The Promises of Free Trade

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2 1 The Promises of Free Trade Unicef Ecuador/2003/Cristóbal Corral Free trade promises positive gains for Latin American and Caribbean economies, but it also brings with it challenges and risks for people in the region. Trade is one of the most powerful driving forces of global integration and has always been crucial for generating wealth. By increasing their participation in global exports, developing countries could experience a growth in national income several times greater than the total amount they currently receive in official development assistance. Indeed, a move in this direction has the potential to considerably improve the lives of millions of families who presently live in poverty. OXFAM 1 and the World Bank 2 have estimated that between 128 and 320 million people could escape poverty as a result of greater integration of developing countries into the world trade system. Millions of children could grow and develop, free of the systematic deprivation caused by poverty, if their families were to reap the positive benefits of world trade. However, evidence suggests that the concrete set of policies used to promote integration into the world economy plays a key role. Opening up economies to international competition in the absence of equitable rules of trade, compensatory mechanisms or social protection systems, could significantly increase the social and economic risks associated with free trade. The question remains: how can the advantages of international free trade be harnessed for the poor while at the same time keeping its adverse effects to a minimum?

3 UNICEF Colombia/2005/Asier Reino is Free 2What Trade? Free trade is the international trade of goods without protective tariffs or other trade barriers. Through protective import tariffs countries can artificially raise the price of imported goods; a free trade agreement (FTA) commits participating countries to mutually removing these tariffs. This ensures that the prices of all products traded are equal throughout every country that has signed the commercial treaty. FTAs exist at the regional level (or sub-regional) as well as at the global level. Global level Multilateral negotiations at the global level essentially take place in the framework of the World Trade Organization (WTO), an institution that evolved from the General Agreement on Tariffs and Trade (GATT). All of the agreements negotiated in this framework have been signed by each of the 149 member states of the WTO and enjoy universal validity among these countries. Regional level Regional commercial blocs are formed between neighboring countries or among nations within a specific geographical zone. As early as 1960, Latin American and Caribbean countries participated in several regional or subregional initiatives. Over the last two decades, countries have been involved in a trend towards commercial integration with the hemisphere s largest economy, the United States, by way of bilateral agreements (between two countries), sub-regional treaties or even regional negotiations throughout the hemisphere. History of Global Free Trade UNICEF Ecuador/2003/Cristóbal Corral First round of the GATT opens with the aim of reducing tariffs on industrial goods. The 8th Round of the GATT (Uruguay Round) ends with the creation of the WTO to provide an institutional framework for future negotiations. The WTO Ministerial Summit in Seattle falters in the face of strong criticism with respect to unequal trade regulations in the agriculture and textile sectors, among others. The Doha Round opens. It is known as the Development Round because it seeks to focus on the needs of developing countries, above all in the areas of public health, intellectual property and agricultural issues. The Ministerial Summit in Cancun fails to reach consensus due to the confrontation between various developing and developed countries, the latter maintaining stiff restrictions on access to their agricultural goods markets Target year for the conclusion of the Doha Round.

4 History of Regional Free Trade in Latin America and the Caribbean 1960s s present 2005 Establishment of sub-regional trade blocs such as the Central American Common Market (1961), the Andean Community (1969), CARICOM (1973) and MERCOSUR (1991) Negotiations begin for the Free Trade Area of the Americas (FTAA) Ratification of the North American Free Trade Agreement (NAFTA) between Mexico, United States and Canada Ratification of the Free Trade Agreement between the United States and Chile Negotiations begin for a bilateral FTA between the United States and Panama, and for an FTA between the United States and three Andean countries (Colombia, Ecuador and Peru) Ratification of the DR-CAFTA in Guatemala, Honduras, Nicaragua, El Salvador, Dominican Republic and the United States. Ratification remained pending in Costa Rica (as of April, 2006). Incorporation of the Bolivarian Republic of Venezuela into MERCOSUR begins. Commercial Integration in Latin America and the Caribbean since the 1960s CARICOM (Caribbean Community and Common Market) CACM (Central American Common Market) Andean Community MERCOSUR (South American Common Market) This map does not reflect a position by UNICEF on the legal status of any country or territory or the delineation of any frontiers.

