DR-CAFTA
International Trade and Commerce

Celia Porras
UAM-CUSE
11/5/2012

Table of Content

I. Introduction………………………………………………………………………. II. Description of the Subject……………………………………………….. III. Goals and Objectives……………………………………………………….. IV. Historical Background…………………………………………………….. V. Analysis of the subject a. Strengths………………………………………………………………….. b. Weaknesses……………………………………………………………… c. Opportunities………………………………………………………….. d. Threats……………………………………………………………………... VI. Prescription and Recommendations………………………………. VII. Difficulties in Implementation…………………………………………. VIII. Solutions to the Difficulties………………………………………………. IX. Prognosis…………………………………………………………………………… X. Conclusion…………………………………………………………………………. XI. References………………………………………………………………………….

I. Introduction
The Dominican Republic-Central America free trade agreement between these six countries and the superpower of the United States is the first among these countries. What this free trade agreement does is to create new and strong economic opportunities by opening markets, eliminating tariffs, and reducing barriers to service. The agreement helps to facilitate trade and investment between the participants, as well as promoting and increasing regional integration (Anonymous). DR-CAFTA presents a huge opportunity for Central American countries and the Dominican Republic; as they have the chance to trade with the biggest economy in the world and fortunately boost their economies. II. Description of the Subject
DR-CAFTA is a free trade agreement between the United States; five Central American countries, El Salvador, Guatemala, Honduras, Nicaragua, and Costa Rica; and the Dominican Republic. This free trade agreement opens a new era in trade between the USA and the six countries; and it generates not only opportunities for the third world countries but also generates opportunities to the United States itself (Enterprise Florida, 2012).
DR-CAFTA was approved in July 2005 by the US Congress and signed by the US President on August 2nd 2005. El Salvador was the first country to enforce the agreement on March 1st 2006. It was then followed by Honduras and Nicaragua on April 1st 2006, Guatemala on July 1st 2006. The next year, the Dominican Republic joined on March 1st 2007. Later, on October 7th 2007, Costa Rica approved the agreement in a national public referendum, but it enforced it until 2009 (Export). What DR-CAFTA does is to eliminate all tariffs that has always been present between these countries on 80 percent of US manufactured goods and cut the rest over a few years later. This FTA is not only regarding manufactured goods, but it also includes every type of trade and commercial exchange. Similarly, it also makes regulatory standards and environmental protections stronger and more efficient in countries located in Central America and the Dominican Republic as well (Enterprise Florida, 2012). As time passes by, most of the tariffs and impediments to trade that previously existed will fall. “Duties on more than 80 percent of the more than $20 billion in U.S. goods exported to the region annually end immediately. Within five years, 85 percent of U.S. exported goods are to become duty-free, while the remaining tariffs will be phased out over 10 years” (Enterprise Florida, 2012). Services represent a large share of the economy in the United States; therefore, CAFTA encourages market access by US service providers to the service sectors of the Dominican Republic and Central American economies. Services include the following: financial services such as banking and insurance, telecommunications, legal services, education, healthcare, etc. Furthermore, investment barriers and tariffs are eliminated between participants. In the CAFTA countries and the DR, US companies have to be treated as if they were local. Similarly, intellectual property rights will be protected as they have been in the US (Enterprise Florida, 2012). For the United States, Central America and the Dominican Republic represent the third largest export market in Latin America; just behind Mexico and Brazil. For example, US exports to DR-CAFTA countries stand at $19.5 billion in 2009. If you combined the total of two-way trade in the year 2009 between these seven countries, you have a total of $37.9 billion (Anonymous). In the year 2009, exports between the participants were the following: Dominican Republic ($5.3 billion), Costa Rica ($4.7 billion), Guatemala ($3.9 billion), Honduras ($3.4 billion), El Salvador ($2.0 billion), and Nicaragua ($715 million). The best categories that were exported during that year were mineral fuel ($2.9 billion), electrical machinery ($2.6 billion), and cereals including corn, wheat, and rice ($1.2 billion). Central American countries and the Dominical Republic are all third world countries and agriculture is an important aspect of their economic activities. US exports of agricultural products to CAFTA/DR countries totaled $3.0 billion in 2009, as a group it would be the 6th largest US agricultural export market (Anonymous). When we talk about imports, in 2009, the United States imported from DR-CAFTA countries