that HipÃ³lito MejÃ­a was able to increase his personal wealth by $800,000 duringhis four-year presidential term. (64) MejÃ­a, officials of all major political parties, and otherindividuals reportedly received money and gifts from Ramon Baez, owner of the now defunct BancoIntercontinental (Baninter). (65) The MejÃ­a government later took control of Baninter's associatedcompanies, including Listin Diario, the country's largest publishing company, and fired many editorsand management officials, even if they were not party to the scandal. There are corruption casespending against Mr. Baez and other prominent Dominican bankers associated with the scandals. Inlate November 2004, the FernÃ¡ndez administration charged 12 former PRD officials withembezzlement, fraud, and misuse of public funds. In April 2005, following up on the October 2004forced retirement of 300 to 400 police officers, many of whom were accused of misconduct, theDominican state prosecutor started proceedings against police and military officials accused ofappropriating luxury cars for personal use. Despite these apparent efforts to root out corruption,President FernÃ¡ndez has lost popular support as of late for failing to improve the country's extremelylow prosecution rate for officials accused of corruption. (66)

Human Rights. According to the StateDepartment's Country Report on Human Rights Practices covering 2004, although the Dominicangovernment has made some progress, it still has a poor human rights record. Local press reportsindicate that Dominican police killed 160 more people in 2004 than in 2003. (67) In addition to thecontinued use of torture and physical abuse, prison conditions range from "poor to harsh" as 13,500prisoners are currently being held in overcrowded prisons designed to hold only 9,000 inmates. OnMarch 7, 2005, rival gangs set a fire in one Dominican prison that resulted in 133 deaths and 26injuries. Finally, despite the enactment of an anti-trafficking in persons law in August 2003, theState Department has placed the Dominican Republic on a Tier 2 Watch List for failing to arrest andprosecute those accused of human trafficking.

Status of Haitians and Dominican-Haitians. TheDominican government continues to receive international criticism for its treatment of an estimatedone million Haitians and Dominican-Haitians living within its borders. (68) Each year thousands ofmigrants, many without proper documentation, flock from Haiti, the poorest country in thehemisphere, to the Dominican Republic. The Dominican economy, especially the sugar andconstruction industries, has long profited from a constant influx of cheap Haitian labor. More than90% of the country's seasonal sugar workers and two thirds of its coffee workers are Haitians orDominicans of Haitian origin. (69) In 2002, the Dominican Directorate of Migration forciblydeported more than 12,000 Haitians, including children born of Haitian parents in the DominicanRepublic. (70) Accordingto most Dominican officials, including President FernÃ¡ndez, the recent crisis in Haiti, which resultedin the removal of President Jean-Bertrand Aristide in early 2004, has accelerated the level of illegalmigrants heading to the Dominican Republic and placed further strain on the struggling Dominicaneconomy. (71) Despiteprotests from NGOs and human rights organizations, the Dominican government has asked theinternational community for help in securing its border with Haiti and ordered two massiverepatriations of Haitian illegal immigrants. Some 4,000 individuals were repatriated in May andmore than 1,000 more in August 2005. (72)

Economic Conditions

Fueled by rapid expansion in both the tourism and free-trade zone (FTZ) sectors, theDominican economy grew rapidly throughout the 1990s at an annual rate of 6-8%. Despite theincreased employment and earnings in those two sectors, mining and agriculture continued to be thecountry's highest export earners. Remittances from Dominicans living abroad contributed anadditional $1.5 billion per year to the country's stock of foreign exchange. Economic expansion wasalso facilitated by the passage of several market-friendly economic reforms in the late 1990s by thenPresident Leonel FernÃ¡ndez. One critical reform was a 1997 law allowing the partial privatizationof 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 electricitydistribution companies. Some observers criticized FernÃ¡ndez'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 theglobal economy. Although the Dominican tourism industry has recovered since late 2002, it suffereda significant decline in 2001-2002, as a result of the global recession, a weak euro, and the aftermathof the September 11, 2001 terrorist attacks. More significantly, the country's free trade zones havehad to compete with cheaper goods coming from Central America and China. The trade deficit ofthe 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 andtelecommunications sectors, entered a recession. The country's public finances were placed understrain after President MejÃ­a elected to bail out the country's third largest bank in violation of themonetary 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 executivesto 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, theformer president of Baninter, paid out more than $75 million worth of gifts and payments togovernment officials, including President MejÃ­a and Leonel FernÃ¡ndez. (74) The MejÃ­a administrationnegotiated a $600 million loan from the IMF in August 2003 to counter the effects of the Baninterbailout but only received $120 million before failing to comply with conditions. A renegotiation inFebruary 2004 allowed a disbursement of an additional $66 million but the administration soon fellout of compliance with targets. In addition to the failure of Baninter, two other commercial bankswere bailed out in late 2003, resulting in approximately $700 million in losses to the DominicanCentral Bank.

By the end of 2003, inflation reached 42%, unemployment stood at 16.5%, and the peso hadlost more than half of its value. Since August 2004, the peso has more than regained its pre-crisisvalue, inflation has decelerated, and a late recovery helped the economy grow 2% in 2004. Thefiscal bill should help cut the budget deficit, but measures of austerity that will be necessary to meetfiscal 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, electricityproviders, saddled with dollar-denominated debts, are still struggling to provide service to aDominican populace angry at expensive power bills and continued blackouts. Although the NationalSalary Council recently negotiated a 25% salary increase for private sector employees below acertain wage cap, this increase will not compensate for the purchasing power they have had in thepast 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 migrants at seaen 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 evidencedby extensive economic, political, and cultural ties between the two nations. The DominicanRepublic 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 justicesystem, 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 the1990s, the Baninter scandal, the economic crisis in 2003, and the recent rise in crime against foreigntourists have concerned investors and policy-makers in the United States. Although the DominicanRepublic withdrew its contribution of 300 troops to the coalition in Iraq in May 2004, the BushAdministration has expressed appreciation to the Dominican government for its participation. TheUnited States hopes to assist the FernÃ¡ndez Administration in restoring economic prosperity throughfree trade, building solid democratic institutions, fighting crime and corruption, and promotingregional stability.

Foreign Aid. The United States is the largestbilateral donor to the Dominican Republic, followed by Japan, Venezuela, and Germany. ForFY2005, the United States allocated an estimated $29 million to the Dominican Republic, and theAdministration has requested $28 million in assistance for FY2006. These amounts include supportfor a variety of Development Assistance and Child Survival and Health Programs, a Peace Corpsstaff of some 185 volunteers, and a small military aid program. In response to a May 24, 2004, floodthat left 414 dead and more than 1,600 families homeless in the Dominican-Haitian border regionof Jimani, USAID donated a total of $300,000 to various NGOs, such as World Vision and the RedCross.

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. Tocounteract those illicit activities, the Dominican government, acting with U.S. officials, has steppedup drug-related seizures, arrests, and extraditions. The Dominican Republic is also on the StateDepartment's list of major money-laundering countries. In 2002, the Dominican Republic enacteda 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 onan accusatory system aimed at speeding up the processing of criminal cases.

Trade and Investment. The United States is theDominican Republic's main trading partner. The United States exported $4.3 billion in goods to theDominican Republic in 2004, with apparel and clothing (12%) and textiles (13%) among the leadingitems. In the same year, the United States imported $4.5 billion in goods, almost the same value asexports. 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 Republichas benefitted more from its involvement in CBI than any other Caribbean country. It was also oneof the first countries in the region designated to participate in the expanded trade benefits of theCaribbean 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 DominicanRepublic's 51 free trade zones (FTZs), which were the engine for the country's rapid growththroughout the 1990s. By signing DR-CAFTA, the Dominican Republic hopes to improve accessfor its exports to the U.S. market and to encourage new investment in its FTZs. It is also likely toincrease trade with the Central American nations that are party to the agreement: Costa Rica, ElSalvador, Guatemala, Honduras, and Nicaragua.

DR-CAFTA-Related Issues

On March 15, 2004, the United States and the Dominican Republic concluded a free-tradeagreement (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 DominicanRepublic 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 DominicanRepublic is the largest economy in the Caribbean and notes that adding the Dominican Republic toCAFTA "will become the second largest U.S. export market in Latin America." (76) Under the market accessprovisions of the FTA, 80% of U.S. exports of consumer and industrial goods would becomeduty-free immediately, with the remaining tariffs phased out over 10 years. More than half of currentU.S. agricultural exports would become duty-free immediately, and tariffs on most U.S. agriculturalproducts would be phased out over 15 years, with total elimination by 20 years. Sugar exports fromthe Dominican Republic would have a higher U.S. quota, but the increase would be less than forCentral American sugar exports. Most Dominican products already enter duty-free under CBERA.

Corn Syrup Tax and DR-CAFTA. Acontroversial issue in U.S.-Dominican relations in 2004 was the Dominican tax on drinks containinghigh fructose corn syrup (HCFS), a major U.S. product. The HCFS tax appeared to be a measureto protect Dominican sugar producers. Enacted in September 2004 as part of a fiscal bill containingreforms necessary to restart the suspended IMF agreement, the HCFS tax threatened the country'schances of being included in DR-CAFTA. On December 27, 2004, the Dominican Chamber ofDeputies voted to repeal the tax after a unanimous vote against the tax in the Senate. PresidentFernÃ¡ndez signed the measure into law on December 28, 2004. The Dominican government mustnow find a way to appease the country's sugar producers, who employ some 80,000 people (mostlyundocumented Haitian immigrants) without jeopardizing the country's finances. In 2003, there were531 companies in the Dominican Republic's free-trade zones (FTZs) that employed some 173,379people. Employment in FTZs is the Dominican Republic's second largest employer after the tourismindustry. Manufacturers in the FTZs are strongly in favor of DR-CAFTA. (77)

Textiles and Apparel. Under the FTA, textile andapparel products would be traded duty-free and quota-free immediately, if they met the rules oforigin. The Dominican Republic would fall under the CAFTA cumulation provisions, which providebenefits for incorporating Mexican or Canadian inputs, as long as certain conditions are met. Oneof the chief benefits of an FTA to the Dominican Republic would be to ensure U.S. preferentialtreatment for textiles and apparel. This benefit is important, since the Dominican Republic hasreportedly 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 FTZs havelost their jobs since November 2004 as a result of the quota elimination. (78)

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 FTAAor another FTA as specified enters into force between the United States and a CBTPA beneficiarycountry ( P.L. 106-200 , Section 211). Thus, if the FTA between the Dominican Republic and theUnited States enters into force, articles co-produced by Haiti and the Dominican Republic might nolonger qualify under CBTPA. The Administration said it would work with the Congress so that Haiticould continue to be eligible under CBTPA for apparel with inputs from the Dominican Republic.

Environment. The Dominican Republic is partyto a number of multilateral agreements related to the environment, including the Convention onBiological Diversity, the Convention on the International Trade in Endangered Species of Wild Floraand Fauna, the Vienna Convention, and the Kyoto Protocol. Although erosion and deforestationwere major problems during the 1980s, the Dominican government and civil society took steps toexpand public awareness on environmental issues during the 1990s. This process culminated in thepassage of the Environmental Law (64-00) and the establishment of the Secretariat for theEnvironment in late 2000. Despite this progress, a new National Parks bill that was passed in July2004, despite protests from environmental groups, a number of foreign embassies and the dissentingPLD may open up to 20% of the country's protected areas to foreign tourism developers. (79) In addition, observers havenoted that the disastrous floods that resulted in hundreds of deaths in Jimani in June may haveresulted from deforestation in Haiti and the building of towns on dry riverbeds in the DominicanRepublic.

Labor. The Constitution of the DominicanRepublic and its 1992 Labor Code provide for broad worker rights, but there are problems withputting these rights into practice. In a 2004 report on human rights practices, the U.S. Departmentof 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 unionorganizers or using intimidation to prevent union activity, especially in the FTZs. It also explainedthat collective bargaining is legal, but continued that the International Labor Organization consideredthe 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. Onchild labor, the State Department report said "the Labor Code prohibits employment of children lessthan 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 ofchildren 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 internationalorganizations to combat child labor.

