Order Code RS22164
June 10, 2005
CRS Report for Congress
Received through the CRS Web
DR-CAFTA: Regional Issues
Clare Ribando
Analyst in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Summary
On August 5, 2004, the United States signed the U.S- Dominican Republic-Central
America Free Trade Agreement (DR-CAFTA) with five Central American countries
(Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican
Republic. DR-CAFTA could have a significant effect on U.S. relations with the region,
primarily by establishing a permanent and reciprocal trade preference arrangement
among the signatory countries. DR-CAFTA must now be ratified by each country’s
legislature and approved by the U.S. Congress before taking effect. Although DR-
CAFTA has been ratified by three of the six legislatures (El Salvador, Honduras, and
Guatemala), opposition to the agreement exists in many of the signatory countries.
Opposition groups have expressed concerns about the lack of transparency during the
negotiation and ratification processes. Other regional concerns focus on DR-CAFTA’s
likely effects on the rural poor, labor conditions, the environment, and domestic laws.
For more information, see CRS Report RL32322, Central America and the Dominican
Republic in the Context of the Free Trade Agreement (DR-CAFTA) with the United
States
, and CRS Report RL31870, The Dominican Republic-Central America-United
States Free Trade Agreement (DR-CAFTA)
. This report will be updated periodically.
Introduction
On August 5, 2004, the United States signed the U.S- Dominican Republic-Central
America Free Trade Agreement (DR-CAFTA) with Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua, and the Dominican Republic. The Central American countries and
the Dominican Republic are small countries with limited resources. Populations range
from 4 million in Costa Rica to 12 million in Guatemala, with per capita income ranging
from $730 for Nicaragua to $4,280 for Costa Rica. Most of these countries are classified
by the World Bank as lower middle-income countries. Exceptions include Costa Rica,
an upper middle-income country, and Nicaragua, a low-income country (the second
poorest in the hemisphere). The combined Gross Domestic Product (GDP) of Central
America and the Dominican Republic is equal to less than 1% of U.S. GDP and the total
population of the countries is 44 million, compared to the U.S. population of 295 million.
The United States is the most important trading partner and source of foreign investment
for all six countries. DR-CAFTA has been ratified by the legislatures of El Salvador,
Congressional Research Service ˜ The Library of Congress

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Guatemala, and Honduras. The ratification debate continues in Costa Rica, the
Dominican Republic, and Nicaragua. In the United States, implementing legislation has
yet to be introduced. The DR-CAFTA would not enter into force until the United States
and at least one other country pass implementing legislation into law.
Foreign Policy Implications of DR-CAFTA
While most of the congressional debate on DR-CAFTA has focused on the domestic
impact of the agreement, the foreign policy implications have also been raised.
Throughout the 20th century, U.S. interest in Central America and the Dominican
Republic has oscillated between periods of attention and neglect. U.S. involvement has
been heavily driven by broader foreign policy concerns such as the spread of communism.
In the 1980s, substantial amounts of U.S. assistance were provided to support Central
American governments battling leftist insurgencies and to finance the U.S.-backed contras
seeking to overthrow a revolutionary regime in Nicaragua. With the dissolution of the
Soviet Union in 1991, U.S. concerns about spreading communist influence lessened, as
did levels of assistance to the region. Other large U.S. assistance packages to the DR-
CAFTA countries have occurred in response to natural disasters, including $1 billion to
the Central American countries devastated by Hurricane Mitch in 1998. One exception
to this episodic involvement has been the preferential trade arrangement extended to the
region since the early 1980s as part of the Caribbean Basin Initiative (CBI).
Proximity ties the DR-CAFTA countries to the United States and so there is a shared
sense of security interests, including the illegal trafficking of arms, drugs, and people;
gangs; and terrorism. Since the early 1990s, all of the DR-CAFTA countries have taken
steps to promote democracy, protect human rights, and pursue market-led economic
growth. Significant threats to security and stability remain, however, such as poverty and
income inequality, crime, corruption, and institutional weakness. Regional leaders have
asserted that DR-CAFTA is essential to strengthening the viability of their economies,
which they assert will support political stability. If DR-CAFTA is rejected, they maintain
that this would indicate that the United States can “sign something but not deliver,” and
could undermine U.S. status and influence across Latin America.1
On May 17, 2005, Deputy Secretary of State (and former U.S. Trade Representative)
Robert Zoellick made a speech linking approval of DR-CAFTA to U.S. strategic interests
in the region. Zoellick noted the disastrous consequences of prior U.S. neglect of Central
America. He argued that if the United States fails to support the fragile democracies there
now by approving DR-CAFTA, higher poverty and more illegal immigration could result.
