Latin America and the Caribbean: Issues for the 108th Congress
Released: 2004-12-20T00:00:00

Introduction

Conditions in the Region

Latin America made enormous strides over the past two decades in political development, with all countries but Cuba having regular free and fair elections for head of state. In 2004, free and fairelections for head of government were held in Antigua and Barbuda on March 23; El Salvador onMarch 21; Panama on May 2; the Dominican Republic on May 16; Venezuela on August 15, for aspecial presidential recall referendum; St. Kitts and Nevis on October 25; and Uruguay on October31. Despite this democratic progress, several nations faced considerable challenges that threatenedpolitical stability, including economic decline and rising poverty, violent guerrilla conflicts,autocratic leaders, drug trafficking, and increasing crime.

In 2002 and 2003, the region as a whole experienced slower economic growth with 2002 registering a gross domestic product (GDP) decline of 0.6% and a per capita income decline ofalmost 2%, the worst economic performance in almost two decades. Argentina, Uruguay, andVenezuela suffered the deepest recessions, skewing the regional data downward, while most othercountries had slow, but positive, growth rates. For 2003, regional economic growth was estimatedto be 1.5%, with a per capita income increase of 0.2%.

By the end of 2004, however, the region had rebounded with an estimated growth rate of 5.5% for the year, surpassing even the most optimistic predictions. Every country in the region, with theexception of Haiti, experienced positive economic growth, and per capita income for the region asa whole increased by an estimated 4% for the year. (1)

In South America, the economic downturn in 2002 and 2003 increased political pressure on elected governments and led some in the region to question democracy and the democraticfree-market model of development. The Andean governments of Bolivia and Peru faced violentprotests, which in Bolivia, led to the resignation of President Gonzalo Sanchez de Lozada on October17, 2003, just 15 months after he was elected. Colombia faced challenges from drug traffickingorganizations, as well as from two left-wing guerrilla groups and a rightist paramilitary group, allof which, combined, have been responsible for thousands of deaths each year. Venezuela wasplagued by political polarization between supporters and opponents of President Hugo Chavez,although Chavez's victory in the August 2004 recall referendum has the potential of reducingpolarization. Argentina's democratic political system was under considerable stress after socialprotests over economic conditions led to the resignation of a democratically elected President inDecember 2001. The political and financial situation eventually stabilized, and bold policy movesin the areas of human rights and institutional reform by President NÃ©stor Kirchner, inaugurated inMay 2003, helped restore Argentines' faith in government.

In Central America, countries such as El Salvador, Honduras, and Nicaragua emerged from the turbulent 1980s and 1990s with democratic institutions more firmly entrenched, yet violent crimewas rampant. While the 1996 peace accords in Guatemala brought an end to the 36-year civilconflict, the government did not fully implement substantive reforms associated with the peace planand the human rights situation remains poor. A new Guatemalan President, Oscar Berger, waselected in December 2003 and was inaugurated on January 14, 2004. Observers are hoping that hewill improve upon the performance of his predecessor.

In the Caribbean, Haitian President Jean-Bertrand Aristide resigned on February 29, 2004, under disputed circumstances after armed opposition groups had taken control of half the country. President Bush deployed U.S. military forces to Haiti to secure key facilities and to help secure thearrival of a Multinational Interim Force, authorized by the U.N. Security Council, which wassucceeded by the United Nations Stabilization Mission in Haiti (MINUSTAH) in June 2004. InCuba, Fidel Castro retained tight control over the Communist government. The human rightssituation deteriorated significantly in 2003, with the arrest and imprisonment of 75 dissidents.

U.S. Policy

Congressional attention to Latin America in the 108th Congress focused on counter-narcotics and counter-terrorism efforts in the Andean region, security cooperation with Latin America, andtrade issues, such as free trade agreements with Chile and Central American countries and theregional Free Trade Area of the Americas (FTAA). Congressional consideration of the annualforeign operations appropriations legislation that funds foreign aid remained an important way forCongress to influence U.S. policy toward the region. Congress maintained an active interest inneighboring Mexico, with a myriad of trade, migration, border and drug trafficking issuesdominating U.S.-Mexico bilateral relations.

U.S. counter-narcotics efforts in the region continued to focus on the Administration's Andean Counterdrug Initiative (2) supporting Colombia andits neighbors with foreign assistance in theirstruggle against drug trafficking and drug-financed terrorist groups. Congress expressed repeatedconcerns over the capture and killing of various U.S. citizens by the Revolutionary Armed Forcesof Colombia (FARC) and the National Liberation Army (ELN).

Security issues became a higher-profile aspect of U.S. relations with Latin America in the aftermath of the September 11, 2001, terrorists attacks in the United States. Bilateral and regionalcooperation on anti-terrorism issues increased, and the United States expanded its assistance toColombia beyond a strictly counternarcotics focus to also include counterterrorism support. In June2002, the United States and other members of the Organization of American States (OAS) signedan Inter-American Convention Against Terrorism in order to improve regional cooperation. President Bush submitted the convention to the Senate for its advice and consent in November 2002,and the Senate Foreign Relations Committee held a June 17, 2004, hearing on the convention.

U.S. officials maintained that the most effective and rapid means to stimulate economic development in Latin America is through trade, and they set the goal of strengthening trade linkageswith the region through the negotiation of numerous free trade agreements (FTAs):

On June 6, 2003, the United States and Chile signed a bilateral FTA that had been completed in December 2002. This paved the way for congressional consideration ofimplementing legislation for the Chile FTA, under so-called fast track procedures, with both theHouse and Senate approving the measure in July ( P.L. 108-77 , H.R. 2738 ).

In December 2003, the Administration completed negotiations for a U.S.-Central America Free Trade Agreement (CAFTA) with four Central American countries: ElSalvador, Honduras, Guatemala, and Nicaragua; Costa Rica agreed to CAFTA in late January 2004after additional bilateral negotiations with the United States. The United States signed the CAFTAwith the five Central American countries on May 28, 2004. Separately, the United States and theDominican Republic concluded negotiations on a similar FTA on March 15, 2004. On August 5,2004, all seven countries signed the U.S.-Dominican Republic-Central America Free TradeAgreement (DR-CAFTA). In part because of its controversial nature, Congress did not considerimplementing legislation for the agreement before the end of the 108thCongress.

The Administration also began FTA negotiations with Panama in late April 2004, and in mid-May 2004 launched FTA negotiations with Colombia, Ecuador, and Peru with thehope that Bolivia will join the U.S.-Andean negotiations in the future.

Finally, the Administration continued to negotiate with other hemispheric nations for the establishment of a Free Trade Area of the Americas (FTAA) by January 2005, a goalfirst agreed to at the 1994 Summit of the Americas. Because of differences in the negotiations abouthow to proceed, it became increasingly unlikely that a comprehensive agreement could be achievedby January 2005.

In addition to trade policy, the United States supported development in the region through foreign assistance programs largely administered by the U.S. Agency for International Development(USAID). The agency supported such activities as education, poverty reduction, health care,conservation, natural disaster mitigation and reconstruction, counter-narcotics and alternativedevelopment, and HIV/AIDS prevention and education. In addition, the United States provides foodassistance, anti-terrorism assistance, and security assistance. The Peace Corps was active in manyLatin American and Caribbean nations. Overall U.S. foreign aid to the Latin America regionamounted to about $862 million in FY2001, $1.5 billion in FY2002, $1.7 billion in FY2003; and anestimated $1.6 billion in FY2004. For FY2005, the Administration requested about $1.6 billion. (For further information, see CRS Report RL32487 , U.S. Foreign Assistance to Latin America andthe Caribbean.)

In the aftermath of several devastating storms in 2004 -- Hurricanes Charley, Frances and Ivan, and Tropical Storm Jeanne -- the United States provided humanitarian assistance to the afflictedcountries, including Haiti, Grenada, Jamaica, the Bahamas, the Dominican Republic, and Cuba. Through October 2004, the United States committed or obligated $22.6 million in such assistance. On October 5, 2004, the House approved H.Con.Res. 496 (Lee) expressing support forthe provision of humanitarian assistance to Caribbean nations devastated by the storms. Subsequently, Congress approved $100 million in emergency supplemental funding for the regionin the aftermath of the storms ( H.R. 4837 , P.L. 108-324 ). (For additional information,see CRS Report RL32160 , Caribbean Region: Issues in U.S. Relations .)

The Bush Administration's new foreign aid initiative, the Millennium Challenge Account (MCA), could significantly increase U.S. foreign assistance worldwide including assistance toseveral Latin American nations to countries that have strong records of performance in the areas ofgovernance, economic policy and investment in people. In May 2004, the Millennium ChallengeCorporation (MCC) board deemed three Latin American nations -- Bolivia, Honduras, andNicaragua -- as eligible to apply for FY2004 MCA funding. (For further information, see CRS Report RL31687 , The Millennium Challenge Account: Congressional Consideration of a NewForeign Aid Initiative .)

Some Members of Congress wanted to increase U.S. assistance to combat poverty in Latin America. In the 108th Congress, the House Subcommittee on the Western Hemisphere approvedan initiative, H.R. 3447 (Menendez), that would have authorized $500 million annuallyfor five years for a Social Investment and Economic Development Fund for the Americas to provideassistance for poverty reduction and increased economic opportunity in the region.

On January 7, 2004, President Bush proposed a new temporary worker program that would allow undocumented persons in the United States, and foreign workers, to work for a period of threeyears (which would be renewable one time) and receive legal temporary status. The proposal wassomewhat similar to legislation proposed by Senator McCain, S. 1461 , andRepresentatives Kolbe and Flake, H.R. 2899 , but no action was taken on thesemeasures. Prospects for action was thwarted by opposition from those who wanted to providebroader amnesty to undocumented workers in the United States as well as from those who believedthat such a proposal constituted a reward to those people living in the United States illegally.

President Bush met with other hemispheric leaders at a Special Summit of the Americas held in Monterrey Mexico from January 12-13, 2004. The leaders issued the Declaration of Nuevo LeÃ³n,which set forth reaffirmations and commitments in the three areas of economic growth with equity,social development, and democratic governance. Among the measures agreed upon was acommitment to reduce the cost of sending remittances in the region by at least half by 2008. TheDeclaration also supported a tripling of Inter-American Development Bank lending to micro, small,and medium-sized enterprises. While the Declaration included a commitment "to deny safe havento corrupt officials, to those who corrupt them, and their assets," it did not include a U.S. proposalthat would have barred corrupt officials from taking part in hemispheric meetings. In addition,although the Declaration welcomed progress toward the establishment of a FTAA, it did not includea U.S. proposal to note a January 2005 deadline for the agreement. (3) (For further information, see CRS Report RS21700 , Special Summit of the Americas -- Monterrey, Mexico, January 2004:Background and Objectives .)

