The Dominican Republic-Central America- United States Free Trade Agreement (CAFTADR): Developments in Trade and Investment

Summary
On August 5, 2004, the United States entered into the Dominican Republic-Central America-
United States Free Trade Agreement (CAFTA-DR). Congress passed the implementing bill on
July 28, 2005 (P.L. 109-53) and CAFTA-DR entered into force with El Salvador, Honduras,
Nicaragua, and Guatemala by July 1, 2006, the Dominican Republic on March 1, 2007, and Costa
Rica on January 1, 2009. This permanent, comprehensive, and reciprocal trade agreement
eliminates tariff and non-tariff barriers to two-way trade, building on unilateral trade preferences
begun under the 1983 Caribbean Basin Initiative (CBI). It enhances rules and other standards for
services, intellectual property rights, government procurement, and investment, and other
disciplines. It also reinforces Congress’s historical support for trade as a foundation of broader
foreign economic, political, and security policies in the region. This report supports congressional
interest with an analysis of the trade and investment trends since CAFTA-DR entered into force.
CAFTA-DR reinforces trade and investment trends that have been emerging at least over the past
decade. The United States remains the region’s dominant trade partner, but its share of total trade
has begun to decline. Intra-Central America trade and trade with China have seen the largest
growth. Still, the United States (1) has vibrant trade in intermediate goods reflecting increasingly
integrated production with the region; (2) provides the largest portion of foreign direct investment
to the region; and, (3) remains the largest market for high-technology content exports. Because
U.S. tariffs were already relatively low, the United States International Trade Commission model
predicted that U.S. exports would rise slightly faster than imports, which so far has been the case.
One important indicator is the change in composition of trade. The United States has seen strong
growth in exports of mineral fuels, machinery, cereals, yarns, and fabrics. Historically, the
CAFTA-DR region has exported agricultural products and later apparel and other assembled
goods to the United States. For over the past decade, more sophisticated and higher-value exports
have grown, including specialized machinery goods (e.g., small aviation motors), electrical goods
(e.g., integrated circuits), and medical equipment, while exports of light manufactures such as
apparel have stagnated, or in some cases, declined. Agricultural trade has increased moderately
and remains a combination of traditional exports (e.g., coffee and bananas) with little growth in
higher value nontraditional goods (e.g., pineapple and sweet peppers).
These aggregate trends, however, mask important country differences. As examples of moving up
the value chain, Costa Rica has increased nontraditional production in both its manufacturing and
agricultural sectors, and so has experienced the largest growth in exports. Similarly, Nicaragua
has begun to enter the assembly manufacturing sector and so experienced the second highest rate
of trade growth. The other four countries have seen their exports stagnate or decline for multiple
reasons, including dependence on the highly competitive apparel trade, lower levels of
investment, public security problems, and broader governance and policy concerns.
CAFTA-DR reinforces the idea that growth in trade correlates closely with policies that promote
economic stability, private investment in production, public investment in education,
infrastructure, logistics, and good governance in general. Countries with worsening security and
governance problems face additional problems in benefitting from CAFTA-DR. It is also
important to promote productivity in part by avoiding delays in making necessary adjustments to
trade liberalization, focusing public and private resources on trade facilitation, developing
strategies for trade diversification, and examining CAFTA-DR trade rules (especially for textiles
and apparel) that have perhaps inadvertently hindered trade growth expected from the accord. READ PAPER PDF