Order Code RL31870
CRS Report for Congress
Received through the CRS Web
The Dominican Republic-Central America-United
States Free Trade Agreement (DR-CAFTA)
Updated April 4, 2005
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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The Dominican Republic-Central America-United States
Free Trade Agreement (DR-CAFTA)
Summary
On August 5, 2004, the United States, Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua, and the Dominican Republic signed the Dominican Republic-
Central America-United States Free Trade Agreement, or the DR-CAFTA. Enacting
the agreement requires legislative action in all countries. To date, El Salvador,
Honduras, and Guatemala have ratified the agreement. In the United States,
implementing legislation has yet to be introduced and Trade Promotion Authority
(TPA) legislation (P.L. 107-210) does not stipulate a time limit for doing so. Once
introduced, however, the committees of jurisdiction (Ways and Means in the House
and Finance in the Senate) have 45 legislative days to report the bill, after which it
would be automatically discharged. Each chamber would then have 15 legislative
days to vote on the bill. The DR-CAFTA would enter into force when the United
States and at least one other country pass implementing legislation into law.
The DR-CAFTA was negotiated as a regional agreement in which all parties
would be subject to the “the same set of obligations and commitments,” but with
each country defining its own separate schedules for market access on a bilateral
basis. The DR-CAFTA is a comprehensive and reciprocal trade agreement, which
distinguishes it from the unilateral preferential trade arrangement between the United
States and these countries as part of the Caribbean Basin Initiative (CBI). It defines
detailed rules that would govern market access of goods, services trade, government
procurement, intellectual property, investment, labor, and environment.
Under the DR-CAFTA, more than 80% of U.S. consumer and industrial exports
and over half of U.S. farm exports to Central America would become duty-free
immediately. For the DR-CAFTA countries, 100% of non-textile and non-
agricultural goods would enter the United States duty free immediately. Many goods
would have tariffs phased out incrementally so that duty-free treatment is reached in
5, 10, 15, or 20 years from the time the agreement takes effect. Duty-free treatment
would be delayed longest for the most sensitive products, and in some cases, the
tariff reductions would not begin until 7 or 12 years into the agreement. To address
asymmetrical development and transition issues, the DR-CAFTA specifies rules for
transitional safeguards, tariff rate quotas (TRQs), and trade capacity building.
The DR-CAFTA is controversial. Supporters see it as part of a policy
foundation supportive of both improved interregional trade, as well as, long-term
social, political, and economic development. Concerns remain in all participating
countries, however, over the need for adjustment policies to address the potential
negative effects on certain import-competing sectors and their workers. Labor rights
issues in some DR-CAFTA countries have caused organized labor to come out
against the agreement, despite arguments that trade contributes to long-term
economic growth, poverty reduction, and development. All these economic issues,
however, are necessarily balanced against the politics of trade, which makes the
outcome of the DR-CAFTA uncertain.

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Contents
Why Trade More Freely? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Impetus for a DR-CAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
U.S. Trade Relations with Central America and the Dominican Republic . . . . . . 8
U.S.-Central America Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
U.S. Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
U.S. Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
U.S.-Dominican Republic Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
U.S. Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Review of the DR-CAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Market Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Textiles and Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Investment and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Government Procurement and Intellectual Property Rights . . . . . . . . . . . . 21
Labor and Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Environmental Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Labor Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Dispute Resolution and Institutional Issues . . . . . . . . . . . . . . . . . . . . . . . . . 29
Trade Capacity Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Appendix 1. Chronology of DR-CAFTA Negotiations . . . . . . . . . . . . . . . . . . . 34
Appendix 2. Selected Economic Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Appendix 3. U.S. Merchandise Trade with DR-CAFTA Countries . . . . . . . . . . 37
List of Figures
Figure 1. Central America’s Direction of Merchandise Trade, 2003 . . . . . . . . . . 9
List of Tables
Table 1. Central American Exports of Goods and Services/GDP . . . . . . . . . . . . 5
Table 2. Top Eight U.S. Merchandise Imports from Central America, 2004 . . . 11
Table 3. Top Eight U.S. Merchandise Exports to Central America, 2004 . . . . . 12
Table 4. U.S.-Dominican Republic Merchandise Trade, 2004 . . . . . . . . . . . . . . 13
Table 5. U.S. Foreign Direct Investment (FDI) in DR-CAFTA Countries . . . . . 14

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The Dominican Republic-Central America-
United States Free Trade Agreement
On May 28, 2004, the United States Trade Representative (USTR) and trade
ministers from Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua signed
the U.S.-Central America Free Trade Agreement (CAFTA), formally concluding the
negotiations. On August 5, 2004, the Dominican Republic, having completed
separate negotiations with the United States, was added to the agreement in a
subsequent signing by all parties. The new agreement was titled the Dominican
Republic-Central America-United States Free Trade Agreement and is referred to as
the DR-CAFTA (see Appendix 1, Chronology of Negotiations).
Since negotiations commenced in January 2003, the DR-CAFTA has been a
complicated and controversial agreement. It became more so in September 2004,
when the Dominican Republic passed a revenue bill that included a 25% tax on
beverages that contain high-fructose corn syrup. Similarly, problems arose in
November 2004 when Guatemala passed a law altering the five-year data protection
period for clinical trial data on patented drugs. The USTR found both laws to breach
obligations under the proposed DR-CAFTA, and indicated that action on the DR-
CAFTA would be delayed, unless they were changed. Although some Members of
Congress expressed concern over U.S. pressure to repeal these laws, legislative fixes
were made and signed into law, eliminating the USTR’s concerns.
Enacting the agreement requires legislative action in all countries. El Salvador
was the first to act, ratifying the agreement on December 17, 2004. Honduras and
Guatemala followed soon thereafter, ratifying the agreement on March 3 and March
10, 2005, respectively. Presidents of all three countries signed the implementing
legislation into law. In the United States, implementing legislation has yet to be
introduced and Trade Promotion Authority (TPA) legislation (P.L. 107-210) does not
stipulate a time limit for doing so. Once introduced, however, the committees of
jurisdiction (Ways and Means in the House and Finance in the Senate) have 45
legislative days to report the bill, after which it would be automatically discharged.
Each chamber would then have 15 legislative days to vote on the bill. The DR-
CAFTA would enter into force when the United States and at least one other country
pass implementing legislation that is signed into law. This report provides
background and analysis on the DR-CAFTA and will be updated.
Why Trade More Freely?
Countries trade because it is in their national economic interest to do so, a
proposition long supported by theory and practice. Comparative advantage has been
recognized for nearly 200 years as a core principle explaining the efficiency gains

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CRS-2
that can come from trade among countries by virtue of their fundamental differences.
It states that countries can improve their overall economic welfare by producing those
goods at which they are relatively more efficient, while trading for the rest. Intra-
industry trade is the other major insight that explains trade patterns, in which the
benefits from exchange among countries occur based on specialized production,
product differentiation, and economies of scale. Many Latin American countries
have liberalized trade policies recognizing the contribution that trade (and related
investment) can make to economic growth and development. As an important
caveat, trade is at best only part of a broad development agenda, and is no substitute
for the promotion of political freedom, macroeconomic stability, sound institutions,
and adequate levels of savings and investment, among many other factors.1
Comparative advantage provides the rationale for U.S.-Central American (and
Dominican Republic) trade in agriculture, textiles, apparel, and capital goods. Intra-
industry trade (e.g. goods within the same harmonized tariff system (HTS) code
number) is based on specialized production, but in this case relies in large part on
differences in wages, skills, and productivity.2 Certain specialized jobs have
developed in Central America (and other developing countries), where they
frequently reside in production sharing (maquiladora) facilities. Economists have
come to refer to such specialized production as “breaking up the value added chain”
and it accounts for why products (and particularly parts thereof) as diverse as
automobiles, computers, and apparel are often made or assembled in Central America
and other countries in partnership with U.S. firms.3 This relationship, discussed in
more detail later, provides the basis for much of the labor policy debate on the DR-
CAFTA, and FTAs more generally.4
1 The role of trade is summarized well in: Rodrik, Dani. The New Global Economy and
Developing Countries: Making Openness Work. The Overseas Development Council,
Washington, D.C. 1999. p. 137 and Bouzas, Roberto and Saul Keifman. Making Trade
Liberalization Work. After the Washington Consensus: Restarting Growth and Reform in
Latin America. Kuczynski, Pedro-Pablo and John Williamson, eds. Institution for
International Economics. Washington, D.C. March, 2003. pp. 158, 165-67.
2 This differs from the standard intra-industry case between two developed countries in
which goods, such as automobiles, are exchanged based on product differentiation and
economies of scale and where differences in wage levels are not a central factor.
3 For the theoretical foundation, see Krugman, Paul. Growing World Trade: Causes and
Consequences, in Brookings Papers on Economic Activity (1), William C. Brainard and
George L Perry, eds. 1995. pp. 327-76 and for the case in Central America, see Hufbauer,
Gary, Barbara Kotschwar, and John Wilson. Trade and Standards: A Look at Central
America. Institute for International Economics and the World Bank. 2002. pp. 992-96.
4 Note that this trend has not been a driving force in the aggregate unemployment rate of the
United States, but does affect the distribution of employment among sectors of the economy.
It is also important to emphasize here that wage levels are only part of the issue. Lower
wages correlate closely with lower productivity, hence an abundance of low-skilled (low
productivity) workers attracts these types of jobs. For a overview of the methodology of
measuring the effects of changes in trade policy, see Rivera, Sandra A. Key Methods for
Quantifying the Effects of Trade Liberalization. International Economic Review. United
States International Trade Commission. January/February 2003.

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Measuring the benefits of freer trade is another difficult issue. There is a
tendency to count exports, imports, and the oft-misrepresented importance of the
trade balance as indicators of the fruits of trade. This approach often gives undue
weight to exports at the expense of understanding benefits from imports, where the
gains from trade are better understood by their contribution to increased consumer
selection, lower priced goods, and improved productivity. For example, high-tech
intermediate goods imported from developed countries are the basis for future, more
sophisticated, production in developing countries. In developed countries, imports
from developing countries, whether final goods for consumers or inputs for
manufacturing enterprises, reduce costs and contribute to productivity and economic
welfare. For all countries, exports are the means for paying for these imports and
their attendant benefits.
Three caveats related to negotiating FTAs are important. First, the discussion
of costs and benefits generally assumes that FTAs are implemented in a multilateral
setting. In fact, given the slow pace of World Trade Organization (WTO)
negotiations, many countries are pursuing preferential arrangements, that is, regional
and bilateral agreements like the DR-CAFTA. Latin America is full of them and
depending on how they are defined, they may actually be trade distorting if they
promote trade diversion. This occurs when trade is redirected to countries within a
limited agreement that does not take into account countries outside the agreement,
some of which may be more efficient producers. Preferential trade agreements are
also cumbersome to manage, requiring extensive rules of origin, and economists
disagree over whether FTAs help or hinder the movement toward greater multilateral
trade liberalization.5
Second, trade, much like technology, is a force that changes economies. It
increases opportunities for internationally competitive sectors and challenges import
competing firms to become more efficient or do something else. This fact gives rise
to the policy debate over adjustment strategies, because while consumers and export
sector workers benefit, some industries, workers, and communities are hurt.
Economists generally argue that it is far less costly for society to rely on various types
of trade adjustment assistance than opt for selective protectionism, the frequent and
forcefully argued choice of trade-affected industries.6 The public policy difficulty is
that both options have costs and benefits, but result in different distributional
outcomes.7 Because trade agreements raise difficult political choices for legislators
5 U.S. businesses operating in Latin America have had to interpret a difficult road map when
dealing with multiple arrangements defined in the Caribbean Basin Trade Partnership Act,
the Andean Trade Preference Act, and the North American Free Trade Agreement. Each
distorts investment decisions in the region and can have a countervailing influence on the
others. Adding the many Latin American FTAs only makes the situation more confusing.
6 For a recent and accessible treatment of this subject, see Kletzer, Lori G. and Howard
Rosen. Easing the Adjustment Burden on US Workers. In: Bergsten, C. Fred., ed. The
United States and the World Economy. Washington, D.C.: Institute for International
Economics, 2005. pp. 313-41.
7 Importantly, when a staple, such as underwear, is produced abroad and sold in the United
States as a lower-priced import compared to a domestically produced good, it is equivalent
(continued...)