Some observers, including many from Latin America, maintained that the Bush Administration did not pay enough attention to the region and to the problems of economic and political stability inseveral countries. U.S. policy was criticized for having returned to a policy of benign neglect as theAdministration focused its attention on such pressing problems as the global anti-terrorismcampaign, the war in Iraq, and homeland security. They argued that the United States cannot affordto let the region become unstable politically or economically, because it is an important market forU.S. exports, and an important supplier of U.S. energy needs, and increased instability could leadto increased illegal migration.

Others suggest that despite its attention to crises and issues worldwide, the United States maintained an active policy toward Latin America. They point to the momentum for free trade inthe region and to the assistance and support provided to Colombia and its neighbors as they combatdrug trafficking and terrorist groups in the Andean region. They maintained that the new U.S. focuson security issues worldwide will only solidify U.S. ties to the region through increased bilateral andregional cooperation such as the Inter-American Convention Against Terrorism.

Regional Issues

Colombia and the Andean Counterdrug Initiative

Congress has expressed concern about the problem of illegal narcotics in the Andean Region and divided over an appropriate policy. For over two decades, U.S. policy towards the AndeanRegion has focused almost exclusively on counternarcotics efforts, that is, curbing the cultivationof coca leaf, its transformation into cocaine, and its subsequent trafficking. Success in controllingcoca and coca base production in Bolivia and Peru seemed to be offset in the mid-to-late 1990s bythe expansion of coca cultivation into uncontrolled areas of Colombia, which previously had servedonly for the refinement of coca base into cocaine. In the last few years, drug traffickers have alsobegun to cultivate opium poppies and transform them into high-grade heroin in Colombia. Eightypercent of the world's cocaine originates in Colombia.

In 2000, the 106th Congress approved expanded political, economic, and military assistance to combat drug production and trafficking in Colombia under the Clinton Administration's proposalto support Plan Colombia ( P.L. 106-246 ), an initiative of then President Pastrana of Colombia(1998-2002). In 2002, it approved the Bush Administration's Andean Regional Initiative (ARI), thecontinuation of the Clinton policy in Colombia and a sizable expansion of assistance to six ofColombia's neighbors: Brazil, Bolivia, Ecuador, Panama, Peru, and Venezuela ( P.L. 107-206 and P.L. 107-115 ). ARI funding included antinarcotics assistance, known as the Andean CounterdrugInitiative (ACI), as well as Foreign Military Financing, Development Assistance, Child Survival andHealth funds, and Economic Support Funds. The 107th Congress also approved a major shift in U.S.Andean policy by authorizing the use of U.S. assistance to help Colombia counter threats to itsstability from illegal armed groups of the left and right which substantially finance their operationsthrough the drug trade.

The 108th Congress continued to scrutinize indicators of the effectiveness of U.S. assistance to the Andean region. (For FY2004, the Bush Administration budget request did not use the term"Andean Regional Initiative," instead making separate requests for the Andean CounterdrugInitiative, Foreign Military Financing, and the other development assistance programs from theirregular accounts.) According to United States and Colombian officials, coca cultivation dropped15% in Colombia during 2002 and 21% in 2003. This marked the first reduction in acreage devotedto coca cultivation in Colombia. Poppy cultivation was reduced by 24% in 2002. It is believed thatthe Plan Colombia goal of having sprayed 50% of the country's coca crop by the end of 2005 mayhave been accomplished two years ahead of schedule. It should be noted that spraying does notprevent, although it may discourage, the replanting of illicit crops. However, according to theAdministration, during 2002 and 2003, coca cultivation picked up in Bolivia, reversing a decliningtrend there. Peru's coca cultivation in 2003 decreased 15%.

Critics of U.S. policy contend that winning the war against drugs is a losing proposition as long as demand continues. They argue that policy should focus on the "demand side" because they viewproviding treatment for the users of illegal narcotics as the only permanent solution. The BushAdministration has, however, recast the debate, arguing that the United States faces not only a threatfrom drug production and trafficking in the Andean region, but also from the increasing instabilitybrought on by insurgent guerrilla organizations that are fueled by the drug trade. To the BushAdministration and its supporters, the assistance to Colombia is necessary to help shore up ademocratic government besieged by drug-supported leftist and rightist armed groups. Substantialassistance to Colombia's neighbors is warranted, they argue, because of an increasing threat fromthe spillover of violence from Colombia, and the possible resurgence of drug cultivation in somecountries and its spread from Colombia to others.

Although some critics agree with this assessment, they argue that the Bush plan overemphasizes military and counter-drug assistance and provides inadequate support for protecting human rightsand encouraging a peace process in Colombia. In particular, they express concern that currentmilitary assistance is drawing the United States into Colombia's guerrilla conflict in support ofarmed forces which, they charge, have substantial ties to rightist groups guilty of gross violations ofhuman rights. This concern grew with the August 2002 inauguration of President Alvaro Uribe, whois viewed by some as tolerating the actions of rightist armed groups, despite his statements that hewill neither tolerate violence against nor on behalf of the government. In July 2003, President Uribeannounced that an agreement had been reached with the rightist paramilitary umbrella organization,the United Self Defense Forces of Colombia (AUC), that would result in its disarmament by the endof 2005. Part of the demobilization plan entails a controversial legislative proposal by PresidentUribe to grant conditional amnesties to illegal combatants who disarm and provide some form ofrestitution under court supervision. Critics also voice skepticism that U.S.-funded aerial fumigationand alternative development projects can effectively cut coca and poppy cultivation, and provideadequate livelihoods to induce growers to voluntarily give up illicit crops.

ACI and Related Funding Programs. The United States has made a significant commitment of funds and material support to help Colombia and theAndean region fight drug trafficking since the development of Plan Colombia in 1999. Congresspassed legislation providing $1.3 billion in assistance for FY2000 ( P.L. 106-246 ) and has provideda total of $3.7 billion from FY2000 through FY2004 in both State Department and DefenseDepartment counternarcotics accounts. Since 2002, Congress has granted expanded authority to usecounternarcotics funds for a unified campaign to fight both drug trafficking and terroristorganizations in Colombia. The three main guerrilla groups in Colombia participate in drugproduction and trafficking, and have been designated foreign terrorist organizations by the StateDepartment. For FY2004, Congress approved $731 million for the Andean Counterdrug Initiative( P.L. 108-199 ). In November 2004, Congress again approved the Administration's request of $731million for FY2005 ( P.L. 108-447 .)

The ACI account funds, among other things, support for the eradication of illegal crops and the destruction of laboratories, as well as economic and social development. Congress also approved$110 million in FY2004 in Foreign Military Financing (FMF) for Colombia. In the past, FMFfunding has been used to train and equip a Colombian Army brigade to protect the CaÃ±o-LimÃ³n oilpipeline in Colombia. The FMF request for FY2005 is $108 million. Congress has regularlymaintained a number of provisions relating to human rights, aerial fumigation, and prohibiting U.S.military personnel from participating in combat operations. Current law also imposed a cap of 400each on U.S. military and civilian personnel deployed in support of Plan Colombia ( P.L. 106-246 ,Section 3204(b)through(d) as amended by P.L. 107-115 ). In response to an Administration request,Congress approved increasing the cap on military personnel to 800 and contract employees to 600in the FY2005 National Defense Authorization Act ( P.L. 108-375 , H.R. 4200 , H.Rept.108-767 ).

The Killing and Capture of U.S. Citizens. Congress has expressed repeated concerns regarding the capture and killing of various U.S. citizensby the Revolutionary Armed Forces of Colombia (FARC), the first case occurred on February 13,2003. On that morning, a Cessna 208 aircraft carrying four American contractors and a Colombiancrash landed in the Colombian province of CaquetÃ¡. The pilot and one of the contractors were shot,the other three contractors were captured by the FARC. Subsequently, in March 2003, three moreAmerican contractors were killed in a plane crash as they were searching for the capturedcontractors. Both planes involved in these crashes were Cessna 208s, which some contractemployees have complained are not suitable for use in Colombia because they cannot perform thesteep climbs required by mountainous terrain. A fifth American was killed in April 2003 when hisT-65 air tractor crashed while spraying opium poppies. While these flights were consideredaccidents, fumigation flights have been fired on, and since August 2003, two planes have beendowned by hostile fire. On August 25, 2003, a spray aircraft piloted by a U.S. citizen was shotdown, resulting in injuries to the pilot. An OV Bronco aircraft was downed on September 21, 2003,reportedly by hostile fire, killing its Costa Rican pilot. The ELN claimed responsibility for theshootdown. (4) Kidnappings of Colombians, includingseveral government officials, and foreignerspersist.

Air Bridge Denial Program. Following the April 2001 accidental shooting down of an airplane carrying U.S. missionaries in Peru by the Peruvianmilitary working with U.S. assistance, the Air Bridge Denial Program, an effort to intercept drugtrafficking flights, was suspended in both Peru and Colombia. Congress inserted language in theforeign aid funding bills requiring that safety enhancements be instituted before such flights couldresume in Peru. Although discussions are still ongoing with Peru, Secretary of State Powellrecommended to President Bush on August 5, 2003, that flights be resumed in Colombia afteragreement was reached with Colombian authorities on protocols to ensure enhanced safety. Theprogram resumed soon thereafter. The FY2005 request was for $21 million, and Congress approved$11.2 million.

U.S.-Latin American Trade Relations

Since the North American Free Trade Agreement (NAFTA) took effect in January 1994, its mixed and controversial reviews have led many Members of Congress to adopt a more cautiousattitude toward future trade negotiations. This outlook was reflected in the spirited debate overTrade Promotion Authority (TPA), which continued for eight years before legislation permitting"fast-track" approval of trade agreements was passed in August 2002. It was also seen in the debatethat emerged over the implementing legislation for the U.S.-Chile FTA, among others, that waspassed by Congress in July 2003. In the meantime, the Bush Administration is pursuing, and insome cases has completed, other FTAs with Latin American countries that will require congressionalapproval before they can take effect.