Representatives of the AFL-CIO and the Dominican labor group Consejo Nacional de UnidadSindical (CNUS) have testified that there are serious violations of worker rights in the DominicanRepublic. (80) They pointout that the most serious violations are in the export processing zones and that there are problemsalso 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 thatthis oversight would be lost under an FTA. Human Rights Watch reports that women "who becomepregnant are routinely fired from jobs and shut out of employment in the Dominican Republic'sexport-processing sector," and such abuses of workers would be allowed to continue, becauseCAFTA does not prohibit workplace discrimination. (81) Workers' groups also fear the loss of protections under currentU.S. unilateral trade programs such as CBI. (82)

Proponents of DR-CAFTA have responded to these criticisms by noting that the agreementhas provisions providing for the enforcement of domestic labor laws and creating cooperative waysto bring those laws up to international standards. For example, on July 14, 2004, the DominicanRepublic's Ministers of Trade and Labor, along with their counterparts from the other DR-CAFTAcountries, 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 tostrengthen labor law compliance and improve the capacity of labor institutions in the DR-CAFTAcountries.

Intellectual Property. Annually from 1998through 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 ofintellectual property rights. In 2003, the Dominican Republic was moved to the lower-level "WatchList," where it remained in 2004. The USTR notes that although the Dominican Republic hasrelatively strong legislation and an adequate regulatory framework to enforce intellectual propertyrights, "United States industry representatives continue to cite lack of IPR enforcement as a majorconcern." (83) TheInternational Intellectual Property Alliance (IIPA), a coalition of trade associations representing thecopyright industries, estimates that total U.S. industry losses due to piracy in the DominicanRepublic totaled $16.3 million in 2004. (84)

Approval Status. On August 14, 2004, formerPresident MejÃ­a sent DR-CAFTA to the Dominican Congress. President FernÃ¡ndez came out insupport of the DR-CAFTA agreement soon after taking office on August 16, 2004. After a series ofpublic hearings and several months of deliberation, the Senate of the Dominican Republic approvedDR-CAFTA on August 26, 2005, by a vote of 27-2. The Chamber of Deputies followed byapproving the measure on September 6, 2005, by a vote of 118 to 4. The Dominican governmentmust now find a way to appease the country's sugar producers without jeopardizing the country'sfinances.

El Salvador(85)

Political Situation

El Salvador achieved notable stability and economic growth in the 1990s, but its growth hasstagnated for the past five years, making it increasingly dependent on remittances from citizensliving abroad. (86) A1992-negotiated peace accord brought the country's protracted 12-year civil war, which had resultedin 75,000 deaths, to an end. The agreement formally assimilated the former guerrilla forces, theFMLN, 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 wasinaugurated 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 countrysince 1989.

In March 2004, Saca (ARENA), a well known businessmen and sports announcer, won theSalvadoran presidential election handily with 57.7% of the vote. He soundly defeated his nearestrival, Shafick Handal, an aging former guerrilla and Communist party member, of the FMLN whoobtained 35.7% of the vote. The failure of either of the two third party candidates to receive even5% 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 inDR-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 toIraq. President Saca's first round victory was a serious setback and cause for assessment for theFMLN that had gone into the campaign with high expectations based on the party's strongperformance in the March 2003 legislative and municipal elections. In those elections, the FMLNwon more seats in the Legislative Assembly than ARENA, the mayoralty of San Salvador for thethird consecutive time, and 7 of the 14 departmental capitals. Despite Handal's poor electoralshowing, his orthodox faction of the FMLN, led by ex-guerilla Medardo Gonzalez, prevailed overa more moderate candidate (the mayor of Santa Tecla, Oscar Ortiz) in the party's internal leadershipelections on November 7, 2004. Tensions within the party have resulted in mass defections fromthe FMLN and the creation of a new party, the Democratic Revolutionary Front (FDR), which nowclaims 7 seats in the Assembly. (87)

President Saca is maintaining the free market economic policies of his predecessors, but isalso looking for ways to increase tourism and to build up his country as a logistical hub in order toboost employment and economic growth. At his inauguration, boycotted by the FMLN, he calledfor 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 thepassage of the long-stalled 2004 budget, largely by agreeing to spend more funds on health andeducation sectors and to channel a larger share of the funds to the municipalities. The budgetapproval 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 alongthe lines of former President Flores's "Firm Hand" plan passed in July 2003, the package includesreforms stiffening the penalties for gang membership and especially gang leadership. The anti-ganglegislation was approved despite vocal criticisms by the United Nations and other religious andhumanitarian groups that its tough provisions, especially those allowing convictions of minors under12 years of age, violate international human rights standards. (88)

Although some 54% of Salvadorans approve of President Saca's overall job performance, hewill face a number of significant challenges in 2005. In October 2004, the FMLN, withdrew itssupport from the multiparty commission developed by President Saca to discuss important nationalsocial, economic, and political issues. On December 17, 2004, Saca was able to muster enoughsupport in the legislature from small parties to ratify the DR-CAFTA agreement over FMLNobjections. On January 27, 2005, the country's 2005 budget was finally approved. The budget hadstalled in El Salvador's Legislative Assembly amidst FMLN opposition to its provisions for increasedforeign borrowing. Although the FMLN is also likely to oppose any proposals for furtherprivatization, or to change El Salvador's public health or education programs, with only 24 of 84seats in the Assembly, the party does not pose as big an obstacle to President Saca's agenda as it didbefore.

Economic and Social Conditions

In the 1990s, El Salvador adopted a "neo-liberal" economic model, cutting governmentspending, privatizing state-owned enterprises, and adopting the dollar as its national currency. ElSalvador is considered the 12th most open economy in the world. (89) The economy averagedan annual growth rate of 4.5% between 1990 and 2001 but registered only 2% growth the past fewyears. While remittances and reconstruction projects remained steady in 2004, high oil prices anda slump in the maquiladora sector (large assembly plants operating in free-trade zones) kept growthat a modest 1.8% in 2004. Remittances now contribute 15% of El Salvador's annual GDP, and thecountry's economic success has become increasingly dependent on the success of the globaleconomy.

El Salvador's recent economic stagnation may be linked to disruptions that resulted fromHurricane Mitch in 1998, two major earthquakes in 2001, a decline in coffee prices, and theslowdown in the U.S. economy following September 11, 2001. The earthquakes in particular causedthe country significant damage, leaving more than 100,000 people homeless and tens of thousandswithout jobs. Total damage estimates were placed as high as $3 billion. (90) This series of naturaldisasters occurred as El Salvador's coffee industry was recording record losses when internationalcoffee prices fell nearly 70% since 1997. Since the United States is El Salvador's most importanttrading partner, the U.S. recession and sluggish recovery in 2001- 2002 lowered the demand forSalvadoran exports. Although the U.S. economy has recovered since 2003, increasing competitionfor access to the U.S. market from Asian and other producers has limited the demand for Salvadoranexports.

Although El Salvador has fared better than other countries in the hemisphere, whenpopulation increases are taken into account, the country's modest growth, averaging 2% or less forthe past four years, is not enough to produce dramatic improvements in standards of living. With48% of the population living in poverty and more than 25% reportedly feeling they must migrateabroad in search of work, some critics have argued that the average Salvadoran household has notbenefitted from neoliberalism. (91) Dollarization has raised the cost of living while its primarybenefits, lower interest rates and easier access to capital markets, have not resulted in an overalldecline in poverty levels. Between 1989 and 2004, poverty levels actually rose from 47% to51%. (92) With pricesrising, privatization has been vigorously opposed. A nine-month doctors' strike, the longest in thecountry's history, ended in June 2003, when the privatization of the country's social security systemwas halted. Finally, the fruits of stable economic growth have not been equitably distributed as theincome 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 andinequality, combined with 15% unemployment and significant underemployment, have contributedto the related problems of crime and violence that have plagued El Salvador since its civil war. Asmany as 30,000 Salvadoran youth belong to maras (street gangs). (95) In 2004, the SalvadoranNational Police estimated that 2,756 homicides were committed in the country, 60% of which weregang-related. (96) Thesegangs are increasingly involved in human trafficking, drug trafficking, and kidnaping, and pose aserious threat to the country's stability. The Salvadoran government reported that its "Super FirmHand" anti-gang legislation led to a 14% drop in murders in 2004. However, El Salvador recordeda total of 1,715 murders in the first six months of 2005, 36.5% more than during the same period in2004. (97) In February2005, 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, PresidentSaca of El Salvador and President Oscar Berger of Guatemala agreed to set up a joint security forceto patrol gang activity along their common border. Although most of El Salvador's anti-ganginitiatives 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 andless on enacting tough measures that criminalize youth and may violate human rights.

Relations with the United States

Throughout the last two decades, the United States has maintained a strong interest in thepolitical and economic situation in El Salvador. During the 1980s, El Salvador was the largestrecipient of U.S. aid in Latin America as its government struggled against the armed FMLNinsurgency. After the 1992 peace accords were signed, U.S. involvement in El Salvador shiftedtowards helping the government transform the country's struggling economy into a model offree-market economic development. Since that time, successive ARENA governments havemaintained a close relationship with the United States. On December 17, 2003, El Salvador, signedthe 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 firstcountry in Central America to ratify DR-CAFTA. El Salvador has maintained a troop presence inIraq since 2003 despite protests from the FMLN and terrorists threats against the ARENAgovernment from an extremist group claiming to be linked to Al-Qaeda. (98) The United States is inthe process of establishing an International Law Enforcement Academy (ILEA) based in El Salvadorto train police officials from across Latin America.

U.S. Foreign Aid. In the 1990s, total U.S. foreignassistance to El Salvador declined from wartime levels ($570.2 million in 1985), and shifted frommilitary aid towards development assistance and disaster relief. Military aid to El Salvador reacheda 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, Congressappropriated an estimated $40.2 million for El Salvador, and the Administration has requested $42.5million in assistance for FY2006. These amounts support a wide variety of Development Assistanceand Child Survival and Health Programs, as well as 169 Peace Corps volunteers.

Counter-Narcotics Issues. Not a major producerof 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. In2004, 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 deliverof 71 metric tons of narcotics to the rest of the region. (99)

Support for U.S. Military Operations in Iraq. ElSalvador immediately supported the United States following the September 2001 terrorist attacksand sent a first contingent of 360 soldiers to Iraq in August 2003 and a replacement contingent of380 soldiers in February 2004. While all other Spanish-speaking countries have withdrawn theirtroops, a third contingent of 380 Salvadoran troops departed for Iraq on August 19, 2004. Despitethe fact that 60% of Salvadorans surveyed oppose their country's involvement in Iraq, President Sacasent a fourth contingent of troops to Iraq on February 10, 2005. (100)

Migration Issues. The United States respondedto the recent natural disasters in El Salvador by granting Temporary Protected Status (TPS) to anestimated 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 theUnited States until September 9, 2006. TPS is an important bilateral issue for El Salvador, whosemigrants living in the United States sent home roughly $2.5 billion in remittances in 2004. Theexodus of large numbers of poor migrants to the United States has also eased pressure on theSalvadoran 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 economybased on the principles of privatization, foreign investment, and free trade. Few sectors remainunder government control, the U.S. dollar is the country's legal tender, and tariffs on foreign goodsaverage just 7.4%.

The United States is El Salvador's main trading partner, purchasing 60% of its exports andsupplying 50% of its imports. More than 300 U.S. companies currently operate in El Salvador, manyof which are based in the country's 17 free trade zones. The composition of U.S. imports from ElSalvador 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 CentralAmerica, got duty free access to the U.S. market on approximately three-quarters of its products asa result of the Caribbean Basin Trade Partnership Act or CBTPA ( P.L. 106-200 , Title II), whichexpires 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. By2002, however, exports jumped to $1.98 billion, with apparel products accounting for 79% of thattotal.

DR-CAFTA would make permanent and reciprocal the duty- and quota-free treatment statusprovided 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 toCentral American apparel made with U.S. materials, by extending that status to garments made frommaterials 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 regionfrom imported fabric.

