The USA and five Central American Nations — Guatemala, El Salvador, Honduras, Costa Rica, and Nicaragua — and the Dominican Republic have developed a consensus to sign a free trade agreement named CAFTA.
A Brief Background
North America already has a success story of mutual trade alliance, the North American Free Trade Agreement (NAFTA — now replaced by the USMCA). It is the first free trade agreement between the USA and regional developing economies. The USMCA served as an example for the creation of CAFTA-DR.
The idea was conceived sometime in 2003. The USA took a time of about TWO years to make its mind. The implementation legislation for the CAFTA was signed on August 2, 2005. It was followed by El Salvador, Honduras, Nicaragua, and Guatemala in 2006, the Dominican Republic in 2007, and Costa Rica in 2009. The name was changed from CAFTA to CAFTA-DR after the joining of the Dominican Republic. The agreement is now officially known as the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR).
The CAFTA is comparatively a small-size Free Trade Agreement (FTA). It, however, deals with trade issues like removing tariffs and merchandise processing fees to open up and increase bilateral trade between the participating countries. The full implementation of CAFTA is scheduled for January 1, 2025. The process of phasing out duties and tariffs on all USA imports and exports will be completed by that time.
The agreement provides for a win-win situation for both the USA and small developing participants. It offers ample commercial opportunities for economic stability and harmony between the participating countries. The annual trade among the member nations has almost doubled after the ratification in 2005 & 2013.
The Scope of CAFTA-DR
The CAFTA basically is a Free Trade Agreement. Its emphasis is on removing tariff bottlenecks by qualifying the imports and exports for tariff-free trade. The imports, and exports of products need to comply with the agreement’s rules of origin, which are similar to NAFTA and the US-Chile Free Trade Agreements. The USA International Trade Commission’s Harmonized Tariff Schedule provides the latest information and updates about rules of origin.
The agreement also addresses the following issues in addition to tariffs:
- The Processes of Customs Administration
- Government Procurement
- Electronic Commerce
- Intellectual Property Rights
- Environmental and Sustainability Standards
The volume of total trade of goods between member nations touched $57.9 billion in the year 2018. The CAFTA trade block is the third-largest export market for the USA in Latin America after Brazil and Mexico. The reports show that US businesses have heavily gained from exporters of textiles, plastics, cotton, corn, rice, machinery, and motor vehicles.
Costa Rica is on privatization in banking, telecommunications, insurance, and industries after CAFTA. It has attracted Direct Foreign investment (DFI) in its insurance and telecommunication industries. It boosted its economic growth. The Dominican Republic is exporting about half of its goods to the United States. It has given a push to its sugar, coffee, and tobacco trade.
The word agreement sounds good as declaring that some agree on something, but all agreements face criticism. The CAFTA-DR is no exception. It, too, has its disadvantages and shortcomings.
The US subsidizing of agribusiness harms other member countries as Mexico was affected under NAFTA. Honduras enjoyed a trade surplus in agricultural products before CAFTA, which is now facing a trade deficit.
The small members like El Salvador, Honduras, and Guatemala, are not showing promised economic growth. These countries are affected by drug and gang violence as well as forced migration.
The agreement badly affected the apparel exports to the US that significantly dropped after CAFTA. The prices of medicines in Central American nations are breaking the barriers.