a total of $18.8 billion. In 2009, if you would have combined all DR-CAFTA countries, they would have been the USA’s 19th largest goods import supplier. The USA import suppliers from DR-CAFTA on the year 2009 were the following: Costa Rica ($5.6 billion), Dominican Republic ($3.3 billion), Honduras ($3.3 billion), Guatemala ($3.1 billion), El Salvador ($1.8 billion), and Nicaragua ($1.6 billion). The most important import categories between these countries are edible fruits and nuts, optic and medical instruments, woven apparel, etc. When talking about agricultural products, DR-CAFTA countries together would be the 3rd largest supplier of agricultural products with a total of $3.6 billion in 2009 with imports such as bananas, plantains, sugar cane, etc. (Anonymous). This free trade agreement is not only about tariff reduction but a lot more. It provides new market access for US consumer and industrial and agricultural products. There is also unprecedented access to government procurement in the countries involved. What this means is that the government can buy goods or services pretty much at any time without any notice and even without nobody knowing about it. DR-CAFTA also liberalizes the service sectors, strengthens protection for USA patents, trademarks and USA investments in the region (Export). DR-CAFTA has been extremely beneficial for all participants. One of the most important features of the free trade agreement is that it covers custom facilitation and provides benefits to small and medium-sized exporters (Export). This is very important and useful since most of the countries involved are among the least developing countries and they have a lot of small and medium-sized exporters that in some ways have disadvantages that do not allow them to export correctly or as they wish. By implementing this feature, these exporters are granted with a sense of a secure environment to work in and help the country’s economy and that of their family. Another important point is the fact that in the agreement, there are provision that include important topics such as addressing government transparency and corruption, worker rights, protection of the environment, and dispute settlement (Export). These are situations that DR-CAFTA countries are very familiar with. In these countries, there is a lot of corruption from the government, making it hard for investments to come and help the economy. Also, working conditions and rights in these countries are present but sometimes they are not enforced. So what is the point on having them if they are not enforced; and with this free trade agreement countries will have to implement them in order to keep a good relationship with the other trading partners. In addition, DR-CAFTA countries are not very conscious about the environment, therefore, they don’t do much to help it or take care of it. It is good that the agreement imposed this provision so the countries are more aware of how to manage the resources more efficiently. “Most Dominican Republic and Central American exports into the United States have benefited from duty-free treatment as a result of a trade preference program provided by the U.S. Congress to promote regional economic development (the Caribbean Basin Initiative, CBI)” (Export). This is good because by being benefited with a duty-free treatment may be more like an incentive towards more exportation from the Dominican Republic and Central American countries. This would create a stronger trade relationship among the partners and a stronger and safer feeling towards exporting more since exporters would feel they are gaining more by not paying taxes. In order for the free trade agreement to work properly and be fair for each and every participant; it requires important reforms of the domestic legal and business environment. It has to encourage more competitive business development and investment and more protection of intellectual property rights. For DR-CAFTA to work properly there has to be a strong sense of property rights and most importantly; encourage and enforce transparency which many of these trading partners are lacking.
Many people would ask themselves the question of why would a super power and the number one economy in the world would like to have a trading relationship with third world countries. Well, there are many reasons as to why the USA is so interested on trading with the Dominican Republic and Central American countries. This free trade agreement highly benefits the United States in many forms: * Supports American jobs: workers in the US already export about $15.7 billion in US products to Central America and the Dominican Republic. This is more than what they export to countries such as India and Russia together. With a two-way trade, in 2004 they had exports of $33 billion. DR-CAFTA impact would create over 25,000 new jobs in its first year and more than 130,000 new jobs in ten years (US Chamber Federation, 2005). * Levels the playing field for USA workers: 80% of products coming from Central America and the Dominican Republic enter the USA market duty free, but exports from the US face