U.S.-Chile FTA. On January 1, 2004, the U.S.-Chile free trade agreement (FTA) went into effect. The United States and Chile signed the longanticipated FTA in Miami, Florida on June 6, 2003, concluding a 14-round negotiation process thatbegan on December 6, 2000. Congress held hearings before the House Ways and Means, SenateFinance, and both Judiciary Committees. The House passed the U.S.-Chile Free TradeImplementation Act ( H.R. 2738 ) on July 24, 2003 by a vote of 270 to 156, followed bythe Senate one week later, 66 to 31. President George W. Bush signed the implementing legislationinto law ( P.L. 108-77 ) on September 3, 2003. The FTA allows 85% of all consumer and industrialgoods to be traded duty free immediately, with 75% of tariffs on farm goods and Chile's luxury taxon automobiles to be eliminated within the first four years, and tariffs on sensitive goods tradedbetween the two countries to be phased out over a period of up to 12 years. Chile's rules governinginvestment, services trade, intellectual property rights, labor, environment, dispute resolution, andother issues critical to the United States are also clarified and made more transparent. There are noprovisions on antidumping or countervailing duties, key trade issues for Chile and Latin Americain general. Because multiple FTAs are now being contemplated, some Members of Congressexpressed serious reservations about certain provisions in the U.S.-Chile agreement becoming"templates" for future FTAs. In particular, congressional hearings focused on provisions related tolabor, capital controls, and the temporary entry for business persons.

U.S.-Dominican Republic-Central America FTA (DR-CAFTA). On December 17, 2003, the United States concluded negotiationson a U.S.-Central America Free Trade Agreement (CAFTA) with four of the five Central AmericanCommon Market (CACM) countries (Guatemala, Honduras, El Salvador, and Nicaragua). CostaRica agreed to CAFTA on January 25, 2004, following additional bilateral discussions with theUnited States on various sensitive issues. The agreement was signed by all five parties on May 28,2004, at the Organization of American States in Washington, D.C. Separately, the United States andthe Dominican Republic on March 15, 2004, concluded negotiations on a similar FTA. On August5, 2004, all seven countries signed the U.S.-Dominican Republic-Central America Free TradeAgreement (DR-CAFTA). Because of the many controversies surrounding the FTA, noimplementing legislation was introduced in the 108th Congress.

The DR-CAFTA negotiations were ground breaking in trying to reconcile the needs of five (and eventually six) different U.S. trading partners within a "bilateral" framework. The DR-CAFTA wasnegotiated in part as a regional agreement in which all parties would be subject to the same basicframework and rules, but each country was also able to define its own market access schedules. Thisflexibility allowed Costa Rica to delay joining the agreement and for the Dominican Republic to beadded as a new partner when it acceded to "the same set of obligations and commitments." It alsoappended a separately negotiated schedule for market access.

If the DR-CAFTA is implemented, more than 80% of U.S. consumer and industrial exports would become duty-free immediately, with all tariffs removed within 10 years. Tariffs would go tozero on information technology products, agricultural and construction equipment, paper products,chemicals, and medical/scientific equipment, among others. Over half of current U.S. farm exportsto the region would become duty free immediately, including "high quality" cuts of beef, cotton,wheat, soybeans, certain fruits, and vegetables, processed food products, and wine. For the mostsensitive agricultural products, tariffs and tariff rate quotas would be phased out over 15-20 years,with sugar, white corn, potatoes, and onions escaping full duty-free treatment for some countries. Advances were also made in other areas important to the United States including services trade,intellectual property rights, investment, and government procurement.

The DR-CAFTA, however, faces political uncertainty. In the United States, some industry groups oppose liberalizing trade rules for the region's major exports, apparel and agricultural goods,and labor advocates also resist the agreement. For the U.S. Congress, reconciling these diverseinterests is a difficult task given the competing nature of the negotiating goals. Also, support for theagreement has been jeopardized by the Dominican Republic's passage of a revenue bill that includesa 25% tax on beverages containing high fructose corn syrup. The USTR considers the tax "to beinconsistent with the Dominican Republic's obligations under the agreement" and has recommendedto Congress that implementing legislation not include the Dominican Republic, unless the tax isrepealed. As of mid-December 2004, the Dominican Senate had voted to repeal the tax, but furtherlegislative action is needed, leaving the fate of the DR-CAFTA unclear.

Panama Trade Agreement. On April 26, 2004, the United States and Panama initiated negotiations for a bilateral FTA. By building on theDR-CAFTA framework, negotiators have been able to move quickly. To date, six rounds have beencompleted, with a seventh round scheduled to begin January 10, 2005. Panama is a services-basedeconomy, which distinguishes it, and the trade negotiations, from those of its Central Americanneighbors. Agriculture and maritime concerns have been the most challenging issues to negotiate. The United States also has sought to loosen Panamanian rules limiting activities of foreignprofessionals and is focused intently on government procurement provisions, given Panama's planto invest some $8 billion to increase the capacity of the Panama Canal. Unlike the DR-CAFTA,there is little textile and apparel trade, and labor issues have not taken on the same importance. Panama is also a beneficiary of the Caribbean Basin Initiative's (CBI) unilateral trade preferencesof the United States and is among the largest recipients of U.S. foreign direct investment in LatinAmerica. Panama seeks to solidify U.S. market access and investment benefits in the FTA. For theUnited States, Panama has long been of strategic commercial and security importance, even as asmall trading partner. Much of the draft agreement has been completed. Sensitive market accessissues, especially agriculture, and government procurement issues related to projects in the PanamaCanal Authority, have yet to be finalized. The agreement is expected to be concluded early in 2005,and implementing legislation may be introduced in the 109th Congress.

Free Trade Area of the Americas. The Free Trade Area of the Americas is a regional trade proposal among 34 nations of the Western Hemisphere thatwould promote economic integration by creating, as originally conceived, a comprehensive(presumably WTO-plus) framework for reducing tariff and nontariff barriers to trade and investment. Formal negotiations commenced in 1998 and the process so far has led to three draft texts, the lastreleased at the eighth trade ministerial meeting that took place November 17-21, 2003, in Miami. The negotiating schedule called for a final agreement to be adopted by January 2005, with its entryinto force to occur no later than year end. The first deadline has been missed, and meeting thesecond seems unlikely.

The FTAA negotiations are at a crossroads, with Brazil and the United States, the co-chairs of the Trade Negotiations Committee (TNC) that oversees the process, at odds over how to proceed.Brazil has taken strong exception to the U.S. approach to the FTAA, particularly its firm stand ofrefusing to discuss agricultural subsidies, antidumping legislation, and alternatives to its"differentiated market access" proposal. Brazil responded with its own "Three Track Proposal" thatwould eliminate discussion of many issues of importance to the United States. To avoid an impasse,the United States and Brazil jointly authored the Ministerial Declaration of the eighth ministerialmeeting held in Miami on November 20-21, 2003, which defined how the FTAA negotiations wouldproceed. Although it reaffirmed the commitment to complete a "comprehensive and balanced"agreement, it did so in the context of a rather unorthodox compromise. The declaration would allowfor the possibility that countries could assume different levels of commitments, with a common setof rights and obligations applicable to all. The TNC was instructed to define the differences, but sofar has been unable to do so. Negotiations were on hold for much of 2004, but Brazil and the UnitedStates have agreed to restart the FTAA negotiations in January 2005.

In the meantime, both countries are courting other Latin American countries to join them in sub-regional trade agreements. Until Brazil and the United States come to some understanding ofhow to proceed, it appears that the region will continue to follow a path of integration based onbilateral and sub-regional trade arrangements, which most economists argue is far inferior to acomprehensive region-wide FTA.

Terrorism

In the aftermath of the September 2001 terrorist attacks on New York and Washington D.C., U.S. attention to terrorism in Latin America intensified, with an increase in bilateral and regionalcooperation. Latin American nations strongly condemned the attacks, and took action through theOrganization of American States to strengthen hemispheric cooperation. In June 2002, OASmembers signed an Inter-American Convention Against Terrorism in order to improve regionalcooperation, including a commitment by parties to deny safe haven to suspected terrorists. PresidentBush submitted the convention to the Senate in mid-November 2002 for its advice and consent,which was referred to the Senate Foreign Relations Committee (Treaty Doc. 107-18). Thecommittee held a hearing on the treaty on June 17, 2004, but no action was taken before the end ofthe 108th Congress. In the aftermath of 9/11, the OAS also reinvigorated the Inter-AmericanCommittee on Terrorism (CICTE), which cooperated on border security mechanisms, controls toprevent funding of terrorist organizations, and law enforcement and counterterrorism intelligence.

On October 27-28, 2003, the OAS held a Special Conference on Security in Mexico City that focused on identifying new threats, concerns and challenges facing the hemisphere and agreed ona cooperative approach toward addressing them. Among the threats identified in the adoptedDeclaration on Security in the Americas were "terrorism, transnational organized crime, the globaldrug problem, corruption, asset laundering, illicit trafficking in weapons and the connections amongthese activities." (5)

The State Department, in its annual report on worldwide terrorism ( Patterns of Global Terrorism, April 2004), highlighted terrorist threats in Colombia, Peru, and the tri-border region ofArgentina, Brazil, and Paraguay, which has been a regional hub for Hizballah and Hamas fundraisingactivities. In the aftermath of 9/11, U.S. attention focused on potential links in the region to the AlQaeda terrorist network, but the Patterns report maintained that reports of an Al Qaeda presence inthe tri-border region remained "uncorroborated by intelligence and law-enforcement officials." TheState Department also designated four terrorist groups (three in Colombia and one in Peru) asForeign Terrorist Organizations, and Cuba has been listed as a state sponsor of terrorism since 1982.

