An Analysis of the Central American Free Trade Agreement

Since 2004, the United States' trade policy towards Central America has been dictated by CAFTA-DR, more formally known as the Central American - Dominican Republic - United States Free Trade Agreement. As one of several bilateral trade agreements that the United States holds with other nations, including Singapore, Bahrain, Morocco, Israel, Jordan, and Chile, CAFTA-DR removes most tariffs on United States goods in Central America and the Dominican Republic. As of October 7, 2007, seven nations, namely the United States, the Dominican Republic, El Salvador, Guatemala, Nicaragua, Honduras and Costa Rica, have accepted and ratified the agreement.

The document holds seven primary objectives, two of which are focused on the promotion and implementation of the agreement itself, and five of which that are directly related to trade policy between members. The agreement, which aims to establish an area of free trade, claims that it serves primarily to

"encourage expansion and diversification of trade between the Parties[, ] eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties[, ] promote conditions of fair competition in the free trade area[, ] substantially increase investment opportunities in the territories of the Parties[, and] provide adequate and effective protection and enforcement of intellectual property rights in each Party's territory[.]"

The first policies outlined in the agreement occur in the section entitled, "National Treatment and Market Access for Goods" and immediately prohibit the creation of any new trade policy that would create new tariffs on imports from other nations who have signed CAFTA-DR and "provides for the elimination of customs duties on originating goods traded between the Parties," defining "originating" as a good that is completely produced within the borders of one or more nation that has ratified CAFTA-DR or has parts that have been previously imported under a tariff in one or more of the Parties. In these provisions, about eighty percent of goods became immediately tariff free at the signing of the agreement. A period not to exceed ten years is set up under this article, during which the remaining goods are to become duty free.

By removing tariffs, the agreement takes a large and effective step towards free trade. When a tariff is applied to an import, the good becomes more expensive to the consumer, often raising the price above that of its domestic equivalent, even if the imported goods are identical to the domestic product or the imported good sans the tariff is cheaper than the domestic good. By eliminating these tariffs, it becomes possible for the nations of CAFTA-DR to advance their goal of the "[promotion] conditions of fair competition in the free trade area" through the development of a system in which a consumer can choose to buy an imported product without an added cost imposed by government regulations. As more consumers are given the opportunity to purchase goods originating in the nation of their choice (given that the good originates in a nation that has signed CAFTA-DR), more goods will likely be passed between countries, which fulfills the Central American Free Trade Agreement's objective of "[facilitating] the cross-border movement of, goods and services between the territories of the Parties."

All together, the policies to reduce and eventually eliminate tariffs between CAFTA-DR nations and their effects promote the "expansion and diversification of trade between the Parties". As the cost of imports to consumers decrease, it is likely that trade between the nations of CAFTA-DR will increase as a whole. This theory was proven empirically by data collected by the Office of the United States Trade Representative; from 2005 to 2006, trade between the United States and the four countries that had ratified CAFTA in 2006 (Guatemala, Honduras, Nicaragua, and El Salvador) rose by 9.2 percent. Although this data was collected before the Dominican Republic and Costa Rica had accepted the agreement, United States trade with both of these nations increased profoundly during the year. Trade between the Central American nations also increased acutely upon the signing of CAFTA, with trade between Guatemala, Honduras, Nicaragua, and El Salvador growing 14.7 percent in a single year.

There is much opposition to CAFTA-DR on the grounds that it may increase poverty levels in rural Central America, as "small farmers are unable to compete with subsidized agricultural imports from the United States." This perceived unfairness was not an intention of any nation in the formation of the agreement, as one of the initial provisions of the document is to "promote conditions of fair competition in the free trade area." In order to uphold the "fairness" of the market, Chapter 3, Article 14 of the document prohibits a nation from subsidizing agricultural products that are intended for export to any other Party of CAFTA-DR. If subsidies are not permitted, then the government under which a farmer operates does not impact the price at which the agricultural goods are sold, maintaining "fair competition".

Due to inherent properties of international trade, it will never be fully possible for an import to cost the same as it did in its country of origin, simply because the price of transportation will always remain a factor in trade between nations, regardless of free trade agreements. Therefore, the free trade agreement is rendered negligible when the cost of transportation of an import drives the price higher than the price of an identical domestic good. For a homogenous good (i.e. corn, grain, etc.) to be worth importing, the exporting country must be able to produce it at a cost that is low enough that its price, including transportation, is still lower than the domestic good.

In addition to the allowance of goods to cross borders of member nations, CAFTA-DR also aims to provide for a "[substantial] increase [in] investment opportunities in the territories of the Parties." By allowing investors to invest in financial institutions as well as "enterprises, securities, debt, intellectual property rights, licenses, and contracts" within any CAFTA-DR country without discrimination or prohibitions based on nationality, an overall increase in investment will occur. As with goods, capital will be more likely to move when there are fewer restrictions placed upon it; the less expensive it is to invest across borders, the more the opportunity can be expected to be taken.