By vigorously supporting DR-CAFTA, El Salvador hopes to promote greater U.S. investmentinto developing its local capacity to produce paper/paperboard, plastic materials/resin, and processedfoods. Because of its interest in securing U.S. investment, some observers maintain that El Salvadorfolded to pressure from the United States when it withdrew from the G-20 group of developingcountries at the World Trade Organization's meeting in Cancun in September 2003. These reportswere denied, however, by El Salvador's Economy Minister, Miguel Lacayo, who stated, "El Salvadorresponds 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 andEuropean 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 Canadaand four other countries in the region. As noted above, El Salvador is one of the leading proponentsof DR-CAFTA. On December 17, 2004, El Salvador became the first country in the region to ratifythe 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 globaleconomy, and that those farmers may be unable to compete against highly subsidized producers inthe United States. Others note that given the high level of liberalization already present in thecountry, El Salvador stands the least to gain from DR-CAFTA of any country in CentralAmerica. (103) Anumber of sensitive issues arose in the negotiations, which are summarized below.

Apparel. The bulk of exports from El Salvadorto the United States are apparel or related goods. In 2004, apparel and related goods comprised some85% of El Salvador's $2.1 million worth of exports to the United States. The government of ElSalvador reportedly fears that although it would still benefit from the CBTPA and its proximity tothe 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 thatsurrounded 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 officialshope that DR-CAFTA, combined with favorable external circumstances, can help achieve some ofthe lofty targets previously predicted for CBTPA and protect the apparel sector from Chinesecompetition. El Salvador also seeks to develop its textile industry beyond simple cutting and sewingoperations into firms capable of producing finished goods.

Environment. In May 1997, the government ofEl Salvador passed an Environmental Law to complement its existing domestic environmentalprovisions protecting the country's remaining flora and fauna. El Salvador is also a signatory ofmore than 51 international environmental agreements, including the Convention on BiologicalDiversity, the Convention on the International Trade in Endangered Species of Wild Flora andFauna, and the Kyoto Protocol. Despite these conservation measures, some observers argue that ElSalvador has the worst environmental situation in Central America. (105) According to thisreport, El Salvador is the second most deforested country in Latin America, 90% of its river wateris contaminated, soil erosion is pervasive, and air pollution is increasing. A lack of forest cover hasincreased El Salvador's vulnerability to natural disasters, evidenced by the disastrous effects ofHurricane Mitch and the earthquakes of 2001. El Salvador's environmental problems areexacerbated 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 ownenvironmental 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. OnFebruary 18, 2005, El Salvador, along with the other signatories of DR-CAFTA, signed anAgreement on Environmental Cooperation and an Understanding Regarding the Establishment ofa Secretariat for Environmental matters to enforce the environmental provisions of the agreement.

Labor. El Salvador has ratified the InternationalLabor Association's (ILO) conventions against discrimination, forced labor and child labor. It hasnot, however, signed the ILO conventions protecting trade union rights. As a result, Human RightsWatch 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) anda corrupt judicial system. (106) In June 2001, the ILO Committee on Freedom of Associationnoted that the country's existing labor code restricts freedom of association. (107) The labor coderequires burdensome union registration procedures, prohibits union formation and strikes amongpublic sector employees, and does not require the reinstatement of workers unfairly dismissed. (108) Unions are weakest inthe Export Processing Zones (EPZs), as factories have no collective bargaining agreements in placewith the 18 unions active in that sector. The State Department's Country Report on Human RightsPractices covering 2004 asserts that "workers in a number of plants reported verbal abuse, sexualharassment, and, in several cases, physical abuse," and that the Ministry of Labor, which isresponsible 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 abusesas its weak provisions merely require signatories to enforce their existing labor laws, rather thanreforming those laws to meet international standards. They further assert that the penalties forcountries not enforcing their labor laws are relatively weak. In December 2004, the InternationalLabor Rights Fund (ILRF) submitted a petition to the Office of the USTR questioning El Salvador'seligibility for trade preferences under the Generalized System of Preferences (GSP) given its weaklabor laws. (109)

On November 5, 2004, Gilberto Soto, a Salvadoran-born U.S. union leader was murderedoutside his mother's home in El Salvador. Mr. Soto was scheduled to meet with port workers in ElSalvador the following week. On December 4, 2004, the Salvadoran government arrested Soto'smother-in-law and two accomplices in connection with the murder. Some local and internationalhuman rights organizations, as well as the AFL-CIO, have expressed concern that the governmentof El Salvador has failed to investigate the possibility that Mr. Soto's murder was connected to hisunion activities. On December 27, 2004 the Salvadoran human rights prosecutor's office complainedof irregularities in the government's investigation of the case including the accused's accusations thatthey were "subjected to illegal interrogations and physical and psychological torture." (110) Labor and humanrights advocates have noted that this case may have serious repercussions for workers' human rightsin El Salvador. (111)

Despite these obstacles, there have been some positive successes for the Salvadoranworkforce 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 sectorwritten in August 2000 by the MOL, the Salvadoran government acknowledged the problems in themaquila sector and stepped up its monitoring efforts. A second positive step for the Salvadoran laborforce occurred when El Salvador was selected as one of the first countries to get Department ofLabor 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 otherDR-CAFTA countries, formed a Working Group that, with support from the Inter-AmericanDevelopment 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 WorkingGroup to strengthen labor law compliance and improve the capacity of labor institutions in theDR-CAFTA countries.

Intellectual Property Rights. El Salvador is partyto the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) and a bilateralintellectual property agreement with the United States. The government of El Salvador passed anIntellectual Property and Promotion and Protection (IPR) Law in 1993 and was subsequentlyremoved 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 ElSalvador into better compliance with TRIPS. The Attorney General's office is charged withenforcement of these laws, conducting periodic raids against manufacturers and distributors ofpirated 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 ElSalvador incurred trade losses of $4.0 billion in 2003 due to software privacy and $1.5 millionbecause of music piracy. (112) These substantial losses continue to occur due to a lack ofexpeditious court proceedings and tough punishments for pirates in either the criminal or civil courtsin El Salvador. These violations provide a significant barrier impeding increased U.S. trade andinvestment in El Salvador.

Approval Status. On December 17, 2004, theLegislative 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 theagreement. 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 signedthe bill ratifying DR-CAFTA on January 25, 2005.

Guatemala(114)

Political Background

Since the 1980s, Guatemala has been consolidating its transition from a centuries-longtradition of mostly autocratic rule toward representative government. A democratic constitution wasadopted in 1985, and a democratically-elected civilian government inaugurated in 1986. Eighteenyears later, democratic institutions remain fragile. Of all the conflicts that ravaged Central Americain the last decades of the 20th century, Guatemala's conflict lasted the longest. Guatemala ended its36-year civil war in 1996, with the signing of the Peace Accords between the government andGuatemalan National Revolutionary Unity (Unidad Revolucionaria Nacional Guatemalteca, URNG),a group created in 1982 from the merger of four left-wing guerrilla groups. Some of these groupswere 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 historicalgrievances 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 profoundpolitical, economic, and social change to address the conflict's root causes. Embracing 10 otheragreements signed from 1994 to 1996, the accords called for a one-third reduction in the size andbudget of the military; major investments in health, education, and other basic services to reach therural and indigenous poor; and the full participation of the indigenous population in local andnational decision making. They required fundamental changes in tax collection and governmentexpenditures, and improved financial management. The accords also outlined a profoundrestructuring of state institutions, especially of the military, police, and judicial system, with the goalof 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 thegovernment, the United Nations Verification Mission in Guatemala (MINUGUA) states that civilsociety 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 NationalAlliance, won free and fair elections with 54% of the vote in November 2003. The new presidentwas inaugurated on January 14, 2004, for a four-year term. Since taking office, Berger has launchedmajor initiatives to fight corruption, reduce and modernize the military, enact fiscal reforms, andimplement the Peace Accords. He has pursued corruption charges against his predecessor, AlfonsoPortillo of the Guatemalan Republican Front (FRG), whose administration was widely criticized forinadequate implementation of the peace process, increased human rights violations, increases in drugtrafficking 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 programsrelated to the peace process.

Despite his decisive loss in the first round presidential elections, retired General Efrain RiosMontt 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 asgenocide of the Mayan population. Berger's top defense official, General Otto Perez, resigned inMay 2004 to protest negotiations between Berger officials and the FRG, of which Rios Montt is stillleader. Perez charged that Berger offered to protect Rios Montt from prosecution in exchange forhis party's support of fiscal reform legislation (Associated Press, 5/24/04). Berger has beennoncommittal 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 discriminationin a case involving verbal abuse of indigenous leader Rigoberta Menchu.

Socio-Economic Background(115)

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 significantethnic 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 moreunequal countries of the world, with the top 20% of the population accounting for 54% of totalconsumption. Indigenous people, constituting about 50% of the population, account for less than25% of total income and consumption.

According to the World Bank's report, past free market policies have resulted in the exclusionand impoverishment of the indigenous population. Massive land expropriations, forced labor, andexclusion of the indigenous from the educational system all served to develop coffee as Guatemala'sprimary 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 socialindicators, a situation that continues into the present.

Guatemala's per capita GDP is $3,630, in the mid-range internationally. Its total GDP, $20.5billion, is the largest in Central America. Yet the World Bank says data suggest that poverty is higherin Guatemala than in other Central American countries. Estimates of the portion of Guatemala'spopulation living in poverty vary: the U.S. State Department reports that 80% of Guatemalans livein poverty, with two-thirds of that number living in extreme poverty. The World Bank reports that54% 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 extremepoverty. Poverty is significantly higher among indigenous people, 76% of whom are poor, incontrast to 41% of non-indigenous people.

Guatemala's GDP for 2003 was $24 billion. GDP growth rate was 3.3% in 2000, but lowworldwide 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 exportssuch 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 cutflowers, have grown dramatically. Tourism also has grown, though continued growth may dependon the government's ability to address security issues. Problems limiting growth include illiteracyand low levels of education, high crime rates, and an inadequate capital market.

Guatemala's social indicators continue to be among the worst in the hemisphere. Itsmalnutrition rates are among the worst in the world. Its infant mortality rate is 43 per 1,000 livebirths, and its under-5 mortality rate is 58 per 1,000 children. (117) Guatemala's illiteracyrate is extremely high: at 31%, only Nicaragua and Haiti have worse levels in the hemisphere. Theaverage 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 ofmalnutrition, 44% of children under five years of age have stunted growth. Drought and low coffeeprices triggered a rural economic crisis beginning in 2001, which has caused severe malnutritionamong the rural poor.

Implementation of the elements of the Peace Accords relating to improving the livingconditions and the rights of indigenous people and women are far behind schedule. Access toeducation, according to the Inter-American Commission on Human Rights, is "still far frombecoming 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 andwomen continue to face limited opportunities and discrimination in the labor market. According tothe 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 povertyreduction." 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 coverageby basic utility services, wage discrimination, and discriminatory treatment by public officials andother service providers.

International donors and others have criticized Guatemala for not increasing the tax base tothe 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 meetingof the Consultative Group for Guatemala, donors told the Guatemalan government it needed toincrease its tax revenue, decrease spending on the armed forces, and increase social spending asmandated in the accords. The Consultative Group is made up of over 20 donor countries andinternational organizations, including the U.S., Canadian, and Japanese governments, the WorldBank, and the IDB. In its report prepared for that meeting, MINUGUA said the organized privatesector shares the responsibility for inadequate social budgets because it systematically opposesefforts to increase taxes, thereby limiting funding available for key social ministries and institutionsof justice.