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CRS-4
in all countries, many of whom represent both potential winners and losers, FTA
provisions are typically limited in scope (so continue to protect partially or
completely certain products, industries, or sectors) and are phased in over time
(typically up to 15-20 years for very sensitive products).
Third, there are clearly implications in the trade negotiation process for smaller
countries’ bargaining leverage when they choose to negotiate with a large country in
a bilateral rather than multilateral setting. Both Chile and the Central American
countries realized early in the process that there were negotiating issues over which
they would be able to exert little or no leverage. Both agreements deal little with
trade remedies (e.g. antidumping and subsidies) and resolving agriculture issues also
has been limited, given the politically sensitive nature of this issue.
The Impetus for a DR-CAFTA
The United States was motivated by both commercial and broader strategic
interests in deciding to negotiate preferential trade agreements with Central America
and the Dominican Republic. Broad geopolitical and strategic concerns sparked
interest by all parties in pursuing the DR-CAFTA. Proponents expect the DR-
CAFTA to reinforce regional stability by providing institutional structures that will
undergird gains made in democracy, the rule of law, and efforts to fight terrorism,
organized crime, and drug trafficking. The DR-CAFTA may also be a way to expand
support for U.S. positions in the FTAA, and given that the January 2005 completion
date has slipped, may also help rationalize the system of disparate preferential trade
agreements that currently define Western Hemisphere trade relations.
Critics of the DR-CAFTA point to equally broad themes, such as the pervasive
social and economic inequality in much of the region, and so support strong labor and
environment provisions as important negotiating objectives. There is concern, for
example, over the adequacy of working conditions and enforcement of labor laws in
the DR-CAFTA countries. The DR-CAFTA countries argue that the agreement is
one of many forces that can have a positive effect in raising labor standards, although
it is not sufficient to accomplish this goal on its own.
With the proliferation of regional agreements around the world, trade
negotiations have also become a tactical issue of picking off gains where they are
perceived relative to what other countries are doing. It was repeatedly argued by the
U.S. business community, for example, that the U.S.-Chile agreement was necessary
to equalize treatment of U.S. businesses competing with Canadian firms that already
enjoyed preferential treatment with Chile. The case was made for Central America
7 (...continued)
to an increase in real income for the U.S. consumer. This can be significant for low-wage
workers in the United States. The same idea holds true for industrial products and business
consumers. So, there is a “trade off” in the trade policy decision between keeping certain
jobs through protection and losing the income gains, or keeping the income gains and losing
certain jobs. One public policy response has been to pass trade adjustment assistance
legislation to help firms and workers transition more quickly to new opportunities.

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as well, which has trade agreements with Canada and Mexico, each with firms that
compete with U.S. businesses in the region. Delays with WTO and Free Trade Area
of the Americas (FTAA) negotiations only reinforce this attitude.
In the context of regional trade agreements, history, geographic proximity, and
economic complementarities also make the DR-CAFTA an apparently logical step.8
Economic fundamentals shaped a trade relationship based on exports of traditional
agricultural products, and later apparel. From the early days of independence,
agricultural exports were the centerpiece of Central American economic growth. The
British controlled primary export production (coffee, bananas, sugar, and beef) until
about 1850, when U.S. interests won over. This continued until the 1980s when
passage of the Caribbean Basin Economic Recovery Act (CBERA — P.L. 98-67)
began to transform the Central American and Dominican economies. By becoming
eligible for unilateral preferential tariff treatment as part of the Caribbean Basin
Initiative (CBI), U.S. investment fostered growth in light manufacturing, primarily
apparel.9 Central American exports grew, albeit unequally, as a percentage of
economic output, particularly after the turbulent 1980s (see Table 1).
Table 1. Central American Exports of Goods and Services/GDP
Country
1991 Exports/GDP
2003 Exports/GDP
Costa Rica
33.7
46.8
El Salvador
17.2
26.7
Guatemala
17.7
16.2
Honduras
34.5
38.8
Nicaragua
21.8
24.1
Data Source: IMF, International Financial Statistics Yearbook 2004 and Costa Rican Ministry of
Foreign Trade.
The U.S.-Central American/Dominican Republic economic relationship changed
dramatically under the CBI, creating an environment in which businesses forged
strategic partnerships in the increasingly complex world of textile and garment
manufacturing. From 1974 until 1995, rules restricting trade in apparel between
developed and developing countries (mostly quotas) were set out in the Multifiber
Arrangement (MFA). Its successor, the WTO sponsored Agreement on Textiles and
Clothing (ATC) served as a transitional agreement that oversaw the reduction and
elimination of quotas on January 1, 2005.10 The CBI preferential arrangements were
defined under this system, which the United States created to help foster Caribbean
economic development, and to assist U.S. industry in responding to competition from
similar production-sharing arrangements in Asia that were taking a toll on U.S.
production and employment in the textile and apparel industries.
8 For an excellent economic history of the region, see Woodward, Ralph Lee Jr. Central
America: A Nation Divided. New York: Oxford University Press, third edition, 1999.
9 This legislation was extended and amended twice, most recently in 2000 by the Caribbean
Basin Trade Partnership Act (CBTPA — P.L. 106-200, Title II), which further eased
restrictions on apparel imports from the Central American countries.
10 See CRS Report RL31723, Textile and Apparel Trade Issues, by Bernard A. Gelb.

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U.S. textile and particularly apparel industries have been hit hard by foreign
competition, resulting in a total job loss of over 540,000 employees from 1998-
2002.11 The textile industry (e.g., thread, yarns, cloth) has remained marginally
competitive through use of sophisticated production technologies. The apparel
manufacturing industry (e.g., shirts, pants, undergarments) by contrast, is highly labor
intensive, and in striving to reduce costs, has moved production offshore to lower-
wage countries. As part of this process, and with the added incentive of CBI
benefits, U.S. firms invested in Central American and Caribbean countries to develop
assembly businesses that have been required to use mostly U.S. textiles as inputs.
This strategy created a mutually beneficial pact and in 2002, some 56% of U.S.
apparel and textile imports from Central America was assembled from U.S.
materials, compared to less than 1% for imports from China.12 Although this was a
controversial move because of the reliance on foreign low-wage workers to the
detriment of some U.S. employment, many economists argue that the alternative
would have been an even greater loss of textile and garment jobs to Asian countries
that use no U.S. inputs.13
With the removal of textile and apparel quotas in January 2005, the trade picture
changed. The DR-CAFTA countries were already losing U.S. market share, which
from 1997 to 2002 declined from 11.7% to 9.4%. Over the same time period,
China’s market share increased from 9.1% to 13.0%. Given that U.S. textile and
apparel imports from DR-CAFTA countries are heavily concentrated in products
previously covered by quotas, the dominance of China and other low-cost Asian
producers is likely to continue. DR-CAFTA producers are less competitive on a pure
cost basis because of the lower labor costs in Asia, the requirement to use more
expensive U.S. inputs, and the additional administrative costs associated with U.S.
preferential trade requirements.14
Low-cost labor, however, is not the only or even the most important factor
driving competitiveness. Studies suggest that the economic and social networks that
developed between U.S. and Central American firms effectively created a
11 United States International Trade Commission (USITC). The Economic Effects of
Significant U.S. Import Restraints. Publication 3701. Washington, D.C. June 2004. p. 60.
12 USITC. Production-Sharing Update: Developments in 2001. Industry Trade and
Technology Review. November 2003. p. 22 and B-1-4.
13 Chacón, Francisco. International Trade in Textile and Garments: Global Restructuring
of Sources of Supply in the United States in the 1990s. Integration and Trade, Vol. 4, No.
11, May-August 2000. Inter-American Development Bank, Washington, D.C. and United
States International Trade Commission. Production-Sharing Update: Developments in 2002.
Industry Trade and Technology Review. November 2003. p. 12.
14 United States International Trade Commission. Textiles and Apparel: Assessment of the
Competitiveness of Certain Foreign Suppliers to the U.S. Market. USITC Publication 3671.
Washington, D.C. January 2004. pp. 1-12, 3-22, and 3-33-35. On December 13, 2004, the
U.S. Department of Commerce published rules that would impose safeguard measures and
restrict apparel imports from China in 2005, despite the removal of quotas. This may
provide some cushion to DR-CAFTA apparel producers. See Rugaber, Christopher S.
Textiles: CITA to Restrict Imports of ‘Embargoed’ Goods from China, Others in Early 2005.
BNA, Inc. International Trade Reporter. December 16, 2004.

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comparative advantage for the region in apparel exporting that has held up even with
the entry of China in the market. This relationship was made possible by the
proximity of production, operational efficiencies, and quick turn around times for
meeting increasingly shortened deadlines demanded of large retailers.15 In a post-
quota trading world, these advantages allow a certain portion of textile and apparel
production to remain the DR-CAFTA countries, but DR-CAFTA country
representatives have emphasized that the passage of the free trade agreement is a
critical component for maintaining this strategy.16
Strategic considerations were important, but ultimately it is fair to ask what each
country expects to gain commercially from the detailed agreement that has emerged.
The dollar value of U.S. trade with Central America makes the region the United
States’ third largest Latin American trading partner, right behind Brazil, but a far
distant third from Mexico. Still, these are small economies (see Appendix 2 for
economic data) and although firms engaged in this trade may find its effects
significant, total DR-CAFTA trade in 2004 represented only 1.5% of U.S. foreign
commerce, and so can be expected to have only a small macroeconomic effect.
For the United States, an FTA is a more balanced trade arrangement than the
unilateral preferences provided in the CBI. Market access issues (e.g., tariff rates,
quotas, rules of origin) were core negotiating areas. Although Central American and
Dominican tariffs are already relatively low, they can be reduced further. In
particular, U.S. business interests want equal or better treatment than that afforded
to exports from Canada and Mexico based on their FTAs with Central American
countries. Permanent and clarified trade rules would also support the joint
production arrangements already in place between U.S. firms and those in the region.
Finally, a bilateral agreement offers the United States a chance to address other trade
barriers that affect some of its most competitive industries. This includes clarifying
rules for the treatment of intellectual property, foreign investment, government
procurement, e-commerce, and services.
From the Central American and Dominican perspectives, reducing barriers to
the U.S. market (especially for textile and agricultural products) was cause enough
to proceed. The DR-CAFTA would also make permanent U.S. benefits given under
the CBI legislation, but which requires periodic reauthorization by Congress. This
could increase U.S. foreign direct investment (FDI) that defines the maquiladora
relationship and which supports the region’s export driven development strategy.
The DR-CAFTA countries also faced important vulnerabilities, such as the
possibility that U.S. agricultural exports of key staples, such as corn and rice, might
15 A more subtle distinction made by one economist notes that, “How comparative advantage
is created matters. Low-wage foreign competition arising from an abundance of workers
is different from competition that is created by foreign labor practices that violate norms at
home. Low wages that result from demography or history are very different from low wages
that result from government repression of unions.” See Rodrik, Dani. “Sense and Nonsense
in the Globalization Debate.” Foreign Policy. Summer 1997. p. 28.
16 USITC, Textiles and Apparel, pp. 3-33, 4-2-4. Gereffi, Gary. The Transformation of the
North American Apparel Industry: Is NAFTA a Curse or a Blessing? Integration and
Trade. Vol. 4, No. 11. May-August 2000. Inter-American Development Bank. pp. 56-57.

