The Dominican Republic and five Central American countries that have signed a free trade agreement with the United States could boost their combined exports to the United States by as much as 28 percent after implementation, especially in textiles, clothing and processed crops, according to a new IMF report. The U.S. International Trade Commission has previously estimated a 12.5 percent increase after the Dominican Republic-Central American Free Trade Agreement (CAFTA) is fully implemented.

MORE TRADE: Central American and Dominican ports are expected to see more cargo traffic as a result of CAFTA. (Photo: IDB)

"Mexico's experience under NAFTA suggests that trade flows between the Central American countries and the United States could increase rapidly after the inception of CAFTA-DR," the International Monetary Fund (IMF) points out in a new report, Central America: Global Integration and Regional Cooperation.

CAFTA, also known as DR-CAFTA and CAFTA-DR, will immediately reduce tariffs on all nonagricultural and nontextile exports from the CAFTA countries to the United States. About 80 percent of U.S. nonagricultural and nontextile exports from the United States will be reduced. Tariffs on all other goods will be phased out gradually over a 5- to 20-year period.

CAFTA has a total population of 45 million and a combined GDP of $91.6 billion. By comparison, Argentina - Latin America's third-largest economy - has a population of 37.9 million and a GDP of $151.9 billion.

CAFTA Resources

ARTICLES & VIEWS CAFTA? Yes, Please Bush & LatAm Central America:     More Trade? KEY STATISTICS CAFTA Trade CAFTA GDP CAFTA Inflation COUNTRY BRIEFS Costa Rica Dominican Rep. El Salvador Guatemala Honduras Nicaragua USEFUL WEB LINKS CAFTA Costa Rica Dominican Rep. El Salvador Guatemala Honduras Nicaragua

  However, in terms of U.S. trade, it is far more important than Argentina. CAFTA will create the second-largest export market for the United States in Latin America after Mexico. The Dominican Republic, one of the CAFTA countries, is the fifth- largest U.S. commercial partner in the region and traded more goods with the United States last year than larger economies like Argentina, Chile and Peru. Three of the top U.S. trading partners in Latin America are CAFTA countries. In terms of U.S. exports, four CAFTA countries make the top 10 list.

  Last year, the six Latin American CAFTA countries exported goods worth a total of $17.7 billion to the United States, an increase of 4.9 percent from 2003, according to U.S. Census Bureau data analyzed by Latin Business Chronicle. CAFTA imports from the United States grew by 4.8 percent to $15.8 billion. CAFTA is a larger U.S. export market than Russia, India and Indonesia combined, according to the U.S. Trade Representative's Office.

  All in all, total U.S. trade with CAFTA grew by $1.5 billion, or 4.9 percent, to $33.5 billion last year. As a group, Central American countries' trade with the United States increased fivefold in dollar terms in the period 1994–2003, according to the IMF. The United States is by far the largest trading partner for the Latin American members of CAFTA, accounting for 82.3 percent of their total exports and 46.6 percent of their imports last year, according to a Latin Business Chronicle analysis based on data from the United Nations and the U.S. Census Bureau.

By comparison, the United States was the destination for 52.8 percent of total Latin American exports and the origin of 40.7 percent of Latin American imports, our analysis shows.

Leading CAFTA exports to the United States include apparel, bananas, coffee, electrical machinery, medical equipment, fish and mineral fuel. Honduras is the leading provider of knit apparel, while the Dominican Republic exports the most woven apparel. Costa Rica leads in terms of electrical machinery. Leading U.S. exports to CAFTA include electrical machinery, apparel, plastic and cereals.

CAFTA's total exports reached $21.5 billion last year, an increase of 4.4 percent from 2003. Imports grew by 7.3 percent to $33.9 billion, according to preliminary data from the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). In the 1996-2003 period, CAFTA export growth averaged 5.72 percent, while import growth averaged 5.03 percent, according to the IMF.

CAFTA BENEFITS

CAFTA exports to the United States have benefitted from a combination of factors, including preferential access to the U.S. market thanks to the Caribbean Basin Initiative (CBI) and liberalization of the CAFTA economies during the 1990's.

While the CAFTA countries already benefitted from CBI, implementation of CAFTA will provide more stability. CBI has only been granted for short periods at a time and has then been subject to renewal. "Having a free trade agreement provides more long-term security," says Kai Schoenhals, executive director of the Dominican Exporters Association.

In addition, CAFTA will reduce various restrictions and eliminate compliance costs necessary to qualify for preferential access, the IMF report says.