The Berger Administration has taken steps toward implementing the goals set forth by thePeace 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 thePeace Agreements. Despite the government's commitment to increase tax revenues to 12 %of GDPby 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, includestrengthening democratic institutions and implementation of the Peace Accords; encouraging respectfor human rights and the rule of law; supporting broad-based economic growth, sustainabledevelopment, and mutually beneficial trade relations; combating drug trafficking; and supportingCentral American integration through resolution of territorial disputes. (120) Relations betweenGuatemala and the United States have traditionally been close, but strained at times by human rightsand civil-military issues. The Bush Administration repeatedly expressed concerns over the failureof the Portillo Administration to implement the Peace Accords, a perceived high level of governmentcorruption, and lack of cooperation in counter-narcotics efforts. (121) The BushAdministration says that the change of government in Guatemala "affords an important opportunityto reverse negative trends in the country. Donor support will remain essential, however, to keepGuatemala on the positive democratic path and avoid any fall towards a failing state so near to U.S.borders." (122)

U.S. Assistance. From 1997 through 2003, U.S.assistance to Guatemala centered on support of the Peace Accords, providing almost $400 millionto support their implementation. There is no longer a project in direct support of the Implementationof the Peace Accords as of FY2004. Some activities, such as the development of justice centers, andefforts to support increased transparency of Guatemalan government institutions, and to reducecorruption, will continue in other programs. U.S. assistance to Guatemala has declined by over athird in the past four years, from almost $60 million in FY2002, to just under $40 million requestedfor FY2006. The estimate for FY2005 includes $11.6 million in Child Survival and HealthPrograms 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 $9.9million in Child Survival and Health Programs funds; $9.7 million in development assistance, $4million in Economic Support funds, and $16.3 million in P.L. 480 Title II food assistance programs. The Administration has provided $5 million following the devastation of the hurricane thatdemolished entire towns in October 2005. (123)

From the inauguration of a democratically-elected government in 1986 to 1990, Congressplaced conditions related to democratization and improved respect for human rights on militaryassistance to Guatemala. It also prohibited the purchase of weapons with U.S. funds. In 1990, theGeorge H. W. Bush Administration suspended military aid because of concerns over human rightsabuses 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, andof civilian personnel in defense matters, and requires notification to the Appropriations Committeesprior to allocation. For FY2006, the House-passed version of the Foreign Operations appropriationsbill ( H.R. 3057 , H.Rept. 109-152 ) would remove restrictions on IMET but would retainthe prohibition of FMF. In recent years Congress has also asked federal agencies to expedite thedeclassification and release of information related to the murder of U.S. citizens in Guatemala.

Human Rights. The first of the Peace Accordswas the Comprehensive Agreement on Human Rights, which was signed and became effective in1994. The Peace Accords established a Historical Clarification Commission, commonly referredto as The Truth Commission, to investigate human rights violations and acts of violence thatoccurred during the armed conflict from 1960 to 1996. In its 1999 report, "Guatemala: Memory ofSilence," the Commission reported that more than 200,000 people died or disappeared because ofthe armed conflict, and that over 80% of the victims were indigenous Mayans. The Commissionconcluded that the systematic direction of criminal acts and human rights violations at the civilianMayan population amounted to genocide. The Commission attributed responsibility for 93% of theviolations to agents of the state, principally members of the army, and stated: "The majority ofhuman rights violations occurred with the knowledge or by order of the highest authorities of theState." The Commission concluded that, although much of the state's actions were taken in the nameof counterinsurgency efforts, "[t]he magnitude of the State's repressive response" was "totallydisproportionate to the military force of the insurgency...," and that the vast majority of the state'svictims were not guerrilla combatants, but civilians. (124)

Regarding respect for human rights, Guatemala has made enormous strides, but significantproblems remain. The armed conflict has definitively ended, and the state policy of human rightsabuses 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, andGuatemala must still overcome a deeply embedded legacy of racism and social inequality. The U.N.,the OAS, and the United States have all expressed concern that human rights violations haveincreased over the past several years, and that previous Guatemalan governments have takeninsufficient steps to curb them or to implement the Peace Accords. President Berger has madeimplementing the Peace Accords a top priority. He has slashed the size of the military and its budgetby more than that required by the Peace Accords and is modernizing defense policy. He has alsoinitiated programs to improve the rights of women and of the indigenous population.

The previous Guatemalan administration agreed to the establishment of a U.N. HighCommissioner for Human Rights in December 2003, but it has still not been put in place. TheBerger Administration is working to resolve legal obstacles to the establishment of the UNCommission for the Investigation of Illegal Groups and Clandestine Security Organizations(CICIACS), whose mission will be to investigate and prosecute clandestine groups, through whichmany military officers allegedly engage in human rights violations, drug trafficking, and organizedcrime. CICIACS was approved by the Portillo Administration but has yet to be approved by theGuatemalan Congress. The UN Verification Mission in Guatemala (MINUGUA) closed inNovember 2004, after verifying compliance with the Peace Accords for ten years. In September2004, UN Secretary General Kofi Annan said that Guatemala's political process had matured to thepoint 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 recentyears. President Berger has called the lack of security the most important problem facing hisadministration. He initiated a "national crusade against violence" in July 2004. (125) Some have criticizedthe effort for removing security forces from one area to increase protection in others. Following themurder of a judge on April 25, 2005, the Guatemalan Supreme Court adopted a plan to protect 25judges who have received death threats. In recent months, suspected gang members are being killedby 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-transitcountry 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 UnitedStates passes through Guatemala, the preferred country in Central America for the storage andconsolidation of northward bound cocaine. In January 2003, President Bush designated Guatemalaas one of three countries in the world that "failed demonstrably" during the previous year to fulfillits international counter narcotics obligations. He granted a national interest waiver to allowcontinued U.S. assistance to be provided to Guatemala, however.Eight months later, in September2003, the President determined that Guatemala had made efforts to improve its counter narcoticspractices, and did not include it in the "failed demonstrably" list. Among the steps taken werepassage by the Guatemalan Congress in August 2003 of a measure allowing U.S. security forces toenter Guatemalan airspace and waters during joint counter narcotics operations or when in pursuitof suspected drug traffickers.

In July 2004, the Financial Action Task Force, an intergovernmental organization dedicatedto enhancing international cooperation in combating money-laundering, removed Guatemala fromits list of non-cooperative countries . (127) Guatemala had been on the list of nine countries -- the onlyone in the Americas, during the Portillo Administration. (128) The Task Force welcomed progress made by Guatemala inenacting and implementing anti-money laundering legislation. In its March 2005 InternationalNarcotics Control Strategy Report, the Bush Administration reported that "In spite of substantialcounternarcotics efforts by the Government of Guatemala in 2004, large shipments of cocainecontinue 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 program.

U.S. Trade and Investment. Guatemala and theUnited States signed a framework agreement on trade and investment in 1991, through which theyestablished a bilateral Trade and Investment Council. The signing of the Guatemalan Peace Accordsin 1996 removed a major obstacle to foreign investment there. Guatemala was certified to receiveexport 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'sprimary 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 importcommodities 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 deficitwith 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 byalmost half, to $477 million, in 2001; it is concentrated in the manufacturing and financesectors. (130) MajorU.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, andXerox. (131) PresidentBerger has made attracting domestic and foreign investment a priority, believing it will revive theeconomy and create jobs.

DR-CAFTA-Related Issues

The Guatemalan government supports the DR-CAFTA agreement as a further step towardeconomic 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 Chileto the group are underway. Along with El Salvador and Honduras, Guatemala implemented a freetrade agreement with Mexico in 2001. Guatemala signed a customs agreement with El Salvador inMarch 2004 as part of a strategy to improve trade within the region.

Some observers believe that Guatemalan groups with concerns about possible negativeoutcomes of DR-CAFTA, such as small farmers, were limited in their opposition because of thesecretive nature of the CAFTA negotiations. (132)

Despite a foreign investment law passed in 1998 to facilitate foreign investment, under thePortillo administration, "time-consuming administrative procedures, arbitrary bureaucraticimpediments, corruption, and a sometimes anti-business attitude...[were] a reality," according to aU.S. government report. (133) A World Bank report listed Guatemala as one of ninecountries that regulate businesses the most heavily. The report concluded that those countries alsohad the weakest systems for enforcing the laws and were therefore susceptible to bribery andcorruption as well. (134)

Agriculture. Those who support DR-CAFTAargue that the agreement will help farmers, especially those who grow non-traditional crops notgrown in the United States. They also argue that it will help slow migration to the United States ofCentral American farm laborers seeking work.

Others are not so sure. Central American governments wanted to negotiate the eliminationof U.S. farm subsidies as part of CAFTA talks. They feared that small subsistence farmers will beunable to compete against subsidized, and therefore lower-priced, U.S. commodities. Theyacquiesced 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, aGuatemalan, says that Guatemalan farmers "are afraid [CAFTA] is going to be like NAFTA, whichmassacred the campesinos in Mexico." Whether or not NAFTA has hurt subsistence farmers isdisputed, however. A recently-released World Bank report says that NAFTA "has probably had littleimpact 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 tocompetition from U.S. imports will have a negative impact on Central American food security andemployment rates. The Central American governments agreed to include all of these staple foodcrops in the concluded agreement, however. The agreement establishes quotas on sensitiveagricultural commodities imported from the U.S. that will increase over time; by the year 2020, mostquotas and tariffs will be eliminated. White corn, however, will receive some protection inperpetuity. Although a quota on U.S. white corn imports will increase annually, the high tariffs onwhite 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, theU.S. allows a quota of 126,400 metric tons of sugar to enter duty free from the five Central Americancountries 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. Asconcluded, 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 exportedto the United States. The quota will increase annually in perpetuity, but the tariff on any shipmentsover that quota will remain prohibitively high. (136)

Apparel. There are 13 free trade zones operatingin Guatemala, with 7 more authorized to be created. The most frequent beneficiaries of Guatemala'sfree trade/maquiladora laws are textile assembly operations. In 2000 the Caribbean Basin Initiativewas enhanced to give more benefits to the textile industry. Whereas previously garments could onlybe sewn in Guatemala in order to be shipped back into the United States tariff free, since theenhancement, textiles can be cut, sewn, and finished in Guatemala and still receive those tariffbenefits. These benefits would become permanent under DR-CAFTA. Some U.S. producers haveobjected to DR-CAFTA for this reason, saying it will harm their businesses.

Corruption. (137) In recent years, theU.S. government, international organizations, and independent watchdog organizations criticizedGuatemala for extensive corruption, which allegedly increased under the Portillo Administration.The Bush Administration called corruption "the number-one obstacle to increasing the effectivenessof all USG[ovt.] programs in Guatemala." Transparency International said Guatemala was perceivedas 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-autonomousSuperintendency of Tax Administration was established in 1999 to improve customs operations, butunder the previous administration corruption apparently increased instead. In 2001, Guatemalaratified the Inter-American Convention against Corruption.

President Berger has made improving governance and attacking corruption priorities. Hisadministration introduced a code of ethics for cabinet members and is actively investigatingcorruption under the previous FRG government. The former Vice President, Finance Minister,Comptroller General, and Superintendent of Tax Administration are in jail awaiting trial. FormerPresident Portillo, also under investigation for embezzlement, fled the country in February 2004, theday after his immunity from prosecution was lifted. Partly in response to ongoing investigations, 11FRG 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 makingprocurement processes publicly available online.

Environment. (138) Guatemala is party to57 multilateral, regional, and bilateral agreements related to the environment. It is the only CentralAmerican country not to have ratified the Cartagena Protocol on Biosafety, and one of two not tohave signed the Rotterdam Convention on Prior Informed Consent for Certain Hazardous Chemicalsand Pesticides in International Trade. It is part of the Central American Commission onEnvironment and Development, established in1989 to enhance the development of regionalenvironmental 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 dealingwith the major issues of water, forests, solid wastes, biodiversity, etc. that many of the other [CentralAmerican] countries possess." A general Law for Environmental Protection and Improvement waspassed in 1986, and a forestry law was passed in 1996. There is a Ministry of Environment andNatural Resources, and an Environmental Attorney within the Human Rights Commission to ensurecompliance with constitutional articles related to the environment. As the U.S. Trade Representativereport noted, however, the Central American nations' "ability to effectively implement and enforceenvironmental 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 past10 years has averaged almost 2% annually. Guatemala's tourism sector now contributes more to theeconomy than the coffee sector. While Guatemala's natural environment is an important aspect oftourism, 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, landdegradation, loss of wildlife habitats and species, and increased demand for limited supplies of freshwater (i.e. for hotels and swimming pools). In October 2005, flooding from a hurricane causedlandslides that destroyed entire Mayan villages and washed out roads near the tourist area of LakeAtitlan.

Labor. (139) Legally, Guatemalans'right to freedom of association and to form and join trade unions are protected by the Constitutionand 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 sectorsof the economy hesitate to exercise their right of association for fear of reprisals by employers, themost 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 violentrepression of labor activists during the internal conflict, the climate of impunity, and the deep-seatedhostility of the business establishment toward independent and self-governing labor associationsconstrained the exercise of worker rights." The Guatemalan legislature passed two sets of reformsto 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 therequirement that one-half plus one of the workers in an industry must join a union before it can belegally recognized, is seen by labor activists as a practically insurmountable obstacle to theformation of new industrial unions.

Critics argue that the labor provisions under DR-CAFTA are less stringent than thosecurrently in place under U.S. preferential trade arrangements. Under the Caribbean Basin Initiativeand the General Agreement on Preferences, the United States may withdraw trade benefits if CentralAmerican 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 theirexisting, flawed laws, but not to reform laws to meet international labor standards.

