CAFTA Explained, With Its Pros and Cons

Agreement, Member Countries, Pros and Cons

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The Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) includes the United States and six countries in the greater Central America region. It was the first multilateral free trade agreement between the United States and smaller developing economies when it was signed on Aug. 5, 2004.

Like most other trade agreements, CAFTA-DR removes tariffs and merchandise processing fees on trade. All tariffs on U.S. consumer and industrial exports were removed as of 2015 while tariffs on agricultural exports will be gone by 2020. Everything will be duty-free by the time the agreement is fully implemented on Jan. 1, 2025. To be eligible for tariff-free treatment under CAFTA-DR, products must meet the relevant rules of origin.

CAFTA-DR is much smaller than other regional trade agreements, such as the North American Free Trade Agreement, currently the world’s largest free-trade area. It would have been dwarfed by the Transatlantic Trade and Investment Partnership if negotiations had been finalized and the Trans-Pacific Partnership had it been approved by Congress.

Impact of CAFTA-DR

The CAFTA-DR trade area is the U.S.'s third-largest export market in Latin America, right after Mexico and Brazil. According to the U.S. Department of Commerce, CAFTA-DR has benefited U.S. exporters of petroleum products, plastics, paper, and textiles, as well as manufacturers of motor vehicles, machinery, medical equipment, and electrical/electronic products. Also, growers of cotton, wheat, corn, and rice have seen their exports improve.

Implementation dates with the U.S. and the six other CAFTA-DR nations ranged from March 1, 2006, through Jan. 1, 2009:

  • El Salvador: March 1, 2006
  • Honduras: April 1, 2006
  • Nicaragua: April 1, 2006
  • Guatemala: July 1, 2006
  • Dominican Republic: March 1, 2007
  • Costa Rica: January 1, 2009.

CAFTA-DR also improves customs administration and removes technical barriers to trade. It addresses government procurement, investment, telecommunications, electronic commerce, intellectual property rights, transparency, labor, and environmental protection.

Pros

The total trade of goods between the seven countries was about $57.9 billion in 2018, according to the U.S. Census Bureau. Through October of 2019, that figure was on pace to end the year at about $58.5 billion.

The U.S. consistently has exported more than it has imported over the duration of the agreement. In 2018, the U.S. exported about $7.5 billion more in value than it imported. For 2019, the U.S. is on pace to export about $6.6 billion more than it imports.

CAFTA-DR has boosted the economies of Nicaragua, Costa Rica, and the Dominican Republic. The United States is the largest export market for each of those countries.

Costa Rica benefited from increased foreign direct investment in the insurance and telecommunications sectors, which the government recently opened to private investors. These goods include fruit, coffee, and other food, as well as electronic components and medical equipment. When CAFTA-DR was implemented, the Costa Rican government partially privatized the banking, telecommunications, and insurance industries, which helped to boost economic growth.

The Dominican Republic exports roughly half of its goods to the United States. Its exports are primarily sugar, coffee, and tobacco. Gold, silver, and tourism have grown as exports over recent years.

Cons

CAFTA-DR had many of the same destabilizing effects on Central American countries that NAFTA did in Mexico because U.S. agribusiness is subsidized by the federal government.

Before CAFTA-DR, Honduras had a trade surplus in agricultural products. Years after CAFTA-DR, it had encountered a trade deficit. Many farmers took jobs in U.S. apparel factories that moved to their countries after CAFTA-DR. However, many other factories moved to China, Vietnam, and other low-wage countries. As a result, apparel exports to the United States from the CAFTA-DR countries were lower in 2013 than before the trade agreement was signed. 

Economic growth in El Salvador, Honduras, and Guatemala is lower than in the rest of Latin America. This economic instability helps boost the drug trade. This prompts many locals, including children, to emigrate to the United States.