There were increased concerns in 2004 about potential Al Qaeda threats in Central America, although U.S. officials maintained that there was no evidence supporting such concerns. Hondurasdeclared a terror alert on August 23, 2004, after receiving information that Al Qaeda reportedly wasattempting to recruit Hondurans to attack U.S. and other embassies. (6) In June, Honduran officialssaid that a suspected terrorist cell leader, Adman G. El Shukrijumah had been spotted at an InternetcafÃ©. In August, El Salvador received threats from an Islamic extremist group to carry out attacksin the country if it did not pull its troops out of Iraq. Some press reports alleged that Al-Qaeda couldattempt to use a Salvadoran criminal gang, the Mara Salvatrucha, to infiltrate the U.S.-Mexicoborder, although Secretary of Homeland Security Tom Ridge maintained on September 27, 2004,that there was no indication of such infiltration along the border. (7) Moreover, the head of Interpol'sregional office in Central America stated in early October 2004 that reports of Al Qaeda links withCentral American gangs were mere speculation, with no firm basis in evidence. (8)

Through the State Department, the United States provides Anti-Terrorism Assistance (ATA) training and equipment to Latin American countries to help improve their capabilities in such areasas airport security management, hostage negotiations, bomb detection and deactivation, andcountering terrorism financing. ATA financing is generally provided through the annual foreignoperations appropriations measure. In FY2002, a total of $27.5 million was provided for the region,with $25 million for an anti-kidnapping program in Colombia (appropriated through an FY2002supplemental appropriations measure, P.L. 107-206 ) and $2.5 million for the regular WesternHemisphere program. For FY2003, the Administration's $3.6 million in ATA assistance wasprovided for the region, with $3.3 million of that for Colombia. For FY2004, an estimated $2.6million in ATA assistance was provided for the Western Hemisphere, while the Administrationrequested $5.2 million for FY2005, including $1 million for the tri-border region of Brazil, Paraguay,and Argentina, and $3.9 million for Colombia.

In the 108th Congress, the Senate Foreign Relations Committee report ( S.Rept. 108-56 ) to S. 1161 , the Foreign Relations Authorization Act for FY2004, urged the Departmentof State to pay particular attention to training and related equipment for countering terroristfinancing, transitional crime intelligence sharing, and border security in the Tri-border area. Asnoted above, the Senate Foreign Relations Committee held a June 17, 2004, hearing on theInter-American Convention Against Terrorism.

The U.S. Congress also expressed concern regarding the continuing investigation into the July 1994 bombing of the Argentine-Israeli Mutual Association (AMIA) in Buenos Aires that killed 86people. (Allegations have linked Hizballah, the radical Lebanon-based Islamic group, to the 1994bombing as well as to the1992 bombing of the Israeli Embassy in Buenos Aires that killed 30people.) Both the House and the Senate approved similar resolutions -- H.Con.Res. 469 (Ros-Lehtinen) and S.Con.Res. 126 (Coleman) -- on July 22, 2004, that, amongother provisions, urged Argentina to provide resources to investigate all areas of the AMIA case,encourage U.S. law enforcement support, and encourage the establishment of an OAS task force toassist in the investigation.

AIDS in the Caribbean and Central America

The AIDS epidemic in the Caribbean and Central America has begun to have negative consequences for economic and social development, and continued increases in infection ratesthreaten future development prospects. In contrast to other parts of Latin America, the mode oftransmission in several Caribbean and Central American countries has been primarily throughheterosexual contact, making the disease difficult to contain because it affects the general population.The Caribbean countries with the highest prevalence or infection rates are Haiti, with a rate of 5.6%;Trinidad and Tobago, with a rate of 3.2%; the Bahamas, with a rate of 3%; Guyana, with a rate of2.5%; and Belize, with a rate of 2.4%. (Belize and Guyana are considered Caribbean nations becauseof their extensive linkages.) Four other Caribbean countries -- the Dominican Republic, Suriname,Barbados, and Jamaica -- have rates over 1%. In Central America, Honduras has the highestprevalence rate of 1.8%, while Guatemala has a rate over 1%.

The response to the AIDS epidemic in the Caribbean and Central America has involved a mix of support by governments in the region, bilateral donors (such as the United States, Canada, andEuropean nations), regional and multilateral organizations, and nongovernmental organizations(NGOs). Many countries in the region have national AIDS programs that are supported throughthese efforts.

The U.S. Agency for International Development (USAID) has been the lead U.S. agency fighting the epidemic abroad since 1986. USAID's funding for HIV/AIDS in Central America andthe Caribbean region rose from $11.2 million in FY2000 to $33.8 million in FY2003. Because ofthe inclusion of Guyana and Haiti in the President's Emergency Plan for AIDS Relief (PEPFAR),FY2004 U.S. assistance to the region for HIV/AIDS increased to an estimated $56.6 million inFY2004, and the FY2005 request increased to $86 million.

In May 2003, Congress approved the United States Leadership Against HIV/AIDS, Tuberculosis, and Malaria Act of 2003, H.R. 1298 ( P.L. 108-25 ), which authorized $3billion per year for FY2003 through FY2008 to fight the three diseases worldwide. PEPFAR andthe legislation focus on assisting 12 African countries plus Guyana and Haiti, although the legislationnotes that other countries may be designated by the President. Some Members of Congress wantedto expand the list of Caribbean countries in the legislation. Both the House-passed FY2004-FY2005Foreign Relations Authorization Act, H.R. 1950 (Section 1818), and the Senate ForeignRelations Committee's reported FY2005 Foreign Relations Authorization Act, S. 2144 (Section 2518), had provisions that would have added 14 Caribbean countries to those listed in theMay 2003 legislation, but no final action was taken on these measures.

Country Issues

Argentina

Although Argentina emerged from its 2001-2002 economic and political crisis, the current administration of President NÃ©stor Kirchner faced considerable challenges. These include the abilityto build the political consensus needed in order to ensure sustainable economic growth and financialstability and the ability to negotiate a debt restructuring deal for over $100 billion in defaulted bonddebt.

A center-left Peronist (Justicialist Party or PJ), Kirchner emerged from a crowded April 2003 presidential race with 22% of the vote and was inaugurated to a four-year term on May 25, 2003. Hesucceeded another Peronist, Eduardo Duhalde, who had become President in January 2002 in theaftermath of the resignation of President Fernando de la Rua of the Radical Civic Union (UCR) inDecember 2001. Social protests over deteriorating economic conditions had led to De la Rua'sresignation. Although the country was under considerable stress in 2001 and 2002, the democraticpolitical system weathered the crisis and economic growth has resumed from a decline of almost11% in 2002 to an estimated increase of over 7% in 2003. The forecast for 2004 is for economicgrowth of 7%.

President Kirchner's bold policy moves in the areas of human rights and institutional reform helped restore Argentines' faith in government. He vowed to prosecute military officials responsiblefor past human rights violations during the last era of military rule (1976-1983). In the economicarena, the Kirchner government reached a three-year stand-by agreement with the InternationalMonetary Fund (IMF) in September 2003, after several months of tough negotiations, that providedcredit line of about $12.5 billion. Although IMF accords are not normally politically popular, theaccord was widely praised in Argentina as an agreement with realistic fiscal targets that wouldenable Argentina to deal with such issues as employment and social equity.

On the economic front, Argentina suspended its IMF loan program in mid-August 2004 because of IMF pressure on its debt negotiations with bondholders and on Argentine progress inimplementing key economic reforms. The IMF had delayed its third review of the stand-byagreement because of concerns about these issues; the delay held up disbursement of $778 millionto Argentina under the agreement. Argentina expected to renew talks with the IMF in December orJanuary 2005, after it had made progress in restructuring its $100 billion in defaulted bond debt. Thebondholders had strongly criticized the terms of Argentina's initial restructuring proposal, whichincluded a 75% "haircut" or debt reduction. A new Argentine proposal in early June 2004 includedan agreement to pay billions in unpaid interest, but the proposal again was criticized by manybondholders; a formal launching of the proposal was expected in late November 2004, but has beendelayed until mid-January 2005. Although Argentina's economic recovery has enabled it to achievethe macroeconomic targets set by the IMF, many poor and middle-class Argentines have yet to seemajor improvements in living standards.

U.S.-Argentine relations have been strong since the country's return to democracy in 1983 and were especially close during the Menem presidency. The tough U.S. approach toward Argentinaduring its political and financial crisis in 2001-2002 caused some friction in the bilateral relationshipand contributed to an increase of anti-Americanism in Argentina. At present, despite strong bilateralrelations, there have been several irritants in the relationship, such as Argentina's closer relationswith Cuba. U.S. officials also urged both the Argentine government and its private creditors to moveexpeditiously to work out a fair and mutually agreeable debt restructuring agreement, which theybelieve is critical to ensuring Argentina's continued economic recovery.

As noted above (section on Terrorism ), Congress has expressed concern regarding the continuing investigation into the July 1994 bombing in Buenos Aires of the Argentine-Israeli MutualAssociation (AMIA) that killed 86 people. Both the House and the Senate approved similarresolutions -- H.Con.Res. 469 (Ros-Lehtinen) and S.Con.Res. 126 (Coleman) -- on July 22, 2004, that urged Argentina to provide resources to investigate all areas ofthe AMIA case, encourage U.S. law enforcement support, and encourage the establishment of anOAS task force to assist in the investigation.

Bolivia

Political unrest in Bolivia led to the resignation of President Gonzalo Sanchez de Lozada on October 17, 2003, just fifteen months after he was elected. Succeeding him as President is hisformer Vice President, Carlos Mesa, a popular former television journalist, historian, and politicalindependent. This change in leadership came about after months of protests led by indigenousgroups and workers who carried out strikes and road blockages that resulted in up to 80 deaths inconfrontations with government troops. The focus of the protests was the continued economicmarginalization of the poorer segments of society especially in response to government plans toexport natural gas via a port in Chile, an historic adversary of Bolivia. The new President facesmany difficulties in governing a politically fractured society within a context of a highly mobilizedindigenous community, and the uncertainty of being able to obtain consensus on natural gas exportsas a basis for the country's future economic development. The change in government and the rolethat indigenous groups played in it represents challenges for U.S. policy, which has been seen asfocusing almost exclusively on coca eradication and less on equitable economic developmentpolicies.

Brazil

Luis InÃ¡cio Lula da Silva of the leftist Workers' Party (PT) was inaugurated President of Brazil on January 1, 2003, pledging to bring fundamental change to the country while maintaining soundeconomic policies. He won the October 2002 elections decisively, with the support of leftist partiesand a variety of centrist elements. As he sought to fashion support for his programs in Congress, hereached out beyond the parties that supported him in the election to other centrist parties, especiallythe centrist PMDB, but the alliance was strained by the October 2004 municipal elections and splitswithin the PMDB.