Advocates of DR-CAFTA argue that accompanying technical cooperation programs will helpimprove the enforcement of labor laws in the region. In October 2003, the U.S. TradeRepresentative announced a $6.75 million grant to educate the public in CAFTA countries aboutlabor laws and to ensure that workers' rights are respected, saying that the four-year grant is designedto complement CAFTA. (140) While acknowledging the importance of such technicalassistance, the AFL-CIO maintains that it is insufficient to "change deep-seated indifference andhostility towards workers' rights."

Labor rights groups filed a petition in December 2004 with the USTR to review Guatemala'seligibility under the Generalized System of Preferences for violation of internationally recognizedworkers' rights. The groups argue that the review process initiated in 2003 has "failed to bring aboutmeaningful progress" in the areas under review: "judicial impunity with regard to threats andviolence against trade unionists in Guatemala, the systematic failure of the government to enforceexisting labor laws, and the need for further reforms to the country's labor laws in order to bring itinto full compliance with international standards." (141)

Although Guatemala's constitution prohibits children under 14 years of age from workingwithout written permission from the Ministry of Labor, MINUGUA reported in 2000 that just overa 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 tocoordinate the implementation of the National Plan to Eradicate Child Labor.

Intellectual Property. Piracy of copyrightedmaterial, especially for business software applications, is widespread in Guatemala. Guatemala hastaken steps to address the piracy issue. It is a member of the World Intellectual PropertyOrganization, and recently ratified two of the organization's agreements. In 2000, the Guatemalanlegislature passed laws to increase the protection of intellectual property rights, including providingpatent protection for pharmaceutical and agricultural products for the first time. In 2001, thegovernment appointed a special prosecutor responsible for pursuing intellectual property rightsviolations. In 2002, Guatemala passed intellectual property rights legislation. The U.S. TradeRepresentative called the laws "greatly improved," but noted that a month after its passage furtherlegislation suspended the processing of pharmaceutical and chemical patents until 2005 andotherwise weakened the protection of intellectual property rights. (142) According to the U.S.State Department's Country Commercial Guide, enforcement of intellectual property rights andprosecution of their violation remains inadequate in Guatemala.

In December 2004, the Guatemalan Congress repealed a law that provided for test dataprotection for pharmaceutical products and passed a new law that limits the protection foreigncompanies get for pharmaceutical test data and allows other companies to use that data to attainapproval for, and to produce, generic drugs. Both UNICEF and the Pan American HealthOrganization publicly supported the earlier law's repeal. In early January 2005, the BushAdministration said the new law violated the terms of DR-CAFTA and would cause the process tostall. On January 26, 2005, 11 Democratic Members of the U.S. Congress opposed Administrationefforts to force Guatemala to adopt test data protection provisions, arguing in a letter that suchprovisions undermine the "Doha Declaration" of the Trade Promotion Authority Act of 2002, whichwas meant "to ensure that trade rules on intellectual property do not interfere with the ability ofdeveloping countries to take 'measures to protect public health ... and to promote access to medicinesfor all.'" (143) Theletter went on to say that the data protection provisions could be "especially dangerous" forGuatemala, where over 1% of Guatemala's population is infected with HIV/AIDS. The internationalmedical aid agency Doctors Without Borders also believes that the new intellectual propertyregulations will have a negative impact on local access to HIV/AIDS and other essential medicinesand 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 DohaDeclaration, although the Guatemalan government would have to declare a public health emergencyin order to waive the data protection requirement. President Berger promised to make Guatemalacompliant with its DR-CAFTA obligations quickly. The Guatemalan Congress approved legislationto protect confidential test data for agro-chemicals and pharmaceuticals on March 9, opening the wayfor DR-CAFTA to be voted on.

Approval Status. Guatemala became the thirdnation to ratify DR-CAFTA on March 10. The voting was delayed earlier in the week by largeprotests calling for a referendum on the agreement that prevented legislators from reaching theirchambers. The unicameral Congress has 158 members. A simple majority was needed to pass theDR-CAFTA; it passed 126 in favor and 12 against. The Guatemalan Congress held a series ofseminars to educate its members about DR-CAFTA related issues. Public sessions for civil societywere also held. Farmers, union members, students, and social and indigenous groups are amongthose 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 maintain itfavors capital over labor. (145) In response to the ongoing protests, Berger promised a seriesof measures to offset any negative impact from CAFTA. One of these measures is a concessions billto regulate private sector investment in infrastructure development and social service delivery. Thislegislation has in turn drawn protests from critics who worry the legislation could lead to privatizingpublic services such as healthcare and education. Berger has invited the opposition to meet with himto air counter proposals.

Honduras(146)

Political Situation

Honduras has enjoyed 23 years of uninterrupted civilian democratic rule since the militaryrelinquished power in 1982 after free and fair elections. In the November 2001 presidentialelections, National Party candidate Ricardo Maduro defeated his Liberal Party rival Rafael PinedaPonce 52-44%, a wider margin than some had anticipated, although neither of the two major partiesgained a majority in the 128-member unicameral Congress. For most of this century, the Liberal andNational parties have been the two dominant political parties. Both are considered center-rightparties and there appear to be few major ideological differences between the two. In the electoralcampaign, Maduro -- a Stanford University-educated economist and businessman -- ran on a stronganti-crime platform, which appealed to many Hondurans concerned about the dramatic increase ingang violence in the country over the past several years. Maduro's own son was kidnaped andmurdered in 1997.

When he was inaugurated to a four-year term in January 2002, Maduro became the 6th electedpresident since the country's return to civilian rule. President Maduro has faced enormous challengesin the areas of crime, human rights, and improving overall economic and living conditions in oneof the hemisphere's poorest countries. The next presidential elections are scheduled for November27, 2005, but the campaign has been underway for some time. Political parties held primaries onFebruary 20, 2005, with the National Party nominating Porfirio Lobo, the current head of theHonduran Congress, and the Liberal Party nominating Manuel Zelaya, a rancher and former headof the Honduran Social Investment Fund. President Maduro will not be a candidate since under theHonduran 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 PresidentMaduro. Kidnaping and murder had become common in major cities, particularly in the northernpart of the country. Youth gangs known as maras (147) terrorized many urban residents, while correspondingvigilantism increased to combat the crime, with extrajudicial killings increasing. Honduras, alongwith neighboring El Salvador and Guatemala, has become fertile ground for gangs, which have beenfueled by poverty, unemployment, leftover weapons from the 1980s, and the U.S. deportation ofcriminals to the region. (148) President Maduro, who campaigned on a zero-toleranceplatform, increased the number of police officers and cracked down on delinquency. The Madurogovernment signed legislation in July 2003 making maras illegal and making membership in thegangs punishable with 12 years in prison. While the crackdown has reduced crime significantly (forexample, an 80% decline in kidnapping and a 60% decline in youth gang violence (149) ) and is popular withthe public, some human rights groups have expressed concerns about abuses and the effect of thecrackdown on civil liberties. There also have been concerns that poor conditions in alreadyovercrowded prisons will be exacerbated. In May 2004, 104 inmates -- predominately gangmembers -- 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 shockedthe Honduran nation. The Mara Salvatrucha (MS-13) gang was reportedly responsible for thekillings and a number of arrests have been made. Honduran officials maintain that the massacre wasa gang response to the government's zero-tolerance policy. In late July 2005, a U.S. DrugEnforcement Administration agent was killed by two youth gang members in a bungled robbery inTegucigalpa.

Security concerns appear to be dominating the 2005 presidential election campaign, withPorfirio Lobo of the National Party calling for tougher action against youth gangs by reintroducingthe death penalty (which was abolished in 1957) and increasing the prison sentence of juveniledelinquents. Manuel Zelaya of the Liberal Party is opposed to reinstating the death penalty andemphasizes that a more comprehensive approach is needed, taking into account the social conditionsthat contribute to crime.

The Maduro government has reportedly advocated the concept of a Central Americanregional battalion that would help respond to such threats as natural disasters, gangs, and thetrafficking of drugs and migrants. Some Central American nations, however, have questioned themission of such a force, and some observers have raised concerns about militarizing law enforcementfunctions. (150)

Economic Conditions

Another significant challenge for President Maduro has been his ability to improve theoverall state of the Honduran economy and living conditions. Traditional agriculture exports ofcoffee and bananas are still important for the Honduran economy, but nontraditional sectors, suchas shrimp farming and the maquiladora, or export-processing industry, have grown significantly overthe past decade. With a per capita income of $970 (2003, World Bank estimate), Honduras remainsone 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 deteriorationof water and forest resources, according to the U.S. Agency for International Development. (151) Honduras also has asignificant HIV/AIDS crisis, with an adult infection rate of 1.8%. (152) The Garifunacommunity (descendants of freed black slaves and indigenous Caribs from St. Vincent) concentratedin northern coastal areas has been especially hard hit by the epidemic.

Honduras was devastated by Hurricane Mitch in October 1998, which killed more than 5,000people 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 InternationalMonetary Fund (IMF) in 1999 that was extended through 2002. The agreement imposed fiscal andmonetary conditions requiring Honduras to maintain firm macroeconomic discipline and to developa comprehensive poverty reduction strategy. In February 2004, Honduras signed a three-year PRGFagreement with the IMF that, as of April 2005, made Honduras eligible for about $1 billion in debtrelief under the IMF and World Bank's Highly Indebted Poor Countries (HIPC) Initiative. The IMFacknowledged 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 wayinto Congress. The government has faced the dilemma of balancing the IMF's calls for reducingpublic expenditures and the public's demands for increased spending. The IMF, in its most recentreview of Honduras' PRGF agreement, maintained that the government's economic program iscontinuing to deliver results and emphasized the importance of Honduras maintaining consensus onthe program through the November 2005 election and transition to a new government in order toprotect higher growth gains and social progress. (153)

Relations with the United States

The United States has had close relations with Honduras over the years, characterized bysignificant foreign assistance, an important trade relationship, a military presence in the country, andcooperation on a range of transnational issues, including counternarcotics efforts, environmentalprotection, and most recently the fight against terrorism. The bilateral relationship became especiallyclose 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.-supportedexcursions 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 thatprotects human rights and promotes the rule of law, and the promotion of sustainable economicgrowth with a more open economy and improved living conditions. If approved, DR-CAFTA wouldlead to increased U.S.-Honduran economic linkages. The Bush Administration views DR-CAFTAas a means of solidifying democracy in Honduras and promoting safeguards for environmentalprotection and labor rights in the country, while those opposed question whether the agreementwould lead to improvements in the protection of the environment and labor rights.

U.S. Foreign Aid. The United States hasprovided considerable foreign assistance to Honduras over the past two decades. In the 1980s, theUnited States provided about $1.6 billion in economic and military aid to Honduras as the countrystruggled amid the region's civil conflicts. In the 1990s, U.S. assistance to Honduras began to waneas regional conflicts subsided and competing foreign assistance needs grew in other parts of theworld. Hurricane Mitch changed that trend as the United States provided almost $300 million inassistance to help the country recover from the devastation of the storm. As a result of the newinflux 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 toHonduras declined, but will rise once again because of assistance under the Millennium ChallengeAccount (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 Administrationrequested almost $37 million for FY2006. These amounts include support for a variety ofdevelopment assistance projects, HIV/AIDS assistance, food aid, and a large Peace Corps presencewith over 250 volunteers. In 2004, Honduras became eligible to compete for MCA funding, and onMay 20, 2005, the Millennium Challenge Corporation approved a five-year $215 million compactfor the country with assistance targeted for rural development.

Military and Counternarcotics Issues. The UnitedStates 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, whowere involved in military training exercises and in supporting U.S. counterinsurgency andintelligence operations in the region. Today, U.S. troops in Honduras support such activities asdisaster relief, medical and humanitarian assistance, counternarcotics exercises, and search andrescue operations that benefit Honduras and other Central American countries. Regional exercisesand deployments involving active and reserve components provide training opportunities forthousands of U.S. troops. In the aftermath of the Hurricane Mitch in 1998, U.S. troops providedextensive assistance in the relief and reconstruction effort and were involved in delivering reliefsupplies, repairing bridges and roads, rebuilding schools, and operating medical clinics. Morerecently, in mid-October 2005, a disaster response team from Joint Task Force Bravo was sent toGuatemala to help relief efforts after landslides caused by Hurricane Stan.