tariffs in between 30% and 100% higher. With DR-CAFTA, this unfairness will be over. It would eliminate all tariffs on 80% of US manufactured goods, with the rest phased out over some years (US Chamber Federation, 2005). * Farmers will get a big boost: In the US the American Farm Bureau Federation has projections that DR-CAFTA will boost US agricultural exports by $ 1.5 billion annually. Farmers also expect to increase their exports of beef, corn, rice, etc. (US Chamber Federation, 2005). * New opportunities in the region for US companies and workers: with DR-CAFTA, there will be open services markets such as telecoms, new legal protections for copyrights and the likes, and greater transparency. This will increase investment in Central America and the Dominican Republic (US Chamber Federation, 2005). * A helping hand for friends, allies, and neighbors: This agreement will lock in democratic reforms, improvement in labor law enforcement, and push the economic growth throughout the region. And with a stronger economy, there will be more resources for a better education, health care, and infrastructure (US Chamber Federation, 2005).
For the US, entering this free trade agreement has been extremely beneficial. But DR-CAFTA is more beneficial to the rest of the trading partners since they are mostly third world countries. It has given a push to having more economic growth and stability in the country. To show this economic growth and the benefits of DR-CAFTA, let’s look at Nicaragua and how much is has grown regarding exports and imports since CAFTA was adopted.
Nicaragua is known to be the second country that has taken the most advantage out of DR-CAFTA just after Costa Rica. The US buys 29.73% of Nicaragua’s exports and it is the country’s main trading partner. Nicaragua has increased its exports to the US in an impressive 36.4% from 2005 to 2009; having a minor step back in sales falling 5.6% due to the economic crisis that resulted in less demand from the United States (Canales, 2010).
In less than a month after Nicaragua signed, International Textile Group announced plans to locate a $100 million textile mill in Nicaragua creating 750 direct jobs and some 8,000 jobs indirectly. Somewhere around $200 million in new investments have been announced in the textile and apparel sectors generating more than 13,000 Nicaraguan jobs (Murphy, 2007).
Nicaragua has attracted $363.8 million in foreign direct investment from the US; representing 17% of total FDI in the country. The sectors of textiles, energy, mining, and tourism are the ones that have attracted the most investments, contributing to more jobs in the country (Diaz, 2011).
There are two main categories in which Nicaragua has had a huge growth and is definitely moving forward. First, you have agricultural products in which Nicaragua has a huge potential and is definitely leveraging it. Second, exports regarding clothing and the production of it. Nicaragua has preferential access to this market that nobody else in the region has (Canales, 2010).
Nicaexport is an export promotion agency who is directed to reduce poverty, develop the economy, and improve the social situation in Nicaragua. The owner of this business has found DR-CAFTA extremely beneficial not only for big business but for small and medium enterprises like Nicaexport ("Central America: Embracing," 2007).
"Those who say the CAFTA-DR is only for big business don't know the reality - the CAFTA-DR is benefiting the SMEs on an even bigger level." --Ivan Saballos Patinos, Nicaexport In case there is any irregularity or any issue between the partners, they should file a complaint to The Department of Commerce's Market Access and Compliance offices which monitors this agreement to ensure that the DR-CAFTA signatory-partner countries fully comply with their obligations (Anonymous). The environment is very important issue all around the world. In order to protect it, Dr-CAFTA countries along with the United States have an environmental cooperation program. Under this program, the seven countries agreed to cooperate to protect, conserve and improve the environment to advance their goal of sustainable development for the benefit of present and future generations. They present four important topics: 1) Building institutional strength to improve and enforce environmental laws, and to engage the public in decision-making 2) preserving biodiversity and habitat 3) promoting market-based conservation 4) encouraging private business to adopt environmentally sound practices ("Cafta-dr environmental cooperation,"). There is no doubt that DR-CAFTA has brought many good things to the participants. Although there might be some people that do not fully agree with this free trade agreement, the positive results from the agreement are proof of how big it is and what impact it has on the economy of these countries. It has help paved the way for a more stable country, contributing to a better life style in the Dominican Republic and Central American countries. It also helped to have a more transparent and fair country along with a more attractive scenario for investments.

