Making CAFTA-DR Produce in a Down Market

UNCLAS SECTION 01 OF 04 GUATEMALA 000263

SIPDIS

STATE PLEASE PASS TO USTR - A. MALITO

E.O. 12958: N/A
TAGS: ETRD ECON ELAB PGOV PREL GT
SUBJECT: Making CAFTA-DR Produce in a Down Market


1. Summary: CAFTA-DR has substantially improved Guatemala's
ability to participate and compete in global markets. Regulatory
structures were modernized and wide swaths of the Guatemalan economy
were opened to international competition. As a result, trade
increased substantially, foreign direct investment trebled and
poverty began to decline. However, continued lack of capacity has
slowed Guatemala's ability to take full advantage of the agreement
to reduce poverty, and protect workers and the environment. The
current global economic crisis, with consequent reductions in tax
revenue is slowing Guatemala's progress in alleviating poverty,
improving environmental protection and enhancing labor rights.
While gains have been made, more needs to be done to help the GOG
build the capacity needed to fulfill its obligations under the
Dominican Republic-Central American Free Trade Agreement (CAFTA-DR)
to enhance environmental protection, improve worker rights, and
extend the benefits of trade to all sectors of Guatemala. This
cable examines each of these areas and outlines technical assistance
projects that can mitigate the negative impact the economic crisis
will have in these areas and continue to help the GOG expand its
capacity to reduce poverty and fully meet its labor and
environmental obligations. End summary.

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Labor Protection
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Obligations:
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2. Under CAFTA-DR, Guatemala reaffirmed its obligations as a member
of the International Labor Organization (ILO) and pledged to ensure
that labor principles enshrined in the 1998 ILO Declaration were
protected including: 1) the right of association; 2) the right to
organize and bargain collectively; 3) a prohibition on the use of
any form of forced or compulsory labor; 4) a minimum age for the
employment of children and the prohibition and elimination of the
worst forms of child labor; and 5) acceptable conditions of work
with respect to minimum wages, hours of work, and occupation safety
and health.


3. The agreement provides wide latitude in how member states
enforce these standards and notes specifically that member parties
can "exercise discretion with respect to investigative,
prosecutorial, regulatory, and compliance matters and to make
decisions regarding the allocation of resources to enforce labor
matters."


4. CAFTA-DR includes a Labor Cooperation and Capacity Building
Mechanism to improve labor protection in member countries. As an
annex to the CAFTA-DR labor chapter, the mechanism encourages points
of contact to coordinate the development of priorities, seek support
from international organizations (such as the ILO, the IDB, the
World Bank and the OAS) to advance labor rights through technical
assistance, information exchange, and joint conferences and
projects.

Performance since CAFTA-DR entry into force:
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5. The Capacity Building Mechanism has been used to deliver
technical assistance (via DRL, DOL and USAID) in the labor area
including projects to eliminate the worst forms of child labor and
reduce discrimination and harassment against women in the maquilas,
and increase and improve the capacity of the labor inspectorate.
While some advances have been made, Guatemala has fallen short of
expectations for protecting worker rights. The GOG needs to express
its commitment to labor protections through vigorous investigation
and prosecution of labor complaints and murders of labor unionists.
The GOG would also benefit from additional technical assistance to
QThe GOG would also benefit from additional technical assistance to
strengthen its capacity to enforce existing labor legislation.

Next steps to improve performance:
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6. Technical assistance should be devoted to increasing Guatemala's
capacity to inspect work sites, issue and enforce arrest warrants,
prosecute cases and investigate labor violations. Specific projects
could strengthen the Special Prosecutor's Unit for Crimes against
Journalists and Unionists and help the Ministry of Labor develop a
robust system for regularly inspecting conditions at worksites.
Inspectors should be hired as professional civil servants, be given
specific technical training and provided adequate security against
intimidation. Regulations should be reformed to ensure inspector
access to work sites, expand alternative dispute resolution
mechanisms and enhance inter-agency collaboration to improve the
effective promotion and protection of labor rights and follow
through on labor court cases.


7. These are all areas that were specifically recommended by
DOL/OTLA and in its recent CAFTA-DR labor submission report. The

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provision of technical assistance to help the GOG address some of
these deficiencies could help ease the financial burden of
implementing measures to better enforce labor laws, particularly in
a year in which the economic downturn is putting additional pressure
on budgetary resources. Efforts should be devoted to assistance
areas that will help build robust and self-sustaining institutions
that will employ high-quality technical staff hired under special
arrangements shielding them from the likelihood they would be
replaced at the end of the current Colom administration. Technical
assistance would need to be accompanied by continued Embassy
demarches to the GOG to protect worker rights.