During his first two years in office, President Lula da Silva has pursued cautious economic policies and met and even surpassed previously established targets for International Monetary Fund(IMF) loans, while stressing that one of his main priorities is the eradication of hunger in the countrythrough programs called Zero Hunger and Family Payments. As a result of his policies, the countryhas experienced lower inflation, a strengthening of the currency, and a dramatic lowering of Brazil'scredit risk rating. Tackling long-standing problems that were not resolved during the presidency ofFernando Henrique Cardoso (1995-2002), President Lula da Silva obtained a reform of the socialsecurity system to make it more self-sustaining and a modification of the tax system to make it moreeffective and fair. While economic growth was only 0.3 % in 2003, most observers expect 3.5-4%growth in 2004, although interest rates and unemployment rates have remained fairly high. Toguarantee against external shocks to the heavily indebted economy, in early November 2003, Brazilagreed to extend the loan with the IMF and to maintain the previous austere fiscal targets. Underthe agreement, Brazil would have available about $20 billion in resources, including a rollover of$8 billion from the past loan, about $6 billion in fresh funds, and postponement of payment of $5.5billion due in 2005. Brazilian Finance Minister Palocci argues that the loan is an insurance packageand notes that Brazil may not draw upon the funds.

Relations with the United States have been generally positive, although President Lula da Silva has made relations with the neighboring countries in the Southern Common Market (Mercosur) hisfirst priority, has orchestrated the linking of the Mercosur with the Andean Community of Nations(CAN), and has been seeking to strengthen ties with the European Union and with othernon-traditional partners, including India and China. On June 20, 2003, President Lula da Silva madean official visit to Washington, D.C., and the countries' leaders resolved "to create a closer andqualitatively stronger [bilateral] relationship." Leaders agreed on a framework for regular high-leveldiscussions on a wide range of issues, including agreements to enhance cooperation in science andnuclear energy; to jointly promote HIV/AIDS treatment in the Portuguese-speaking African countriesof Mozambique and Angola; and to establish an energy partnership for cooperation on alternativeenergy sources. On October 4-6, 2004, Secretary of State Colin Powell visited Brazil for high leveldiscussions on international trade, hunger, and security matters, as well as Brazil's leading role inthe U.N.-sanctioned peacekeeping force in Haiti.

Lower level U.S. officials have visited Brazil on many occasions, with much of the discussion relating to the Free Trade Area of the Americas (FTAA) since Brazil and the United States areco-chairs of the FTAA Trade Negotiation Committee with responsibility for guiding the talks in thefinal phase of negotiations. Brazil has been taking the position that the FTAA must includemeasures to curtail agricultural subsidies and to reduce the use of anti-dumping and countervailingduties to be acceptable, while the United States has argued that the broader agricultural issues shouldbe resolved in the Doha round of WTO talks.

The WTO talks stalled in September 2003 in Cancun, Mexico, when Brazil led a group of developing countries called the G-20 that insisted that developed countries agree to reduceagricultural subsidies as part of any settlement. However, the talks were revived in early 2004, anda series of meetings led to agreement on August 1, 2004, on the framework of a possible agreement. This framework included commitments to make substantial reductions in trade-distorting domesticagricultural support programs, to phase-out all export subsidies under a yet-to-be-determinedschedule, and to significantly improve market access for agricultural products. (9)

In the FTAA talks, Brazil and the United States took divergent positions in the November 2003 Eighth Ministerial Meeting in Miami, Florida.. Brazil argued that if the United States insisted ondeferring action on agricultural subsidies and anti-dumping measures to the Doha round of WTOnegotiations, the agreement would be much less attractive for Brazil where agriculture has becomethe primary area for exports and development. In that case, Brazil argued that it would like to deferto the WTO negotiations a number of sensitive issues, including investment, services, governmentprocurement, and intellectual property rights. In a mini-ministerial meeting in Washington, D.C. inearly November 2003, Brazil and the United States agreed to a flexible formula for the FTAA, calledby some an "FTAA light" or an "FTAA ala carte." Under the formula, subsequently adopted by theMinisters, all of the countries would agree to a set of core obligations, while countries which favoreda more ambitious agreement would negotiate plurilateral agreements. When the Trade NegotiationsCommittee (TNC) met in Puebla, Mexico, in early February 2004, the delegates were unable to agreeon the FTAA common obligations, and the TNC was suspended. Despite four separate efforts inMarch, April, and May 2004, the cochairs were unable to agree upon a framework for the FTAAnegotiations, and it became increasingly clear that negotiations would not be completed by thescheduled deadline of January 2005.

At the same time, negotiations for a free trade agreement between the European Union and Mercosur that were scheduled to conclude by the end of October 2004, broke down in mid-July2004, with the EU demanding better access to Mercosur's services sector, while Mercosur insistedon greater access to the European market for Mercosur agricultural products. Under thesecircumstances, the two sides called for a meeting of the lead negotiators by the end of the year anda ministerial meeting in the first quarter of 2005.

Cuba

Cuba under Fidel Castro remains a hard-line communist state, with a poor record on human rights that has deteriorated significantly since 2003. With the cutoff of assistance from the formerSoviet Union, Cuba experienced severe economic deterioration from 1989 to 1993. While there hasbeen some improvement since 1994 as Cuba has implemented limited reforms, the economy remainsin poor shape.

Since the early 1960s, U.S. policy toward Cuba has consisted largely of isolating the island nation through comprehensive economic sanctions. The Bush Administration has further tightenedrestrictions on travel and remittances to Cuba significantly. Another component of U.S. policyconsists of support measures for the Cuban people, including private humanitarian donations andU.S.-sponsored radio and television broadcasting to Cuba, Radio and TV Marti. While there appearsto be broad agreement on the overall objective of U.S. policy toward Cuba -- to help bringdemocracy and respect for human rights to the island, there are several schools of thought on howto achieve that objective. Some advocate maximum pressure on the Cuban government until reformsare enacted, others argue for lifting some U.S. sanctions that they believe are hurting the Cubanpeople, and still others call for a swift normalization of U.S.-Cuban relations by lifting the U.S.embargo. There was considerable reaction to the Bush Administration's June 2004 tightening ofrestrictions for family visits and other categories of travel.

Congress continued its high level of interest in Cuba in the 108th Congress with a variety of legislative initiatives regarding sanctions and human rights. Several FY2005 appropriationsmeasures had provisions that would have eased Cuba sanctions, but ultimately these were notincluded in the FY2005 omnibus appropriations measure ( P.L. 108-447 , H.Rept. 108-792 ). TheHouse-passed version of the FY2005 Commerce, Justice, and State appropriations bill, H.R. 4754 , would have prohibited funds to implement, administer, or enforce recentrestrictions on gift parcels and on baggage for travelers. The House-passed version of the FY2005Transportation/Treasury appropriations bill, H.R. 5025 , had three Cuba provisions thatwould have eased sanctions on family travel, travel for educational activities, and private commercialsales of agricultural and medical products. The Senate committee version of the FY2005Transportation/ Treasury appropriations bill, S. 2806 , had a provision that would haveprohibited funds from administering or enforcing restrictions on Cuba travel. The Senate committeeversion of the FY2005 Agriculture appropriation bill, S. 2803 , would have allowedtravel to Cuba under a "general license" when it was related to the commercial sale of agriculturaland medical products. The Administration had threatened to veto both the Transportation/Treasuryand Agriculture appropriations measures if they had provisions weakening Cuba sanctions.

In other action, the 108th Congress demonstrated concern about the poor human rights situation by approving four resolutions: S.Res. 97 , H.Res. 179 , S.Res. 62 , and S.Res. 328 . Numerous other legislative initiatives were introduced that wouldhave ease sanctions on Cuba, but no action was taken on these bills: H.R. 187 , H.R. 188 , H.R. 1698 , H.R. 2071 , H.R. 3422 , H.R. 4678 , S. 403 , S. 950 , and S. 2449 / H.R. 4457 . Two initiatives, H.R. 3470 and H.R. 3670 ,would have tightened sanctions. H.R. 2494 / S. 2002 would have repealeda provision in law that prohibits trademark registration or courts from considering trademark claimsif the trademark was used in connection with confiscated assets in Cuba; in contrast, H.R. 4225 / S. 2373 would have applied a narrow fix to the law so that itconformed with a World Trade Organization ruling.

Since a 1995 U.S.-Cuban migration accord, the U.S. Coast Guard has interdicted thousands of Cubans at sea trying to enter the United States and returned them to Cuba, while those deemed at riskfor persecution have been transferred to Guantanamo and then found asylum in a third country. Those Cubans who reach shore usually are allowed to apply for permanent resident status in one yearpursuant to the Cuban Adjustment Act of 1966 (P.L. 89-732). This so-called "wet foot/dry foot"policy has been criticized by some as encouraging Cubans to risk their lives in order to make it tothe United States and as encouraging alien smuggling. Others maintain that U.S. policy shouldwelcome those migrants fleeing Communist Cuba whether or not they are able to make it to land.

Dominican Republic

President Leonel FernÃ¡ndez of the Dominican Liberation Party (PLD), who served as president previously (1996-2000), took office on August 16, 2004. FernÃ¡ndez is charged with helping theDominican Republic recover from a deep economic crisis that occurred primarily as the result ofthree major banking failures and bailouts in 2003. Since then, the country has faced high inflation,double-digit unemployment, currency depreciation, and chronic power shortages. PresidentFernÃ¡ndez used his electoral mandate to push the PRD-dominated Congress to pass tax increases aspart of a fiscal reform package necessary to restart a suspended $600 million IMF loan. The package has been controversial, however, as it contains a tax on fructose-sweetened drinks, aimedat U.S.- produced high fructose corn syrup. President FernÃ¡ndez and the Dominican Congress aretrying to negotiate a way to pass a 2005 budget that repeals the tax, complies with IMF fiscal targets,and placates the country's sugar industry. If the tax is not repealed, the Dominican Republic couldbe excluded from the U.S.- Dominican Republic - Central America Free Trade Agreement(DR-CAFTA).

Ecuador

In January 2003, Lucio Gutierrez, a former army Colonel who was part of the junta that toppled the government of Jamil Mahuad in January 2000, became the country's sixth president in sevenyears. Upon assuming the presidency, Gutierrez abandoned his populist rhetoric and adoptedeconomic reform and good governance policies in order to secure support from the United States andthe International Monetary Fund (IMF). Despite rapid economic growth driven by high oil prices,President Gutierrez's power has been limited by legislative gridlock, protests organized byindigenous groups that at once formed part of his governing coalition, and allegations of corruptionwithin his administration. Gutierrez's party, the Patriotic Society Party (PSP), won barely 5% of thevote in the regional and municipal elections held on October 17, 2004. Since that time, PresidentGutierrez has formed new alliances with mid-size parties, including that of exiled President AbdalÃ¡Bucaram, in order to stave off impeachment proceedings and shore up support for his government.