While Honduras is not a significant producer of illicit drugs, the country is a transshipmentpoint (via air, land, and sea) for cocaine from South America destined to the United States. TheState Department's March 2005 International Narcotics Control Strategy report noted that cocaineseizures in 2004 were down from the record high level of the previous year but also noted thatHonduras disrupted one of the most active drug trafficking organizations in the country. The StateDepartment 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, joiningother contingents from El Salvador, Nicaragua, and the Dominican Republic. The Madurogovernment's proposal to send the troops was approved by the Honduran Congress, but the narrowmargin of 66-62 reflected strong opposition by some sectors, including the opposition LibertyParty. (154) TheHonduran troops served under a brigade commanded by Spain, but when Spain decided to bringhome its troops, Honduras followed suit and removed all its troops by June 1, 2004.

Migration Issues. A significant issue in bilateralrelations has been the migration status of some 82,000 undocumented Hondurans living in theUnited States. In the aftermath of Hurricane Mitch in 1998, the United States provided temporaryprotected status (TPS) to the undocumented Hondurans, protecting them from deportation, becausethe Honduran government would not be able to cope with their return. Originally slated to expire inJuly 2000, TPS status for undocumented Hondurans has been extended four times -- most recentlyon November 1, 2004 -- and is now scheduled to expire in July 2006. (155) The undocumentedHondurans send back millions of dollars annually in remittances to their families in Honduras.

U.S. Trade and Investment. U.S. trade andinvestment linkages with Honduras have increased since the early 1980s. In 1984, Honduras becameone of the first beneficiaries of the Caribbean Basin Initiative, the one-way U.S. preferential tradearrangement 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 forduty-free entry into the United States of certain apparel products assembled in Honduras. As a resultof 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 coastregion. The passage of the Caribbean Basin Trade Partnership Act ( P.L. 106-200 , Title II), whichprovides Caribbean Basin nations with NAFTA-like preferential tariff treatment, is expected tofurther boost Honduran maquiladoras, as is DR-CAFTA.

The United States is by far Honduras' major trading partner, and is the destination of abouttwo-thirds of Honduran exports and the origin of about half of its imports. (156) In 2004, U.S. exportsto Honduras amounted to about $3.1 billion, with knit and woven apparel inputs accounting for asubstantial portion. U.S. imports from Honduras amounted to about $3.6 billion, with knit andwoven 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 thatentered into force in July 2001. There are more than 100 U.S. companies in Honduras, with manyconcentrated in the maquiladora or export assembly sector, including such companies as CrossCreek, Hanes, Jockey, Levi Strauss, Osh Kosh B'Gosh, and Wrangler. Other investments are in sucheconomic activities as banana and other fruit production (especially Chiquita and Standard Fruit),tourism, energy generation, shrimp farming, cigar manufacturing, insurance, brewing, foodprocessing, fuel distribution, and furniture manufacturing. In addition, a number of U.S. fast-foodrestaurants, hotels, and stores have licensing agreements to operate franchises in Honduras, includingsuch 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, TGIFriday, and Wendy's. (159)

DR-CAFTA-Related Issues

Over the past decade, Honduras has moved toward closer economic integration with itsCentral American neighbors and has negotiated, or is in the process of negotiating, free tradeagreements with several nations as a means of stimulating economic development. It joined withGuatemala, El Salvador, and Nicaragua to establish a free trade area in 1993; the four countriessigned an agreement with Dominican Republic and are currently negotiating one with Chile. In2000, Honduras joined with Guatemala and El Salvador in signing a free trade agreement withMexico that entered into force in 2001.

Honduras views DR-CAFTA as a way to make the region more attractive for investment, asa way to protect the existing preferential trade arrangement for exports to the United States, and asa mechanism to help transform the country's agricultural sector. There have been concerns inHonduras about the adverse effects of the regional agreement in opening the Honduran market toU.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 Honduranmarket have longer phase-out periods, with some ranging as high as 15-20 years. For white corn, theagreement includes a tariff rate quota that would increase 2% annually into perpetuity; there wouldbe 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 helptransform the agricultural sector to make it more competitive.

Apparel. Honduras is the third largest exporterof apparel to the United States after Mexico and China. The maquiladora or export assemblyindustry in Honduras developed in the 1980s and 1990s under special access programs for eligibleapparel products under production sharing arrangements associated with the Caribbean BasinInitiative. In 2000, the Caribbean Basin Trade Partnership Act (CBTPA) provided NAFTA-likebenefits to Caribbean Basin countries to ensure that Mexico's trade benefits under NAFTA did notresult in a substantial advantage over the trade benefits of Caribbean Basin countries. The benefitsunder CBTPA are scheduled to expire in September 2008 or upon entry into force of the Free TradeArea of the Americas, whichever comes first. Honduran officials have fears of not being able tocompete with China and other Asia apparel producers after the January 2005 phaseout of quotasunder the WTO Agreement on Textiles and Clothing. Because of its large maquiladora sector(which employed almost 124,000 people at the end of 2003 (161) ), Honduras is interestedin DR-CAFTA to ensure that its apparel trade benefits under CBTPA are continued beyondSeptember 2008. In the CAFTA negotiations, the Central Americans advocated liberalizing the rulesof origin for apparel to allow the duty-free export of apparel made with yarn from third countries aswell as special quotas for apparel assembled in the region from fabric imported from thirdcountries. (162) Liberalized rules of origin and the special quotas would be especially significant for Hondurasbecause of its large export-assembly sector.

The CAFTA agreement completed in December 2003 included provisions that wouldliberalize the rules for apparel trade. (163) According to USTR, "an unprecedented provision will giveduty-free benefits to some apparel made in Central America that contains certain fabrics fromNAFTA partners Mexico and Canada." (164) Liberalized rules of origin also allow duty-free entry forcertain apparel (boxer shorts, pajamas, and nightwear) made from third-country fabric; brassiereswould also be duty-free with third country fabric if it was cut and sewn in Central America. (165) Apparel deemed toinclude certain content in short supply could also qualify for duty-free treatment. Another provisionallows limited amounts of third-country content fabric to go into CAFTA apparel.

The president of the Honduran Textile and Apparel Manufacturers Association, JesusCanahuati, asserts that CAFTA would enable his country to better compete with producers such asChina, even with the elimination of global quotas on textile and apparel. Canahuati maintains thatvarious foreign companies, largely from the United States, will invest about $300 million inHonduras with approval of the agreement. (166)

Environment. According to a report by the Officeof the U.S. Trade Representative, Honduras "has a more limited slate of domestic environmentallegislation" than its Central American neighbors. (167) Honduras passed a general environmental law in 1993, andthe Ministry of Natural Resources and Environment is the agency ensuring compliance withenvironmental law and coordinating environmental policies. Honduras is party to 54 bilateral,regional, and multilateral agreements, including the Convention on Biological Diversity and theKyoto Protocol.

The most significant environmental challenges facing Honduras include deforestation andforest degradation and proper watershed management. The devastation caused by Hurricane Mitchin 1998 highlighted poor watershed management. With regard to deforestation, illegal logging bylumber companies has been a problem in eastern Honduras. In May 2003, death threats againstFather JosÃ© AndrÃ©s Tamayo, who has been vocal in criticizing forest product companies and hascalled for a moratorium on forest exploitation, prompted President Maduro to increase security forthe forests in eastern Honduras and to initiate plans for developing a new forestry policy. (168) Father Tamayo led asecond national "March for Life" protest in June 2004 calling for an end to illegal logging in Olanchoprovince. In response, President Maduro promised to set up committees (with government andenvironmental representatives) to evaluate petitions to ban logging in some areas. (169)

Several environmental groups in Central America expressed support for the environmentalprovisions in the DR-CAFTA agreement. This includes the Honduran Ecologist Network forSustainable Development (REHDES), which consists of six environmental non-governmentalorganizations. (170) In contrast, a number of other Central America environmental groups actively oppose CAFTA. (171) This includes theEnvironmental Movement of Olancho, a coalition of subsistence farmers and religious leadersopposed 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 Hondurangovernment does not have the political will to enforce environmental protection laws. (172)

On February 18, 2005, Honduras and other DR-CAFTA signatories concluded two additionalaccords at strengthening the trade agreement's environmental provisions. The first, anunderstanding, called for the establishment of a secretariat to administer a submission process inorder to allow citizens to petition whether a country is not enforcing environmental laws effectively.The second agreement, an Environmental Cooperation Agreement, would guide environmentalcooperation in the region. (173)

Labor. (174) About 7.3% of theHonduran work force is unionized, according to the State Department's February 2005 human rightsreport, with public sector unions having more strength than those in the private sector. Overall, theeconomic and political influence of unions reportedly has diminished in recent years. Honduras hasthree major labor confederations: the Confederation of Honduran Workers (CTH), the GeneralWorkers' Central (CGT), and the Unitary Confederation of Honduran Workers (CUTH). The growthof "solidarity" associations in private companies, an alternative to unions that provide credit andother services to workers, has been criticized by organized labor as employer-dominated and anattempt 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 Code prohibits blacklisting,but according to the Department of State's human rights report, there is credible evidence thatblacklisting has occurred in the maquiladoras because of employees' union activities. USTR reportedin 2001 that there were widespread reports of dismissal and other reprisals against workers for theirunion activities. USTR and the Ministry of Labor signed a memorandum of understanding in 1995that had recommendations to enforce the Labor Code and resolve disputes. Labor unions maintainthat the ministry has not made sufficient progress toward enforcing the Labor Code, includinginspections 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 themaquiladora sector has occurred in isolated cases, according to the Department of State. TheHonduran Labor Minister maintains that some 10 years ago, the maquiladora sector had a problemwith 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.-basedlabor groups and the International Federation of Free Trade Unions (ICFTU). A report by theAFL-CIO asserts that the "Honduran government tolerates a broad and systematic pattern of workerrights violations, particularly in maquiladoras producing apparel for export to the U.S. market." (176) The ICFTU maintainsthat while Honduran law recognizes the right to form and join trade unions, there are a number ofrestrictions. It further asserts that in practice "workers are harassed and even sacked for trade unionactivities, 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 campaignfocusing attention on alleged worker rights violations at a Honduran maquiladora factory producingshirts for the fashion company of hip-hop performer Sean P. Diddy Combs. The owner of the factorycalled the charges a total fabrication, and the Honduran Ministry of Labor maintains that aninspection of the factory did not uncover abuses alleged by the labor activists. (178) Critics of the NationalLabor Committee argue that the group specializes in campaigns involving celebrities whether theallegations are true or not. (179)

In December 2004, two labor groups -- the International Labor Rights Fund and theAssociation of Labor Promotion Services (AsociaciÃ³n Servicios de PromocÃ­on Laboral) -- submitteda petition to USTR to review Honduran labor practices regarding the country's continued eligibilityfor General System of Preferences (GSP) trade benefits. The groups alleged that Honduras has donenothing since 2000 to fully implement a 1995 memorandum of understanding with USTR regardingimprovement of Honduran labor practices. (180)

The trade and labor ministers of Honduras and other DR-CAFTA countries met in July 2004under the sponsorship of the Inter-American Development Bank (IDB) to develop recommendationsfor actions needed to strengthen labor law compliance and enforcement. In April 2005, the countriesfollowed up and unveiled a so-called white book that endorsed a work plan to strengthenenforcement of labor laws in the region. The recommendations included projects to improve tradeunion 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 childlabor. (181)

Some Members of Congress assert that Central American labor laws fall short of ILOstandards so that better enforcement of standards will be insufficient. They maintain that Hondurashas burdensome requirements for union recognition, the right to strike, and other restrictions onunion leadership. They also note that Honduras has not provided adequate sanctions for anti-uniondiscrimination. (182)

Intellectual Property Rights. In 1998, Honduras'sCaribbean Basin Initiative and Generalized System of Preferences (GSP) (183) benefits were partiallysuspended for several months because of the piracy of U.S. televison broadcasts and videos. Thebenefits were restored after Honduras took action to stop the piracy. Today, the Office of the UnitedStates Trade Representative (USTR) maintains that Honduras has largely complied with the WTOAgreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), but notes that theHonduran Congress has yet to enact reforms related to integrated circuit designs and plant varietyprotection to be in full compliance with TRIPS. In the DR-CAFTA, Honduras agreed to provideeffective patent protection for plants or to ratify or accede to the International Convention for theProtection of New Varieties of Plants. According to USTR, the piracy of books, sound and videorecordings, compact disks, and computer software is widespread in Honduras because of limitedenforcement capacity. The United States and Honduras initialed a bilateral intellectual propertyrights agreement in 1999, but both parties agreed to fold the provisions into CAFTA andDR-CAFTA. USTR maintains that the agreement would strengthen intellectual property rightsprotection to conform with or exceed WTO norms. The illegal registration of well knowntrademarks has also been a problem in Honduras, although USTR maintains that the DR-CAFTA'senforcement provisions are designed to help reduce trademark piracy. (184)

Approval Status. The Honduran Congressapproved the DR-CAFTA agreement on March 3, 2005, by a final vote of 124-4, demonstratingbroad support for the agreement by both the Liberal and National parties. Only members of the smallleftist Party of Democratic Unity (PUD) voted against the agreement. (185) Active opponents ofthe agreement included some government sector employees. The Popular Block and NationalCoordinator of Popular Resistance (CNRP), consisting of workers, teachers, and peasants, and theCivic Council of Honduran Popular and Indigenous Organizations (COPINH) organized protestsagainst the agreement. As noted above, some environmental groups, such as the EnvironmentalMovement of Olancho, also opposed the agreement.