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overwhelm their small markets, causing huge displacement issues. Sensitivity to
these and other key industry sectors were addressed in the extended tariff phase-out
and safeguard schedules, and as a matter of development policy, by DR-CAFTA
country efforts to diversify the agricultural sector into non-traditional exports and
non-farm employment.17
Finally, two factors pointed to significant negotiation challenges. The first was
the need for better Central American integration. Individually, the Central American
countries may be too small to justify a U.S. bilateral agreement by themselves, and
also trade has been hampered within the subregion by cumbersome customs and
other rules. For the DR-CAFTA to work well, the United States needed some
assurance that goods could flow efficiently within the region. Second, much was
made of the difference in negotiating capacity between Central America and the
United States. U.S. and multilateral offers to assist these countries in developing
such capacity were viewed as generous, but also a little self-serving, which required
a sensitive approach to the whole negotiation process.
U.S. Trade Relations with Central America and the
Dominican Republic
“Docking” the Dominican Republic FTA to CAFTA added the largest of what
would be six trading partners covered by the DR-CAFTA agreement. Total U.S.
trade with the Dominican Republic in 2004 was one-third greater than with either
Costa Rica or Honduras, which tie as the next largest U.S. trading partner in Central
America. What made the process feasible was the Dominican Republic’s willingness
to accept the basic framework and rules of CAFTA, while negotiating market access
and some other issues bilaterally, as was done with each of the five Central American
republics. In addition, the Dominican Republic’s economy and export regime are,
in many ways, similar to those of Central America. U.S.-Dominican Republic trade
was added to this report and is discussed in more detail separately.
U.S.-Central America Trade
Because of its huge size and geographical proximity, the U.S. market is a natural
destination for Central American exports. Merchandise trade with the United States
has dominated Central America’s foreign commerce for 150 years, and as seen in
Figure 1, remains in that role today. The United States is by far the largest of
Central America’s trading partners, accounting for some 56% of its exports and 44%
17 The DR-CAFTA countries have begun new exports projects in areas such as miniature
vegetables, cut flowers, cable manufacturing, among others, in expectation that moving
beyond subsistence agriculture and textile manufacturing is critical to achieve economic
diversification and development. What distinguishes this effort from the earlier agricultural
export model is the emphasis on integrating small producers into the export system. The
idea is not only to tap into naturally small production capabilities, but to help bring social
development to areas that previously were not integrated into the agricultural export
development model. It is still a relatively small effort and its widespread application has yet
to be fully realized, but the DR-CAFTA countries see the FTA as supporting this strategy.

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CRS-9
of its imports. The rest of Latin America collectively is the next largest trading
partner, accounting for 25% of Central America’s exports and 31% of its imports.
The European Union and Asia together account for about 14% of Central American
exports and 21% of imports.
Figure 1. Central America’s Direction of Merchandise Trade, 2003
This distribution is not uniform throughout the region. Honduras, for example,
exports 67% of its merchandise goods to the United States, compared to 44% for
Costa Rica. Honduras also has the highest import percentage from the United States
at 53% compared to Nicaragua’s 25%, which is the lowest. Total trade (exports plus
imports) with the United States is also somewhat uneven country by country. Costa
Rica accounts for 30% of total Central American trade with the United States,
whereas Nicaragua amounts to only 5% of the total. Guatemala, Honduras, and El
Salvador account for 25%, 22%, and 18% respectively.
Trade volume with the United States varies among countries, but in most cases
the trend has been one of growth at a rate higher than the average for U.S. trade with
the world. Over the past five years, U.S. exports to Central America grew by 34.7%
(25.3% including the Dominican Republic), compared to 17.6% with the world and
21.2% with Latin America as a whole (see Appendix 3 for the data). U.S. imports
from Central America increased by 19.3% (15.4% including the Dominican
Republic) over the same time period, compared to 43.4% from the world and 51.4%
from Latin America. Importantly, in 2003 some 80% of imports from Central
America and the Dominican Republic entered the United States duty free under either
normal trade relations (NTR) status or the CBI or GSP programs.18
18 United States International Trade Commission. U.S.-Central America-Dominican
Republic Free Trade Agreement: Potential Economywide and Selected Sectoral Effects.
(continued...)

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CRS-10
For 2004, although trade growth varied among the five countries, U.S. export
growth to Central America doubled average export growth to the world, with all five
countries experiencing solid growth. U.S. imports from Central America, by
contrast, grew by less than half that of average import growth from the world. As
these trends suggest, the United States tends to run small merchandise trade deficits
with all the Central American countries and the Dominican Republic. In part, this
is the nature of a production-sharing trade relationship, where parts and materials are
sent abroad for value-added processing and then returned to the United States.
Importantly, when services trade is added to the trade balance, the United States
tends to run trade surpluses with all these countries. This trend, too, is indicative of
the basic relationship between the United States, a service-based economy, and
developing countries.19
U.S. Imports. Nearly three-quarters of U.S. imports from Central America fall
into three main categories: fruit (mostly bananas) and coffee; apparel; and integrated
circuits. These three distinct categories, for various reasons, are not traded uniformly
by the five countries (see Table 2). First, Central America has traditionally exported
bananas and coffee, which is dominated by Costa Rica and Guatemala. Coffee has
actually declined for all countries except Costa Rica and constitutes only 3.8% of
U.S. imports from the region. This reflects the competitive nature of trade in coffee,
which is grown in vast quantities by Brazil, Colombia, and countries in Africa as
well. Banana trade has also declined in importance and accounts for only 5.0% of
U.S. imports from Central America.
Second, knit and woven apparel has become the primary export goods for all
countries except Costa Rica and accounts for nearly 57% of total U.S. imports from
Central America. Because of the CBTPA benefits, some 56% of textiles and apparel
imported from the six DR-CAFTA countries in 2002 was assembled from U.S. fabric
(from U.S. yarns). Of that amount, the Dominican Republic had 33% of the total
followed by Honduras with 30%, El Salvador with 18%, Costa Rica with 9%,
Guatemala with 8%, and Nicaragua with 2%. Under the CBTPA, these countries
may engage in greater value-added operations such as cutting and dyeing, which has
allowed them to remain somewhat competitive with low-cost Asian exports. These
restrictions would be further relaxed under the DR-CAFTA.20 The USITC points out
that the DR-CAFTA countries have been losing market share to Asia since at least
1997, and the DR-CAFTA is seen as a way to help abate this trend.21
18 (...continued)
USITC Publication 3717. August 2004. p. 7.
19 This trend is not disputed, but the U.S. Department of Commerce does not disaggregate
bilateral services trade data for the Central American countries. Estimates are provided in
some of the Country Commercial Guides produced by the U.S. Department of Commerce
based on foreign country reporting.
20 United States International Trade Commission. Production-Sharing Update:
Developments in 2001. Industry Trade and Technology Review. November 2003. pp. 13,
22, B1-4.
21 USITC, Textiles and Apparel, p. 1-12.

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CRS-11
Table 2. Top Eight U.S. Merchandise Imports from Central
America, 2004
($ millions)
Product and HTS
Total
C.R.
Hon
Guat
El Sal
Nic
Number
Total U.S. Imports
13,172
3,333
3,641
3,155
2,033
991
Knit Apparel (61)
5,108
253
2,013
1,261
1,364
216
Woven Apparel (62)
2,415
265
729
686
357
379
Edible Fruit & Nuts (08)
1,037
490
172
359
0
14
-Bananas (0803)
(657)
(245)
(129)
(273)
(0)
(11)
Electrical Mach. (85)
983
719
172
1
18
73
-Integrated circuits 8542
(489)
(489)
(0)
(0)
(0)
(0)
Optical/Med. Equip. (90)
492
480
0
12
0
0
Spices, Coffee, Tea (09)
512
150
45
216
49
52
-Coffee (0901)
(504)
(148)
(43)
(213)
(49)
(52)
Fish and Seafood (03)
293
60
133
22
6
74
Mineral Fuel, Oil (27)
186
0
0
180
6
0
Other
2,146
916
377
418
233
183
Top 8 as % of Total
83.7%
72.5%
89.6%
86.8%
88.5%
81.5%
Data Source: U.S. Department of Commerce.
#HTS = Harmonized Tariff Schedule
Third, Costa Rica attracted $500 million in foreign direct investment for a
computer chip assembly and testing plant, which has become its major export
generator. This investment was augmented by an additional $110 million in October
2003 for the production line of “chipsets” for personal computers. In 2004, U.S.
imports of integrated circuits constituted 18% of total imports from Costa Rica.
Similar importance may be seen in the imports of Costa Rica’s medical equipment,
another indicator of its relatively sophisticated production capabilities. Costa Rica
is the fastest growing and most diversified trader in Central America, which explains,
in part, why it has outpaced its neighbors on the development path.22
The DR-CAFTA is intended to build on these trends, support export
diversification, and provide a long-term stable trade environment that will increase
U.S. foreign investment in the region. Evidence is already seen in alternative
agricultural exports such as cut flowers and miniature vegetables (in multiple DR-
CAFTA countries), as well as, developing maquiladora operations to supply coil
wrapped cables for the automotive sector (Honduras) and adapting apparel cutting
technology to supply insulation for aircraft engines (Costa Rica).
Many non-apparel items that the United States imports from Central America
face minimal or no tariffs. Bananas, coffee, oil, most fish products, and Costa Rica’s
integrated circuits and medical equipment enter duty free. Some enter the United
22 Hufbauer, Kotschwar, and Wilson, op. cit., p. 1003.

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CRS-12
States under preferential arrangements, but the majority is free of duty under normal
(most favored nation — MFN) tariff rates. Apparel was technically excluded from
preferential treatment under CBI, but under a special access program (SAP), eligible
Central American apparel exports receive preferential treatment under production-
sharing arrangements (Chapter 98 of the Harmonized Tariff System — HTS). This
arrangement was extended under the Caribbean Basin Trade Partnership Act
(CBTPA) in October 2000 (P.L. 106-200), which allows duty-free and quota-free
treatment of apparel imports if assembled in the Central American countries from
fabrics made in the United States made of U.S. yarns, whether the fabrics were cut
to shape in the United States or Central America.23
Table 3. Top Eight U.S. Merchandise Exports to Central
America, 2004
($ millions)
Product and HTS
Costa
Hon
Guat
El Sal
Nic
Number#
Total
Rica
Total U.S. Exports
11,388
3,304
3,077
2,548
1,868
592
Elec Machinery (85)
1,698
1,092
175
206
157
68
-Integrated circuits 8542
(828)
(822)
(0)
(5)
(1)
(0)
Machinery (84)
1,031
301
205
256
205
69
-Office Mach. Pts (8473)
(207)
(68)
(26)
(62)
(32)
(19)
-Computer Parts (8471)
(136)
(43)
(20)
(32)
(26)
(10)
Cotton Yarn, Fabric (52)
780
18
412
241
84
23
Mineral Fuel (27)
712
93
239
313
57
10
Knit/Crocheted Fabric 60
688
38
351
24
272
3
Plastic (39)
657
253
123
181
87
13
Knit Apparel (61)
624
101
312
33
176
2
Cereals (10)
559
156
92
118
125
68
-Corn (1005)
(242)
(71)
(31)
(65)
(64)
(10)
-Wheat and Meslin 1001
(167)
(38)
(28)
(34)
(46)
(21)
-Rice (1006)
(149)
(46)
(33)
(18)
(16)
(37)
Other
4,639
1,252
1,168
1,176
705
336
Top 8 as % of Total
59.3%
62.1%
62.0%
53.8%
62.3%
43.2%
Data Source: U.S. Department of Commerce. #HTS = Harmonized Tariff Schedule
U.S. Exports. As seen in Table 3, the major U.S. exports to Central America
include electrical and office machinery (computers), apparel, yarn, fabric, and plastic.
Many of these goods are processed in some form and re-exported back to the United
States under production-sharing arrangements. For example, nearly 60% of electrical
machinery exports to Central America is integrated circuits going to Costa Rica for
processing and re-export. The same may be said for fabric and yarns that are
exported to all countries, sewn and otherwise assembled, and re-exported back to the
23 For the technical details of this arrangement, see CRS Issue Brief IB95050, Caribbean
Basin Interim Trade Program: CBI/NAFTA Parity, by Vladimir N. Pregelj.