5 Commercial Integration with the United States since the 1990s NAFTA (North American Free Trade Treaty) DR-CAFTA (Dominican Republic- Central America Free Trade Agreement) UNICEF Ecuador/2003/Cristóbal Corral Other FTAs with the United States 3 Free Trade and Agriculture The agricultural sector plays an important role in the economies of the region. Agricultural production represents a relatively high percentage of the region s exports and GDP. For this reason, changes in the agricultural sector constitute a determining factor for development, especially in rural areas where agricultural production is concentrated and where the incidence of extreme poverty among families is highest. After ten years of multilateral negotiations in the framework of the WTO, the situation of global agricultural trade remains characterized by huge asymmetries that adversely affect agricultural producers in Latin America and the Caribbean: Persistent protection of the agricultural markets of developed countries The average tariffs imposed by the developed countries on imports are low for manufactured goods (1%) but increase significantly for textiles and agricultural products (7% and 14%, respectively), creating major obstacles for the entry of Latin American products into their markets. 3 Large subsidies for agricultural producers in developed countries The financial support that the OECD countries offer to their agricultural producers has been substantial, and amounted to more than US$250 billion in 2003 (with the European Union responsible for almost half), resulting in unfair competition for farmers from other countries. 4 Agricultural export subsidies in developed countries Developed countries offer additional subsidies to support their agricultural exporters, resulting in products with artificially low prices being placed on international markets. This is a practice known as dumping. In order to begin reducing the asymmetries in this area, developed countries committed themselves to completely eliminating these subsidies by 2013 at the WTO 2005 Ministerial Summit in Hong Kong.

6 CaseStudy DR-CAFTA and Agriculture 5 Rural areas throughout the countries that ratified the DR-CAFTA display a higher incidence of poverty and hunger than average (rural poverty is 69% in Honduras while chronic undernutrition is above 55% in Guatemala). 6 The agricultural sector employs approximately a third of the labour force of the countries involved (except in the United States). 7 In this context, the elimination of tariff protection poses considerable risks for farming families. Free but unequal competition With the elimination of tariff protections in the framework of DR-CAFTA, agricultural producers of the participating countries will have open access to new markets. However, U.S. agricultural producers will enter into this competition with the benefit of domestic and export subsidies while their Central American counterparts will enjoy no such support. Cheaper agricultural goods, but family income at risk As a consequence of the elimination of tariffs and the massive influx of subsidized products, a considerable reduction is projected in the price of sensitive agricultural goods (rice, corn, beans, etc.). While it can be argued that this will benefit the majority of consumers (including the poorest sectors and those living in rural areas), poor agricultural workers will also be at risk of losing a considerable portion of their income derived from the cultivation of such products. 8 Food security threatened Due to the projected decline in prices, producers of staple agricultural goods will find it increasingly difficult to stay in business. This could in turn represent a threat to the provision of sufficient foodstuffs for all sectors of the population. The liberalization of rice in Honduras during the 1990s provides an illustrative example. In 1991, tariffs on rice imports were reduced as part of the response to a drought. Over the course of the decade, the number of rice producers fell from 25,000 to less than 2,000. This resulted in a substantial loss of employment in the sector, declining from 150,000 to just 11,200. As a consequence, national production of rice decreased by 86% between 1991 and The need for protection and state assistance The small farmers of Central America and the Dominican Republic do not have the technical and financial conditions required to compete on an equal footing with their U.S. counterparts. In a similar context in Mexico, where the agricultural sector was opened up to foreign competition in the framework of NAFTA, farmers cultivating traditional crops faced intense competition from U.S. exports. It is estimated that 1.7 million agricultural workers have lost their jobs since NAFTA entered into force. 10 However, a programme of non-conditional transfer payments to traditional farmers (PROCAMPO) helped maintain family income and production at stable levels. 11

7 Potential Consequences for Children Poverty and child labour The children of Latin America and the Caribbean disproportionately bear the burden of poverty. A reduction in the income of poor families in rural areas would particularly affect children, jeopardizing their rights and increasing the likelihood of their dropping out of school and becoming exposed to the risks of child labour. 12 This situation would contribute to perpetuating the intergenerational transmission of poverty. UNICEF Paraguay/2005/Alex Dos Santos Child malnutrition The negative impact of free trade on farmers could also lead to a national deficit of food supplies. This situation may in turn exacerbate already high levels of malnutrition (both stunting and underweight) that adversely affect children throughout the region. Family disintegration The decline in prices of agricultural goods could increase rural unemployment. This situation could put further pressure on rural families to migrate towards the cities or abroad, leaving children more vulnerable to family disintegration, precarious economic conditions and other risks associated with migration. Insufficient investment in health and education Children are the main beneficiaries of public investment in education and health. If the loss of state resources associated with the elimination of tariffs leads to reductions in public social investment, this would compromise the human development of the next generation. UNICEF Guatemala/2003/Andrea Aragón Official Development Assistance and Agrarian Subsidies in the OECD Countries Official Development Assistance (ODA) in Latin America and the Caribbean ODA worldwide Agricultural Assistance in OECD Countries Billions of US$ Source: Based on Economic Commission for Latin America and the Caribbean (ECLAC, 2005, Millennium Development Goals: A Latin American and Caribbean Perspective.