Nicaragua(186)

Political Situation

Nicaragua began a transition to democracy in 1990 after a decade-long struggle between aleftist regime and U.S.- backed counter-revolutionary forces. A country plagued by generations ofdictatorial rule, civil war and poverty, Nicaragua has begun to develop democratic institutions andcreate a framework for economic development. Progress has been made in key social sectors, as thecountry'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 heavilyindebted poor countries (HIPC) initiative, and has signed the free trade agreement with the UnitedStates, its Central American neighbors, and the Dominican Republic. It has also been selected asone of only three Latin American countries to receive a substantial injection of foreign aid under theMillennium Challenge Account, a new program which rewards poor countries for curbing corruptionand improving governability. Nonetheless, Nicaragua remains poor and its institutions weak. Overthe last couple of years, a growing political crisis has threatened its current government, though itappears the political impasse has been overcome for now.

The most recent, and consequential, international demonstration of support for the beleaguredcurrent President, Enrique BolaÃ±os, was a visit from U.S. Deputy Secretary of State Robert ZoellickOctober 4 -5, 2005. While in Managua, Zoellick said that Nicaragua's future was "threatened by acreeping coup. It's threatened by corruption, it's threatened by a clique of caudillos," using theSpanish term for political bosses to refer to Sandinista leader Daniel Ortega and former PresidentArnoldo 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 BolaÃ±os from office. In thefollowing two weeks, the Nicaraguan National Assembly had agreed to postpone implementingconstitutional amendments that transferred executive powers to the legislative branch until afterBolaÃ±os completed his term in December 2006 and had ratified CAFTA and until the political pactthat had driven opposition to BolaÃ±os had been broken.

The ongoing political tensions in Nicaragua have been shaped by power struggles betweenthree prominent political figures: President Enrique BolaÃ±os and former Presidents Daniel Ortegaand Arnoldo Aleman. President BolaÃ±os, of the Liberal Constitutionalist Party (PLC), was electedto a five-year term in November 2001, in elections widely regarded as being free and fair. BolaÃ±os,a businessman in the agricultural sector, defeated Daniel Ortega, a prominent figure in Nicaraguanpolitics for over 25 years. During the 1980s, BolaÃ±os's farm service company was nationalized, andhe was jailed for his opposition to the Sandinista government. During the 2001 presidentialcampaign, BolaÃ±os emphasized the importance of maintaining positive relations with the UnitedStates. He faces the challenges of stimulating economic growth in the hemisphere's second poorestcountry, and promoting democratic reform while pursuing prosecutions for corruption in theprevious administration. The Bush Administration has praised and supported BolaÃ±os'santi-corruption efforts. Others have criticized BolaÃ±os for employing a "confrontational route" offighting corruption by going after top officials, including Aleman, rather than seeking allies whowould 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 itoverthrew the Somoza dictatorship in 1979. He served as President from 1985-1990, having wonelections which much of the international community deemed fair, but which were boycotted bymuch of the opposition and deemed unfair by the Reagan Administration. Ortega's administrationwas marked by a bloody civil war with the U.S.-backed "contras," and charges of corruption. In thecontext of the Central American Peace Plan, Ortega's Sandinista government agreed tointernationally 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. Theyappear to have capitalized on divisions between President BolaÃ±os and the PLC, which is controlledby imprisoned former president Arnoldo Aleman, to garner important victories in the municipalelections held on November 7, 2004. The Sandinistas swept those polls, winning some 87 of 152municipal seats. In March 2005 the FSLN named Ortega its candidate for 2006 presidentialelections.

In 2003, President BolaÃ±os took the landmark step of prosecuting former President ArnoldoAleman (1997-2002) and 13 of his associates for embezzling about $100 million in public fundswhile in office. The United Nations recently named Aleman as one of the world's five most corruptliving ex-leaders. (188) The effort is particularly notable, because BolaÃ±os and Aleman not only belong to the same politicalparty, but BolaÃ±os 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; heis currently under house arrest. His supporters are still trying to negotiate his release, however. ThePLC is promoting an amnesty bill that would revoke all convictions for misuse of public funds andelectoral crimes committed after 1990. BolaÃ±os' moves against Aleman have left him increasinglyisolated, however.

The opposition has repeatedly brought charges of electoral fraud against BolaÃ±os, allegingthat former President Aleman laundered public funds into his party's election campaign and thatBolaÃ±os knowingly benefitted from those funds. President BolaÃ±os denies those charges, and thelegislative committee dropped its initial investigation. In October 2004, the Comptroller General'soffice, whose panel consists of members of the Sandinista and Liberal parties in opposition toBolaÃ±os, issued a report renewing charges of fraud against the President. The opposition has usedthe report to promote impeachment efforts, despite the Supreme Electoral Council's having earliercertified that BolaÃ±os had not committed election finance irregularities. In June 2005, the nationalassembly named a special commission to study the possibility of removing BolaÃ±os' immunity fromprosecution 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 agreementknown as "el pacto" in 1998 that had defined national politics until now. In late 2004, renegotiationof the pact included a demand for Aleman's release. In January 2005, their two parties adopted aseries of constitutional amendments that transferred presidential powers to the legislature and furtherdivided up government institutions as political patronage. The Central American Court of Justiceruled the amendments illegal. The ruling is non-binding, and the Nicaraguan Supreme Court, whichis dominated by pacto party members, ignored it. After meeting with President BolaÃ±os, DanielOrtega announced on October 16, 2005, that he had broken the pact with the Aleman faction of theLiberal party. (189) The announcement followed the visit to Managua by Deputy Secretary Zoellick, who had met withseveral leaders who have broken with the Liberal and Sandinista parties over the pact, which theysee as corrupt, and who are gaining support for the upcoming elections. Ortega's political strengthhas relied in part on divisions within the Liberal party.

The U.S. State Department said it "stands firmly with the democratically elected governmentof President BolaÃ±os" and "deplore[s] recent politically motivated attempts, based on dubious legalprecedent, to undermine the constitutional order in Nicaragua and his presidency." (190) The OAS sent a specialmission to Nicaragua in October 2004 to encourage all parties to preserve and follow democraticorder 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 BolaÃ±os, the Sandinistas, andthe Liberals to strengthen governance. (191) Tensions continued to mount, however, with violent protestsagainst an increase in public transportation fares and calls for BolaÃ±os' resignation by theopposition-controlled mayors' association in April. Some observers say these protests areorchestrated by the opposition and not supported by public opinion. The government negotiated anend 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 BolaÃ±os' 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 BolaÃ±osincluded a visit from the head of the U.S. Southern Command, General Bantz Craddock. The OASSecretary General visited Nicaragua in June to try to restart political dialogue, but no settlement wasagreed upon. The OAS is acting under the OAS Democratic Charter, through which a membergovernment that considers its democratic process or legitimate exercise of power to be at risk mayrequest 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 ZoellickOctober 4 -5, 2005, which led to the passage of CAFTA, the agreement to let BolaÃ±os complete histerm without implementing constitutional changes, and Ortega breaking the pact with the LiberalParty.

The ongoing influence of both Aleman and Ortega in Nicaraguan politics has made governingincreasingly difficult for President BolaÃ±os over the last two years. After the intercession of theOAS and the United States, two items on BolaÃ±os' agenda were achieved: the passage of CAFTAand the suspension of constitutional changes that would have stripped BolaÃ±os of many executivepowers. It remains to be seen if recent concessions by Ortega and the National Assembly willcontinue to make governance easier for the remainder of BolaÃ±os' term.

Economic Conditions

Nicaragua began free market reforms in 1991, after what the State Department has describedas "12 years of economic free-fall under the Sandinista regime." The Sandinista guerrillas led acoalition 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 FSLNshortly thereafter established a pro-Soviet government that nationalized rural properties owned bythe Somozas or their associates, as well as financial institutions, which had gone bankrupt duringthe 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 decline.

In 1990, the first post-conflict democratic government was elected, and it pursued significantdemocratic and economic reforms. Significant progress has been made since then: thepost-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 IMFforgave 80% of Nicaragua's foreign debt of roughly $6.5 billion under the HIPC program, and inMay 2004 Nicaragua was one of only three Latin American countries selected to receive increasedforeign 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), andremittances sent from Nicaraguans living abroad (15% of GDP). (192) Its economy alsoremains 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. Almosthalf of Nicaragua's 5 million inhabitants live in poverty; unemployment and underemployment ratesremain as high as 40% to 50%; and income distribution is extremely unequal. Per capita GDP in2003 was only $470, making Nicaragua the second poorest country in the Western Hemisphere afterHaiti. Although the Nicaraguan government has made a concerted effort to improve basic healthindicators and school enrollment rates, significant gaps exist. While close to 90% of children ages7 to 12 now attend primary school, less than 50% of 13 to 18 year olds attend secondary school. (193) The government aimsto 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 Nicaraguashifted from providing military support to the "contras" towards pressuring the Nicaraguangovernment to enact political reforms. The United States provided extensive foreign assistance toNicaragua after Hurricane Mitch in 1998, and has repeatedly extended the Temporary ProtectedStatus (TPS) of some 6,000 Nicaraguans living within its borders. Recently the two countries havenegotiated agreements related to intellectual property, trade, and counter-narcotics efforts. Nicaraguacontributed 113 mine-clearing troops to the coalition forces in Iraq, and has passed legislation givingPresident BolaÃ±os 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, increasingeconomic growth through free trade, strengthening democracy, and improving human capitalinvestments. Nicaragua enjoys debt relief under the HIPC initiative and was recently selected toreceive Millennium Challenge Account funding. In December 2003, the Nicaraguan governmentsigned CAFTA, and in August 2004, it signed DR-CAFTA, which it hopes will provide expandedaccess to the U.S. market. The Nicaraguan National Assembly ratified CAFTA on October 10, 2005.

U.S. Foreign Aid. The United States has providedNicaragua with $1.2 billion in assistance from 1990, when Violeta Chamorro defeated theSandinistas 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 asprominent human rights cases, resolution of property claims, and military, judicial, and economicreforms. From 1999 through 2001, an additional $93 million was provided to assist in reconstructionefforts following the massive destruction caused by Hurricane Mitch. The Bush Administrationstates that strengthening democracy is its first priority in Nicaragua. The United States provided $6.2million dollars in assistance to support the 2001 election process. The Administration providedabout $37.5 million to Nicaragua in FY2003, including $16 million in food aid, and requested $39million annually for FY2004 and FY2005. The Board of the newly established MillenniumChallenge Corporation announced on June 13, 2005, that it had approved a five-year, $175 millioncompact with the government of Nicaragua. In November 2004, President BolaÃ±os had agreed todestroy approximately 1,000 Soviet-era missiles that the Bush Administration saw as a securitythreat. After the Nicaraguan legislature stripped BolaÃ±os of the power to deal with the stockpile, theBush Administration suspended U.S. military aid in March 2005. Those restrictions were lifted theweek of October 10, 2005.

