CAFTA Explained, With Its Pros and Cons

Agreement, Member Countries, Pros and Cons

banana trade
••• Bananas are imported from Costa Rica. Photo: Image Library/Getty Images

The Central American-Dominican Republic Free Trade Agreement is between 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. It was signed August 5, 2004.

The CAFTA trade area is America's third-largest export market in Latin America, right after Mexico and Brazil. CAFTA 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. 

Like most other trade agreements, CAFTA 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 January 1, 2025. To be eligible for tariff-free treatment under CAFTA, products must meet the relevant rules of origin.

CAFTA 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. 

Member Countries

The seven CAFTA members are Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic, and the United States. Implementation dates ranged from March 1, 2006 through January 1, 2009, as follows.

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

Pros

Total trade of goods between the seven countries was $60 billion in 2013, the latest period for which most recent figures are available. Services were not measured. That's a 71 percent increase since 2005. CAFTA boosted the economies of Nicaragua, Costa Rica, and the Dominican Republic. The United States is their largest export market.

Nicaragua, one of the poorest countries, boosted exports of textiles and agriculture so that the two are now 50 percent of total exports. The economy has grown by leaps and bounds: 4.7 percent in 2014, 4.6 percent in 2013, and 5 percent in 2012. 

Costa Rica benefited from increased foreign direct investment in the insurance and telecommunications sectors, which the government recently opened to private investors. The United States is its largest trading partner, receiving 32 percent of Costa Rica's exports. These include fruit, coffee, and other food, as well as electronic components and medical equipment. GDP increased 3.6 percent in 2014, 3.5 percent in 2013, and 5.1 percent in 2012. 

The people in Costa Rica supported CAFTA, according to Lheyner Gomez in an interview with Baxter Healthcare in Cartago, Costa Rica. The referendum resulted in 51.7 percent in favor and 48.3 percent opposed. When CAFTA was implemented, the government partially privatized the banking, telecommunications, and insurance industries, which helped to boost economic growth.

The Dominican Republic exports half its goods to the United States. Its exports are primarily sugar, coffee, and tobacco. Since 2012, gold, silver, and tourism have grown as exports. Remittances from Dominican Republic expats working in the United States equals 7 percent of GDP. The economy grew 7.3 percent in 2014, 4.8 percent in 2013, and 2.6 percent in 2012.

Cons

CAFTA had many of the same destabilizing effects on Central American countries that NAFTA did in Mexico. That's because U.S. agribusiness is subsidized by the federal government. As a result, exports of low-cost grains rose 78 percent to Honduras, El Salvador and Guatemala. Local family farmers could not compete.  Before CAFTA, Honduras had a trade surplus in agricultural products. Six years after CAFTA, it has a trade deficit.

Many farmers took jobs in U.S. apparel factories that moved to their countries after CAFTA. 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 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. It prompts many locals, including children, to emigrate to the United States.

CAFTA Compared to Other Trade Agreements

CAFTA is much smaller than other regional trade agreements, such as the NAFTA, 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.