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CRS-13
United States. Some of these goods are consumed in the DR-CAFTA countries along
with capital goods (machinery and parts) and agricultural products.
Similar trends for U.S. import trade are evident in U.S. exports. In 2004, 78%
of knit apparel and 76% of knit, cotton, and yarn fabric went to Honduras and El
Salvador. Although the United States exports machinery and parts to all five
countries, electrical machinery and particularly integrated circuits, are sent to Costa
Rica. All five countries import U.S. cereals and some, such as corn and rice, are
among the more import sensitive products for the DR-CAFTA countries.24
The significant aspects of this trade structure are that it reflects: 1) the continued
historical trend of (largely duty-free) regional dependence on the large U.S. market
as an important aspect of trade and development policy; 2) a deepening economic
integration; and 3) growing U.S. direct investment over the long run.
U.S.-Dominican Republic Trade
The Dominican Republic is the 28th largest U.S. export market (6th in Latin
America) and ranks as the 41st largest import country (8th in Latin America). More
so than any of the Central American countries, Dominican trade is dominated by the
United States (see Table 4 for bilateral trade data.)
Table 4. U.S.-Dominican Republic Merchandise Trade, 2004
U.S. Exports (by product
U.S. Imports (by product
$ millions
$ millions
and HTS Number*)
and HTS Number*)
Electrical Machinery (85)
529
Woven Apparel (62)
1,147
Knit Apparel (27)
379
Knit Apparel (61)
889
Cotton Yar, Fabric (52)
301
Medical Instruments (90)
417
Oil (not crude) (27)
291
Electrical Machinery (85)
393
Plastic (39)
235
Precious Stones/Jewelry(71)
341
Machinery (84)
230
Tobacco (24)
227
Precious Stones/Jewelry(71)
219
Iron and Steal (73)
161
Cereals (10)
185
Footwear (64)
137
Other
1,974
Other
816
Total
4,343
Total
4,528
Top 8 Exports as % of Total
54.5%
Top 8 Imports as % of Total
82.0%
Data Source: U.S. Department of Commerce. #HTS = Harmonized Tariff Schedule
The United States absorbs 80% of its exports, with 12% going to other
developed countries and only 8% entering developing countries. The Dominican
Republic imports 50% of its merchandise goods from the United States, 13% from
other developed economies, and 37% from various developing countries. Although
24 USITC, Production-Sharing Update: Developments in 2001. Industry Trade and
Technology Review. July 2002. pp. 39-42, B1-4

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CRS-14
the largest of the DR-CAFTA trading partners, U.S. exports grew by only 1.6% in
2004 as the Dominican Republic continued to recover from a severe recession.
The joint-production arrangements of U.S.-Dominican trade are evident in
apparel and jewelry-making industries. Apparel and textiles constitute 16% of U.S.
exports and 48% of U.S. imports. Other significant U.S. exports include various
types of machinery, refined oil products, and plastic. Other important U.S. imports
include medical instruments, electrical machinery, tobacco, and plastic. In many
ways, the structure of the U.S.-Dominican trade is similar to that of U.S.-CAFTA
trade, and hence the economic logic of “docking” it to the Central American
agreement.
U.S. Foreign Direct Investment
The DR-CAFTA countries also benefit from foreign direct investment (FDI) as
part of the trade relationship with the United States, which is the largest foreign
investor in all six countries. To the extent that an FTA can be considered a
stabilizing factor in economic relationships, it is expected to encourage more FDI and
thereby promote longer term economic growth and development. U.S. FDI in the
CAFTA countries is presented in Table 5.
Table 5. U.S. Foreign Direct Investment (FDI) in DR-CAFTA
Countries
($ millions)
Country
1999
2000
2001
2002
2003
Costa Rica
1,493
1,716
1,835
1,802
1,831
El Salvador
621
540
464
684
779
Guatemala
478
835
311
303
294
Honduras
347
399
227
181
270
Nicaragua
119
140
157
250
261
Total Central America
3,058
3,630
2,994
3,220
3,435
Dominican Republic
968
1,143
1,116
983
860
Total CAFTA
4,026
4,773
4,110
4,203
4,295
Data Source: U.S. Department of Commerce. Bureau of Economic Analysis. Available at
[http://www.bea.doc.gov/bea/di/usdlongcty.htm]. Data are stock of FDI on a historical-cost basis.
The trends suggest that U.S. direct investment in the area is relatively small and
has grown erratically in recent years. Some countries have fared better than others
and net foreign investment may increase or decrease because of both economic and
political trends, as well as opportunities in other parts of the world that can affect
business decisions. Investment patterns have been skewed toward Costa Rica, which
has over half of U.S. FDI in Central America. The stock of FDI has declined since
1999 in El Salvador, Guatemala, Honduras, and the Dominican Republic.

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CRS-15
Review of the DR-CAFTA
The CAFTA negotiations concluded on March 15, 2004. The agreement was
signed by the USTR and the five Central American trade ministers on May 28, 2004,
followed by a second signing of the DR-CAFTA with all countries, including the
Dominican Republic, on August 5, 2004. The DR-CAFTA is a controversial
agreement and implementing legislation necessary to enact the agreement was not
introduced in the 108th Congress, but is expected in the first session of the 109th.
One aspect of the congressional debate over trade agreements focuses on their
potential economic effects on the United States. Congress mandated that the United
States International Trade Commission (USITC) assess these effects and it released
its final report in August 2004. The report provides quantitative and qualitative
estimates of the DR-CAFTA effects on the U.S. economy as a whole and for selected
sectors. Overall, the “welfare value” or aggregate effect on U.S. consumers and
households of trade liberalization under the DR-CAFTA, assuming it would be fully
implemented on January 1, 2005, would be approximately $166 million (less than
0.01% of GDP) for each year the agreement is in effect.25
With respect to trade flows, the reduction of relatively higher tariff rates on U.S.
goods is expected to provide a greater effect on U.S. exports than to imports from the
region. The USITC model estimates that if the DR-CAFTA is fully implemented,
U.S. exports to the DR-CAFTA countries would increase by $2.7 billion or 15%,
while imports would increase by $2.8 billion, or 12%. The effect on aggregate U.S.
output and employment is expected to be minimal. The largest sector increases were
estimated to occur for U.S. grains (0.29% for output and 0.31% for employment) and
the greatest decrease to occur for sugar manufacturing (-2.0% for both output and
employment).26 These estimates are in line with expectations made prior to the
negotiations that the marginal effects of the DR-CAFTA would be small, but positive
for the U.S. economy as a whole, given the DR-CAFTA countries had small and
already largely open economies.
The rest of this section briefly summarizes the major negotiation issues and
references the ITC’s conclusions with respect to each major issue area, where
applicable. Emphasis is given to those sectors expected to be most affected by the
agreement.
Market Access
Market access covers provisions that govern barriers to trade such as tariffs,
quotas, safeguards, and rules of origin, which define goods eligible for tariff
preferences based on their regional content. For the DR-CAFTA countries, the FTA
25 USITC, U.S.-Central America-Dominican Republic Free Trade Agreement, p. 64. The
study reviews literature on the DR-CAFTA and makes estimates of the economywide and
sectoral effects of trade liberalization under DR-CAFTA based on a computable general
equilibrium (CGE) model. For details, see pages xiv, 2, and Appendix D.
26 Ibid., pp. xxii and 64-70.

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CRS-16
would consolidate and make permanent preferential market access currently provided
under the Caribbean Basin Trade Partnership Act (CBTPA) and the Generalized
System of Preferences (GSP). For the United States, DR-CAFTA would change the
trade arrangement with Central America from one based largely on unilateral trade
preferences to a bilateral FTA, making U.S. exports more competitive. Agriculture
and textile/apparel goods, Central America’s major exports, were the most important
and difficult market access issues to resolve.
Each traded good falls into one of eight “different tariff elimination” staging
categories, which define the time period over which duties would be eliminated.
Each country negotiated a list of its most sensitive products for which duty-free
treatment would be delayed. For manufactured goods, duties on 80% of U.S. exports
would be eliminated immediately, with the rest phased out over a period of up to 10
years.27 For agricultural goods, duties on over 50% of U.S. exports would be
eliminated immediately, with the rest phased out over a period of up to 20 years. In
some cases, duty-free treatment is “back loaded” and would not begin for 7 or 12
years. For the DR-CAFTA countries, 100% of non-textile and non-agricultural
goods would enter the United States duty free immediately.28 Safeguards are retained
for many products over the period of duty phase out, but antidumping and
countervailing duties were not addressed in the DR-CAFTA, leaving all U.S. and
other country laws fully enforceable as required under TPA.
Textiles and Apparel. The DR-CAFTA would remove all duties on textile
and apparel imports that qualify under the agreement’s rules of origin, retroactive to
January 1, 2004. Special safeguard measures are included. The permanence of the
provisions and the more accommodating rules of origin and administrative guidelines
may allow for a marginal increase in apparel imports from the region. These
provisions are intended to address the decline in textile and apparel imports from the
region over the past five years, most of which have been displaced by Asian products,
despite the enhanced preferential treatment that Congress afforded to Central
American and Dominican imports under the CBTPA.29
Central American and Dominican apparel has been entering the United States
duty free for years provided it is assembled from U.S. materials under the so-called
“yarn forward” rule, in which the production process beginning with the yarn (not the
fiber) must be done in a country covered by the agreement. Under the cumulation
rule, DR-CAFTA would allow duty-free treatment to be extended selectively, and on
a limited basis, to eligible products made from NAFTA-partner materials, a new step
toward integrating apparel manufacturing in the region. Duty-free treatment would
also be extended to goods with limited amounts of material from third countries.
Although these rules were widely supported, some textile producers registered
concern that they are overly restrictive and therefore limited in their intended effect
27 Ibid., p. 25.
28 Office of United States Trade Representative. Free Trade with Central America:
Summary of the U.S.-Central America Free Trade Agreement. p. 1. Hereafter cited as the
CAFTA Summary. It may be found at [http://www.ustr.gov].
29 USITC, U.S.-Central American-Dominican Free Trade Agreement, pp. 28-29.

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CRS-17
of helping the region compete (by lowering costs) in the U.S. market against Asian
imports. U.S. and DR-CAFTA firms that produce for the U.S. market wanted as
much flexibility as possible to use fabrics from third countries. Others feared they
were too generous and would harm U.S. producers.
There are exceptions to the yarn forward rule for certain products (affecting less
than 10% of trade) and tariff preference levels (TPLs) were allowed for a few imports
from Nicaragua. These provisions were challenged because of their special treatment
by those countries that did not receive similar consideration, as well as some U.S.
textile manufacturing interests, which argued that they would hurt U.S. producers.
There was also considerable debate over the expansion from the CBTPA of the
“short-supply” list. This is the list of goods given duty-free access if made from
fabrics that are determined to be in “short supply” in the United States. The DR-
CAFTA may also increase slightly U.S. exports of textiles, but on balance, the
USITC study estimated that it “will likely have a negligible impact on U.S.
production or employment.”30
Agriculture. Domestic support programs were not addressed in the DR-
CAFTA, but strides were made to reduce tariffs and increase quota levels, the most
costly trade-distorting policies. Average applied tariffs on agricultural goods by most
DR-CAFTA countries are relatively low, ranging from 7% to 23%. Most agricultural
imports face no tariff in the United States. For all countries, the pressing challenge
was negotiating tariff rate quotas (TRQs — see below) for their most sensitive
products.31 Agricultural products have the most generous tariff phase-out schedules,
with up to 20 years for some products (e.g. rice and dairy). This approach
acknowledges that the agricultural sectors bear most of the trade adjustment costs and
that it takes time for rural economies to make the transition to freer trade.32
All agricultural trade would eventually become duty-free except for sugar
imported by the United States, fresh potatoes and onions imported by Costa Rica, and
white corn imported by the other Central American countries. These goods would
continue to be subject to quotas that would increase by 2% each year in perpetuity,
with no decrease in the size of the above-quota tariff. Over half of current U.S. farm
exports to Central America would become duty free immediately, including high
30 Inside U.S. Trade. CAFTA Textile Rules Pave Way for Increase in Foreign Fabric Use.
December 19, 2003 and Press Release. NTA Denounces CAFTA as Threat to U.S. Textile
Industry. December 18, 2003 and USTR, CAFTA Summary, p. 2 and USITC, U.S.-Central
American-Dominican Republic FTA, p. 30-32. Nicaragua received special preferential
treatment for certain “non-originating apparel goods”(Annex 3.27) and Costa Rica received
limited special treatment for certain wool apparel goods (Annex 3.28).
31 For more details, including sanitary and phytosantiary (SPS) provisions, see CRS Report
RL32110, Agricultural Trade in a U.S.-Central American Free Trade Agreement (CAFTA),
by Remy Jurenas.
32 Salazar-Xirinachs, Jose M. and Jaime Granados. The US-Central America Free Trade
Agreement: Opportunities and Challenges. In: Schott, Jeffrey J. ed. Free Trade
Agreements: US Strategies and Priorities. Washington, D.C. Institute for International
Economics. 2004. pp. 245-46.