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Environmental Protection
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Obligations:
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8. CAFTA-DR reserves the right of each party to establish its own
levels of domestic environmental protection but specifies that each
Party will ensure its laws and polices encourage "high levels of
environmental protection." It also prohibits CAFTA-DR countries
from waiving environmental laws to promote trade or attract
investment. The annex to Chapter 17 calls on the Parties to work
together to share best practices, exchange information and foster
partnerships to address current or emerging conservation and
management issues, including personnel training and capacity
building.

Performance since CAFTA-DR entry into force:
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9. CAFTA-DR provided an important policy framework upon which to
center discussions on ways to improve environmental protection in
Guatemala and deliver technical assistance. Since the inception of
CAFTA-DR we have worked with Guatemala to strengthen its ability to
review and evaluate Environmental Impact Assessments (EIAs),worked
with the Ministry of Environment and Natural Resources (MARN) to
develop science-based regulations for monitoring water, air and soil
around mines, improved monitoring and control of waste water
discharges, worked to improve the environmental law capacity of the
Courts and established a public complaint unit to manage
environmental claims and oversee environmental obligations set out
in Chapter 17 of CAFTA-DR.

Next steps to improve performance:
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10. Improvements to Guatemala's environmental protection regime
should focus on: 1) ensuring the Ministry of Environment and Natural
Resources and the other principal entities with environmental
protection responsibilities are equipped to make sound,
science-based judgments with respect to enforcing the legal
framework as well as granting approval for development projects,
issuing regulations, and monitoring compliance with environmental
laws; 2) protecting bio-diversity in the sensitive Maya Biosphere
region; and 3) creating incentives for Guatemala to protect the
rainforest through active development of and participation in a
carbon trading regime. All such efforts should involve the active
participation of private sector businesses and NGOs. Efforts in
these areas will also positively impact many of the issues related
to Global Climate Change and Guatemala's high risk susceptibility to
climate change.


11. Specific projects for Guatemala could include:

-- Continued support for the development of science-based
regulations for the monitoring of air, soil and water in industry in
general and mining zones: Monitoring and enforcement bodies need
strengthening to more effectively carry out their important role.
Qstrengthening to more effectively carry out their important role.
Mining remains a polemical activity in Guatemala with powerful
domestic and international interests advocating both for and against
mining activities. Guatemala possesses substantial mineral
resources that, if more fully developed, could support substantial
employment and provide important revenue streams for the national
government and local communities. While there is also substantial
social controversy surrounding mining, from a strictly environmental
point of view, the best way to ensure that mineral resources are
responsibly developed and robust environmental safeguards are
implemented is through rigorous application of science-based
regulations to monitor the environmental impact of mining. Projects
should include: 1) the creation of a database of best practices and
regulations; 2) technical training and the development of Standard
Operating Procedures on how to properly conduct monitoring visits,
including maintaining samples and submitting them for certified
testing; and 3) working with industry, government and civil society
to increase trust and information sharing between the all interested
parties. That said, mining remains a "third wire," with sensitive

GUATEMALA 00000263 003 OF 004


political and social issues for affected communities.

-- Expanded use of SERVIR: Guatemala's Ministry of Environment and
the Institute of Seismology, Weather, and Meteorology would like to
expand their understanding and usage of the regional global climate,
land use and weather monitoring system SERVIR (Regional
Visualization and Monitoring System). SERVIR was created by NASA
and supported by USAID, the World Bank, and CCAD (the Central
American Commission for the Environment and Development),to provide
live satellite images, earthquake records and fire monitoring of
Central America. Guatemalan officials would benefit from training
in how to use information from SERVIR to monitor and control forest
fires, track deforestation and work to address the largest threats,
protect natural parks and cultural areas, and develop a benchmark
survey of water and soil quality across the country that could be
overlain onto a map. The enhanced capacities of SERVIR would be
available to others in the region as well as the public via its web
portal.

-- Protection of Biodiversity: Linking of biodiversity and natural
resources conservation with sustainable forestry practices (timber
and non-timber),eco-tourism and environmental services in general
is critical for attaining long-term improvements. More needs to be
done in this area.

-- Participation in Carbon Markets: Despite market limitations,
USAID estimates Guatemala has potential for sequestering 89 million
tons of carbon verifiable annually. The development of five or more
pilot carbon sequestration projects, including one in the Maya
Biosphere Reserve, would contribute to generating a national program
within the framework of the global climatic challenge. The projects
would contribute to establishing carbon baselines, development of
prospectus for carbon sequestration projects, certification of
carbon sequestration projects and approaching potential buyers for
these projects in international carbon markets.


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Poverty Reduction
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Obligations:
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12. CAFTA-DR makes no specific provision for poverty reduction, but
the benefits of the overall agreement were intended to be shared by
all sectors of society. In the agreement's preamble the creation of
new employment opportunities and improved working condtions and
living standards is specifically citedas one of the purposes of the
agreement. To facilitate poverty reduction through trade, the
Committee on Trade Capacity Building was created to seek the
prioritization of trade capacity building projects, coordinate with
international donor institutions, NGOs and private sector entities
and promote reforms and investment necessary to foster trade-driven
economic growth, poverty reduction and adjustment to liberalized
trade.