Others have added that a failure to approve DR-CAFTA could discourage other countries
from continuing their own reform efforts in hopes of entering into FTAs with the United
States. Critics of DR-CAFTA have dismissed these assertions as exaggerations, asserting
that even if DR-CAFTA is rejected, countries in the region would still have preferential
access to the U.S. market under existing CBI and related programs. They further maintain
that the DR-CAFTA countries would still receive U.S. foreign assistance, and would
1 “Latin Lessons: The U.S. Faces a Loss of Leadership in a Troubled Region,” Financial Times,
May 17, 2005.

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continue working with U.S. officials on issues of shared concern such as immigration and
drug trafficking.2
Ratification Status
In Central America, the legislatures of El Salvador, Honduras, and Guatemala have
ratified DR-CAFTA. All three countries have experienced popular protests against the
agreement. On December 7, 2004, the Legislative Assembly of El Salvador ratified the
DR-CAFTA despite strong objections from the leftist Farabundo Marti Liberation Front
(FMLN). After more than 19 hours of floor debate and a brief takeover of the chamber
by protestors, DR-CAFTA was ratified by a vote of 49-35. Honduras followed on March
3, 2005 by a final vote of 124-4 showing strong support for the agreement from both
major parties. This result may not reflect opposition to the FTA among farmers, public
sector workers, and the poor, whose interests are under-represented in the Honduran
legislature. After a March 3 vote had to be postponed because of ongoing popular
protests, Guatemala became the third country to ratify DR-CAFTA on March 10, 2005
by a vote of 126-12. In order to win support for the FTA, the Guatemalan government has
promised complementary measures that would promote investment in rural infrastructure
development and social service delivery. Despite these initiatives, protesters have
continued to speak out against the agreement. Clashes with police in Guatemala have led
to arrests, injuries, and at least one death.
The DR-CAFTA ratification debate continues in the Dominican Republic,
Nicaragua, and Costa Rica. According to the U.S. Embassy in the Dominican Republic,
a reputable poll conducted in April/May 2005 found that 60% of Dominicans are aware
of DR-CAFTA; of those, 50% support the agreement. The Dominican government
strongly support DR-CAFTA as a means of continuing the country’s economic recovery.
The business community generally supports the agreement. As long as compensation
mechanisms can be developed to compensate sugar producers and other sectors that may
be adversely affected by DR-CAFTA, the Dominican Congress is soon likely to approve
the agreement. In Nicaragua, the opposition Sandinistas, who control 38 of the 92 seats
in the National Assembly, strongly oppose DR-CAFTA. Opponents are concerned that
the FTA may lead to the privatization of public services and may threaten the livelihood
of the country’s farmers who comprise 45% of the workforce. The National Assembly
has indicated that it will seek complementary legislation for trade capacity building and
will not vote on DR-CAFTA before the U.S. Congress does so. In Costa Rica, the most
developed DR-CAFTA country, President Pacheco has not presented the FTA to the
Legislative Assembly. Opposition groups fear the agreement may compromise the
country’s high environmental standards and force the privatization of its well-functioning
telecommunications system. Press reports indicate that Costa Rica may not consider the
pact until after presidential elections are held there in February 2006.3
2 Robert B. Zoellick, Deputy Secretary of State, “From Crisis to Commonwealth: Crisis and
Democracy in Our Neighborhood,” May 16, 2005; “The CAFTA Vote is About More Than
Trade,” Financial Times, May 16, 2005.
3 See “Central American Presidents, Avoiding Protests at Home, Tour U.S. to Garner Support for
DR-CAFTA,” Washington Office on Latin America (WOLA), May 10, 2005; U.S. Southern
Command “One Dead in Guatemala Protests Against Trade Deal with U.S.,” Mar.16, 2005;
(continued...)

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Regional Concerns
On May 10-11, 2005, the presidents of the DR-CAFTA countries traveled
throughout the United States in an effort to build support for the agreement. They and
other advocates of the agreement argue that it will help spur needed economic growth and
consolidate democratic progress made in the region by creating institutional structures that
could strengthen the rule of law and prevent opportunities for corruption. They also
maintain that increased competition from foreign firms, as well as ongoing international
scrutiny that would result from DR-CAFTA would provide extra incentives to enact
deeper reforms. Support for the agreement within the DR-CAFTA countries is far from
uniform, even in the countries whose legislatures have already ratified the agreement.