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CRS-18
quality cuts of beef, cotton, wheat, soybeans, certain fruits, and vegetables, processed
food products, and wine.33
Many other transitional provisions exist. Agricultural products would be subject
to tariff-rate quotas, or limits on the quantity of imports that can enter the United
States before a very high tariff is applied. The phased reduction in agriculture
protection also includes the transitional use of price- and volume-triggered
safeguards, or applying temporarily an additional duty on products that are being
imported in quantities deemed a threat to the domestic industry.34 Export subsidies
would be eliminated except when responding to third party export subsidies. The
United States would be able to impose a sugar price mechanism to compensate
Central American sugar exporters in lieu of according them duty-free treatment.
Sugar was perhaps the most controversial and complex of agricultural issues to
resolve and U.S. sugar growers and processors are vehement opponents of the
agreement. The U.S. conceded to slight numerical increases in sugar quotas for all
six countries. Sugar and sugar-containing products imported under the U.S. quota
system enter the United States duty-free, but exports above the quota face prohibitive
tariffs (nearly doubling the price). Raw sugar receives the largest quota by volume,
28% of the total U.S. sugar quota for the world was filled by the DR-CAFTA
countries in 2003, and was the major issue for this agreement. The U.S. market
accounts for only 14% of the region’s sugar exports, representing less than 10% of
the region’s sugar production.35
The DR-CAFTA would raise the U.S. quota by an amount equal to 35% of the
current quota in year one, rising to 50% by year 15, after which the quota would
increase each year slightly in perpetuity. This may seem large, but the USITC notes
that the initial increase amounts to only 1% of U.S. production and consumption of
raw sugar in 2003, and that the overall effects of the sugar provisions may be small.
Two studies done by the USITC and Louisiana State University estimated that the
sugar provisions could result in a decline in sugar prices of 1% (USITC) and 4.6%
(LSU), with perhaps largely offsetting employment effects in the sugar producing and
sugar-containing product industries.36
Increasing grain exports was an important goal for the United States. Wheat is
not grown in the DR-CAFTA countries and there is already largely free trade in this
commodity. Staples for the DR-CAFTA countries, such as rice and white corn,
however, remain protected and there is a complicated system for phasing out TRQs
33 U.S. Sugar Industry Group. Press Release: Mexican and US Sugar Industries Jointly
Oppose CAFTA Sugar Provisions. December 18, 2003.
34 For example, in the case of beef, the Central American countries have agreed to the
immediate elimination of tariffs on U.S. prime and choice cuts, but have a 15-year tariff
phase-out on other products, with a backloaded schedule (no tariff reductions in the early
years) and a safeguard. The United States has a 26% out-of-quota tariff on beef that will be
phased out over 15 years, with the quota schedule defined for each country.
35 USITC, U.S.-Central American-Dominican Free Trade Agreement, p. 35.
36 Ibid., pp. 38-40.

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on U.S. exports over a 15-20 year period. As with sugar imports to the United States,
U.S. exports of corn and rice will increase slowly due to the highly restrictive TRQs
and special safeguard measures. The USITC estimates that changes in the quantity
of exports from the United States will be small at first and rise by perhaps 20% by
the end of the TRQ phase-out period. The USITC suggests that the long-run effect
would be small (1.2% of total U.S. grain exports), but notes that the “potential
increase in grains exports offers significant market opportunities for U.S. white and
yellow corn growers and U.S. rice growers.”37
Despite the lengthy transition period toward freer trade under the DR-CAFTA,
concerns remain over the potentially harmful effects to Central America, particularly
to the small commercial and subsistence farmers, of further opening its markets to
U.S. agriculture.38 Three recent studies, however, agree that overall, increased
agricultural trade can be one source of Central American rural development. In
addition to increasing Central American agricultural exports, the majority of
households are net consumers of agricultural goods, and so stand to gain from lower
prices, the equivalent to a increase in family income. Subsistence producers will not
be greatly affected by changes in market prices.39
Still, for the minority of rural net producers of agricultural goods, economists
also agree that adjustment policies are essential, beginning with targeted income
assistance. For rural areas to benefit fully from the DR-CAFTA, there is also a
critical need for increased investment in transportation and communications
infrastructure, education, and more fully developed financial services. This would
improve agricultural productivity, help transition workers toward non-farm
employment, and integrate the rural economy more fully with the national and
international economy. Without concerted effort in adjustment assistance, the
poorest segments of rural Central America would remain vulnerable to the effects of
freer trade.40
Investment and Services
In 2003, the United States’ stock of foreign direct investment (FDI) in the DR-
CAFTA countries was $4.3 billion, which represents only 1.4% of U.S. FDI in Latin
America and the Caribbean. Some 43% of the FDI in DR-CAFTA countries went
37 Ibid., pp. 43-47.
38 Oxfam International. A Raw Deal for Rice Under DR-CAFTA. Briefing Paper #68. 2004.
39 Todd, Jessica, Paul Winters, and Diego Arias. CAFTA and the Rural Economies of
Central America: A Conceptual Framework for Policy and Program Recommendation.
Inter-American Development Bank. Washington, D.C. December 2004. pp. 43-50, Mason,
Andrew D. Ensuring that the Poor Benefit from CAFTA: Policy Approaches to Managing
the Economic Transition. Draft of Chapter 5 in forthcoming book. The World Bank.
Washington, D.C. March 25, 2005. pp. 25-26, 35, and Arce, Carlos and Carlos Felipe
Jaramillo. El CAFTA y la Agriclutura Centroamericana. Paper presented at the World
Bank Regional Conference on International Trade and Rural Economic Development,
Guatemala. February 21-22, 2005. p. 17.
40 Ibid.

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to Costa Rica, followed by the Dominican Republic with 20%. The United States has
advocated clear and enforceable rules for foreign investment in all trade agreements,
which is largely accomplished by “standard” language requiring national and most-
favored-nation (nondiscriminatory) treatment. The DR-CAFTA would clarify rules
on expropriation and compensation, investor-state dispute settlement, and the
expeditious free flow of payments and transfers related to investments, with certain
exceptions in cases subject to legal proceedings (e.g. bankruptcy, insolvency,
criminal activity). Transparent and impartial dispute settlement procedures would
provide recourse to investors.
Two investment issues stand out. First, an investor-state provision, common in
U.S. bilateral investment treaties and used in earlier FTAs, has been included. It
would allow investors alleging a breach in investment obligations to seek binding
arbitration with the state directly, as opposed to pursuing a slower and more
cumbersome path involving a state-to-state process, or relying solely on domestic
court remedies, which may be inadequate in some countries. Under the NAFTA
provisions, this raised fears that foreign investors would “obtain more favorable
rulings than are available under U.S. law to native investors” and numerous cases in
the United States, Canada, and Mexico were filed arguing that environmental and
other regulations, for example, ran counter to the NAFTA investment provisions.41
Congress addressed the NAFTA concerns in TPA by instructing that in future
trade agreements “that foreign investors in the United States are not accorded greater
substantive rights with respect to investment protections than United States
investors....” This provision, and another that would allow for early elimination of
“frivolous” suits, are major changes from the NAFTA language. U.S. investors
advocated the inclusion of investor-state rules to ensure they have recourse in
countries that do not have laws as detailed in coverage as the United States with
respect to the rights of foreign investors. For the DR-CAFTA countries, this
provision may actually entice increased investment flows from the United States, but
there is still opposition to the investor-state provision.42
Second, the DR-CAFTA countries requested greater flexibility in the treatment
of certain sovereign debt. Annex 10-A allows sovereign debt owed to the United
States that has been suspended and rescheduled not to be held subject to the dispute
settlement provisions in investment chapter, with the exception that it be given
national and MFN treatment. Annex 10-E extends from six months to one year the
amount of time required before a U.S. investor may seek arbitration related to
sovereign debt with a maturity of less than one year. Both provisions are intended,
in the event of a financial crisis, to keep the DR-CAFTA from interfering in any
sovereign debt restructuring process, and are viewed by the U.S. Treasury as an
accommodation to Central American interests.
The United States is the largest services exporter in the world, and not
surprising, services trade presented a number of hurdles given that the Central
41 This issue is discussed in CRS Report RL31638, Foreign Investor Protection Under
NAFTA Chapter 11, by Robert Meltz. pp. 3-5.
42 USITC, U.S.-Central America-Dominican Republic Free Trade Agreement, pp. 90-91.

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American countries have adopted few commitments of the WTO’s General
Agreement on Trade in Services (GATS). There are also many industry-specific
barriers that exist, such as: barriers to foreign insurance companies in Guatemala;
“heavy” regulation licensing of foreign professionals in Honduras; local partner
requirements in some financial services in Nicaragua; and numerous services
monopolies in Costa Rica (insurance and telecommunications).43 The DR-CAFTA
would provide broader market access and greater regulatory transparency for most
industries including telecommunications, insurance, financial services, distribution
services, computer and business technology services, tourism, and others. Banks and
insurance firms would have full rights to establish subsidiaries, joint ventures, and
branches. Regulation of service industries is required to be transparent and applied
on an equal basis and e-commerce rules are clearly defined, a critical component of
delivering services.44
Overall, the USITC suggests that the DR-CAFTA would have little effect on
U.S. services imports because the market is already open. New opportunities would
materialize, however, for U.S. firms to expand into Central America. In particular,
Costa Rica agreed to the eventual opening of its state-run telecommunications and
insurance industries, where there has been strong political resistence to
deregulation.45 Unlike the other countries, doing so would constitute a major
structural adjustment for the Costa Rican economy, have implications for Costa
Rican social policy, and require amending the constitution, all of which, the Costa
Ricans argued, would be difficult for their legislature to support without concrete
tradeoffs in other areas, such as agriculture and textiles. These issues were resolved
in two week-long discussions held in January 2004 and their detailed commitments
are presented in the relevant chapters of the DR-CAFTA. Because of their continued
sensitivity, however, ratifying the DR-CAFTA may be a high controversial vote for
the Costa Rican congress.
Government Procurement and Intellectual Property Rights
These two areas were also of particular interest to the United States. The DR-
CAFTA was seen as an opportunity to remedy many deficiencies and move toward
strong enforcement of standardized practice in the region. None of the DR-CAFTA
countries is a signatory to the WTO Agreement on Government Procurement and
allegations against the various purchasing processes vary from dissatisfaction with
less than transparent and cumbersome procedures in Costa Rica to outright
corruption in Guatemala. El Salvador and Nicaragua passed new government
procurement laws in 2000 and Honduras followed in 2001, and in general, there have
been improvements in all countries in dealing with project bidding, although
transparency issues remain.46 In part, this is due to a lack of incentives given that
43 USTR. 2004 National Trade Estimate Report on Foreign Trade Barriers. Washington,
D.C. 2004.
44 USTR, CAFTA Summary, p. 2-3.
45 Salazar-Xirinachs and Granados, op.cit., p. 260.
46 USTR, 2004 National Trade Estimate Report on Foreign Trade Barriers.

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many of these countries would not be able to compete in the U.S. government
procurement market.47
The DR-CAFTA would grant non-discriminatory rights to bid on contracts from
Central American ministries, agencies, and departments, with the exception of “low-
value contracts” and other exceptions. It would also call for procurement procedures
to be transparent and fair, including clear advance notices of purchases and effective
review. Specific schedules detailing exceptions and limitations were written by each
country, covering such diverse issues as the sale of firearms to supplying school
lunch programs. In addition, each country provided a list of subnational governments
(e.g. states and municipalities) that would adhere to the GP provisions. The DR-
CAFTA would also make clear that bribery is a criminal offense under the laws of
all countries, and in general, the provisions are supported by U.S. businesses
interested in doing or expanding opportunities in the region.48
All Central American countries are revising, or have revised, their intellectual
property rights (IPR) laws and are closing in on complying with the WTO Agreement
on Trade-Related Aspects of Intellectual Property Rights (TRIPS). That said, all
countries are subject to criticism for falling short on either clarifying or enforcing
penalties for noncompliance and in some cases have simply not adopted reforms that
many U.S. industries (e.g., sound and video recordings, pharmaceuticals, book
publishing, computer software) consider necessary to protect their intellectual
property. Piracy, incomplete or inadequate legal protection, and enforcement
capacity remain problems and ongoing concerns exist across the range of IPR issues
of patents, trademarks, and copyrights, covering print, electronic, and other media.49
The IPR provisions in the DR-CAFTA would provide that U.S. and DR-CAFTA
businesses receive equal treatment in all areas and that the DR-CAFTA countries
ratify or accede to various international IP agreements. Trademarks would benefit
from a transparent on-line registration process and special system to resolve disputes
over internet domain issues, among other benefits. Copyright provisions would
clarify use of digital materials (exceeding TRIPS standards) including rights over
temporary copies of works on computers (music, videos, software, text), sole author
rights for making their work available on-line, extended terms of protection for
copyrighted materials, strong anti-circumvention provisions to prohibit tampering
with technologies, the requirement that governments use only legitimate computer
software, the prohibition of unauthorized receipt or distribution of encrypted satellite
signals, and rules for liability of internet service providers for copyright infringement.
Patents and trade secrets rules would conform more closely with U.S. norms. End-
user piracy would be criminalized and all parties would be required to authorize the
seizure, forfeiture, and destruction of counterfeit and pirated goods. The DR-CAFTA
would also mandate statutory damages for copyrighted material.50
47 Salazar-Xirinachs and Granados, op.cit., p. 253.
48 USTR, CAFTA Summary, p. 5.
49 Ibid and 2004 National Trade Estimate Report on Foreign Trade Barriers.
50 Ibid., p. 4-5.

