Updated August 22, 2019
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 apparel), as well as other
eliminates on a reciprocal basis tariff and non-tariff barriers
trade issues such as intellectual property rights protections
on goods, services, and agriculture, building on U.S.
and investor-state relations. Some policymakers wanted
unilateral trade preferences begun under the 1983
better trade adjustment and capacity building policies to
Caribbean Basin Initiative (CBI). The agreement reinforces
address potential negative effects on vulnerable sectors in
U.S. support for trade liberalization and expansion as a
partner countries, such as the apparel industry and
foundation of broader foreign economic, political, and
agriculture. Ongoing criticisms of the agreement point to
security policies in the region.
the region’s pervasive social and economic inequality, poor
working conditions and inadequate enforcement of labor
CAFTA-DR Facts
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. Critics
DR agreement was signed on August 5, 2004. The Senate
argue that governments in the region are unable or
passed implementing legislation 54 to 45 on June 30, 2005,
unwilling to provide labor reforms and need to strengthen
with the House fol owing in kind 217 to 215 on July 28,
enforcement mechanisms related to the FTA worker rights
2005. It was signed into law on August 2, 2005 by President
provisions.
Bush (P.L. 109-53). The agreement entered into force on a
What are the Effects of the Agreement?
rol ing basis: with El Salvador, Honduras, Nicaragua, and
CAFTA-DR deepened the trade partnership between the
Guatemala by July 1, 2006, the Dominican Republic on
United States and partner countries by transitioning the
March 1, 2007, and Costa Rica on January 1, 2009.
relationship from one of trade preference arrangements to a
CAFTA-DR Provisions. The agreement has 22 chapters,
binding reciprocal FTA among the parties. The agreement’s
including provisions on tariff and non-tariff barrier
more flexible rules of origin than those under trade
elimination, rules of origin, customs procedures, sanitary
preference programs provided incentives for regional
and phyto-sanitary measures, government procurement,
integration among Central America and the Dominican
investment, trade in services, intel ectual property rights
Republic. It also enhanced trade-related rules and
protection, labor, environment, and dispute settlement.
disciplines for services, especially in telecommunications,
intellectual property rights protection, government
Trade Preferences. The agreement replaced U.S.
procurement, and investment.
unilateral preferential trade treatment extended to
CAFTA-DR countries under the Caribbean Basin Economic
More sophisticated and higher-value exports from CAFTA-
Recovery Act (CBERA), the Caribbean Basin Trade
DR countries have grown since the agreement’s entry into
Partnership Act (CBTPA), and the Generalized System of
force, while exports of light manufactures such as apparel
Preferences (GSP).
have stagnated or declined. Agricultural trade has increased
moderately. The share of apparel exports from CAFTA-DR
to the United States has declined slightly over the past ten
What Are Supporting Views?
years, while trade in higher-value products such as medical
Proponents of CAFTA-DR view the agreement as an
equipment has increased. However, because most U.S.
instrument to boost trade and economic growth, enhance
imports from the region had already been duty free under
prosperity in CAFTA-DR countries, increase employment
normal trade relations or trade preference programs and
opportunities, and strengthen broader relations with
imports from CAFTA-DR countries represents a small
countries in the region. Supporters also view the agreement
portion of overall U.S. imports, CAFTA-DR’s effect on the
as a way to reinforce economic stability and encourage
U.S. economy has been small.
regional economic integration. Deeper economic ties with
Regional Integration
the United States can complement foreign policy objectives
CAFTA-DR reinforced regional integration with rules of
in promoting democracy, the rule of law, and efforts to fight
origin that allow for greater production-sharing among
organized crime, migration and drug trafficking. Some
Central American and Mexican producers using U.S.
studies suggest that the agreement has been an effective
inputs. Harmonized rules of origin and lower trade barriers
tool for promoting worker rights protection and advancing
have enhanced regional competitiveness by increasing co-
social issues in the political agenda of Central America and
production relationships and greater economies of scale, as
the Dominican Republic.
well as increased regional market access more generally.
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Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)
This includes reciprocal trade rules for U.S. duty-free
stable. Second, enhanced investment rules protect investors
treatment of imports assembled from inputs produced in
in other countries.
