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.
OXFAM1 and the World Bank2 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?
UNICEF Colombia/2005/Asier Reino
2
What is
Free 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.
UNICEF Ecuador/2003/Cristóbal Corral
History of Global Free Trade
1947
First round of the GATT opens with the aim of
reducing tariffs on industrial goods.
1995
The 8th Round of the GATT (Uruguay Round) ends
with the creation of the WTO to provide an
institutional framework for future negotiations.
1999
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.
2001
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.
2003
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.
2006
Target year for the conclusion of the Doha Round.
History of Regional Free Trade in Latin America
and the Caribbean
1960s 1990s
Establishment of sub-regional trade blocs such as the
Central American Common Market (1961), the Andean
Community (1969), CARICOM (1973) and
MERCOSUR (1991)
1991
Negotiations begin for the Free Trade Area of the
Americas (FTAA)
1994
Ratification of the North American Free Trade
Agreement (NAFTA) between Mexico, United States
and Canada
2003
Ratification of the Free Trade Agreement between the
United States and Chile
2004 present
2005
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.
Commercial Integration with the
United States since the 1990s
NAFTA
(North American
Free Trade Treaty)
DR-CAFTA
UNICEF Ecuador/2003/Cristóbal Corral
(Dominican RepublicCentral America Free
Trade Agreement)
3
Other FTAs with
the United States
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.
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 2002.9
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
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
0
100
200
300
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.
4
Free Trade and
Public Health
UNICEF Belize/2003/César Villar
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.
The poorest
families are most
likely to face
the greatest risks
posed by
free trade.
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$325.14
Exceptions
The TRIPS contains a certain margin of
flexibility for balancing the protection of
intellectual property with national interests.
Specifically, governments can authorize the
production (by the use of a compulsory license)
or import of affordable generic medications. In
the Doha Declaration (2001), member countries
affirmed that the rules of the TRIPS should be
implemented in a manner “supportive of WTO
members’ right to protect public health, and in
particular, to promote access to medicines for
all.”
For example, the progress made by Brazil in their
response to HIV/AIDS is due in large part to
negotiations with pharmaceutical companies
under the threat of issuing compulsory licenses.
Billions of US$
Brazil: Cost of Antiretroviral Therapy (ART)
with the Introduction of Generic
Medications and Negotiations with
6000
Pharmaceutical Companies
(average annual price
per patient in US$)
4860
5000
4540
4240
4000
3320
3000
2530
2000
1000
0
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
CaseStudy
1997
1998
1999
2000
2001
Source: Ministry of Health, Government of Brazil
http://www.aids.gov.br/final/biblioteca/drug/drug6.htm
DR-CAFTA and Public Health
UNICEF HQ05 0872/Shehzad Noorani
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.
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.
The Potential Consequences for Children
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
5
Facing the Risks and
Building Upon the
Opportunities that
Free Trade Offers
Children
UNICEF HQ05-0864/Shehzad Noorani
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.
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.
•
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.
References
1. Oxfam (2002), Rigged Rules and Double Standards:
Trade, Globalisation, and the Fight Against Poverty, p.49.
2. World Bank (2001), Global Economic Prospects 2002,
p. 176.
3. Anderson, K., and Martin, W. (ed.) (2006), Agricultural
Trade
UNICEF Colombia/2005/Asier Reino
Reform and the Doha Development Agenda, p. 5.
4. Economic Commission for Latin America and the
Caribbean (ECLAC) (2005), Millennium Development Goals: A Latin American and Caribbean
Perspective, p. 237.
5. 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 2006.
7. 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. 2.
8. 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. 129.
9. Oxfam (2004), A Raw Deal for Rice under CAFTA.
10. Oxfam (2005), p. 3.
11. 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. 166.
14. 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, http://www.msf.es.
17. Correa, C. M. (2005).
18. United Nations Development Programme (UNDP) (2003). Making Global Trade Work for
People, p. 209.
19. 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, http://www.msf.es; 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 0843-03045
Panama City, Panama
©UNICEF, April 2006
Cover Photos: UNICEF Panama/2004/Marie Louise Belanger, UNICEF HQ050865/Shehzad Noorani, UNICEF Colombia/2005/Asier Reino