April 21, 2016
Dominican Republic-Central America-United States Free Trade
Agreement (CAFTA-DR)
Overview
What Are Opposing Views?
CAFTA-DR is a free trade agreement (FTA) among the
When CAFTA-DR was being considered, many lawmakers
United States, Costa Rica, El Salvador, Guatemala,
were concerned about possible effects on U.S. labor and
Honduras, Nicaragua, and the Dominican Republic. It
sensitive industries (sugar and textiles), as well as other
eliminates tariff and non-tariff barriers on goods, services,
trade issues such as intellectual property rights protections
and agriculture, building on unilateral trade preferences
and investor-state relations. Some policymakers wanted
begun under the 1983 Caribbean Basin Initiative (CBI). The
better trade adjustment and capacity building policies to
agreement reinforces Congress’s historical support for trade
address potential negative effects on vulnerable sectors in
as a foundation of broader foreign economic, political, and
partner countries, such as the apparel industry and
security policies in the region.
agriculture. Ongoing criticisms of the agreement point to
the region’s pervasive social and economic inequality, poor
CAFTA-DR Facts
working conditions and inadequate enforcement of labor
laws. Since the agreement’s entry into force, labor groups
Milestones. Negotiations began in January 2003 with the
and human rights advocates contend that some countries
Dominican Republic joining in January 2004. The CAFTA-
have failed to comply with their labor obligations. For
DR agreement was signed on August 5, 2004. The Senate
example, they charge that some manufacturing plants fail to
passed implementing legislation 54 to 45 on June 30, 2005,
pay workers the proper wages or provide pensions. Other
with the House following in kind 217 to 215 on July 28,
critics argue that governments in the region are unable or
2005. It was signed into law on August 2, 2005 by President
unwilling to provide labor reforms and need to work more
Bush (P.L. 109-53). The agreement entered into force on a
to strengthen enforcement mechanisms.
rolling basis: with El Salvador, Honduras, Nicaragua, and
Guatemala by July 1, 2006, the Dominican Republic on
What are the Effects of the Agreement?
March 1, 2007, and Costa Rica on January 1, 2009.
CAFTA-DR deepened the trade partnership between the
CAFTA-DR Provisions. The agreement has 22 chapters
United States and partner countries by transitioning the
including provisions on tariff and non-tariff barrier
relationship from one of trade preference arrangements to a
elimination, rules of origin, customs procedures, sanitary
binding reciprocal FTA among the parties. The agreement’s
and phyto-sanitary measures, government procurement,
more flexible rules of origin than those under trade
investment, trade in services, intellectual property rights
preference programs provided incentives for regional
protection, labor, environment, and dispute settlement.
integration among Central America and the Dominican
Trade Preferences. The agreement replaced U.S.
Republic. It also enhanced trade-related rules and
unilateral preferential trade treatment extended to
disciplines for services, especially in telecommunications,
CAFTA-DR countries under the Caribbean Basin Economic
intellectual property rights protection, government
Recovery Act (CBERA), the Caribbean Basin Trade
procurement, and investment. Because most U.S. imports
Partnership Act (CBTPA), and the Generalized System of
from the region had already been duty free under normal
Preferences (GSP).
trade relations or trade preference programs, CAFTA-DR’s
effect on the U.S. economy has been small.
What Are Supporting Views?
Regional Integration
Proponents of CAFTA-DR view the agreement as an
CAFTA-DR reinforced regional integration with rules of
instrument to boost trade and economic growth, enhance
origin that allow for greater production-sharing among
prosperity in CAFTA-DR countries, increase employment
Central American and Mexican producers using U.S.
opportunities, and promote broader foreign economic
inputs. Harmonization of rules of origin and lower trade
policy interests in the region. Supporters also view the
barriers have enabled the region to become more
agreement as a way to reinforce economic stability and to
competitive by increasing co-production relationships,
encourage regional economic integration. Deeper economic
allowing for greater economies of scale in production, as
well as greater market access to each other’s markets more
ties with the United States can complement foreign policy
objectives in promoting democracy, the rule of law, and
generally. This includes reciprocal trade rules for U.S. duty-
efforts to fight organized crime and drug trafficking. Some
free treatment of imports assembled from inputs produced
studies suggest that the agreement has been an effective
in Central America or Mexico. For example, fabric and
tool for promoting worker rights protection and advancing
yarns produced in the United States are used in apparel
social citizenship issues in the political agenda of Central
production in CAFTA-DR countries, with final goods
America and the Dominican Republic.
receiving duty-free treatment in the United States.