Again, as with goods, the international investment must have a significantly higher potential outcome, enough to cover not only the opportunity cost of investing domestically, but also to make the additional cost of doing business across borders worthwhile.

Aside from goods and investments, the Central America Free Trade Agreement also has provisions dealing with telecommunications, electronic information, and intellectual property rights. As with goods, the agreement frees electronic information from tariffs and customs duties. Electronic, digital, and telecommunications products hold the same general principles as tangible goods and therefore react to decreased regulation by increasing in frequency of trade. The untaxed trade of electronic information does not only increase total trade for the CAFTA-DR nations, but it also poses the ability for people in all member nations to quickly communicate and spread knowledge, information, and ideas, which may have a potential effect of ultimate intellectual and artistic progress for each country.

To ensure that the unrestricted trade of digital information across borders does not result in the violation of intellectual property rights, all CAFTA-DR countries are required to also agree to several international copyright treaties and agreements, including the Patent Cooperation Treaty, the WIPO Copyright Treaty, the International Convention for the Protection of New Varieties of Plants, and the Trademark Law Treaty. By obligating each member nation to comply with the regulations set forth by these agreements, citizens of each nation can confidently exchange information, goods, and digital products across borders without an additional risk of copyright, trademark, or patent infringement.

Despite the overall effectiveness of CAFTA-DR in increasing the trade between Central America, the Dominican Republic, and the United States, the agreement is not entirely flawless. While the document directly addresses some of the more frequent condemnations of the agreement, such as humane treatment of labor and the state of the environment, the most viable criticism of the agreement is based on the idea that "the combined GDP of Central America is equal to 0.5 percent of U.S. GDP." Because the United States is a large country and has a massive impact on the world price of many goods, including agricultural goods, which comprise a good deal of Central American's gross domestic product, it may have an unfair advantage over each of its trade partners under CAFTA-DR. A miniscule percentage of the United States' grain, for example, is a massive percentage of that of a Central American country. Therefore, if a Central American country were to import that grain, its own economy in that good may be altered extensively. The United States, on the other hand, has the capability of importing most Central American products without a significant change in the economy, simply because of the extreme gap between the nations' GDPs. Taking this into account, it is clear that while each CAFTA-DR nation has an opportunity to grow through the free trade agreement as well as a risk, the United States has a moderately large chance to benefit from the agreement with a low risk, and each of the other nations have a larger potential gain accompanied by an immense risk of economic instability.

As a whole, the Central American - Dominican Republic - United States Free Trade Agreement establishes grounds for immense growth opportunity for trade of concrete and digital goods as well as investment between the United States, Honduras, the Dominican Republic, Nicaragua, Costa Rica, Guatemala, and El Salvador. By reducing the tariffs between these nations, there is a profound reduction in barriers to trade, creating a more free market in accordance with the original provisions of the agreement.

"CAFTA-DR Final Text". Office of the United States Trade Representative. http://www.ustr.gov/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/Section_Index.html. Accessed October 29, 2007.

"CAFTA Facts". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/asset_upload_file834_7179.pdf. Accessed October 29, 2007.

"Dominican Republic - Central America Free Trade Agreement" Wikipedia. http://en.wikipedia.org/wiki/CAFTA. Accessed October 29, 2007.

"Initial Provisions". "CAFTA-TR Final Text". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file747_3918.pdf. Accessed October 29, 2007.

"Summary of the Agreement". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/asset_upload_file74_7284.pdf. Accessed October 29, 2007. Page 1.

"Summary of the Agreement". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/asset_upload_file74_7284.pdf. Accessed October 29, 2007. Page 6.

"CAFTA Facts". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/asset_upload_file834_7179.pdf. Accessed October 29, 2007.

"Summary of the Agreement". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/asset_upload_file74_7284.pdf. Accessed October 29, 2007. Page 1.

"Initial Provisions". "CAFTA-TR Final Text". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file747_3918.pdf. Accessed October 29, 2007.

Ibid.

Ibid.

"U.S. Trade with the CAFTA-DR Countries." Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/asset_upload_file601_13191.pdf. Accessed October 29, 2007.

Ibid.

"Central America-Dominican Republic Free Trade Agreement" The Washington Office on Latin America. http://www.wola.org/index.php?&option=com_content&task=blogsection&id=6&Itemid=&topic=Rights+and+Development⊂=1&content_topic=CAFTA. Accessed October 29, 2007.

"Initial Provisions". "CAFTA-TR Final Text". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file747_3918.pdf. Accessed October 29, 2007.

"CAFTA-DR Final Text". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file721_3920.pdf. Accessed October 29, 2007.

Ibid.

"Summary of the Agreement". Office of the United States Trade Representative. http://www.ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/asset_upload_file74_7284.pdf. Accessed October 29, 2007. Page 12.

Ibid. Page 18

"Central America-Dominican Republic Free Trade Agreement" The Washington Office on Latin America. http://www.wola.org/index.php?&option=com_content&task=blogsection&id=6&Itemid=&topic=Rights+and+Development⊂=1&content_topic=CAFTA. Accessed October 29, 2007.