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POLICY ANALYSIS: CAFTA Weakens Nicaragua’s Immune System

May 12th, 2009

Nicaraguans have a saying: When the U.S. sneezes, Nicaragua catches pneumonia.  When Nicaragua’s economy catches pneumonia do U.S. policies provide support or do they make the situation worse? Three years ago the U.S. and Central America along with the Dominican Republic implemented the Dominican Republic-Central America Free Trade Agreement (CAFTA), the first regional trade agreement between such vastly unequal trading partners1. Assessing the impact of CAFTA in the short term has become more complex with the global economic crisis. However, this sobering situation provides a unique opportunity to review CAFTA’s promises of development and jobs by looking at Nicaragua’s ability to weather an economic storm. What happens to Nicaragua when the U.S. economy catches pneumonia?

A Denim Cold

The largest CAFTA investment in Nicaragua, U.S. denim producing factory Cone Denim, closes its doors laying off 900 workers.

“The primary objective of CAFTA was to create jobs… and Cone Denim was emblematic of CAFTA,” says Carlos Sequiera, Nicaragua’s chief negotiator for CAFTA. Cone Denim, a U.S. textile company invested nearly $100 million in Nicaragua a year ago and quickly became the acclaimed golden child of CAFTA. The manufacturing plant would integrate the whole textile production chain, starting with processing cotton into denim and ending with assembled jeans.  In the beginning Cone Denim provided 900 direct jobs and 1,500 indirect jobs and committed to stay for 40 years.23
“This company is here to stay… Cone Denim’s investment is a concrete example of the long-term commitment of North American businesses with the people of Nicaragua.  And the government of the United States shares that commitment,” assured former U.S. Ambassador Paul Travelli at the factory’s inauguration.

One year later there is no semblance of that proclaimed commitment to the Nicaraguan people. Cone Denim recently announced a fourteen-month “temporary” shut down of its operations in Nicaragua throwing 900 more workers into the swelling pool of the unemployed. The global economic crisis and a slow down in the supply chain are the reasons cited for its closure.  Although ninety percent of the workers’ contracts were cancelled, dozens continued to show up at the gates of the factory for many weeks, hoping that the company would reopen.4  Former Cone Denim employee Marvin Lopez is not optimistic. “When a trans-national like this leaves, I don’t think they’ll come back.”5

Fleeting Investment
CAFTA promised much-needed jobs by attracting foreign investment with Nicaragua’s most viable “asset” – an uneducated and massive pool of unemployed, a.k.a. “competitive” or cheap labor. As a result of CAFTA negotiations, Nicaragua managed to become the only country in the region with a Tariff Preference Level granting Nicaragua the ability to export to the U.S. clothing assembled with cheaper fabrics or yarns from non-CAFTA countries, like China. This was supposed to further attract investment in maquilas, textile and garment manufacturing factories  in the free trade zone (FTZ) producing for export to the U.S.6 Since the implementation of CAFTA, foreign direct investment has indeed increased with investors from the U.S. taking the lead. Most of those investments have been primarily focused on producing for export to the U.S.7 including textiles in the FTZ8.  During 2007, Nicaragua’s maquila sector grew by 10% compared to the previous year, generating $968.2 million in exports9 and employing nearly 89,000 by the end of the year.10 In that same year Nicaragua became the third largest global exporter of textile products.11

Employing up to 89,000 workers, 80% of whom are women, the maquila sector became a vital source of  formal employment for countless Nicaraguan  households despite earning  the lowest wages in Central America at $105/month.
The maquila sector where workers are mostly young Nicaraguan mothers became a vital vein in the heart of the national economy and countless Nicaraguan households. A vein infamous for violating labor laws and causing environmental degradation, but nevertheless tolerated and even appreciated due to the desperate need of a secure, fixed salary in the formal economy. Nicaraguan economist Carlos Pacheco comments, “Maquilas alleviated a little bit of the huge unemployment pressure in the country… CAFTA insisted on promoting that sector… but these have been very bad jobs”.12

Cheap Unemployment
Producing duty free no value added products destined for export to the U.S, it is clear that the only benefit maquilas bring to the Nicaraguan economy is formal employment.  Companies don’t pay taxes, stimulate local production, or sell their products to Nicaraguans. The “competitive” wages are not a living wage, especially in the face of the current economic crisis. Already Nicaraguans’ real purchasing power has decreased an astonishing 17% due to the drastic price increases in oil and basic grains over the last two years13.  Leonardo Blaz, a Nicaraguan father of five and former maintenance worker for Cone Denim, emphatically states his inability to provide for his family. “I made $24 a week. A pound of beans costs $0.60, a pound of rice $0.50, and then there are my water and electricity bills. Plus my children need to eat three meals a day and need money for school supplies and clothing. How and when would that ever be enough? Never!”14