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For many countries, these commitments would require changes in law that may
prove politically challenging where there is no tradition of strong IPR protection.
There is also concern that strict IPR provisions may impede technology transfer to
the DR-CAFTA countries. Pharmaceutical products is one high profile case, pitting
the social concern for making drugs available at an “appropriate price” (branded
versus generic) against the needs of the industry to recover the high costs of research
and navigating the regulatory process.
This issue came to light in November 2004 when the Guatemala legislature
changed the laws governing the treatment of data exclusivity provisions related to
patented drugs. The USTR insisted that this change was a breach of the DR-CAFTA
commitments (Article 15.10.1(a)) to protect clinical trial data on patented drugs for
five years from the date of approval. The USTR threatened to delay moving
implementing legislation until the law was changed. Guatemala ultimately chose to
reverse the data protection law, to the disappointment of many who argued that the
DR-CAFTA provisions could limit access to generic drugs. An August 5, 2004 side
agreement among all signatories clarifies, however, that all parties retain the right to
take measures necessary “to protect public health by promoting access to medicines
for all” in particular those needed to combat epidemics such as HIV/AIDS,
tuberculosis, and malaria, among others. Some still question whether the U.S. five-
year data exclusivity standard is the best way to enforce data protection.51
The DR-CAFTA goes a long way toward meeting U.S. business IPR protection
needs and the USITC suggests that many industries will benefit from higher revenue
if the new standards can be enforced.52 Even if laws are changed to conform to the
DR-CAFTA commitments, however, enforcement issues will likely remain and
technical assistance may be needed to help develop the necessary capabilities.
Labor and Environment
Perhaps the greatest challenge to the DR-CAFTA arises from the environment
and labor chapters, which complicate the trade negotiation process by moving it
beyond purely commercial issues into the realm of social policy. Although it has
become widely accepted that social issues can be affected by trade liberalization,
there is considerable disagreement over how aggressive language in trade agreements
should be in accommodating this concern. Should trade agreements require all
countries to meet specific core standards, or is this approach too stringent? Is a trade
agreement the best, or even a good enforcement mechanism for social policy that
usually is the purview of domestic laws and regulation?
51 The legal issue is complicated and perhaps subject to interpretation as to whether the five-
year data exclusivity could, under some circumstances, limit access to generic drugs beyond
the patent period. The side agreement is available at [http://www.ustr.gov] and for a
summary of the debate, see Brevetti, Rosella. CAFTA Opponents Blast U.S. Stance on
Guatemalan Data Protection Law. International Trade Reporter. BNA, Inc. March 10,
2005.
52 USITC, U.S.-Central America-Dominican Republic Free Trade Agreement, p. 101.

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From an economic perspective, labor and environment advocates in the United
States argue that developing countries may have an “unfair” competitive advantage
because their lower standards are the basis for their lower costs, which in turn are
reflected in lower prices for goods that compete with those produced in developed
countries.53 It follows from this argument that the difference in costs is an enticement
to move U.S. investment and jobs abroad. On the other hand, studies suggest that
these cost differentials are usually not high enough to determine business location
alone, and that productivity remains the primary decision factor.54 Further, many
economists view trade liberalization as part of the overall development process that,
in and off itself, can promote social change.55 Developing countries are also
concerned with sovereignty issues related to specifying standards in trade agreements
and the possibility that they can be misused as a disguised form of protectionism.
Environmental Issues. For environmental advocates, major goals include
protecting and assuring strong enforcement of existing domestic environmental
standards, ensuring that multilateral environmental agreements are not undermined
by trade rules, promoting strong environmental initiatives to evaluate and raise
environmental performance, developing a systematic program of capacity-building
assistance, and assuring that environmental provisions in FTAs are subject to the
same dispute resolution and enforcement mechanisms as are other aspects of the
agreements.56
The USTR summary states that congressional objectives on environmental
issues have been met in the proposed DR-CAFTA agreement. It includes language
requiring all countries to enforce their laws and regulations and also creates an
environmental cooperation agreement with a framework for establishing a
cooperation commission and a process to conduct capacity building. All parties
53 The difference is that in most developing countries, the social costs associated with
environmental degradation, pollution, and poor working conditions may not be captured in
the market price (so-called external costs). Through legal and regulatory measures,
developed countries require that businesses correct for many of these social problems,
thereby internalizing these costs to the business, where they are then reflected in the final
(relatively higher) price of the good or service in the market place.
54 See CRS Report 98-742, Trade with Developing Countries: Effects on U.S. Workers, by
J.F. Hornbeck. September 2, 1998, pp 11-13. Productivity and wage levels are, however,
highly correlated. See Rodrik, Sense and Nonsense in the Globalization Debate, pp. 30-33.
55 In addition to the external costs addressed in this section, it is interesting to note that there
is some broader evidence that FTAs have not “forced a race to the bottom of regulatory
standards,” but to the contrary, that policy convergence is affected more by countries
agreeing to “norms of governance” via cooperation through international agreements. See
Drezner, Daniel W. Globalization and Policy Convergence. International Studies Review.
Vol. 3, Issue 1, Spring 2001. pp. 75 and 78.
56 See [http://www.sierraclub.org/trade/fasttrack/letter.asp], Principles for Environmentally
Responsible Trade. Another important issue for the United States is ensuring that its higher
environmental standards defined in law and regulation not be compromised by challenges
of protectionism. See CRS Report RL31638, Foreign Investor Protection Under NAFTA
Chapter 11, by Robert Meltz.

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would agree to commit to establish high levels of environmental protection and to
open proceedings in the administration and enforcement of laws and regulations.57
Advocates raise the issue of the environmental effects of trade, particularly in
developing countries that may have weak laws and lax enforcement mechanisms, but
the environmental provisions are not the most contentious issues in the DR-CAFTA.
Many of these same advocates have conceded that trade agreements have not led to
catastrophic pollution problems nor encouraged a “regulatory race to the bottom.”
In fact, there has also been a certain acknowledged degree of success, by having
environmental issues addressed in the body of FTAs, in side agreements on
environmental cooperation, and through technical assistance programs, the latter of
which developing countries can use to respond to specific problems. Advocates still
note that much can be improved, such as tightening enforcement language and
ensuring that the United States allocates financial resources to back up promises of
technical assistance, particularly in the case of Central America, where commitment
to “public accountability” is questioned in some cases.58
The Trade and Environment Policy Advisory Committee supports most of the
environment provisions in the DR-CAFTA and particularly the enhanced public
participation process negotiated by the State Department in a environmental
cooperation side agreement. The dispute settlement provisions, effectively the same
rules governing labor disputes, were accepted as striking the “proper balance.” The
advisory committee still raised a number of specific environmental concerns, and
questioned whether the DR-CAFTA would be able to meet congressional objectives
on capacity building without concrete funding for the program.59
In a final attempt to address environmentalists’ concerns, the seven countries
signed a supplemental Environmental Cooperation Agreement (ECA) on February
18, 2005. It calls for a new unit to be established in the Secretariat for Central
American Integration to administer public submissions or complaints made on
enforcement issues. The ECA is intended to address both short- and long-term
environmental goals, including providing for a monitoring process.
Labor Issues. Arguably, the most contentious issue in the DR-CAFTA is the
labor chapter. Two broad themes have emerged. First, the extent to which the DR-
CAFTA countries have adequate labor laws and enforcement mechanisms, and
second, whether the DR-CAFTA meets the negotiation objectives defined by
Congress in TPA.
Labor Laws and Enforcement. Labor advocates argue that some, if not all,
DR-CAFTA countries lack adequate protection for workers’ rights in their labor
57 For more details on congressional interest in environmental provisions in trade
agreements, see CRS Report RS21326, Trade Promotion Authority: Environment Related
Provisions in P.L. 107-210, by Mary Tiemann.
58 See Audley, John. Environment and Trade: The Linchpin to Successful CAFTA
Negotiations? Carnegie Endowment for International Peace. Washington, D.C. July 2003.
59 Trade and Environment Policy Advisory Committee on the Central American Free Trade
Agreement. The U.S.-Central American Free Trade Agreement. March 12, 2004.

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codes and that even where such rights are spelled out, enforcement mechanisms are
woefully inadequate. The standards to which these countries are being held are the
core labor principles as defined by the United Nations International Labor
Organization (ILO). These are defined in the ILO’s 1998 Declaration on
Fundamental Principles and Rights at Work as: 1) the freedom of association and the
effective recognition of the right to collective bargaining; 2) the elimination of all
forms of forced or compulsory labor; 3) the effective abolition of child labor; and 4)
the elimination of discrimination in respect of employment and occupation.
To counter these accusations, the Central American countries requested that the
ILO conduct a study of their labor laws. The final report is subject to interpretation,
but appears to suggest that the core ILO principles are guaranteed in all the countries,
either through constitutional or statutory measures.60 Labor advocates have argued
that there is still a need to clarify or change laws in some countries for them to
comply with these principles. There is little disagreement, however, that
enforcement of labor laws and rights is a problem in many DR-CAFTA countries and
that unionization is not widespread.
Proposing that the DR-CAFTA be the document that enforces ILO principles
raises a number of questions. First, if the ILO is not in a position to enforce its own
principles, is such a burden reasonable to expect of a trade agreement? Second, as
far as the labor provisions go in the DR-CAFTA, are they not part of a multiple effort
to raise standards that includes the ILO, domestic labor laws, and the market itself?
In the last case, to protect the reputation of brand names from being associated with
“sweatshop” production, corporate social responsibility has taken on new life as large
apparel retailers have begun insisting on higher uniform labor standards from all their
suppliers, while also realizing that worker productivity, not necessarily lowest cost,
is the key to remaining globally competitive.61 In some cases, U.S. firms are setting
higher labor standards in Central America than domestic firms, suggesting that trade
and foreign investment can support the development process.
There are historical and cultural factors at work, as well, which limit the
influence of unions as understood in the United States. For example, in subsistence
agrarian economies, whole families tend to work the agricultural plot. Changing this
social structure overnight is not feasible, even if it runs against ILO child labor
principles. Also, worker organizations have developed differently in Latin America
for many reasons. Solidarity and industry associations provide lines of
communication from employees to management, define working rules and conditions
collectively, and promote worker’ benefits such as defining work days, vacation time,
pay scales, and the provision for credit unions and subsidized cafeterias. In some
countries, unions have poor reputations among workers for their corruption and
60 United Nations. International Labor Organization. Fundamental Principles and Rights
at Work: A Labour Law Study: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua.
Geneva, 2003.
61 For an example, see The Gap, Inc. 2003 Social Responsibility Report. This report may
be found at [http://www.gapinc.com/social_resp/social_resp.htm]. For a review of the
report, see Liedtke, Michael. Gap Acknowledges Labor Violations. The Washington Post.
May 13, 2004, p. E6.