Despite some recent disagreements, Ecuador continues to cooperate with the U.S. counter-narcotics program and has mobilized its military and police forces to help control spillovereffects from the conflict in Colombia along its northern border. Ecuador and the United Statespossess a significant trade and investment relationship that has been enhanced since 1992 by theAndean Trade Preference Act. The United States has concluded six rounds of negotiations withEcuador, along with Colombia and Peru, for an Andean Free Trade Agreement. Ecuador was placedon the State Department's 2004 Tier 3 List of countries that had not adequately combated traffickingin persons, but avoided U.S. sanctions by making progress on that issue between June and September2004.

El Salvador

On March 21, 2004, businessmen Tony Saca of the conservative National Republican Alliance (ARENA) party soundly defeated his nearest rival, Shafick Handal, a former guerrilla andCommunist Party member, of the Farabundo Marti National Liberation Front (FMLN) to win theSalvadoran presidential elections. Mr. Saca took office on June 1, 2004, alongside Ana Vilma deEscobar, who became the first Salvadoran woman to serve as vice president. The new administrationis facing a divided legislature, in which the FMLN continues to hold 31 of 84 seats. President Sacascored a number of early legislative triumphs, such as the approval of the 2004 budget and toughlegislation to combat gang violence. Although 60% of Salvadoran approve of his overall jobperformance, 73% disprove of his August decision to send a new contingent of 380 Salvadoransoldiers to Iraq. The United States is working with President Saca to combat narco-trafficking, toresolve immigration issues, and to promote free trade, possibly through the proposed UnitedStates-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA). On December17, 2004, despite the opposition of the FMLN, El Salvador became the first country in CentralAmerica to ratify DR-CAFTA.

Guatemala

Since taking office on January 14, 2004, for a four-year term, President Oscar Berger has attacked corruption and enacted long-delayed military reforms. Since the 1980s, Guatemala has beenconsolidating its transition from a centuries-long tradition of mostly autocratic rule towardrepresentative government. A democratic constitution was adopted in 1985, and ademocratically-elected government was inaugurated in 1986. Democratic institutions remain fragile. A 36-year civil war ended in 1996 with the signing of the Peace Accords between the governmentand the left-wing guerrilla movement. The accords not only ended the civil conflict but alsoconstituted a blueprint for profound political, economic, and social change to address the conflict'sroot causes. They outline a profound restructuring of state institutions, with the goal of endinggovernment security forces' impunity from prosecution, and consolidating the rule of law; a majorshift of government funding away from the military and into health, education, and other basicservices to reach the rural and indigenous poor; and the full participation of the indigenouspopulation in local and national decision making processes. Berger has promised to make fulfillingthe Peace Accords a central theme of his administration.

Berger has pursued corruption charges against his predecessor, Alfonso Portillo, of the Guatemalan Republican Front (FRG), and other former FRG officials. His proposed economicreforms include new income tax rates and a temporary tax to fund programs related to the peaceprocess. He says passing the free-trade agreement signed with the United States is a top priority andthat he plans to stimulate the economy by encouraging private investment. The Financial ActionTask Force, an international organization dedicated to enhancing international cooperation incombating money-laundering, removed Guatemala from its list of non-cooperative countries in July2004. (10) Guatemala had been on the list of ninecountries -- the only one in the Americas -- duringthe Portillo Administration. (11) The Task Forcewelcomed progress made by Guatemala in enactingand implementing anti-money laundering legislation.

The United States has prohibited International Military Education and Training (IMET) and Foreign Military Financing (FMF) to Guatemala since 1990 because of human rights concerns. TheBerger Administration has lobbied Washington to ease the military aid prohibition, noting thatwithin its first six months in office it had reduced the size of the military by half and developedproposals for other military reforms. The government says it needs funds to modernize the militaryand provide equipment for border protection and counternarcotics efforts. While applauding thereduction in forces, some human rights groups say that other reforms required by the Peace Accords,such as adopting a military doctrine limiting the military to external defense, have not yet beenenacted. They also express concern about continued human rights abuses, impunity for suchoffenses, and corruption among current and former military officials.

Furthermore, the proposed U.N. Commission for the Investigation of Illegal Armed Groups and Clandestine Security Organizations (CICIACS) has still not been formed. CICIACS, which wouldinvestigate and prosecute clandestine groups, through which many military officers allegedly engagein human rights violations, drug trafficking, and organized crime, was approved by the PortilloAdministration and has yet to be approved by the Guatemalan Congress.

Some human rights groups argue that the U.S. ban on military aid should not be lifted until these and other reforms are carried out, and others not until reparations are made to civilian victimsof the armed conflict. (12) The Guatemalan Congressauthorized reparations to former paramilitaries(PACs) on August 19, 2004, despite opposition from human rights groups and others saying theCongress should not bow to threats of violence from the PACs if the legislation were not passed.

Regarding respect for human rights, Guatemala has made enormous strides, but significant problems remain. The armed conflict is definitively ended, the state policy of human rights abuseshas been ended, and civilian control over military forces has increased . On the other hand, securityforces reportedly continue to commit gross violations of human rights with impunity, and Guatemalamust still overcome a deep ly embedded legacy of racism and social inequality. The U.N., the OAS,and the United States have all expressed concern that human rights violations have increased overthe past several years, and that the Guatemalan government has taken insufficient steps to curb themor to implement the Peace Accords. In August 2004, the U.N. Office of the High Commissioner forHuman Rights opened an office in Guatemala. It succeeds the U.N. Verification Mission inGuatemala, which withdrew in December 2004, after verifying compliance with the Peace Accordsfor ten years. In September 2004, U.N. Secretary General Kofi Annan said that Guatemala's politicalprocess had matured to the point where the country should now be able to deal peacefully with allof its unresolved issues.

From1997 through 2003, U.S. assistance to Guatemala focused on support of the peace process. U.S. aid to Guatemala no longer includes a project specifically in support of the peace process andhas been cut by more than a third in the past three years, declining from about $60 million in FY2002to $38 million requested for FY2005. Congress criticized the Administration's strategy of reducingstaffing and funding for Guatemala for FY2004 in its conference report for the FY2004 omnibusappropriations bill ( H.Rept. 108-401 ), saying it would "limit the ability of the United States to beresponsive at this critical juncture in Guatemala's history."

The FY2005 consolidated appropriations act ( P.L.108-447 ) continues to limit IMET for Guatemala to expanded- IMET, or training for civilians, military justice reform, and respect forhuman rights. FMF would continue to be prohibited. Up to $3.227 million in prior year "MilitaryAssistance Program" funds available for Guatemala may be used for non-lethal defense items if theSecretary of State certifies that certain military reforms have been enacted. These would include thelimitation both "in doctrine and practice" of military activities to those permitted by the 1996 PeaceAccords and cooperation with civilian authorities in the investigation and prosecution of militarypersonnel implicated in human rights violations and other criminal activities. The Guatemalangovernment would have to carry out other prerequisites for the release of military assistance funds,including working with the U.N. to establish CICIACS; continuing to make the military budgetprocess transparent and accessible to civilian authorities and the public; facilitating the promptestablishment of a U.N. High Commissioner for Human Rights office in Guatemala; and increasingefforts to combat narcotics trafficking and organized crime. The act also earmarks for Guatemala$6 million in Economic Support Funds and $1 million in Andean Counternarcotics Initiative funds. The bill also stipulates that Child Survival and Health, and Development Assistance funding levelsshould not be less than that provided in FY2004, earmarking $22.5 million for Guatemala. Themanagers' statement commended the Guatemalan (and Nicaraguan) anti-corruption office andrecommended $250,000 for the office.

Haiti

Long-term political conflict in Haiti escalated until armed rebellions around the country led to the departure of President Jean-Bertrand Aristide on February 29, 2004. An interim government,headed by Prime Minister Gerard LaTortue, has taken over, but ongoing violent protests by bothsides continue. Security conditions are so tenuous that some observers are expressing concerns thata civil war will break out or that Haiti will become a "criminal state." Aristide went into exile inSouth Africa on May 31, 2004. Some supporters maintain that he is still the democratically electedpresident and that the United States forced him from office, a charge the Bush Administration denies.

Former soldiers have demanded restoration of the Haitian army, which had a long history of human rights abuses and was disbanded by Aristide in 1995. They have seized control of towns,assumed security responsibilities alongside local police, or expelled police officers in various partsof the country. Supporters of Aristide, demanding his return to office, began violent protests onSeptember 30, 2004, the anniversary of the coup that removed Aristide from office in 1991. Thesehave left at least 55 dead, including police officers who were decapitated. The Bush Administrationcondemned the violent "systematic campaign to destabilize the interim government and disrupt theefforts of the international community to assist the Haitian people" it says is being carried out bypro-Aristide armed gangs. (13) Both sides areheavily armed. The Haitian National Police areunderstaffed and under-equipped to maintain order.

At the end of its initial six-month authorization, the U.N. Stabilization Mission in Haiti had 6,060 personnel, still less than the full 8,000 troops and civilian police it was authorized to have, andis finding it difficult to carry out its mandate to establish law and order. Two U.N. peacekeepers havebeen wounded. In addition, the mission's efforts were diverted by the need to help protect anddeliver emergency assistance following Haiti's natural disasters in spring and fall 2004.

Congressional concerns relating to Haiti include support for strengthening the transition to democracy; the cost and effectiveness of U.S. assistance; protection of human rights andimprovement of security conditions; combating narcotics trafficking; limiting illegal Haitianmigration; and addressing humanitarian needs.

