The U.S.-Central American-Dominican Republic Free Trade Agreement, referred to as DR-CAFTA or simply CAFTA, includes Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. The agreement is anticipated to spur North-South trade and investment while promoting stability and the rule of law in the region.

Leveling the Playing Field

Prior to the establishment of the accord, the U.S. weighted average tariff rate on CAFTA countries was 2.6 percent, according to the World Bank. This reflected the fact that approximately 80 percent of CAFTA imports already entered the U.S. duty free. On the other hand, the weighted average tariff rate on U.S. goods was 10.1. percent in the Dominican Republic, 5.8 percent in Costa Rica, 6.1 percent in El Salvador, 5.8 percent in Guatemala, 7.3 percent in Honduras, and 2.3 percent in Nicaragua.

The deal calls for the immediate elimination of 80 percent of CAFTA country tariffs on U.S. goods, while phasing out the remainder over 10 years, according to the United States Trade Representative (USTR). Importantly, the agreement is anticipated to boost U.S. exports of machinery, high technology equipment and agricultural goods, and help U.S. apparel companies operating in the Dominican Republic and Central America to maintain their U.S. market share in the face of Chinese competition.

Rolling Admissions

Although economists generally agree that the projected benefits well exceed the disadvantages to both the U.S. and CAFTA countries, opposition in the U.S. House of Representatives was evident by the July 28, 2005 narrow passage of 217 to 215. And opposition in various CAFTA countries has held up implementation. As of this writing, the Costa Rican government still has not yet ratified the agreement.

Additionally, USTR has not yet approved participation for Guatemala and the Dominican Republic due to reforms USTR still believes need to be implemented there. As a result, country participation has and will continue to occur on a rolling admissions basis.

Making CAFTA Work

The accord is anticipated to economically strengthen and help stabilize CAFTA countries. In turn, U.S. direct investment there, which registered a cumulative amount of approximately $4 billion in 2004, is likely to rise, satisfying a strong CAFTA country demand for capital, especially for much needed infrastructure projects including power generation, electricity distribution, highways and ports. Plus, the deal will support reform and democracy—all factors that lead to higher standards of living.

According to the U.S. Department of Commerce, U.S. exports to the six CAFTA nations reached $16.8 billion in 2005—more than U.S. exports to all of Africa, Brazil or Hong Kong. With a combined population of 44 million, CAFTA members offer U.S. companies a substantial and quickly growing export market, especially for exporters of machinery and equipment, chemicals and plastics, foodstuffs, and textiles.

This article appeared in July 2006. (CM)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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