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inefficacy.62 If there is a problem with these well-meaning alternatives, it is that they
exist mostly at the pleasure of the firm and lack the strict bargaining power of a
traditional union.
Finally, many DR-CAFTA countries have admitted to lacking the financial
resources and technical expertise to enforce good labor practices, a problem that will
also take time and resources to overcome. This is an area where the DR-CAFTA
could be used to assist countries financially with technical assistance to achieve
higher enforcement standards. In fact, as part of the FY2005 appropriations, the
United States set aside $20 million to help DR-CAFTA countries improve their
capacity to enforce their labor laws, an approach that could be implemented through
the labor Cooperation and Capacity Building Mechanism, if the DR-CAFTA is
implemented.63
Labor Provisions and TPA. Irrespective of a particular country’s capacity
to legislate and enforce labor standards, there are concerns over the way the labor
chapter was written in the DR-CAFTA. From a technical perspective, the USTR,
makes three claims with respect to the agreement. First, that it fully meets the labor
objectives set out by Congress in the Trade Promotion Act of 2002 and makes labor
obligations a part of the core text of the trade agreement. Second, that it includes
unprecedented provisions that commit DR-CAFTA countries to provide workers with
improved access to procedures that protect their rights. Third, that it goes beyond
Chile and Singapore FTAs through a 3-part cooperative approach to improve
working conditions by: 1) ensuring effective enforcement of existing labor laws; 2)
working with the ILO to improve existing labor laws and enforcement; and 3)
building local capacity to improve workers rights.
U.S. labor advocates charge to the contrary, that “The labor provisions of the
DR-CAFTA will not protect the core rights of workers in any of the six countries
participating in the agreement.”64 The crux of the critique centers on the dispute
settlement provisions and the extent to which they are effective in requiring countries
to meet certain standards, and also to meet congressional trade negotiating objectives
defined in TPA. Labor advocates argue that they are a step backward from the
provisions allowing for the suspension of trade benefits found in the GSP and CBI,
which currently govern much of the U.S. trade with Latin America. Specifically,
there are three provisions given different weight in the DR-CAFTA: 1) the effective
enforcement of domestic labor laws; 2) the reaffirmation of commitments to ILO
basic principles; and 3) “non-derogation” from domestic standards (not weakening
or reducing protections to encourage trade and investment).65
62 Ver Beek, Kurt Alan. Maquiladoras: Exploitation or Emancipation? An Overview of the
Situation of Maquiladora Workers in Honduras. World Development, 2001.
63 Norton, Stephen, J. CAFTA Puts Labor Money on the Table. CQ Weekly. December 4,
2004. p. 2832.
64 Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC). The U.S.-
Central America Free Trade Agreement. March 19, 2004. p. 1.
65 Ibid, p. 6 and Lee, Thea M. Assistant Director for International Economics, AFL-CIO.
(continued...)

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Failure to enforce domestic labor laws can be formally challenged in the dispute
resolution process as defined in the DR-CAFTA. In the case of the other two
provisions, which are supported in principle, such recourse is not available (Articles
16.2 and 16.6). The USTR points to cooperative mechanisms for improving
workers’ rights in the FTA, but labor advocates argue that unless all three are
enforceable, the DR-CAFTA does not provide a meaningful trade discipline.66
In addition, for labor (and environmental) issues, the dispute resolution process
operates differently than for commercial issues. If a commercial dispute remains
unsettled, the country faces the possibility of a suspension of benefits “of equivalent
effect” (Article 20.16), resulting in the raising of tariffs, or payment of a monetary
assessment equal to 50% of what a dispute panel determines is “of equivalent effect.”
This article does not apply to the disputable labor provision. The difference is that
the option for failing to resolve a labor dispute is a monetary assessment, which
would be capped at $15 million per year, with recourse to an equivalent dollar value
of suspended benefits (higher tariffs) if the monetary assessment is not paid. The
monetary assessment would also be paid into a fund and expended for “appropriate
labor initiatives.” Labor advocates argue that by capping the assessment at $15
million and having the assessment paid into a fund in the offending country, the labor
provisions are rendered largely ineffective. The USTR argues that for small
countries, such a fine would be significant relative to the dollar value of the trade
benefits it would receive.67
From a congressional perspective, there is the question of whether differences
in the treatment of the three labor provisions in some way fail to meet the principal
negotiating objectives as outlined in TPA legislation. Although the three provisions
are not accorded the exact same treatment in the DR-CAFTA, neither are they in the
TPA language. Section 2102(b)(11) of the Trade Act of 2002 (TPA) states that
among the principal labor negotiation objectives is the provision “to ensure that a
party to a trade agreement with the United States does not fail to effectively enforce
the environmental or labor laws.” This may be contrasted with the weaker objectives
“to strengthen the capacity of United States trading partners to promote respect for
core labor standards,” and, in Sec. 2102(a)(1)(7) to “strive to ensure that they do not
weaken or reduce the protections afforded in domestic environmental and labor laws
as an encouragement for trade.”
Although the TPA provisions seem to differ with respect to treatment of these
three labor provisions, under the dispute resolution provision (sec. 2102(b)(12)(G)),
a principal negotiating objective also listed is “to seek provisions that treat United
States principal negotiating objectives equally” with respect to the ability to resort to
dispute settlement, the availability of equivalent procedures, and the availability of
65 (...continued)
Comments on the Proposed U.S.-Central American Free Trade Agreement, before the USTR
Trade Policy Committee, November 19, 2002.
66 For the Department of State reports on human rights, including labor rights, see
[http://www.state.gov/g/drl/rls/hrrpt/2003].
67 Lee, op. cit., and Labor Advisory Committee Report.

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equivalent remedies. Whereas the labor groups have argued that this is not the case
with labor and commercial disputes, the USTR has responded that this standard has
been met since both commercial and labor disputes are subject to monetary
assessments and suspension of benefits. The dispute settlement procedures do
operate slightly differently, however, and it may be a matter of interpretation as to
whether there is a problem in their meeting congressional negotiating objectives.68
Practical issues have also been raised. For example, support for core labor
rights is one thing, but actually monitoring them, identifying violations, and resolving
disputes in a uniform way would create immense measurement and interpretive
challenges for dispute arbitration panels.69 This raises two other thorny questions.
The first is whether the United States should insist that the DR-CAFTA require all
countries to meet core ILO principles as the proper benchmark for support of labor
rights given it has not ratified most of the relevant ILO conventions? The second
question addresses equity in practice. Would all countries entering into a bilateral
FTA with the United States be subject to the same standards? The Central American
countries have argued that given the precedence for U.S. acceptance of FTAs with
Jordan, Singapore, Morocco, and Bahrain (not yet ratified), the DR-CAFTA is being
held to different standards than other FTAs made with countries whose labor
standards could be easily challenged.
A challenge for policymakers is deciding whether the DR-CAFTA, as
negotiated: 1) can be seen as one of many factors that may help bring about positive
social change in the workplace, 2) falls so short of doing so that it should not be
implemented, or 3) can be “fixed” with one or more side agreements that would
allow it to be implemented.
Dispute Resolution and Institutional Issues
This negotiation group focused on numerous aspects that define how the trade
agreement will operate, particularly with respect to rules governing procedures for
dispute resolution. Dispute resolution is modeled on previous FTAs, in which
disagreements are intended to be resolved cooperatively via a consultative process.
If this approach is not successful, the process moves to the establishment of the Free
Trade Commission of cabinet-level representatives, and finally an arbitral panel.
68 It should also be noted that under the principal negotiating objectives in TPA with respect
to labor is a limiting provision that is reflected almost verbatim in Article 16.2 of the DR-
CAFTA: 1) “to recognize that parties to a trade agreement retain the right to exercise
discretion with respect to investigatory, prosecutorial, regulatory, and compliance matters
and to make decisions regarding the allocation of resources to enforcement with respect to
other labor [or environmental] matters determined to have higher priorities,” 2) that “a
country is effectively enforcing its laws if a course of action or inaction reflects a reasonable
exercise of such discretion;” and 3) “no retaliation may be authorized based on the exercise
of these rights or the right to establish domestic labor standards.” P.L. 107-210, sec.
2102(b)(11)(B).
69 These issues were explored in a report prepared by the National Academy of Sciences.
A summary of the key issues is provided in: Moran, Theodore H. Trade Agreements and
Labor Standards. The Brookings Institution. Policy Brief #133. May 2004.

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CRS-30
Arbitral panels are intended to broker mutually acceptable resolutions, including
providing for compensation, if appropriate. If a mutually-agreed solution is not
found, the complaining party may resort to a suspension of benefits of equivalent
effect. This may also be challenged, and final resolution, as well as, how the
suspension of benefits are to be administered are set out in guidelines. Resolving
labor and environmental disputes would be slightly different (see previous section).
All dispute resolution procedures are defined in Chapter 20. Administrative and
other technical matters (e.g. transparency issues) of trade agreement implementation
were also addressed by this working group.
Trade Capacity Building
Even before detailed discussions began on the DR-CAFTA, the Central
American countries expressed a strong apprehension of being overwhelmed by the
resources and experience that the United States could muster to negotiate and later
comply with liberalized trade rules. Hence, the need for trade capacity building,
which, now that the negotiation process is over, may be classified into three distinct
areas beyond trade negotiation capabilities. First, the ability to identify priorities,
including where the major adjustment costs (losers) are expected to be and how to
respond to them. Second, the ability to develop resources to implement the
agreement, including institutional, financial, and analytical resources. Third, the
capacity to benefit from the DR-CAFTA.70 The agreement would create a permanent
Committee on Trade Capacity Building to continue work begun in the negotiation
process, and recommendations in the agreement call for one of its first priorities to
be customs administration.
The third category, however, is arguably the most challenging. Also referred to
as “supply side” capacity, it refers to the ability of a business to: compete in a larger
market; learn how to export and use imports (as inputs) more to its advantage; tap
into global finance; navigate customs and trade logistics problems; and in other ways
make the transition from local producer to international player.71 This will be a
difficult challenge for many Central American firms, particularly if barriers to world
trade are reduced outside the U.S.-Central American relationship (WTO/FTAA)
putting increasing pressure on marginally productive businesses. The joint-
production relationship already established in textiles and garments suggests that
certain firms have already developed some expertise in meeting these challenges.
From the outset of negotiations, the United States advocated assisting the
Central American countries. Each Central American country prepared a National
Action Plan based on a review of its “trade-related” needs. Assistance is being
provided by the United States government through the U.S. Trade and Development
Agency, Agency for International Development, and the Department of State, among
others; private groups (corporate and non-government organizations — NGOs); and
five international organizations (the Inter-American Development Bank — IDB,
Central American Bank for Economic Integration — CABEI, United Nations
70 This typology of capacity issues was developed by Bernard Hoekman of the World Bank.
Earlier versions of this report mentioned a fourth area, trade negotiation capacity.
71 Ibid.

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CRS-31
Economic Commission on Latin America and the Caribbean — ECLAC,
Organization of American States — OAS, and the World Bank).72
The DR-CAFTA includes a Committee on Trade Capacity Building to
coordinate these types of activities. U.S. inter-agency funding in support of DR-
CAFTA trade capacity building peaked as the agreement came to completion,
including $20 million for labor and environmental technical assistance in the FY2005
budget. Maintaining formal support for these programs, including ongoing financial
commitments, is one challenge supporters of these programs emphasize.
Outlook
The DR-CAFTA negotiations moved quickly and were concluded by the
anticipated year-end 2003 deadline, with the exception of a slight delay with Costa
Rica and the later addition of the Dominican Republic. A final version of the
agreement was signed on May 28, 2004. The DR-CAFTA, by the very nature of
being a negotiated agreement, is a compromise, a second best solution that defines
more the limits each country is willing to accept in furthering freer trade, rather than
a referendum on free trade itself. It is, nonetheless, a comprehensive and innovative
agreement, melding the interests of the United States with those of six developing
countries that vary significantly among themselves. This makes it an historic effort,
which must now be judged by the legislatures of the participating countries as to
whether it, on balance, leads to a positive outcome.
As the USITC study suggests, implementing the DR-CAFTA would have a
small effect on the U.S. economy as a whole. In fact, it represents more of a marginal
rather than wholesale change from the existing U.S. trade arrangement with the
region. It would build on long-established trade partnerships, but would also change
the framework from the CBI unilateral preferential arrangement to a negotiated
bilateral agreement. These altered terms would provide the United States with
greater access for vital sectors of its economy, but have also allowed the Central
American countries greater say in how controversial provisions, such as labor rights
enforcement, would work. In the end, the United States entered negotiations with the
hope that the DR-CAFTA could be part of a policy foundation supportive of both
improved interregional trade and long-term social, political, and economic
development.
The United States has both commercial and broader development/strategic
interests at stake, which sometimes seem at odds with each other. U.S. commercial
interests reflect both mercantilist (protect import-competing sectors) and free trade
(support exporting and import-using sectors) sentiments. Even within sectors, such
as textiles and agriculture, there are both supporters and detractors of the DR-
CAFTA, causing Congress to seek balance in this agreement. Respective
commercial positions on free trade stem from their economic interests, raising one
of the basic difficulties with any congressional trade vote. The U.S. Congress has
72 Details of the program and the Central American National Action Plans may be found at
the USTR website: [http://www.ustr.gov].