“CAFTA is not a development model. In the long run maquilas are only a form of survival, not development. What attracted these investments?” Carlos Pacheco asks.  “Cheap labor, no taxes, and the government’s inability to enforce labor and environmental laws.” He continues, “In the long run, maquilas weaken the economy,

With the loss of jobs due to maquilas fleeing Nicaragua, thousands of female heads of households will join the ranks of  the informal sector for survival.
not strengthen it”.15 Despite CAFTA investments, open unemployment rates over the last three years have shown no significant improvement and have actually increased. In fact the current under and unemployment rate stands at a staggering 77.8%.16 As the winds of the global economic crisis grow stronger, investments are not only decreasing but are easily fleeing.  In the last year and a half twenty-three maquilas have fled, leaving masses of unemployed Nicaraguans.17

Made for the U.S.A.
Dependence on the U.S. is nothing new, since historically the United States has been one of Nicaragua’s most important trading partners. CAFTA, however, formalized and consolidated that dependence; the U.S. is Nicaragua’s single most important export market.  Over half of total export revenue is concentrated in the FTZ alone18 and 99% of FTZ products are made for the U.S. market19. Carlos Pacheco elaborates, “…through CAFTA, Nicaragua completely tied itself to one single economy. It is not healthy to put all your eggs in one basket. We need to diversify our markets.  If all your products depend on one market and that market crashes, you will feel the impact. That’s what we are seeing right now”.20

When listing the benefits of CAFTA, the U.S. Ambassador to Nicaragua, Robert J. Callahan notes that Nicaragua is the only CAFTA country to maintain a favorable trade balance with the U.S. In the trade agreement’s first year the commercial value of trade between Nicaragua and the U.S. grew by 44.7 % while the trade between Nicaragua and the other CAFTA countries increased by only 17 %.  However, it is important to note that much of the export growth can be attributed to an increase in international market prices, not an increase in production or volume. For example, in 2008 exports to the U.S. grew by 23.2% in value while decreasing in volume by 7.41%21, signalling more profit but less production and/or demand. As international prices decline Nicaragua’s earnings decline.  It is also important to note that Nicaragua’s exports are mostly raw materials and assembled clothing with little value added since only one stage of the production chain occurs in country.22

The heart of Nicaragua’s economy is vulnerable to a volatile foreign consumer market over which it has no power.  Lobster for example, one of Nicaragua’s most important and lucrative export products, has always had its traditional market in the U.S. “What do you think is the first thing to go when the U.S. consumer is feeling a pinch?” Carlos Pacheco aptly asks.23 In the first months of this year five million pounds of frozen lobster were stock piled in Nicaragua’s warehouses with no buyers. When international market prices drop drastically and U.S. demand and consumption shrink, exports decrease.  Companies begin to downsize and eventually shut down, as occurred with Cone Denim. Investors pull out suddenly when Nicaragua’s attractive cheap labor is no longer profitable.

CAFTA’s promise of job security is brought into question. Since 2008, Nicaragua has lost 25,000 jobs in the maquila sector alone.24 In the first two months of 2009 total exports fell by 21.74%, a loss of $50.8 million and a 60 metric ton reduction in volume.25 Increasingly, maquila shutdowns have contributed to unemployment leaving Nicaragua with nothing to show for its “comparative advantage” but empty factories and internal economic bleeding in the face of crisis.

Duty Free
Of course, not all of Nicaragua’s problems can be attributed to CAFTA.  Poverty and unemployment have been chronic issues for decades.  In addition, Nicaragua currently faces an internal crisis triggered by allegations of electoral fraud resulting in the U.S. and the European Union withholding substantial aid money.  In the face of both foreign and domestic crises Nicaragua finds it difficult to weather any economic storm, regardless of origin.

While the Obama administration can launch stimulus packages in an attempt to save and protect the U.S. economy and people in the face of a crisis, Nicaragua lacks the fiscal and export revenue to do so. Pacheco elaborates: “Because CAFTA eliminated tariffs, a lot of the companies that used to pay taxes on imported products no longer do.  That has affected the government’s fiscal revenue. In a moment of real crisis those tariffs could have helped maintain the government’s health and education programs. With maquilas leaving and exports dropping, less money is coming in and unlike the U.S., Nicaragua cannot inject cash into its economy.26

In the face of recent news that ten more maquilas may be “temporarily” closing, Miguel Ruiz, president of the Center for Unionised Workers JBE, comments on the potential 20,000 additional unemployed. “When we lose one job in the maquila sector, from where will we generate more employment? There needs to be an emergency plan. There are a lot of government ministries that should be at the forefront of this, but they are dysfunctional in the face of this crisis that is strongly hurting our workers. On top of all this, you also have to take into account the increase in the cost of basic services and basic grains while wages stay at the same level”.27

Broken Hearted
Without the protection provided by fiscal revenues, market diversity, and sustainable investment, CAFTA has weakened Nicaragua’s economic heart—its jobs, health, education, and production—and compromised its defence mechanisms in the face of the foreign storm. Pacheco states, “Even if there hadn’t been a crisis, that doesn’t mean there would have been improvement in the quality of life. I assure you, those (CAFTA) benefits would not have reached the people.”28 So, what does happen to Nicaragua when the U.S. catches pneumonia?