Critics of DR-CAFTA in the region include labor unions, environmentalists, indigenous
and peasant groups, the Catholic church, and some political parties. They argue that, as
negotiated, DR-CAFTA has inadequate labor and environmental provisions, limits access
to generic drugs necessary for fighting diseases like HIV/AIDS, and unfairly pits
subsidized U.S. agricultural interests against the region’s subsistence farmers. Public
sector workers also fear provisions in DR-CAFTA that may hasten the privatization of
state-run programs.
Transparency in Government. Since the early 1990s, the DR-CAFTA countries
have sought, with varying degrees of success, to develop transparent and accountable
democratic institutions. Strong institutions that encourage dialogue and citizen
participation are critical to establishing viable democracies in countries that have long
been polarized by political, ethnic, and class differences and plagued by official
corruption. In July 2004, U.S. and Central American Catholic bishops issued a joint
communique expressing concern about the lack of transparency in the negotiations for
CAFTA in Central America. They noted that, with the exception of Costa Rica,
information on the agreement was not made available to the public and that members of
civil society were excluded from the negotiation process. Similar concerns have been
expressed by NGOs and opposition legislators in El Salvador and Guatemala about the
lack of public debate and time given for legislative scrutiny during those countries’
ratification processes.4 Regional leaders have downplayed these problems, noting that
trade capacity building (TCB) assistance related to DR-CAFTA will empower civic
groups to demand increased accountability from their governments and private firms.
They also maintain that DR-CAFTA will help improve government accountability by
requiring transparency in customs administration, competitive bidding for government
procurement, and stronger intellectual property protection.
3 (...continued)
Time for CAFTA,” Latin American Regional Report, May 2005; “Costa Rica Balks at Free-Trade
Pact,”Wall Street Journal, May 3, 2005.
4 Joint Statement Concerning the CAFTA by the Bishop’s Secretariat of Central America, and
the United States Conference of Catholic Bishops, July 2004; “Central Americans Speak Out
Against DR-CAFTA,” Alliance for Responsible Trade, March 2005.

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Effects on the Rural Poor.5 In 2004, the United Nations Development Program
identified the persistent problems of poverty and inequality as two of the biggest obstacles
to democratic consolidation in Latin America. Critics of DR-CAFTA have argued that
the agreement might exacerbate the social and economic inequality, especially rural-urban
income disparities, that are pervasive in much of the region. While most households
stand to gain from lower prices associated with trade liberalization, some sectors —
particularly subsistence and small farmers — could lose their livelihoods as a result of
cheap agricultural imports from the United States as they did in Mexico under the North
American Free Trade Agreement (NAFTA). World Bank researchers have concluded that
the benefits of NAFTA did not reach Mexico’s poor southern states, primarily inhabited
by subsistence farmers, due to a lack of investment by the Mexican government in
infrastructure, education, and local institutions. Those observers maintain that more
transition support programs and technical assistance for small farmers are needed in the
DR-CAFTA countries for all sectors of society to take advantage of trade liberalization.
It is unclear to some who question DR-CAFTA whether the countries possess the political
will and resources necessary to enact reforms needed for the rural poor to benefit from
DR-CAFTA. Advocates of the agreement point out that Guatemala and Honduras have
already designed national rural development plans that will complement DR-CAFTA.
Employment and Labor.6 DR-CAFTA is likely to affect employment and labor
conditions in Central America and the Dominican Republic. Since global textile quotas
were lifted in January 2005, 18 plants in four DR-CAFTA countries have closed and some
10,000 jobs have been lost. Some say that DR-CAFTA could mitigate the effects of
textile job losses that are occurring as a result of increased competition from Asian
producers. Others note that any jobs gained in export manufacturing could be offset by
potential jobs lost in agriculture due to the likely influx of U.S. agricultural products.
While the Office of the U.S. Trade Representative (USTR) asserts that labor laws
in the CAFTA countries generally comply with the ILO’s core labor standards, critics
argue that those laws are well below international norms. Enforcement of domestic labor
laws is weak in many CAFTA countries, including in some export processing zones
(EPZs). In El Salvador, for example, factories have no collective bargaining agreements
in place with the 18 unions active in the EPZs, and workers there have reported sexual
harassment, as well as verbal, and even physical abuse. In Costa Rica, a country with
good labor conditions, the legislature is considering legislation that would eliminate the
8- hour workday and reduce requirements for overtime pay. These news laws may be an
5 Sources include “Democracy in Latin America,” United Nations Development Program, 2004;
WOLA Issue Guide, Fair Trade or Free Trade: Understanding CAFTA, April 2004; Gerardo
Esquivel et al, “Why NAFTA Did Not Reach the South,” World Bank, June 2002, Andrew
Mason, “Policy Approaches to Managing the Transition: Ensuring that the Poor Can Benefit from
DR-CAFTA,” World Bank, May 11, 2005.
