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A maquiladora in Honduras, one of the beneficiares of CAFTA-DR. (Photo: Honduras' Presidency)
Thursday, June 10, 2021

DR-CAFTA Turns 15: Still Growth Potential

The US trade agreement has boosted trade, but still offers more potential.

Inter-American Dialogue

This year marks the 15th anniversary since the Dominican Republic–Central America Free Trade Agreement between the United States, five Central American nations—Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua—and the Dominican Republic took effect. What have been CAFTA-DR’s most significant contributions to the countries involved? To what extent does the trade pact need to be modernized, and what specific changes could be made to improve it? Is there political will both in the United States and in the Central American and Caribbean nations to revisit the accord, and how likely is a return to the negotiating table in the period ahead?

Kellie Meiman Hock, managing partner of McLarty Associates: The original proponents of CAFTA-DR saw the agreement as a means of supporting stability and economic development in a region of strategic importance to the United States. While there is much left to do in the nontrade realm to enhance rule of law and reduce corruption in Central America, CAFTA-DR has been a significant pillar of U.S. economic development strategy, particularly in the agricultural and textile sectors. However, the agreement has not met its promise of becoming a hub for ‘fast fashion’ and diverse apparel offerings, primarily due to CAFTA-DR’s restrictive rules of origin for apparel. This has limited the agreement’s ability to meet its employment potential in the strategically critical Northern Triangle countries of Guatemala, Honduras and El Salvador. To compete with Asian offerings and grow job opportunities, Central American nations must be able to access a broad variety of cost-competitive fibers under the agreement. Republicans and Democrats agree that engendering job growth in Central America and diversifying apparel manufacturing away from China are policy imperatives, providing a potential rare moment of bipartisanship, should the U.S. Congress decide to offer additional flexibility to the textiles rules of origin under CAFTA-DR. Just as the Biden administration seeks to address the root causes of illegal migration from the region, trade policymakers should seek adjustments to the CAFTA-DR agreement to grow jobs and economic opportunity in Central America.

F. Tomás Dueñas, former trade minister of Costa Rica, ambassador to the United States and ambassador to the European Union: Since the beginning of our efforts to lobby for the approval of CAFTA-DR, it became quite apparent that the agreement’s stated purpose of ‘creating new and better economic opportunities by opening markets, eliminating tariffs, reducing barriers’ would not be enough to sustain political, social and economic stability in our region. Months before President Obama’s election, a few of us were talking about the need to reinforce institutional reform, build capacity and strengthen democratic institutions as a complement to the agreement, and rewarding countries for doing so. Unfortunately, that changed with the new U.S. administration. All efforts toward continued support for Central American countries were practically abandoned, except for a proposal called Plan for the Alliance for Prosperity for the Northern Triangle (Guatemala, El Salvador and Honduras), which was more an effort to contain migration from those countries to the United States than anything else. Nothing improved during the Trump administration, except for the presence and interest of China in the region, filling the void that the United States left. Meanwhile, governance in the region has deteriorated, political instability is quite clear, social instability has led to mass exodus toward the U.S. border and Covid-19 has seriously damaged our economies. Thus, the challenges are great. If we are to rescue the region, our governments and institutions must make a serious effort not only to recognize our problems but also to commit to democratic reform. More funding will not suffice if it is not accompanied by serious and immediate institutional reform, which could begin with the Central American Integration System.

Jim Kolbe, senior transatlantic fellow at the German Marshall Fund of the United States and former member of the U.S. House of Representatives (R-Ariz.): While CAFTA was proposed and largely argued in Congress as a free trade agreement, its intended effects were always more of a political nature. The Caribbean Basin Initiative, enacted more than 20 years earlier, already gave more than 80 percent of exports from these countries duty-free access to the U.S. market. That its impact on trade has been positive, but not substantial, is evidenced by the modest 15 percent growth in total trade over the last decade between the United States and its six CAFTA counterparts. CAFTA has had more significant impact in the areas of trade regulation, legal protections for investors and intellectual property, labor rights and regulatory processes, with many of the countries upgrading their legal codes to reflect the requirements of CAFTA. However, in terms of bringing about substantial political change and increased democratization or reducing the levels of violence in Central America, the agreement has not lived up to its expectations. Democracy has seen backsliding in some of the countries, notably Nicaragua and El Salvador. Corruption still grips the economic and political institutions of some CAFTA countries. Poverty and income inequality remain very high. Above all, violence in Honduras and Guatemala is at record levels, reflected in the increased flow of migrants north through Mexico and to the southern border of the United States. Judged by its social and political impact, CAFTA would not get a passing grade. It is hard to imagine what changes might be made to a ‘trade’ agreement that would reverse these negative indicators. Proposals for a massive infusion of economic assistance holds a better promise for CAFTA countries. In any event, there is little or no political will on either side to revisit the agreement. For better or worse, we are wedded to CAFTA for the foreseeable future.

Juan Carlos Sikaffy C., president of the Honduran Council of Private Enterprise (COHEP): It has been 15 years since CAFTA-DR came into effect and strengthened the commercial relationship between Central America, the Dominican Republic and their most important business partner, the United States of America. The idea behind this free trade agreement was not only to develop more and better commerce, it was also to generate opportunities and prosperity for all parties involved, especially for the productive sectors of the countries. All trade agreements give the signing parties legal certainty, tariff benefits and the possibility of exchanging technology and innovation, to improve the national production. In the case of CAFTA-DR, trade has increased between the region and the United States, benefiting the exporters, importers and producers. Nonetheless, there is still a lot that can be done to take advantage of the opportunities granted in the FTA, which is key to improving the situation of the Central American countries and addressing the multiple causes of illegal migration. One of the main objectives of the region is generating more and better jobs. The pandemic, along with two hurricanes, have affected the countries enormously, increasing the unemployment and therefore reducing development opportunities for the people, especially the younger populations. With this in mind, the productive sectors of CAFTA-DR need to take more advantage of it, promoting the exchange of goods, implementing trade facilitation and using harmonized and simplified commerce and custom processes. Without a doubt, CAFTA-DR still has a lot to give to all its members and can promote more employment and socioeconomic development.

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




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