Performance since CAFTA-DR entry into force:
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13. Since the entry into force of CAFTA-DR, substantial efforts
have been devoted to developing trade capacity to ensure the
benefits of trade extend to all Guatemalans. However, more needs to
be done. Trade capacity building assistance is an important tool in
poverty alleviation. Technical assistance has helped Guatemala
comply with rules of origin, customs administration and sanitary and
phytosanitary (SPS) requirements. Training on these and other
issues necessary for small- and mid-sized business owners to compete
in the export markets has drawn substantial numbers of new
entrepreneurs into the export market. USAID/Guatemala's Economic
Qentrepreneurs into the export market. USAID/Guatemala's Economic
Growth program has provided technical assistance to rural small and
medium-scale enterprises using a supply-chain approach in high-value
services. The supply-chain approach links producers directly with
markets and generates employment and income for rural small and
medium scale producers. This supply-chain focus on a wide variety
of products and services including high-value gourmet vegetables and
agricultural products, gourmet coffee, forest floral greenery,
non-traditional species quality hardwood, handmade ceramics,
hand-woven textiles and community eco-tourism. Perhaps most
importantly, is the employment generation/poverty reduction impact
of such assistance, where one-half of small-scale producers
increased income in the highlands is spent locally, resulting in a
major economic multiplier effect, more than for any other
investment. USDA in conjunction with the USAID Regional office in
El Salvador has provided technical assistance to both government
officials and the private sector on sanitary and phytosanitary
issues enabling the country to meet many US regulations and access
to the US market for new agricultural products.


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Next steps to improve performance:
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14. To ensure the impact of the global economic downturn is
minimized, particularly for vulnerable populations such as the rural
poor, we should continue to fund programs to ensure that the
economic benefits of CAFTA-DR are effectively distributed.
Technical assistance should be devoted to helping micro, small and
mid-sized businesses, especially farmers, adopt new technologies,
meet international quality standards and open new markets,
principally in the agricultural, coffee, tourism, and forestry
sectors. In doing so we should take advantage of the full range of
USG technical assistance and leverage international financial
institutions and the private sector to ensure maximum impact of USG
assistance.


15. Specific projects should include technology transfer, training
and institutional strengthening programs to assist small-farmers and
cooperatives understand and take advantage of export potential.

-- We should leverage international financial institutions and
others in the donor community to improve essential small
infrastructure (key community bridges, farm-to-market roads, small
scale irrigation systems) and reduce the costs of market access for
rural Guatemalans.

-- Significant work is needed to rebuild Guatemala's agricultural
research and extension service. Without it, the successes in
employment generation/poverty reduction from increased high-value
agriculture exports are at risk in the short- to medium-term due to
inadequate capacity to treat continuously developing threats from
plant pests and diseases.

-- We should utilize technical assistance under the U.S. Treasury's
Small Business Lending Initiative to help Guatemala create a more
robust legal and supervisory framework for lending to small and
medium sized businesses.

-- If the program expands, Guatemala should be included in the next
tranche of countries under the U.S.-Chile Infrastructure Finance
Experts Corps (IFEC) project. IFEC aims to leverage the potential
of Public-Private Partnerships in mobilizing the private sector to
ensure adequate financing of larger infrastructure projects and
improve transparency in project execution.

-- We should utilize the U.S.-Brazil Biofuels Initiative as a
catalyst to bring together interests in renewable energy to create
the legal framework necessary to develop a robust domestic market
for the production and consumption of biofuels.

-- Technical assistance should also be dedicated to expanding
research into the development for use as biodiesel of Jatropha
curcus - a promising feedstock for biodiesel native to Guatemala,
cultivated by small farmers and can be grown in areas unsuitable for
most food crops. Preliminary studies show Jatropha grown in
marginal agricultural areas of Guatemala could substitute up to 80
percent of imported diesel. Successful development of biodiesel for
domestic consumption would improve Guatemala's balance of payments,
and provide an important alternative cash crop for small farmers.


16. Comment: To ensure the current global economic environment
does not slow or reverse important gains in poverty alleviation made
in the wake of CAFTA-DR, the USG, together with partners in the
donor community, should work to deepen engagement, especially with
vulnerable populations, to ensure they enjoy the benefits of the
free trade agreement. Similarly, CAFTA-DR provides important
frameworks and remedies to enhance worker rights and improve
environmental protection. Important gains have been made, but
Qenvironmental protection. Important gains have been made, but
institutional weakness and capacity constraints, and to some extent
political will, have weakened the Guatemalan government's ability to
take full advantage of the labor and environmental provisions of
CAFTA-DR. Continued USG engagement is necessary to ensure the
Guatemalan government continues to improve its capability to ensure
high standards of environmental protection and safeguards for
workers.