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CAFTA Five Years Later

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DR-CAFTA has been positive for the United States, Central America and the Dominican Republic.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Five years have passed since the United States began fully implementing the treaty now known as the Dominican Republic-Central America Free Trade Agreement. How successful has DR-CAFTA been at aiding trade between its member countries? Which industries have been most affected? Does the free-trade accord have significant drawbacks?

Jason Hafemeister, member of the Advisor board and vice president of Allen F. Johnson & Associates: DR-CAFTA has been positive for all participants, but it is not living up to its potential. Agricultural trade, where strong comparative advantages exist on both sides, provides good examples of the benefits and the unfulfilled potential. U.S. agricultural exports to the DR-CAFTA countries have increased by 72 percent from their 2005 level, up $1.3 billion. U.S. agricultural imports have climbed nearly 50 percent from the DR-CAFTA countries, a nearly 50 percent increase from a higher base. The good news is that trade is following natural advantages, delivering real sustainable gains from trade to producers and consumers alike. U.S. exports are led by grains (soybean exports have doubled and soybean oil has tripled), meats (pork exports have increased four times), animal products (dairy nearly doubled), and fresh fruits (apple and grape exports have doubled). For these products, access is still limited by high tariffs that are in the process of being phased out, so gains should be expected into the future. For the Central American countries and the Dominican Republic, strong trade in pineapples has continued to grow, and the agreement has created new access for sugar. But most promising has been exports of products like fresh tomatoes and peppers (both up nearly 10 times) that have benefitted from cooperative arrangements to improve market access. That's good, but not great. For U.S. exports, more work is needed in market promotion to take advantage of tariff preferences, strong U.S. brands and growing markets. For the DR-CAFTA countries, peppers and tomatoes should not be an isolated example of new market access-more focused work with U.S. regulators and in market development should exploit opportunities for value-added products into the world's top consumer market.

Bernardo Vega, president of Fundación Cultural Dominicana and former ambassador of the Dominican Republic to the United States: Imports from the United States and Central America have grown much more rapidly than Dominican exports to those two destinations. This was to be expected since the Dominican Republic had free access to the U.S. market under the Caribbean Basin Initiative legislation. Also, textile exports to the United States dropped after the elimination of the Multi-fiber Agreement. There has been trade deviation, in favor of U.S. cars, for example. Few Dominican industries or agricultural producers have yet been affected because of the 10 to 15 year liberalization schedule. The Dominican government lost customs revenues. The main benefit has been that U.S. investors feel it is safer to invest in the Dominican Republic because of guarantees to investors specified in the agreement. 

Welles Orr, senior international trade advisor at Miller & Chevalier Chartered: As the Obama administration and the new Congress forge ahead in a bipartisan way to finally enact implementing legislation for the U.S.-Korea Free Trade Agreement and reach agreement in moving the long-stalled Colombia and Panama FTAs too, they would be smart to look at the success of the DR-CAFTA agreement, both for trade with the United States as well as trade between the seven signatory countries. Since that agreement was signed in 2006 with El Salvador, Guatemala, Honduras and Nicaragua, with the Dominican Republic in 2007 and with Costa Rica in 2009, significant gains from increased trade and investment have had an extremely positive impact on each of these growing, developing countries. This has been especially true in agricultural trade. One example is Nicaragua, which experienced a 44 percent increase in its U.S. exports in the first three years that the agreement was in effect. U.S.-Nicaraguan bilateral agricultural and nonagricultural trade has increased by 36 percent since 2006. And in just the first year of the agreement, trade flows between Nicaragua and its CAFTA neighbors expanded by 17 percent. Moreover, the agreement has had the positive effect of enabling member countries to not only expand trade but also diversify exports. All countries are seeing increased trade in agricultural and nonagricultural sectors-U.S. trade with DR-CAFTA countries in bananas, coffee, sugar and fresh fruit is now dwarfed by trade in apparel, machinery and optical and medical equipment. Perhaps the biggest plus of the agreement has been the positive inflows of foreign direct investment, with all six countries seeing exponential growth. Nonagricultural sectors have especially benefited from FDI, which has led to increased workforce demand, higher wages and improved GDP. And if imitation is the sincerest form of flattery, then so be it, as the CAFTA 5 and Panama last year signed a comprehensive FTA, which will come into force this year with the European Union.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

 

 

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