By Michael McDonald
GUATEMALA CITY (Reuters) - The United States has agreed to freeze an arbitration panel with Guatemala in order to informally settle accusations that the Central American nation has failed to protect workers' rights, Guatemala's economy minister said on Monday.
"Initiating an arbitration panel could have negative effects on commerce between the two nations, which is why we have entered into this agreement before the panel is formed," said economy minister Sergio de la Torre.
Two-way trade between the United States and Guatemala totaled $10.8 billion last year.
U.S. officials requested the arbitration panel last year after labor unions from both countries filed suit under the Dominican Republic-Central American Free Trade Agreement, or DR-CAFTA, alleging Guatemala's government failed to effectively combat child labor, guarantee the right to assemble, and ensure overtime pay.
But the United States will put the arbitration panel on hold as long as Guatemala proves it is taking steps toward improving working conditions, said De la Torre.
He added that the Guatemalan labor ministry has hired 100 labor inspectors set to begin work in the next two weeks, and that the country is providing the United States with monthly progress reports, conditions spelled out by U.S. officials in order to avoid arbitration.
If arbitration were to proceed, Guatemala could face millions of dollars in penalties if the panel finds that the country has violated the treaty.
The U.S. Trade Representative's office did not immediately respond to a request for comment.
De la Torre said his country is committed to complying with its international obligations.
Guatemala will present its third progress report to the U.S. next month in which it will tout the new inspectors and a platform to share information between the labor, economy and interior ministries on businesses that violate labor laws.
The United States has also requested that Guatemala grant authority to labor inspectors to fine businesses who violate labor laws, but sanctioning power rests with the courts and Guatemala's constitutional court has ruled that penalties must be doled out by judges.
De la Torre said that Guatemala will work to better train judges and expedite sanctions.
Among the poorest countries in Latin America, Guatemala sends nearly half of its annual exports including clothing, flowers, jewelry and coffee to the United States.
(Reporting by Michael McDonald; Editing by Phil Berlowitz)