8 4 Free Trade and Public Health Public health indicators in Latin America and the Caribbean are a cause for concern. Between 20% and 77% of the population do not have access to health care services when they need them and 78% have no health insurance whatsoever. 13 Under these conditions, unrestricted access to affordable medication is essential for fighting illnesses such as HIV/AIDS, malaria and tuberculosis, among others. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of the WTO can lead to limitations in the provision of medicines. Medicines protected by patents The TRIPS gives the holder of a patent for a particular medication the exclusive right to production and sales for a period of 20 years in order to provide incentives for investments in research and development. Pharmaceutical companies that develop new drugs can therefore impede production by other companies that may produce generic copies of these drugs. Monopoly prices The monopoly rights on production and sales granted by the patent allow patent-holders to charge prices well over the costs of production. For example, the price of brand name antiretroviral medication for the treatment of HIV/AIDS in Panama amounts to about US$1200 per year. The same treatment using generic products would cost around US$ Exceptions The TRIPS contains a certain margin of flexibility for balancing the protection of intellectual property with national interests. Specifically, governments can authorize the production (by the use of a compulsory license) or import of affordable generic medications. In the Doha Declaration (2001), member countries affirmed that the rules of the TRIPS should be implemented in a manner supportive of WTO members right to protect public health, and in particular, to promote access to medicines for all. For example, the progress made by Brazil in their response to HIV/AIDS is due in large part to negotiations with pharmaceutical companies under the threat of issuing compulsory licenses. UNICEF Belize/2003/César Villar The poorest families are most likely to face the greatest risks posed by free trade.

9 Billions of US$ Brazil: Cost of Antiretroviral Therapy (ART) with the Introduction of Generic Medications and Negotiations with Pharmaceutical Companies (average annual price 4860 per patient in US$) Thanks to these negotiations, the Brazilian Government is able to provide free and universal antiretroviral treatment, using generic medications as well as brand name medications at prices below the regional average. Since the introduction of this policy, AIDS-related deaths have been cut by half. 15 Source: Ministry of Health, Government of Brazil CaseStudy DR-CAFTA and Public Health Like the majority of free trade agreements signed with the United States in the region, CAFTA-DR contains clauses concerning public health and the protection of intellectual property. These clauses are known as TRIPS+ because they establish stricter regulations than those agreed upon in the WTO framework, thereby reducing the flexibility contained in the TRIPS. UNICEF HQ /Shehzad Noorani Longer duration of patents The duration of a patent can be extended beyond 20 years in the case of delays in issuing the license or in authorizing a pharmaceutical product for sale. 16 This extension of the monopoly period means that a person with no health insurance or sufficient income to be able to afford the patented medication will have to wait more than 20 years in order to acquire the product at a reasonable price. Greater protection of trial data The trial data or scientific information concerning the safety and efficacy of new medications are a requirement for their approval. DR-CAFTA (in contrast to the TRIPS) protects the exclusivity of this data for five years. 17 This additional barrier can make it impossible for national health authorities to approve cheaper generic medications, even if the state has authorized their distribution via a compulsory license in the interest of public health.

10 The Potential Consequences for Children Poor families without access to medications Access to cheap medication is essential to health in developing countries, where 90% of medicine purchases are made directly by individuals. 18 The limited access to medication particularly harms the health of children living in poor households and consequently, places their continued survival and development at risk. Obstacles in the response to the HIV/AIDS epidemic Treatment with antiretroviral medications is one of the principal elements in the response to the pandemic. The future of the 740,000 young people and 48,000 children in the region presently living with HIV/AIDS is at risk if wide access to such medications at reasonable prices is not guaranteed. 19 Facing the Risks and Building 5Upon the Opportunities that Free Trade Offers Children UNICEF HQ /Shehzad Noorani In order for free trade to effectively benefit the children of Latin America and the Caribbean and their families, it is essential that governments and civil society promote a series of policies at all levels: Global and Regional Levels In order to ensure that integration to the international trade system is adequate to each country s level of development, there should be: Recognition of special and differential treatment as a general rule of the WTO rather than as an exception, in order to reduce asymmetries in the international trade system. Flexible international norms and bilateral treaties which allow developing countries to adopt specific policies that facilitate progress towards the Millennium Development Goals. In order to achieve equitable access for developing countries to the international trade system, developed countries should: Drastically reduce tariffs and other obstacles to allow access to their markets. Reduce domestic subsidies for their agricultural producers. Eliminate export subsidies across the board.