Janele Rodrigues Ruiz is a Nicaraguan mother. She was laid off two years ago from a maquila in Cuidad Sandino. Today she sells homemade pastries on the streets. “They (maquilas) exploited us but at least we had a secure wage for our children. But now what are we going to have? We’re here, under the scorching sun, humiliated, and with nothing”. When asked about his current plan, former Cone Denim employee Leonardo answered, “We (Nicaraguans) always struggle to survive”.29


1 Washington office on Latin America: http://www.wola.org/index.php?&option=com_content&task=blogsection&id=6&Itemid=&topic=Rights+and+Development&sub=1&content_topic=CAFTA

2 “Adios Maquila!”  Prod. Carlos Fernández. Esta Semana. On- line video. March 29, 2009 http://www.estasemana.tv/archivo/2009/marzo/115

3 http://spanish.nicaragua.usembassy.gov/22_de_abril_2008.html

4 El Nuevo Diario, http://www.elnuevodiario.com.ni/nacionales/44237

5 “Adios Maquila!”  Prod. Carlos Fernández. Esta Semana. On- line video. March 29, 2009 http://www.estasemana.tv/archivo/2009/marzo/115

6 Industrial Directory: Nicaragua 2008. Managua, Nicaragua: National Commission for the Free Trade Zone. 2008: 12

7 La Prensa  http://www.laprensa.com.ni/archivo/2007/noviembre/07/suplementos/negocios/225571.shtml

8 La Prensa  http://www.laprensa.com.ni/archivo/2005/marzo/22/economia/

9 ProNicaragua http://www.pronicaragua.org/index.php?option=com_content&view=article&id=35&Itemid=98&lang=en

10 Industrial Directory: Nicaragua 2008. Managua, Nicaragua: National Comisión for the Free Trade Zone. 2008: 139

11 El Nuevo Diario   http://impreso.elnuevodiario.com.ni/2008/02/07/nacionales/69646

12 Pacheco, Carlos (economist) Interview by the author, Managua, Nicaragua, April 15th, 2009.

13 Grigsby, Arturo. “Blow by Blow, Step by Step, the Global Crisis is Hitting us Hard” Envio  28 (March 2009): 16

14 Blaz, Leonardo (Ex Cone Denim worker) Interview by the author, Managua, Nicaragua, April 14th, 2009.

15 Pacheco, Carlos (economist) Interview by the author, Managua, Nicaragua, April 15th, 2009.

16 Fundacion Internacional para el Desafio Economico Global (FIDEG) http://www.laprensa.com.ni/archivo/2008/febrero/25/noticias/nacionales/245172.shtml

17 El Nuevo Diario  http://www.laprensa.com.ni/archivo/2009/abril/23/noticias/economia/323367.shtml

18 Industrial Directory: Nicaragua 2008  . Managua, Nicaragua: National Comisión for the Free Trade Zone. 2008: pg. 140

19 Noguera, Emilio.  “The Free Trade Zone Regiment” . Witness for Peace delegation meeting. Free Trade Zone Corp. Office, Las Mercedes, Managua, Nicaragua.  2nd of April, 2009.

20 Pacheco, Carlos (economist) Interview by the author, Managua, Nicaragua, April 15th, 2009.

21 CETREX

22 El Nuevo Diario   http://impreso.elnuevodiario.com.ni/2006/09/26/economia

23 Pacheco, Carlos (economist) Interview by the author, Managua, Nicaragua, April 15th, 2009.

24 La Prensa http://www.laprensa.com.ni/archivo/2009/abril/23/noticias/economia/323367.shtml

25 CETREX

26 Pacheco, Carlos (economist) Interview by the author, Managua, Nicaragua, April 15th, 2009

27 El Nuevo Diario http://www.elnuevodiario.com.ni/nacionales/45278

28 Pacheco, Carlos (economist) Interview by the author, Managua, Nicaragua, April 15th, 2009

29 “Adios Maquila!”  Prod. Carlos Fernández. Esta Semana. On- line video. March 29, 2009 http://www.estasemana.tv/archivo/2009/marzo/115

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