U.S. and CAFTA traders are particularly enthusiastic about the requirements for modernization of the CAFTA countries' customs services, which have been plagued by corruption and ineffiency.

"We expect that a tariff liberalization process will aid in bringing about a much-needed modernization of our customs administration system and our ports, along with all the institutions related to the importation process," Andres Dauhajre, then-president of the National Importers Association of the Dominican Republic, said earlier this year. "In the medium term, this will facilitate doing business in the Dominican Republic and will cut costs even further."

Multilaterals like the World Bank and IMF also argue that CAFTA will help reduce poverty in Central America and the Dominican Republic by boosting trade, expanding the economies and creating new jobs.

"Greater trade opportunities are essential to improving living standards in developing countries," World Bank President Paul Wolfowitz said in connection with the release of a new report on CAFTA. "This agreement will help secure and expand the access of Central American nations to their largest trading partner and help provide the potential for increased trade and investment in the region - critical factors in boosting economic growth and reducing poverty."

Last, but not least, CAFTA will help the region offset potential losses from the increased Chinese competition. "The need to move forward with CAFTA-DR becomes more urgent given the rising competition from Asia, especially from China," the IMF says. "The recent decision by the United States to impose curbs on some categories of Chinese textile exports to the United States will give Central America some relief in the short term, allowing the region to implement CAFTA-DR."

U.S. BENEFITS

When a majority of members of the U.S. House of Representatives on July 28 voted to approve the Dominican Republic-Central American Free Trade Agreement (CAFTA), they did more than boost the potential for U.S. trade with the trade pact's six Latin American members.

The vote boosts U.S. efforts to expand free trade throughout Latin America, where the United States already has free trade agreements with Mexico (through NAFTA) and Chile and is currently negotiating a trade agreement with three Andean countries (Colombia, Ecuador and Peru).

These agreements are seen as key to boosting U.S. exports at a time when efforts to create a Free Trade Area of the Americas (FTAA) have failed. The FTAA, agreed to by 34 heads of states in December 1984, was to have created the world's largest free trade area - from Canada to Chile - by December 2005. But two leading countries, the United States and Brazil, failed to reach agreement on how to proceed with the final part of negotiations and many experts now believe an "FTAA Light" (consisting of several individual and regional free trade agreements) will be more likely than the original FTAA.

If U.S. lawmakers had failed to approve CAFTA, it would have sent a highly negative message to the Andean countries negotiating the agreement as well as other countries keen to do so. "It ...fosters leadership and credibility in our global as well as regional and bilateral trade negotiations," James W. Jarrett, the vice president for legal and government affairs at chip maker Intel Corporation, said in a seperate statement. Intel is the largest foreign investor in Costa Rica, where it has set up a major assembly operation that is key to that country's economy.

It would also have hurt U.S. companies that use the CAFTA area for apparel assembly intended for the U.S. market and are now starting to compete fiercely with imports from China. "A loss would have hurt American manufacturing and jobs here at home," John Engler, president of the National Association of Manufacturers, said in a statement after the vote.

Without CAFTA, U.S. exporters would continue to face steep tariffs in Central America and the Dominican Republic, averaging between 30 percent and 100 percent, according to the U.S. Chamber of Commerce. "The agreement levels the playing field for U.S. workers," the chamber says.

According to the American Farm Bureau Federation, CAFTA will boost U.S. agricultural exports by $1.5 billion annually. 

For U.S. companies, CAFTA provides a legal framework that guarantees their investments in the region, thus boosting the potential for future U.S. investments there. The agreement provides strict observance of rules on intellectual property rights, investment, government procurement, and competition policies. The dispute resolution provisions are similar to NAFTA, which helped boost U.S. - and other foreign - investment in Mexico.

"CAFTA-DR is likely to boost FDI flows to the Central American countries, as NAFTA did in the case of Mexico," the IMF report says. "As NAFTA did, CAFTA-DR could serve as a commitment device and encourage FDI flows while inducing a change in the nature of trade flows in favor of vertical trade. CAFTA-DR could also help attract foreign multinational corporations to the Central American countries, as Mexico's NAFTA experience proved."

While an informal coalition of U.S. sugar and textile companies and labor unions opposed CAFTA, the pact has gained support from practically all U.S. multinationals, including such giants as General Electric, Citigroup, Coca-Cola Company and Microsoft and industry groups such as the National Association of Manufacturers, the Telecommunications Industry Association and Pharmaceutical Research and Manufacturers of America.