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Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)
Merchandise Trade Trends
The United States is the largest investor in CAFTA-DR
The United States is the dominant trade partner for
countries, although the stock of FDI has decreased since
CAFTA-DR parties, although its market share has fallen
2005, according to the Bureau of Economic Analysis.
slightly over the past decade. In 2015, 41% of exports from
Investment is also influenced by macroeconomic
CAFTA-DR countries went to the United States, down
conditions, making it difficult to assess the FTA’s impact.
from 52% in 2005, while 37% of their imports came from
The services sector is the leading recipient of FDI in the
the United States, down from 40% in 2005. U.S. trade with
region. Costa Rica attracted the highest levels of new FDI
partner countries increased since the agreement’s entry into
flows from the United States in 2014, followed by
force, with U.S. exports increasing faster than imports.
Guatemala, and Dominican Republic. Costa Rica and the
Aggregate U.S.-CAFTA-DR bilateral trade data show that
Dominican Republic have the highest wage rates and
between 2005 and 2015, growth in U.S. exports (71.8%)
manufactured exports in the region, indicating that
outpaced U.S. imports (31.3%), while the U.S. trade
investment is not necessarily drawn to low-cost producers,
balance moved from a deficit of $1.2 billion in 2005 to a
but rather to countries that have relatively higher levels of
surplus of $5.2 billion in 2015 as shown in Figure 1.
stability, education, and productivity.
Figure 1. U.S. Merchandise Trade with CAFTA-DR
Labor Issues
Partners (US$ in billions)
The labor chapter was a strong point of contention in the
CAFTA-DR congressional debate, divided largely along
party lines and revolving around three issues: whether
CAFTA-DR countries’ laws complied with International
Labor Organization (ILO) basic principles; whether the
countries had the ability to enforce their laws; and whether
the labor chapter could compel legal compliance and
enforcement. In a 2005 report by the labor ministers,
CAFTA-DR countries recognized that they lacked the
financial resources and technical expertise to enforce good
labor practices. They identified their areas of concern and
recommended actions to improve worker rights, enhance
capacity, and promote a culture of compliance with labor
standards. The United States has submitted three labor
Source: Compiled by CRS using data from ITC.
submissions under CAFTA-DR alleging that the Dominican
Republic, Honduras, and Guatemala failed to comply with
Composition of Trade
their commitments. The United States has engaged
Over the past decade, more sophisticated and higher-value
extensively with the three governments to resolve the cases
exports from CAFTA-DR countries have grown, while
and negotiated labor action plans with each country. The
exports of light manufactures such as apparel have
cases have been slow moving. It took three years from the
stagnated or declined. Agricultural trade has increased
time of the AFL-CIO submission against Honduras to the
moderately. The share of textiles and apparel trade among
issuance of a Department of Labor Report. Only the
the partners has declined slightly over the past ten years,
pending case against Guatemala has proceeded past the
while trade in higher-value products such as medical
consultation stage of the dispute settlement process.
equipment and semiconductors has increased. For example,
U.S. imports of medical equipment and auto parts increased
Issues for Congress
by 105% and 195%, respectively, between 2005 and 2015.
The proposed Trans-Pacific Partnership agreement (TPP)
In comparison, U.S. apparel imports decreased by 10%.
and the rising number of trade agreements throughout the
world have implications for U.S. trade policy. The United
In 2015, major U.S. exports to CAFTA-DR countries
States has FTA agreements with eleven Latin American
included petroleum and coal products (18%); fibers, yarns
countries, three of which are parties to the TPP. Some
and threads (5%); oilseeds and grains (4%); resin and
CAFTA-DR countries have expressed an interest in joining
synthetic rubber products (4%); communications equipment
the TPP if it is approved by Congress. While it is uncertain
(3%); and fabrics (3%). Major U.S. imports included
whether this is a possibility, the United States may consider
apparel (33%); fruits and tree nuts (13%); medical
other options to build upon this economic relationship. One
equipment and supplies (8%); motor vehicle parts (5%);
possibility could be to harmonize rules of origin and allow
tobacco products (4%); and semiconductors (3%).
regional cumulation with TPP countries to encourage
production sharing. Another option is to consider a trade
Foreign Direct Investment
facilitation agenda to make trade more efficient. Latin
FTAs are often considered equally important for attracting
American countries are increasingly searching for ways to
foreign direct investment (FDI) as they are about trade. FDI
work together as a region. The United States could consider
flows are a measure of a country’s foreign attractiveness.
increasing commercial dialogues with them to advance its
An FTA can encourage FDI through two channels. First,
trade policy agenda in the Western Hemisphere.
permanent preferential access to the U.S. market reassures
potential investors that access to the largest market is more
M. Angeles Villarreal, Specialist in International Trade
stable. Second, enhanced investment rules protect investors
and Finance
in other countries.
IF10394
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Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)


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https://crsreports.congress.gov | IF10394 · VERSION 2 · NEW

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