Democratic Reform. The BolaÃ±os Administrationhas committed itself to attacking government corruption. It has already convicted the former chieftax collector, and arrested over a dozen other high level officials in the previous administration onfraud or corruption charges. This anti-corruption campaign reached a climax in December 2003 asBolaÃ±os' predecessor, former President Arnoldo Aleman, was sentenced to 20 years in prison formoney laundering and other crimes. As a former President, Aleman had received an automatic seatin the legislature, along with legislative immunity from prosecution. In 2002, the unicameralNational Assembly voted to remove Aleman as its president and took the historic step of strippingAleman of his immunity from prosecution.

BolaÃ±os's reform efforts are being thwarted, however, as the Liberal party is working againsthis government and is trying to obtain the former President's release and reduce BolaÃ±os' powers orremove him from office. The OAS and U.S. and other foreign governments expressed concern thatcharges of electoral fraud made against BolaÃ±os and efforts to impeach him are threats to theconstitutional order. The OAS has sent several high-level delegations to Nicaragua since October2004 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 tosuspend proceedings for ratifying amendments to the constitution that would transfer manypresidential 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 signedon 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 democracyin Nicaragua.

Nicaragua is engaged in a structural reform program of the judicial system, but the systemremains weak and, according to the U.S. State Department's human rights report released February28, 2005, "highly susceptible to corruption and political influence." (194) President BolaÃ±os hasincreased his criticisms of the Sandinista-dominated judiciary in response to the recent convictionof one of his top allies on charges of corruption. The U.S. Ambassador to Nicaragua, BarbaraMoore, asserted that recent judicial decisions have been "damaging" to the country's reputation andits ability to attract foreign investment. (195)

Human Rights. Under Nicaragua's authoritarianregimes, and during its civil war, human rights abuses were widespread. Since the end of the civilwar in 1990, however, respect for human rights has improved, and human rights observers no longeraccuse Nicaraguan governments of systematic human rights violations. According to the StateDepartment's 2004 report on Human Rights Practices, the Nicaraguan government "generallyrespected the human rights of its citizens; however, serious problems remained....," includingallegations of extrajudicial killings and torture by security forces The government punished somemembers of security forces who committed human rights abuses, but, according to the report, "...adegree of impunity persisted." Other human rights problems include violence against women andchildren, trafficking in women and girls for sexual exploitation; and discrimination againstindigenous 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 withdomestic and international organizations to get thousands of children out of the workforce and intoschool. According to the report, "the national minimum wage did not provide a decent standard ofliving for a worker and family," amounting to less than $141 a month, which is what the governmentestimates is the cost of a basic basket of goods for an urban family. The report also noted thatalthough the Labor Code seeks to bring Nicaragua into compliance with international standards forworkplace hygiene and safety, the relevant ministry "lacks adequate staff and resources to enforcethese 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. citizensarising 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 propertytribunals with the goal of resolving longstanding property disputes. The new property tribunalsbegan accepting cases in July 2000. Procedures of the new property tribunals include mediation,binding arbitration, and expedited trials. Through technical assistance for judicial reform, U.S.assistance is helping to improve the mechanism for settling property disputes. U.S. law prohibitsaid to countries that have confiscated assets of U.S. citizens, but since 1993, U.S. administrationshave granted annual waivers to allow Nicaragua to receive U.S. aid. The National Assembly passeda new law recently creating a new land institute. Critics are concerned that this institute willconsolidate Sandinista land and property expropriations, known as the "piÃ±ata," made at the end oftheir term in power. The new institute has not been established yet, however.

Narcotics and Arms Trafficking. According tothe State Department's International Narcotics Control Strategy Report for 2004, Nicaragua is atransit zone for narcotics traffic from South America to the United States and Europe. (196) The report listsNicaragua's location; deep, endemic poverty; lack of government presence throughout much of thecountry; "paucity" of government funds available for law enforcement; and the number of people stillwell-armed from the 1980s civil war as factors making Nicaragua attractive to drug traffickers. Itsvulnerable banking system makes it a potential target for money laundering as well. The StateDepartment describes Nicaragua as a strong ally in counternarcotics activities, whose cooperationwith the Drug Enforcement Administration has been "ongoing and effective" since 1997. TheNicaraguan National Police have made significant achievements in the seizure of cocaine and heroinand in operations against local drug distribution centers. Nonetheless, their effectiveness ishampered 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 CentralAmerican countries and in Mexico. In November 2001, arms supposedly exchanged between theNicaraguan and Panamanian police forces ended up in the possession of right-wing paramilitariesin Colombia. The Organization of American States (OAS) reported in January 2003 that Nicaraguanpolice and military officers were negligent in not verifying that those conducting the transition wereindeed Panamanian police, as was presumed. After receiving the OAS report, BolaÃ±os reportedlytold former U.S. Ambassador Morris Busby, the report's author, about steps his government wouldtake to close loopholes in Nicaraguan arms control legislation that contribute to regional armssmuggling. Also in January 2003, President BolaÃ±os proposed a disarmament process in CentralAmerica, to reduce the number of arms in the region.

The Bush Administration expressed concern last year about a stockpile of approximately1,000 Soviet-era missiles that it saw as a security threat. In November 2004, President BolaÃ±os hadagreed to destroy them. After the Nicaraguan legislature stripped BolaÃ±os of the power to deal withthe stockpile, the Bush Administration suspended U.S. military aid in March 2005. The BushAdministration lifted the restriction the week of October 10, 2005. U.S. Defense Secretary DonaldRumsfeld said he was convinced the Nicaraguan military had secured the missiles well enough tokeep them out of the hands of terrorists. (197)

U.S. Trade and Investment. The success of theNicaraguan 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 asNicaragua gained duty free access to the U.S. market for the majority of its products under theCaribbean Basin Initiative. These linkages were strengthened by the passage of the Caribbean BasinTrade Partnership Act ( P.L. 106-200 , Title II), which provides Caribbean Basin nations withNAFTA-like preferential tariff treatment.

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 CentralAmerican nations (37.8%). Most of the country's imports (27.4% of the total), such as machineryand transport equipment, industrial raw materials, and consumer goods, originate in the UnitedStates. About 25 wholly or partly owned subsidiaries of U.S. companies operate in Nicaragua. In2002, U.S. exports to Nicaragua amounted to $438 million, with the largest category beingmachinery and transport equipment (23% of that total). U.S. imports totaled $679 million, withapparel accounting for 26% of all import categories. Those totals are likely to increase substantiallyif the free trade agreement is approved. (198) Major U.S. companies operating in Nicaragua include EssoStandard Oil, E.D. and F. Man (agricultural supply and financing firm), Bellsouth, TexacoCaribbean, Pepsi-Cola, Kraft Foods-Nabisco, Gulf King (shrimp boat fleet), Coca-Cola, andCinemark theaters.

DR-CAFTA-Related Issues

Although agriculture continues to be one of the most important sectors of the Nicaraguaneconomy, the country's nascent maquiladora industry, which primarily manufactures apparelproducts and whose success is extremely reliant on favorable external trade conditions, is rapidlyexpanding. 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 mostopen economies in Central America. It has recently taken further steps to foster regional integrationby joining the Central American customs union, also comprised of Guatemala, El Salvador andHonduras. The Nicaraguan negotiating team for the recently signed free trade agreement with theUnited States believes that the outcome of the negotiations are highly positive for the country. (199)

Evidence of this positive outcome includes the fact that Nicaragua gained duty-free accessto the U.S. market for 68% of its farm products and 100% of its industrial products, while ensuringsignificant protection for its domestic farmers against U.S. imports. DR-CAFTA would affordNicaraguan rice farmers a 28-year period of adjustment before they would be subjected to fullcompetition with U.S. producers. Nicaragua was also allowed to implement the strictest quotas onimports of U.S. corn of any of the five Central American countries. In addition, Nicaraguan textileexporters were the only such exporters in Central America to receive permission to use up to 100million square meters per year of cloth from non-U.S., non-Central American suppliers to makeapparel products that would still enjoy duty free access to the U.S. economy.

Despite these positive observations, skeptics have noted that Nicaraguans had littlebargaining 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 bereplaced by new employment in the manufacturing sector. A number of specific sensitive issuesarose in the negotiations, which are summarized below:

Environment. Nicaragua has a significant amountof environmental legislation in place, anchored by a general law on the Environment and NaturalResources passed in 1996. The Nicaragua Ministry of Environment and Natural Resources(MARENA) regulates national policy on the management and protection of the country's naturalresources. Additionally, Nicaragua is a party to 57 multilateral, regional and bilateral environmentalagreements, which include the Convention on Biological Diversity, the Convention on theInternational 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 relativelyabundant forest reserves and a low population density, deforestation and lake contamination threatenits environment. Between 1990 and 2000, Nicaragua had the second highest rate of deforestationamong its Central American neighbors. Deforestation, resulting in soil erosion, has increased thecountry's vulnerability to natural disasters, such as Hurricane Mitch (1998), and periodicdroughts. (201) Conditions in the country's major freshwater lake, Lake Nicaragua, the world's twentieth largestaquifer, deteriorated in the nine years between 1994 and 2003 at a "rate equivalent to that normallyobserved in European lakes over a period of 150 to 200 years." (202) Critics of CAFTA havequestioned whether merely requiring countries to enforce their existing laws is enough to ensureadequate environmental protection.

Labor. The Nicaraguan labor force, comprisedof roughly 2.25 million workers, is largely rural-based and unskilled. An estimated 45% of thoseworkers are employed in the agricultural sector, 42% in services, and 15% in manufacturing. Thoughit expanded by 2.3% in 2003, the Nicaraguan economy continues to be plagued by unemploymentand underemployment rates as high as 40% to 50%. Along with declining confidence in unionleaders, this has eroded the strength of the Nicaraguan labor movement. Half of the unionized laborforce 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 1996Labor Code removed many restrictions on trade union rights, the Nicaraguan Labor Ministryacknowledges that it still takes about six months for a union to go through all the proceduresnecessary 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 laborrights violations in Nicaragua reportedly occur in the export processing zones (EPZs) where 62 EPZcompanies, or maquilas, employ 52,000 people, only 3% of whom are unionized. (204) An estimated 9,500workers in Chinandega, Nicaragua have spent the last five years pursuing million-dollar lawsuitsagainst international banana conglomerates for health damages caused by pesticide exposure. Somecritics of the free trade agreement fear that as companies arrive in pursuit of cheap labor, "thevulnerability 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 bilateralagreement on intellectual property protection with the United States in January 1998, the first of itskind in Central America and only the fourth in Latin America. Since that time, the Nicaraguanlegislature has enacted modern laws on copyrights, transmission of satellite signals, plant varietyprotection, integrated circuit systems, patents, and trademarks. The government launched two majorefforts to crack down on music recording privacy in 2001, and is now targeting software piracy inpublic offices. Despite these efforts, the Business Software Alliance estimates that Nicaragua hada 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 putNicaragua on the U.S. Trade Representative's "Special 301" list of countries with inadequateprotection of intellectual property rights. Nicaragua took further steps to protect intellectualproperty rights in 2002 by signing the World Intellectual Property Organization's "Internet Treaties."

Approval Status. The unicameral NicaraguanNational Assembly ratified CAFTA on October 10, 2005, by a vote of 49 to 37. President BolaÃ±oshad submitted the bill for ratification on October 5, 2004. On May 4, 2005, the committee ofjurisdiction issued a report, moving the process along one step further. Since then, some membersof the Liberal and Sandinista parties had opposed CAFTA. U.S. Deputy Secretary of State Zoellickvisited Nicaragua and said that the continuation of the pact between Aleman and Ortega "will leadNicaragua to lose the Millennium Challenge Account Assistance, to lose the opportunity ofCAFTA...." Shortly afterward, Daniel Ortega, who is running for President in 2006, withdrew theSandinistas' opposition to CAFTA, allowing it enough votes to pass.

Appendix 1. U.S. Economic and Military Assistance to Central America and the Dominican Republic, FY1977-FY2004

(in $U.S. millions, current)

Source : AID, U.S. Overseas Loans and Grants. Data for FY2003 are estimated amounts and forFY2004 are the requested amounts.

Appendix 2. Map Showing DR-CAFTA Pact Partners