Beginning in 2000, in response to an unresolved elections dispute, the Clinton Administration redirected U.S. humanitarian assistance through non-governmental organizations, rather than throughthe Haitian government. The Bush Administration continued this policy throughout the Aristideadministration. Aid began to decrease at the end of the Clinton Administration and continued to doso for the first two years of the Bush Administration. The Bush Administration launched aninitiative in 2003 to prevent the transmission of the HIV/AIDS virus from mothers to children; Haitiwas one of 14 countries included in the program. According to USAID, between four and sixthousand Haitian children are born with the virus each year. The Administration is providing aid tothe interim LaTortue government, and will reportedly consider requests from that government forweapons purchases, which would mean lifting the arms embargo against Haiti that has been in placesince a military coup ousted Aristide in 1991. (14)

The FY2004 foreign aid appropriations legislation ( P.L. 108-199 , Division D) continues to allow Haiti to purchase defense articles and services for the Haitian Coast Guard, prohibits the useof funds to issue a visa to any alien involved in extrajudicial and political killings in Haiti, allocates$5 million to the OAS Special Mission in Haiti and $19 million in Refugee and Entrant Assistancefunds to communities with large concentrations of Haitian (and Cuban) refugees of varying ages forhealthcare and education. Before the current unrest, Haiti was going to receive an estimated $55million in U.S. foreign aid in FY2004. Additional humanitarian and disaster assistance was madeavailable following floods in February and hurricanes in fall 2004, which left thousands dead orhomeless. More costs were incurred with the U.S. military forces in Haiti. The BushAdministration has requested an additional $120 million in assistance to Haiti, for a total of about$230 million for FY2004-FY2005. According to USAID, the aid will be distributed as follows: $22million for job creation; $45 million for government infrastructure support; $26 million for improvedsecurity through improved administration of justice; $122 million for humanitarian aid, includinghealth care, nutrition, and education; and $15 million for elections support.

The FY2005 consolidated appropriations act ( P.L. 108-447 ) contains several provisions regarding Haiti. The law (1) makes International Military Education and Training funds and ForeignMilitary Financing available only through regular notification procedures; (2) appropriates $20million for child survival and health programs, $25 million for development assistance, includingagriculture, environment, and basic education programs; $40 million in ESF for judicial reform,police training, and national elections; "sufficient funds" for the OAS to help Haiti hold electionsin 2005, and $2 million to Zanmi Lasante for maternal and child health activities; (3) allows Haitito purchase defense articles and services for its Coast Guard; (4) notes disappointment on the Haitiangovernment's role in the trial and acquittal of Louis Jodel Chamblain, and the deteriorating securityhuman rights situation; (5) requires a report within 90 days on a multi-year assistance strategy; (6)and encourages the Administration to help Haitian and NGO officials to devise a reforestationstrategy and to provide a report on that strategy within 180 days. The conference report was agreedto in both houses on November 20, 2004. The earlier Senate version had made several findingsregarding improving security in Haiti, concluding that "the failure to establish a secure and stableenvironment and to conduct credible and inclusive elections will likely result in Haiti's completetransition from a failed state to a criminal state."

On July 20, 2004, international donors pledged more than $1 billion over the next two years to help Haiti rebuild its infrastructure, strengthen institutions, and improve basic services. The interimgovernment signed an agreement with the U.N. and the OAS on August 23 to hold presidential,parliamentary, and local elections in 2005. The U.N. established a trust fund for the elections,started with $9 million in U.S. funds, which they hope will reach $41 million. Members of formerPresident Aristide's Fanmi Lavalas party have threatened to boycott the elections and claim to facepolitical persecution by the interim government. Several were arrested in October; reportedly thecharges have not been made public.

Honduras

Honduras faced enormous challenges in the areas of crime (especially youth gangs known as maras ) and human rights and improving overall economic and living conditions in one of thehemisphere's poorest countries. Inaugurated to a four-year term in January 2002, current PresidentRicardo Maduro is the 6th elected president since the country's return to civilian rule. The UnitedStates has a close relationship with Honduras, characterized by significant foreign assistance, animportant trade partnership, a military presence in the country, and cooperation on a range oftransnational issues, including anti-narcotics efforts and more recently the fight against terrorism. Negotiations for a U.S.-Central America Free Trade Agreement (CAFTA) with five CentralAmerican countries concluded in December 2003, which was signed on May 28, 2004; subsequentlya combined U.S.-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) wassigned on August 5, 2004. The Bush Administration views DR-CAFTA as a means of solidifyingdemocracy in Honduras and promoting safeguards for environmental protection and labor rights inthe country; critics fear that a CAFTA without strong environmental and labor provisions would donothing to spur reforms in the country. As noted above ( U.S.-Latin American Trade Relations ),Congress did not consider implementing legislation for the DR-CAFTA by the end of the 108thCongress.

Mexico

Congressional interest in Mexico generally focuses on trade, migration, drug trafficking andhuman rights issues, but more attention to migration was sparked by President Bush's January 7,2004 immigration proposal. The President called for an overhaul of the immigration system topermit the matching of willing foreign workers with willing U.S. employers when no Americans canbe found to fill the jobs. Under his proposal, temporary legal status would be available to newforeign workers who have work offers in the United States and to undocumented workers alreadyemployed in the United States for a term of three years that could be renewed but would end at somepoint. President Fox welcomed the proposal when he met President Bush on several occasions inearly 2004, and he called for renewed attention to immigration matters when he called tocongratulate President Bush on his re-election and when they met at an APEC summit in November2004. The proposal was in keeping with Fox-Bush pledges in 2001, subsequently stalled as a resultof terrorism concerns, to work to achieve more orderly and humane migration flows between thecountries. The President's proposal supplemented other congressional proposals with guest workerprovisions, including S. 1461 (McCain)/ H.R. 2899 (Kolbe), S. 1387 (Cornyn), S. 2010 (Hagel and Daschle), S. 2381 (Kennedy)/ H.R. 4262 (Gutierrez), and S. 1645 (Craig)/ H.R. 3142 (Cannon). In a related development, Congress passed the Intelligence Reform and TerrorismPrevention Act of 2004 ( S. 2845 / P.L. 108-458 ) in December 2004, with provisions toincrease immigration law enforcement personnel and to adopt more stringent border control andidentity document standards.

On trade issues, Mexico is the United States' second most important trading partner, with two-way trade tripling since 1994 under the North American Free Trade Agreement (NAFTA), butthere are various disputes between the countries. Mexico has complained, for example, that theUnited States is still failing to grant Mexican trucks access to U.S. highways under the terms of theNAFTA pact, and the U.S. Supreme Court ruled against non-governmental plaintiffs in June 2004that an environmental impact statement is not required. However, the Transportation-TreasuryAppropriations for FY2005, incorporated into the Consolidated Appropriations Act for FY2005( H.R. 4818 / P.L. 108-447 ), contains a provision that prohibits implementation of anAdministration rule allowing Mexican and Canadian truck owners and operators an additional twoyears to bring their trucks into compliance with U.S. safety provisions. The United States hascomplained about Mexico's 20% tax on soft drinks made with high fructose corn syrup (HFCS) thathas had a devastating impact on HFCS and corn sales from the United States, and, in September2004, the United States and Mexico selected the panelists for a WTO dispute settlement panel toconsider the U.S. claims against Mexico's HFCS tax, although producer groups are still hoping toachieve a negotiated settlement. Mexico banned beef imports from the United States in December2003 following the discovery of one cow infected with mad cow disease in Washington state. InMarch and April 2004, following the earlier announcement of new U.S. procedures that wouldexclude unhealthy cattle from the food chain, Mexico announced that it was resuming beef trade withthe United States, but was retaining the ban on live cattle imports.

On drug trafficking issues, the State Department's March 2004 International Narcotics Control Strategy Report praised Mexico for the capture of major drug cartel figures, for the seizure of largequantities of illicit drugs, and for unprecedented levels of cooperation with the United States incounter-narcotics efforts. The State Department reported in April 2004, however that marijuanacultivation increased 70% and opium poppy cultivation increased 78% in Mexico in 2003, in partbecause of unusually favorable growing conditions. In recent law enforcement actions withU.S.-Mexico cooperation, Efrain Perez and Jorge Arellano Felix, two alleged lieutenants of theArellano-Felix drug cartel, were arrested in Mexico on June 3, 2004, and Ramiro Hernandez, oneof the alleged leaders of the Gulf cartel was arrested in Mexico on August 10, 2004. On October 19,2004, DEA officials announced the dismantling through Operation Money Clip of a major Mexicanmoney-laundering and drug trafficking organization.

On human rights issues, President Fox has freed several critics from jail, and he has designated special prosecutors to prosecute those responsible for human rights abuses in the 1970s and 1980s. Although a number of suspects have been arrested for past abuses, human rights groups argue thatthe special prosecutors have failed to produce significant results. In late January 2004, President Foxnamed a special prosecutor to coordinate the federal and state efforts to find and punish thoseresponsible for a decade of slayings of over 300 women in Ciudad Juarez, across the border from ElPaso, Texas. The State Department's March 2004 report on human rights conditions in Mexiconotes that the government's efforts to improve the human rights situation appeared to stall, with afew exceptions. On July 24, 2004, a Mexican judge refused a special prosecutor's request for anarrest warrant against former President Luis Echeverria for involvement in a 1971 massacre, ongrounds that the statute of limitations had expired. On December 10, 2004, President Fox,responding to an analysis by the U.N. High Commission for Human Rights, presented a series ofproposed reforms to discourage torture and to strengthen the rights of defendants in Mexico.

Panama

Panama has made notable political and economic progress since the 1989 U.S. military intervention that ousted the military regime of General Manual Antonio Noriega from power. Sincethen, the country has had four successive civilian governments, with the current administration ofPresident Martin Torrijos of the Democratic Revolutionary Party (PRD) elected in May 2004 andinaugurated on September 1, 2004. In the May 2, 2004, election, Torrijos -- the son of formerpopulist leader General Omar Torrijos -- won a decisive victory with 47.5% of the vote in afour-man race. His electoral alliance also won a majority of seats in the unicameral LegislativeAssembly. Torrijos succeeded President Mireya Moscoso of the Arnulfista Party (PA) who beenelected in May 1999. The most significant challenges facing the new government include dealingwith the funding deficits of the country's social security fund (Caja de Seguro Social), developingplans for the expansion of the Panama Canal, and combating poverty and unemployment.

President Moscoso had been elected as a populist, with pledges to end government corruption and reduce poverty, but her campaign pledges proved difficult to fulfill amid high-profile corruptionscandals and poor economic conditions over the past several years. As a result, the President'spopularity fell considerably in her last year in office. In one of her last presidential acts, PresidentMoscoso pardoned four anti-Castro activists who had been sentenced in April 2004 to prisons termsranging from seven to eight years for involvement in an alleged plot to kill Fidel Castro. One of thefour, Luis Posada Carriles, was allegedly involved in the 1976 bombing of a Cuban airliner. Cubaresponded to the pardon by breaking diplomatic relations with Panama. President Torrijos criticizedthe pardons and vowed to begin the process of reestablishing relations with Cuba.

