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Refugees travelling to the US who enter Guatemala, including Salvadorans and Hondurans, will now be required to apply for asylum protection from the Central American nation instead of at the US border.
Under the deal Guatemala has been declared a so-called “safe third country”.
The Central American nation and the US have been negotiating the deal for months.
Donald Trump earlier threatened to place trade tariffs on Guatemala if an agreement wasn’t reached.
“We’ll either do tariffs or we’ll do something. We’re looking at something very severe with respect to Guatemala,” the US president said on Wednesday.
Jimmy Morales, Guatemala’s president, said the agreement would allow the country to avoid “drastic sanctions ... many of them designed to strongly punish our economy, such as taxes on remittances that our brothers send daily, as well as the imposition of tariffs on our export goods and migratory restrictions.”
As part of the agreement the US will increase access to the the H-2A visa program for temporary agricultural workers from Guatemala.
The country’s government said its labour ministry would, in the coming days, ”start issuing work visas in the agriculture industry, which will allow Guatemalans to travel legally to the United States, to avoid being victims of criminal organisations, to work temporarily and then return to Guatemala, which will strengthen family unity.”
“We have long been working with Guatemala and now we can do it the right way.” Mr Trump said.
“This landmark agreement will put the coyotes and smugglers out of business.”
Despite the president’s optimism it remains unclear how the agreement will take effect.
Guatemala’s constitutional court has granted three injunctions preventing its government from entering into a deal without approval of the country’s congress and Mr Morales himself has questioned the concept of a “safe third country”, which forms the basis of the agreement.
“Where does that term exist?” he asked reporters on Friday, hours before the deal was struck.
”It does not exist, it is a colloquial term. No agreement exists that is called ‘safe third country.”
Rights groups have condemned the deal, with multiple experts questioning its legality.
Jordan Rodas, a human rights prosecutor, said his team was studying the agreement and whether Enrique Degenhart, Guatemala’s interior minister, had the authority to sign it.
Amnesty International condemned the deal, saying ”any attempts to force families and individuals fleeing their home countries to seek safety in Guatemala are outrageous.”
Rights groups and student organisations rallied against the agreement in Guatemala City, gathering in front of the constitutional court.
Many believe the nation, which is mired in poverty and unemployment, has no capacity to take in refugees.
The problems of homelessness, severe drought, gang violence and unemployment which are endemic in El Salvador and Honduras are also present in Guatemala.
Eliot Engel, a Democrat who chairs the House Committee on Foreign Affairs said Mr Trump’s decision to sign the agreement was “cruel and immoral.”
‘’It is also illegal,” he added. “Simply put, Guatemala is not a safe country for refugees and asylum seekers, as the law requires.”
The president was asked on Friday if he expected to reach similar agreements with Honduras and El Salvador.
He replied, “I do indeed.”
Additional reporting by agencies