6 Sources include “Fraying of a Latin Textile Industry,” The New York Times, March 25, 2005;
U.S. Department of State, Country Reports on Human Rights Practices 2004: El Salvador,
March, 2005; “Guatemala Third Country to Ratify DR-CAFTA as Others Hold Back,” Inside
U.S. Trade
, March 11, 2005; “Labor Groups Petition USTR to Review FTA Partners’ GSP
Eligibility,” Inside U.S. Trade, December 24, 2004; USTR, “CAFTA’s Strong Protections for
Labor Rights,” CAFTA Policy Briefing Book, February 2005; “CAFTA’s Weak Labor Rights
Protections: Why the Present Accord Should be Opposed,” Human Rights Watch, March 2004.
See CRS Report RS22159, DR-CAFTA Labor Rights Issues, by Mary Jane Bolle.

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effort to keep the country competitive with other CAFTA countries that pay lower wages.
In December 2004, labor groups filed complaints asking USTR to review the labor
practices of four of the DR-CAFTA countries regarding their continued eligibility for
Generalized System of Preferences (GSP) trade benefits.
Regional officials maintain that DR-CAFTA has a three-pronged strategy to improve
labor conditions in the region. The agreement calls for the enforcement of domestic labor
laws, violations of which may be enforced by monetary fines and dispute resolution
proceedings; commits the countries to working with the ILO to bring their laws up to
international standards; and provides technical assistance to help build country capacity
to enforce labor laws. Trade Representative Rob Portman has called for an international
donors’ conference to further increase such assistance. Critics contend that most of DR-
CAFTA’s labor provisions are unenforceable as countries may simply reduce their budget
for labor-related programs to pay for any fines they may incur, and that the oversight
found in unilateral U.S. programs, such as the GSP, will be lost under DR-CAFTA.
Environment.7 Tourism is a major source of revenue for most of the DR-CAFTA
countries. The DR-CAFTA countries rely on the beauty of their natural surroundings to
attract foreign visitors. All five Central American countries have passed a general
framework law on the environment, and amended their constitutions to include the
government’s obligation to protect the environment. But as the USTR notes, the Central
American governments’ ability “to effectively implement and enforce environmental
laws is limited by the lack of fiscal and human resources.” While Costa Rica has strong
environmental laws that are strictly enforced, many other countries in the region do not.
Some environmentalists have expressed concerns that development associated with DR-
CAFTA could exacerbate the region’s existing environmental problems. In apparent
response to criticism that the DR-CAFTA Environmental Cooperation Agreement (ECA)
was weak, signatories concluded two supplemental agreements in February 2005. These
agreements will be supported by U.S. funding for technical assistance to enforce
environmental standards and to implement the ECA.
Impact on Domestic Laws. There have been concerns expressed in the DR-
CAFTA countries about changes in their domestic laws that may have to occur in order
to comply with the agreement’s provisions. The Dominican Republic and Guatemala have
already had to repeal domestic laws that the USTR found to be in breach of DR-CAFTA
obligations: the former a tax on beverages containing high-fructose corn syrup, and the
latter a law changing the five-year protection period for clinical trial data used to certify
patented drugs. Costa Rica will have to make substantial legislative changes in order open
up its telecommunications and insurance sectors to foreign competition. Civil society
groups reportedly fear that DR-CAFTA provisions will make it difficult, if not
impossible, for governments in the region to preserve essential public services, and to
develop new initiatives that respond to local needs for sustainable development programs.
Proponents of the agreement say that some of the reforms required by DR-CAFTA,
though difficult, may be necessary for the DR-CAFTA countries’ economies to become
more efficient, transparent, and competitive.
7 USTR, Interim Environmental Review: U.S.-Central America Free Trade Agreement, Aug.
2003; Quixote Center, “CAFTA and the Environment,” July 2004; “DR-CAFTA Countries Sign
Two Pacts to Boost Environmental Cooperation,” International Trade Reporter, Feb. 24, 2005.