Investment Under CAFTA
CAFTA addresses more than trade in goods–it is also an agreement on the rules of investment. Because NAFTA and the recent US bilateral trade agreements with Chile and Singapore are the templates for CAFTA, it is clear that Central American governments would be significantly restricted in their ability to regulate foreign investment so that it promotes their own sustainable development. The investment provisions in the most recently negotiated free trade agreements clearly give greater rights to foreign investors than to domestic investors and, ultimately, ordinary citizens. Furthermore, no binding commitments are being sought to ensure respect for labor rights and environmental regulations in accordance with international standards.
In Central America, while capital investments are critically needed for all manner of human and economic development goals, the quality of investment matters more than the overall quantity. Quality investments help distribute wealth, and promote economic growth that improves human development for the benefit of the majority of people. CAFTA is not expected to require foreign investors to use local materials and transfer technology through their business investments to local people. Without such requirements, productive investments can be isolated from the rest of the economy, offering limited benefit in terms of circulating money through the economy in the country, and little job creation.
Central American governments have been unable to attract investment that would stimulate domestic industry or contribute significantly to poverty reduction. The majority of foreign direct investment flowing into the region has been directed towards assembly plants know as maquiladoras in the clothing industry. These factories generate very little value added in the country, and they are not linked to other local industries.
The horrendous labor rights violations that occur in maquiladoras are well documented. The maquiladora industry takes advantage of low wages, generous tax breaks, and lack of enforcement of the existing, inadequate labor regulations in Central America. Low wages and precarious working conditions have become the most important competitive advantage these countries have to offer foreign investors, and countries compete among themselves to provide these advantages. The country with the cheapest labor force and the lowest levels of mandated worker protection wins in this perverse competition, often referred to as "the race to the bottom".
The race to the bottom will not benefit workers in poor countries. If CAFTA does not provide strong protections for workers' rights, defined by the core labor standards of the International Labor Organization, then the agreement would only worsen labor conditions and threaten sustainable livelihoods.
Recent US bilateral agreements with Chile and Singapore limit their ability to impose controls on highly speculative investments, which can cause economic instability when large numbers of investors suddenly pull their money out of a country. If CAFTA limits a country’s ability to reduce its financial instability in times of crisis, it could lead to increased poverty.
Corporate Investor Complaints
Another provision of serious concern in previous trade agreements that will likely be part of CAFTA and the FTAA is the mechanism by which foreign investors may bring complaints before international arbitral tribunals when they believe their business interests have been impaired by government actions. The potential use of this mechanism to challenge regulations that are designed to protect public health, safety, and the environment represents a serious threat to a government's ability to provide for the basic human rights of its citizens.
One of the most noteworthy cases brought under a provision of NAFTA known as Chapter 11 is a 1997 complaint filed by the US-based waste disposal company Metalclad against the Mexican government. Metalclad claimed that the Mexican state of San Luis Potosi had violated the company's rights under NAFTA when the state prevented the company from opening a waste disposal plant after the company had taken over a facility with a history of contaminating local groundwater. The local government denied Metalclad a permit to reopen the facility and later declared the site part of a 600,000-acre ecological zone. Mexico was ultimately forced to pay Metalclad over $15 million in compensation.