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CRS-32
also supported opening U.S. markets to the DR-CAFTA countries to promote
development and stability in the region, most recently in 2000 with the vote to
implement the Caribbean Basin Trade Partnership Act. The DR-CAFTA builds on
this rationale, as well.
Labor is one of the major issues that threatens to derail ratification of the DR-
CAFTA, which also points to the challenge of reconciling commercial and
development policy goals. Criticism that the labor provisions are inadequate emanate
either from a concern that the lower standards provide an unfair commercial
advantage, or from a concern over humanitarian issues like workers’ rights.
Organized labor continues to argue that the labor provisions do not go far enough, but
supporters of the labor language argue the DR-CAFTA can be part of a collaborative
effort along with national, international, and private sector initiatives to support
social development. The DR-CAFTA language must also be weighed against the fact
that the United States has ratified only two ILO conventions related to core labor
standards sought by labor groups to be covered in this agreement.
From a broader development perspective, evidence continues to mount that
trade contributes to economic growth and poverty reduction.73 The greatest benefits
from the DR-CAFTA may arise from the dynamic gains of foreign investment that
enhance technology, productivity, and employment.74 Studies further indicate that
U.S. protectionism disproportionally affects lower-income households in both
Central America and the United States because it affects goods that Central America
exports most, and which also make up a greater proportion of U.S. lower-income
household budgets, like food and clothes. In the case of the DR-CAFTA countries,
this means that by reducing restrictions on the imports for which they have a
comparative advantage, such as agriculture, textiles, and apparel, the United States
would be assisting with these countries’ development agenda.75
Evidence from economic studies is converging on the idea that even rural areas
of Central America can benefit from the DR-CAFTA if appropriate adjustment
policies are put in place, particularly in helping the small farmer make the transition
from subsistence agriculture to either a cash crop or non-farm employment. In some
cases, direct income support will be needed for the poorest rural families. In this
context, trade is viewed as a potentially constructive force and part of a much broader
73 A rigorous case is made in: Cline, William R. Trade Policy and Global Poverty. Institute
for International Economics, Washington, D.C. June 2004. pp. 25-27, 270-71, and 278-79.
The author makes the interesting point, that “Global free trade is found to raise the median
real wage for unskilled labor in developing countries by 5%.” p. 279-85.
74 Mason, Ensuring the Poor Can Benefit from CAFTA, p. 26.
75 Reducing rich-country protectionism is a critical goal identified in a study aimed at
highlighting policies that affect social development and equity in Latin America. Birdsall,
Nancy, Augusto de la Torre, and Rachel Menezes. Washington Contentious: Economic
Policies for Social Equity in Latin America. Carnegie Endowment for International Peace
and Inter-American Dialogue. Washington, D.C. 2001. pp. 65-66. See also: Center for
Global Development. Global Trade, Jobs, and Labor Standards. [http://www.cgdev.org].

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CRS-33
development process, provided it is managed well and integrated into and supported
by domestic programs.76
The economic arguments for trade, however, allow for plenty of room for
different interpretations of whether a proper balance has been struck. These
arguments are also necessarily tempered by politics, and the fate of the DR-CAFTA
is far from certain. Whether the U.S. Congress decides to support the agreement or
not, one thing is clear. The status quo will not be an option given the many trade
agreements emerging in the Western Hemisphere. In such a dynamic policy and
negotiating environment, the decision on the DR-CAFTA will send a strong message
one way or the other to Central America and the Dominican Republic.
76 Mason, Ensuring that the Poor can Benefit from CAFTA, p. 35, Arce and Jaramillo, El
CAFTA y la Agricultura Centroamericano, p. 17, and Todd, Winters, and Arias, CAFTA
and the Rural Economies of Central America, pp. 43 and 50.

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CRS-34
Appendix 1. Chronology of DR-CAFTA Negotiations
Date
Milestone
January 16, 2002
President George W. Bush announces his intention to explore
a free trade agreement (FTA) with Central America.
August 6, 2002
President Bush signs the Trade Act of 2002 (P.L.107-210),
which includes Trade Promotion Authority (TPA).
October 1, 2002
President Bush, as required under TPA, formally notifies
Congress of his intention to negotiate a U.S.-Central America
Free Trade Agreement (CAFTA) with Guatemala, El
Salvador, Honduras, Costa Rica, and Nicaragua.
November 19, 2002
USTR holds public hearings, accepting written and oral
testimony on CAFTA.
January 27, 2003
The first of nine negotiation rounds begins in San Jose, Costa
Rica.
August 4, 2003
USTR Zoellick formally notifies Congress of intent to
negotiate an FTA with the Dominican Republic.
December 17, 2003
CAFTA negotiations concluded in Washington, D.C. Costa
Rica decides not to accept the agreement pending further
discussion on telecommunications, insurance, agriculture, and
textile market access issues.
January 5-9, 2004
Costa Rica and the United States hold first round of bilateral
discussions on CAFTA.
January 12-16, 2004 First round of negotiations with Dominican Republic held.
January 19-24, 2004 Costa Rica and United States hold second round of bilateral
discussions on CAFTA.
January 25, 2004
Costa Rica and United States agree to CAFTA provisions.
January 28, 2004
USTR releases draft version of CAFTA to public.
February 20, 2004
President Bush formally notifies Congress of his intention to
sign CAFTA.
March 15, 2004
The United States and the Dominican Republic conclude a
bilateral FTA and the USTR announces it will be “docked” to
CAFTA.
March 24, 2004
President Bush formally notifies Congress of his intention to
sign the U.S.-Dominican Republic FTA.
April 9, 2004
USTR releases draft text of the FTA with the Dominican
Republic.
May 28, 2004
The USTR and trade ministers from the Central American
countries sign CAFTA in Washington, D.C.
August 5, 2004
The USTR and trade ministers from the Dominican Republic
and Central America sign the DR-CAFTA agreement in
Washington, D.C.
December 17, 2004
Salvadoran legislature ratifies the DR-CAFTA 49 to 35.
March 3, 2005
Honduran legislature ratifies the DR-CAFTA 100 to 28.

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CRS-35
Date
Milestone
March 10, 2005
Guatemalan legislature ratifies the DR-CAFTA 126-12.
April 13, 2005
Senate Finance Committee hearing scheduled.
April 21, 2005
House Ways and Means Committee hearing scheduled.

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CRS-36
Appendix 2. Selected Economic Indicators
(year 2003 data, except where otherwise indicated)
Costa
El
Guat-
Hon-
Nicar-
Dom.
Rica
Salvador
emala
duras
agua
Rep.
GDP ($ billions)
17.5
14.7
24.0
6.8
2.7
20.5
GDP Growth (%)
5.0
2.2
2.4
1.5
2.3
-1.3
GDP Growth 1980-
3.0
0.2
0.8
2.7
-1.9
3.1
1990 (%)*
GDP Growth 1990-
4.9
4.3
4.0
3.1
4.3
6.0
2002 (%)*
PPP Per Capita Gross
8,560
4,190
4,030
2,540
2,350
6,270
National Income**
Inflation (%)
9.3
2.8
5.5
9.8
6.1
28.0
Current Account
-5.9
-4.5
-4.3
-7.6
-17.6
4.5
Balance (% of GDP)
Pop. Below $1 per
2.0
31.1
16.0
23.8
45.1
<2.0
day (%)***
Human Development
42
105
119
115
121
94
Index (HDI) Rank#
Sources: World Bank, World Development Indicators 2004, pp. 14-15, 54-55, and 178-83, United
Nations, Human Development Report, 2003, and IMF website.
* Average annual percent growth.
** Gross national income (GNI) converted to international dollars using purchasing power parity rates.
An international dollar has the same purchasing power over the GNI as a U.S. dollar has in the United
States. GNI, formerly represented as GNP by the World Bank, is a different, but similar measure as
GDP. Data are for year 2002.
*** Percentage of population living on $1 per day or less, most recent survey year.
# HDI is a composite measure (education, income, and life expectancy) of average achievement in
human development. A lower ranking is better: e.g. United States (7), Italy (21), and South Korea
(30). The 2003 report reflects data for year 2001.

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CRS-37
Appendix 3. U.S. Merchandise Trade with DR-CAFTA
Countries
($ millions)
%
%
Country
1999
2000
2001
2002
2003
2004
Change
Change
2003-2004
1999-2004
U.S. Exports
Costa Rica
2,381
2,460
2,502
3,117
3,414
3,304
-3.2%
38.8%
Honduras
2,370
2,584
2,416
2,571
2,826
3,077
8.9%
29.8%
Guatemala
1,812
1,901
1,870
2,044
2,263
2,548
12.6%
40.6%
El Salvador
1,519
1,780
1,760
1,664
1,821
1,868
2.6%
23.0%
Nicaragua
374
379
443
437
502
592 17.9%
58.3%
Dominican Rep
4,100
4,473
4,398
4,250
4,205
4,343
3.3%
5.9%
Total CAFTA
12,556
13,577
13,389
14,083
15,031
15,732
4.7%
25.3%
Mexico
86,909
111,349
101,296
97,470
97,412
110,775
13.7%
27.5%
LAC*
55,153
59,283
58,157
51,551
51,946
61,426
18.3%
11.4%
Latin America
142,062
170,632
159,453
149,021
149,358
172,201
15.3%
21.2%
World
695,797
781,918
729,100
693,103
724,771
817,936
12.9%
17.6%
U.S. Imports
Costa Rica
3,968
3,539
2,886
3,142
3,364
3,333
-0.9%
-16.0%
Honduras
2,713
3,090
3,127
3,261
3,313
3,641
9.9%
34.2%
Guatemala
2,265
2,607
2,589
2,796
2,947
3,155
7.1%
39.3%
El Salvador
1,605
1,933
1,880
1,982
2,020
2,053
1.6%
27.9%
Nicaragua
495
589
604
679
770
991
28.7%
100.2%
Dominican Rep
4,287
4,383
4,183
4,169
4,455
4,528
1.6%
5.6%
Total CAFTA
15,333
16,141
15,269
16,029
16,869
17,701
4.9%
15.4%
Mexico
109,721
135,926
131,338
134,616
138,060
155,843
12.9%
42.0%
LAC*
58,464
73,348
67,370
69,503
78,829
98,749
25.3%
68.9%
Latin America
168,185
209,274
198,708
204,119
216,889
254,592
17.4%
51.4%
World
1,024,618
1,218,022
1,140,999
1,161,366 1,257,121
1,469,671
16.9%
43.4%
U.S. Balance of Trade
Costa Rica
-1,587
-1,079
-384
-25
50
-29
Honduras
-343
-506
-711
-690
-487
-564
Guatemala
-453
-706
-719
-752
-684
-607
El Salvador
-86
-153
-120
-318
-199
-185
Nicaragua
-121
-210
-161
-243
-268
-399
Dominican Rep
-187
90
215
81
-250
-185
Total CAFTA
-2,777
-2,564
-1,880
-1,947
-1,838
-1,969
Mexico
-22,812
-24,577
-30,042
-37,146
-40,648
-45,068
LAC*
-3,311
-14,065
-9,213
-17,952
-26,883
-37,323
Latin America
-26,124
-38,642
-39,256
-55,098
-67,531
-82,391
World
-328,821
-436,104
-411,899
-468,263
-532,350
-651,735
Source: Table created by CRS from U.S. Department of Commerce data.
* Latin America and the Caribbean, except Mexico.

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