III. Goals and Objectives
What is intended with this paper is to analyze in depth the case of the free trade agreement DR-CAFTA with the super power of the United States. The first goal is to understand what DR-CAFTA does and what it really is about. Also, to look at the positive effects the treaty has towards the trading partners; having as example the country of the United States and Nicaragua. In addition, this paper tries to view at the many different ways in which DR-CAFTA has helped the countries involved in becoming more competitive in the market and in having a positive economic growth along with reformations to become a better country. IV. Historical Background
Historically, the Dominican Republic and the Central American countries always had a trading relationship with the United States. As a matter of fact, the US has been the main trading partner of all the six countries.
Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua had history since the early 1960s when they attempted to form what is known as the Central American Common Market. The objective of this common market was to increase and facilitate regional economic development through what is known as free trade and regional economic integration. This relationship did not last long and it collapsed on 1969 when there was a war between Honduras and El Salvador that started after a riot at a soccer game between the teams of these two countries (Hill, 2013).

Central American countries have had wide-ranging unilateral and regional trade reforms since the late 1980s. “Negotiations for a free trade agreement between the U.S. and the nations of Central America follow a long process of trade and broad policy reforms that have been undertaken in the region since the late 1980s” (“Central American Department….”)
Costa Rica, Honduras, Guatemala, El Salvador, and Nicaragua began to reduce tariffs unilaterally starting in the late 1980s and early 1990s. It is said that by the mid 1990s, average tariff levels in Central America were among the lowest in the Latin America region. For instance; for the five Central American participants, the average import duties fell from 45% in 1985 to 14.1% in 1990 and to 7.1 percent by 1999 as you can see in table below (“Central American Department….”)

In addition, Central American countries also restructured their approach towards having more exports. “Since 1983, Central American countries have enjoyed trade preferences to the U.S. market under the Caribbean Basin Initiative (CBI). This initiative allows duty-free access to the U.S. market for a substantial number of products” (“Central American Department….”).
The chart at the right shows the growth figures for the Central American countries starting in 1990. With this chart, one could identify three different phases. The first one starting with high growth rates during 1990 through 1995. The second phase has mixed results with ups and downs from 1996 to 1999. The last phase presents poor economic results starting in 2000; with the exception of Nicaragua that in 2000 had a boom situation due to aid flows after the famous Hurricane Mitch (“Central American Department….”). V. Analysis of the Subject a. Strengths:

b. Weaknesses:

c. Opportunities: d. Threats:

VI. Prescription and Recommendations VII. Difficulties in Implementation VIII. Solutions to the Difficulties IX. Prognosis X. Conclusion
Beyond the economic benefits to U.S. businesses, CAFTA paves the way for greater economic and political stability in the region by nurturing the rule of law; open, transparent governance; protection of private property rights and investments; market-based competition; and regional economic integration. As markets and civil society strengthen and become more stable, predictable and economically linked, citizens in the CAFTA countries will have greater economic prospects at home. The FTA promotes closer economic cooperation among the Central American countries, thereby advancing regional integration and contributing to greater peace and stability in the region.

References
Anonymous. (n.d.). Cafta-dr (dominican republic-central America FTA). Retrieved from http://web.archive.org/web/20110309190353/http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta
Enterprise Florida. (2012). The cafta intelligence center. Retrieved from http://www.caftaintelligencecenter.com/subpages/What_is_CAFTA.asp
Export, G. (n.d.). U.s.- cafta-dr free trade agreement. Retrieved from http://web.archive.org/web/20080518233946/http://www.export.gov/fta/CAFTA/index.asp?dName=CAFTA
Murphy, J. (2007, November). Dr-cafta: The record so far. Retrieved from http://web.archive.org/web/20081202112922/http://www.uschamber.com/NR/rdonlyres/ecfles5ozzwcdpez3dtqtg7rfvs5eqkzsnilmx475mrqougepsuwy7a2nzvwpiavhcongqfjwd735f4sr2owk56rgmc/DRCAFTATheRecordSoFar.pdf
Diaz, T. (2011, July 17). Impact of cafta-dr in nicaragua after 5 years of implementation . Retrieved from http://www.elobservadoreconomico.com/articulo/1151
Canales, G. (2010, April 26). Nicaragua sobresale en el cafta. Retrieved from http://www.laprensa.com.ni/2010/04/26/economia/22797
Central america: Embracing cafta-dr. (2007, April 18). Retrieved from http://web.archive.org/web/20080516001157/http://www.state.gov/p/wha/rls/fs/2007/83181.htm
US Chamber Federation. (2005, June 21). Retrieved from http://media.portland.indymedia.org/media/2006/05/338959.pdf
Cafta-dr environmental cooperation program. (n.d.). Retrieved from http://www.caftadr-environment.org/index.htm
Hill, C. W. L. (2013). International business, competing in the global marketplace. (9th ed.). McGraw-Hill Irwin.
Central America Department and Office of the Chief Economist Latin America and Caribbean Region. (n.d.). dr-cafta: Challenges and opportunities for central america. Retrieved from http://siteresources.worldbank.org/LACEXT/Resources/258553-1119648763980/DR_CAFTA_Challenges_Opport_Final_en.pdf