"Today's passage of [CAFTA] in the U.S. House of Representatives is a victory for economic growth and innovation in both the United States and the nations covered by the agreement," Microsoft CEO Steve Ballmer said in a statement after the vote. "The ability of Microsoft Corp. and the U.S. technology industry to continue to create jobs and expand exports depends on access to developing markets. Microsoft is pleased that this agreement not only provides this access, but also ensures solid intellectual property, procurement and e-commerce protections."

Even certain textile groups support CAFTA. That's the case with the United States Hosiery Manufacturers Coalition (USHMC), which counts Russell Corporation and Sara Lee Branded Apparel among its members. "Passage of DR-CAFTA will allow USHMC members to remain competitive in sock production by supplementing domestic production, thus preserving as many US jobs as possible," the group said in a statement in June.

MACRO ECONOMY

The U.S. approval of CAFTA approval comes as the macro economic outlook of several CAFTA countries is improving. Honduras will see the strongest GDP growth this and next year, while Guatemala and El Salvador will see improved growth rates, according to private and multilateral forecasts. The odd man out will be Costa Rica, which is slated to see GDP slow down this and next year.

CAFTA is expected to expand the economies further. One estimate - by IMF economists Alvin Hilaire and Yongzheng Yang - forecasts a GDP increase of 1.5 percent for the Central American countries as a result of the implementation of the pact. The new IMF report says it could be even higher. The increase is spurred by the expected growth in exports, as happened in Mexico after the implementation of NAFTA.

Another benefit is the expected stabilization of the CAFTA economies. "Increased trade and financial integration associated with CAFTA-DR could reduce the adverse effects of macroeconomic instability (volatility) on economic growth," the IMF report says. "Highly volatile macroeconomic fluctuations have been a major impediment to sustained growth in Central America."

Also the Dominican Republic has suffered from economic volatility - as recently as 2003, when the government intervened the country's top bank, BanInter, suspected of massive fraud. The intervention caused a major crisis and a jump on inflation.

In fact, last year was bad news in terms of inflation in all six CAFTA countries, which registered higher inflation rates than in 2003. The worst performances took place in the Dominican Republic (51.5 percent) and Costa Rica (12.3 percent). Except for those two countries, the CAFTA countries have registered single-digit inflation rates the past two years. This year, rates are expected to fall in all CAFTA countries, as they will next year as well, the IMF predicts.

However, the IMF warns that the implementation of CAFTA should coincide with increased focus on structural reforms. "For the growth and stability benefits of CAFTA-DR to be fully materialized, however, the agreement needs to be accompanied by structural reforms," the IMF said in its report. "A broad range of reforms are needed to secure the potential benefits associated with CAFTA-DR. In particular, most Central American countries need to strengthen their institutions, including regulatory bodies, the rule of law, property rights, labor market flexibility, and human capital."

And that may be easier said than done, as opposition to free trade and CAFTA itself is growing. "Most of the opposition [against CAFTA] has come from a coalition of groups that are skeptical about forging closer ties with the United States on political grounds, public sector unions, and civil society and interest groups concerned about the conditions negotiated in the agreement and its impact on some sectors, including the traditional agricultural sector," the IMF report says. "In addition, selected agro-industrial firms (for example, meat, dairy, and poultry industries) have expressed concern about losing their protected positions under CAFTA-DR."

OUTLOOK

CAFTA was signed in Washington in August 2004. It has been ratified by lawmakers in El Salvador, Guatemala and Honduras and is pending approval by national assemblies in Costa Rica, the Dominican Republic and Nicaragua.

The Dominican national assembly will likely approve the pact soon, but approval by the Costa Rican and Nicaraguan assemblies remain more uncertain. Costa Rican president Abel Pacheco has been lukewarm to the pact, although he sent his trade minister to sign it in Washington last year. Many observers believe he will postpone sending the pact to lawmakers until he leaves office next year. (His likely successor, former president and Nobel laureate Oscar Arias, favors CAFTA). And although Nicaraguan president Enrique Bolanos supports CAFTA, he has a majority of the lawmakers against him due to infighting within his own party and a rivalry with former president Arnoldo Aleman.

Although U.S. and CAFTA exporters are set to be the big winners, also consumers in the CAFTA countries are set to gain from the pact, supporters say. "One of the big beneficiaries will be the average Dominican," says Hugo Rivera, a former deputy trade minister who took part in Dominican CAFTA negotiations with the United States. "The consumer will see a larger amount of products and substantially lower prices, even for those products that are manufactured locally."

Back to top

YOUR OPINION?
Share your views on CAFTA through the Latin Business Forum.

RELATED SITES