11 In order to guarantee a balanced relationship between the protection of intellectual property rights and social development, countries should: Guarantee the priority of public health over intellectual property rights, including preserving the right of developing countries to make autonomous decisions with respect to their public health systems. Achieve a gradual implementation of TRIPS according to each country s level of development. Avoid commitments being incorporated into regional treaties that have greater intellectual property restrictions than the WTO framework (e.g.,trips+). National Level In many cases, a FTA does not create new problems. Rather, it exacerbates existing ones caused by increasing globalization and economic interconnection. The following domestic policies are necessary in all cases, but are particularly important to protecting children and their families from the adverse effects of FTAs. Such policies should: Guarantee the right to survival and development, facilitating universal access to public health care systems and affordable medication. Establish social protection systems for poor families that are adversely affected by the liberalization of national markets, including conditional cash transfer programmes. Facilitate the adaptation of poor farmers to changing economic conditions through technical assistance and credit programmes so as to promote greater productivity and diversification of production. UNICEF Paraguay/2005/Martin Crespo Target infrastructure investment in rural areas so as to improve the access of farming families to markets. Ensure young people are provided with the necessary tools for integration into the global economy through adequate and efficient public investment in education. Free trade can only bring real benefits for children through an equitable trade system that recognizes different development needs among countries and allows nations to adequately invest in and protect people.

12 References 1. Oxfam (2002), Rigged Rules and Double Standards: Trade, Globalisation, and the Fight Against Poverty, p World Bank (2001), Global Economic Prospects 2002, p Anderson, K., and Martin, W. (ed.) (2006), Agricultural Trade UNICEF Colombia/2005/Asier Reino Reform and the Doha Development Agenda, p Economic Commission for Latin America and the Caribbean (ECLAC) (2005), Millennium Development Goals: A Latin American and Caribbean Perspective, p DR-CAFTA is used as an example of a regional treaty since it is representative of the new series of treaties signed in the region over recent years. 6. An average of 39% of the rural population in Central American countries lives in extreme poverty, compared with 37% in Latin America as a whole. The rate of stunting also surpasses the larger regional average, with 24.6% compared to the regional average of 16% (see: ECLAC (2005); UNICEF (2006), The State of the World s Children Oxfam (2005), On the Implementation of the Dominican Republic-Central America Free Trade Agreement: Written testimony before the U.S. House Committee on Ways and Means, p Up to 24% for the rural population and 20% for the poorest quintile in Guatemala according to a study about the effects of CAFTA-DR. See: World Bank (2005), DR-CAFTA: Challenges and Opportunities for Central America, p Oxfam (2004), A Raw Deal for Rice under CAFTA. 10. Oxfam (2005), p Lederman, D. et al. (2003), Lessons from NAFTA for Latin American and the Caribbean Countries (LAC): A Summary of Research Findings. 12. The empirical evidence shows that opening up to global trade is associated with a reduction in the incidence of child labour. However, removing children from school in order for them to work is one of the coping mechanisms used by poor families to compensate for reductions in family income. See: Cigno, A. et al., Globalisation and Child Labour, in Cornia, G.A. (ed.) (2001), Harnessing Globalisation for Children: A Report to UNICEF. 13. ECLAC (2005), p National HIV/AIDS Programme, Ministry of Health, Government of Panama. 15. See ECLAC (2005); International AIDS Society (2005), Fact Sheet on HIV/AIDS in Brazil and Latin America. 16. Correa, C. M. (2005), Efectos del CAFTA sobre la salud pública en Guatemala, Informe de Médicos Sin Fronteras, Correa, C. M. (2005). 18. United Nations Development Programme (UNDP) (2003). Making Global Trade Work for People, p The United States Government maintains that the clauses of the FTA will not interfere with the protection of public health in the member countries. However, this position is subject to interpretation before arbitration authorities. This legal uncertainty represents a risk for the producers of generic medications and consequently strengthens the position of the patent holders. (See Correa, C. M. (2005), Efectos del CAFTA sobre la salud pública en Guatemala, Informe de Médicos Sin Fronteras, World Bank (2004), Global Economic Prospects 2005, Chap. 5.) Produced by: UNICEF Regional Office for Latin America and the Caribbean Public Policy Unit Ciudad del Saber, Building 131 Box Panama City, Panama UNICEF, April 2006 Cover Photos: UNICEF Panama/2004/Marie Louise Belanger, UNICEF HQ /Shehzad Noorani, UNICEF Colombia/2005/Asier Reino

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