Before the December 1989 U.S. intervention, the Panamanian economy had been severely damaged by two years of U.S. economic sanctions and economic disruption caused by the politicalcrisis. Since 1990, the economy has rebounded, registering real growth annually, although the levelof annual growth has varied a lot and slowed considerably in 2001 and 2002. Although the economyhas improved considerably since 1990, poverty has worsened over the past three years because ofslow economic growth. Income distribution remains highly skewed and high unemployment hasbeen a persistent problem.

The United States has close relations with Panama, stemming in large part from the extensive history of linkages developed when the Panama Canal was under U.S. control and Panama hostedmajor U.S. military installations. The current U.S. relationship with Panama is characterized byextensive cooperation on counternarcotics efforts as well as U.S. assistance to help Panama assurethe security of the Canal and the security of its border with Colombia. U.S. assistance to Panamahas increased in the past several years with the country receiving assistance under the BushAdministration's Andean Regional Initiative to help Colombia and its neighbors combat drugtrafficking.

U.S.-Panamanian negotiations for a bilateral free trade agreement began in late April 2004. To date, six negotiating rounds have been held, with the most recent concluding in mid-December 2004.Reportedly significant progress has been made and negotiators hope to conclude an agreement inearly 2005. The most sensitive issues in the talks are differences over market access for certainagricultural products; for Panama, potatoes, onions, and vegetable oils are sensitive products, whilesugar remains a sensitive product for the United States. (15) The next round of talks will take place theweek of January 10, 2005, in Washington.

with Panama wanting more access to the U.S. agricultural market, but fearing the full opening of its agricultural market to U.S. products. (16) Panamais seeking an FTA as a means of increasing U.S.investment in the country, while the Bush Administration has stressed that an FTA with Panama, inaddition to enhancing trade, would further U.S. efforts to strengthen support for democracy and therule of law. Since Panama has a service-based economy, it traditionally has imported much morethan it exports to the United States. In 2003, the U.S. trade surplus with Panama was $1.5 billion,with Panama exporting $301 million in goods and importing $1.8 billion in merchandise. The stockof U.S. foreign investment in Panama was estimated at $20 billion in 2002, surpassing the combinedU.S. foreign investment in the five other Central American nations.

Peru

Peru under President Alejandro Toledo has been characterized by two seemingly contradictorytrends: high economic growth and extremely low popularity of the president. President Toledo hasbeen widely criticized as having weak leadership skills, his image has been damaged by personalissues, and his administration tarnished by corruption charges. Toledo's public support has remainedlow for two years, and was at 11% in October 2004. Many Peruvians wonder whether he will be ableto survive politically until the end of his term in 2006. Toledo denies allegations of corruption, andsaid he would open his bank accounts to public scrutiny. Although the scandals are limited incomparison to the widespread corruption of the earlier Fujimori administration, they have proveddamaging to Toledo, who came to office as a reformer.

Toledo has presided over 37 consecutive months of economic growth, in contrast to four years of stagnation under his predecessors. Peru has been more stable economically than its neighbors. Under Toledo, Peru has exhibited one of the highest growth rates in Latin America, with anincreased economic output of over 4% for 2003 and 2004. The public is impatient, however, for arapid improvement in its standard of living: 54% of the population lives in poverty, and 43% areunderemployed. Responding to nearly constant, widespread protests by teachers, farmers, and othersfor higher wages, Toledo has declared several states of emergency. Opposition in Congress --where no party holds a majority -- has also limited the President's ability to push through economicreforms. In July 2004, Toledo was further weakened by his party's loss of the leadership of theunicameral Congress.

Peru is a major illicit drug-producing and transit country. According to the State Department's March 2004 international narcotics report, Peru made progress in the preceding year on manycomponents of the U.S.-Peru counternarcotics program, including the reduction of coca cultivationby 15%, and the signing of an extradition treaty. The United States and Peru signed a five-yearcooperative agreement for 2002-2007 that links alternative development to coca eradication moredirectly than past programs have. After thousands of coca growers protested against forced cocaeradication, the government and growers signed an agreement calling for the "gradual and fixed"reduction of coca leaf cultivation and restricted forced eradication. Peru is the second largestbeneficiary, after Colombia, of the Andean Counterdrug Initiative. For FY2004, Peru was allocated$66 million for interdiction, $50 million for alternative development, and $1.7 million in ForeignMilitary Financing (FMF). For FY2005, the Administration requested $62 million for interdiction,$50 million for alternative development, and $1 million in FMF.

The FY2005 consolidated appropriations act ( P.L. 108-447 ) contained several provisions regarding Peru. Under Economic Support Funds, $8 million was earmarked for Peru and $3 millionfor the Peru-Ecuador Peace initiative. Under the Andean Counterdrug Initiative, Peru was allocateda total of $116.3 million: $62 million for interdiction and $54.3 million for alternative development. The act continues to prohibit resumption of a Peruvian air interdiction program until enhancedsafeguards are in effect, with a 30-day notification to Congress before resumption. Peru was allotted$1 million for Foreign Military Financing funds.

Support for democracy and human rights also is a U.S. concern in Peru. U.S. initiatives include the provision of $50 million over five years to support consolidating democratic reform, $3.5 millionto support the Truth and Reconciliation Commission in investigating past human rights abuses, andthe continued declassification and delivery of State Department documents requested by Peru'sCongress to support its investigation into corruption and abuses under the Fujimori government. President Alberto Fujimori fled the country in the wake of scandals in 2000. Vladimiro Montesinos,Fujimori's spy chief who had ties to U.S. agencies, continues to face trials on dozens of chargesranging from influence peddling to directing a death squad.

The case of Lori Berenson, an American jailed in Peru, has been an ongoing issue in bilateral relations. Berenson's 1996 conviction by a secret military tribunal was overturned, but she wasconvicted again by a civilian court on charges of collaboration with terrorists. The Inter-AmericanCourt of Human Rights agreed in September 2002 to consider her case. Hearings were held in Mayand June 2004. Many observers were surprised by the Court's decision, announced on December3, 2004, which upheld her conviction. The ruling represents a reversal of a 2002 Inter-AmericanCommission on Human Rights decision, which found Peru responsible for violations of the right tojudicial guarantees and recommended Peru make amends for violations of Berenson's human rights. Her 20-year sentence will end in 2015.

The $1.6 billion Camisea natural gas project in Peru, supported by U.S. investors, generated controversy in the 108th Congress. Critics, including some Members of Congress, some U.S.officials, and international environmental groups, expressed concern about its negative impact onindigenous societies and the environment, including a pristine tropical rain forest and Peru's onlymarine sanctuary for endangered birds and mammals. Supporters of the project say it will contributegreatly to Peru's economy, including some $5.5 billion in tax revenues, and $100 million annuallyto affected communities, and will reduce pollution in Lima. Two Texas energy companies areinvolved in the project: Hunt Oil Company, and the Kellogg Brown and Root unit of HalliburtonCompany. In August 2003, the U.S. Export-Import Bank board rejected a request for about $214million in loan guarantees for the project based on concerns for the environment and indigenouspeople in the Amazon. The Inter-American Development Bank (IDB) approved $135 million inloans to the project in September; the United States abstained. According to the U.S. Agency forInternational Development, U.S. environmental laws required the Treasury Department to vote noon the loans because the required environmental studies had not been completed. In August 2004,gas from Camisea reached Lima. The FY2005 consolidated appropriations act also included $8million to implement a regional strategy for conservation in the Amazon basin countries, includingprograms to improve the capacity of indigenous communities and local law enforcement agenciesin indigenous reserves.

Venezuela

An oil-exporting South American nation with a population of about 25 million, Venezuela has been wracked by several years of political turmoil under the rule of President Hugo Chavez, who wasfirst elected in 1998. Under Chavez, Venezuela has undergone enormous political changes, with anew constitution in place, a new unicameral legislature, and even a new name for the country, theBolivarian Republic of Venezuela. Chavez was re-elected President with a new six-year term in July2000 under the new constitution. Although President Chavez remained widely popular untilmid-2001, his popularity has eroded considerably after that amid concerns that he was imposing aleftist agenda on the country and that his government was ineffective in improving living conditions. In April 2002, massive opposition protests and pressure by the military led to the ouster of Chavezfrom power for a brief period. However, the military ultimately restored him to power. Politicalopposition to Chavez's rule has continued since his return to office. From early December 2002until early February 2003, the opposition orchestrated a general strike that severely curtailedVenezuela's oil exports and disrupted the economy but was unsuccessful in getting President Chavezto agree to an early non-binding referendum on his rule or new elections.

After months of negotiations facilitated by the Organization of American States (OAS) and the Carter Center, the government of Hugo Chavez and the political opposition signed an agreement inMay 2003 that set forth mechanisms to resolve the political crisis. This included holding apresidential recall referendum pursuant to constitutional provisions, which ultimately was held onAugust 15, 2004. Leading up to the referendum, public opinion polls conducted by various surveyfirms yielded significantly different results, with some favoring the opposition and some favoringChavez, but by early August 2004 a number of polls showed Chavez with an advantage. In the end,Chavez convincingly won the overall vote by a margin of 59.3% to 40.7%. The opposition claimedfraud and refused to accept the outcome, but both the OAS and Carter Center concluded that the voteresults were accurate and conducted an additional audit of the vote to confirm the results.

The United States has traditionally had close relations with Venezuela, but there has been friction in relations with the Chavez government. The Bush Administration expressed strong supportfor the work of the OAS in resolving the crisis, welcomed the May 2003 political accord, andsupported its implementation. After the recall referendum, the Administration congratulated theVenezuelan people for their commitment to democracy and commended the work of the OAS andCarter Center. At the same time, U.S. officials stressed the importance of reconciliation on the partof the government and the opposition in order to resolve their political differences peacefully. Adilemma for U.S. policymakers has been how to press the Chavez government to adhere todemocratic principles without taking sides in Venezuela's polarized political conflict. SinceVenezuela is a major supplier of foreign oil to the United States (the fourth major foreign supplierin 2003, after Saudi Arabia, Canada, and Mexico), a key U.S. interest has been ensuring thecontinued flow of oil exports at a reasonable and stable price.