Central America or Mexico. For example, fabric and yarns
The United States is the largest investor in CAFTA-DR
produced in the United States are used in apparel
countries, although the stock of FDI in some countries has
production in CAFTA-DR countries, with final goods
decreased in recent years, according to the Bureau of
receiving duty-free treatment in the United States.
Economic Analysis. Investment is also influenced by
According to the USITC, the rules of origin changes and
macroeconomic conditions, making it difficult to assess the
tariff reductions have been more liberalizing for CAFTA-
FTA’s impact. The services sector is the leading recipient
DR countries than estimated. Their geographic proximity to
of FDI in the region. El Salvador has the highest stock of
the United States has allowed them to have greater access to
U.S. FDI in the region, followed by the Dominican
U.S. textile inputs quicker than other FTA partners with
Republic, and Costa Rica. Costa Rica and the Dominican
reduced shipping costs and an overall increase in trade.
Republic have the highest wage rates and manufactured
Merchandise Trade Trends
exports in the region, indicating that investment is not
The United States is the dominant trade partner for
necessarily drawn to low-cost producers.
CAFTA-DR parties, although its market share has fallen
slightly over the past decade. In 2018, 45% of exports from
Labor Issues
CAFTA-DR countries went to the United States, down
The labor chapter was a strong point of contention in the
from 52% in 2005, while 39% of their imports came from
CAFTA-DR congressional debate, divided largely along
the United States, compared to 40% in 2005. U.S. trade
party lines and revolving around three issues: whether
with partner countries increased since the agreement’s entry
CAFTA-DR countries’ laws complied with International
into force. In 2018, U.S. exports of $32 billion were higher
Labor Organization (ILO) core principles; the countries’
than U.S. imports of $25 billion. However, aggregate U.S.-
ability to enforce their laws; and whether the labor chapter
CAFTA-DR bilateral trade data show that between 2008
could compel legal compliance and enforcement. In a 2005
and 2018, growth in U.S. exports (29%), was slightly lower
report by the labor ministers, CAFTA-DR countries
than U.S. imports (30%), although the U.S. trade balance
recognized that they lacked the financial resources and
grew from a surplus of $6.0 billion in 2008 to a surplus of
technical expertise to enforce good labor practices. The
$7.5 billion in 2018 as shown in Figure 1.
United States has submitted three labor complaints under
CAFTA-DR dispute settlement provisions, alleging that the
Figure 1. U.S. Merchandise Trade with CAFTA-DR
Dominican Republic, Honduras, and Guatemala failed to
Partners
comply with their commitments. The United States has
($ in bil ions)
engaged extensively with the three governments to resolve
the cases and negotiated labor action plans with each
country. The cases have been slow moving. It took three
years from the time of the AFL-CIO submission against
Honduras to the issuance of a Department of Labor Report.
Only the case against Guatemala by the United States in
2010, which the United States did not win, proceeded past
the consultation stage of the dispute settlement process but
did not find there was a sustained or recurring course of
action or inaction that was in a manner affecting trade.
Issues for Congress
The rising number of trade agreements throughout the
world have implications for U.S. trade policy. The United
States has FTA agreements with eleven Latin American

countries, three of which are parties to the Comprehensive
Source: Compiled by CRS using data from Global Trade Atlas.
and Progressive Agreement for Trans-Pacific Partnership

that formed after the United States’ withdrawal from the
In 2018, major U.S. exports to CAFTA-DR countries
Trans-Pacific Partnership. The United States may consider
included petroleum and coal products (22%); oil and gas
other options to build upon this economic relationship. One
(6%); fibers, yarns and threads (5%); oilseeds and grains
possibility could be to consider a trade facilitation agenda
(5%); resin and synthetic rubber products (3%); and
to make trade more efficient. Latin American countries are
communications equipment (3%). Major U.S. imports
increasingly searching for ways to work together as a
included apparel (32%); fruits and tree nuts (13%); medical
region. The United States could consider increasing
equipment and supplies (11%); motor vehicle parts (5%);
commercial dialogues with them to advance its trade policy
tobacco products (4%); and electrical equipment (1%).
agenda in the Western Hemisphere.
Foreign Direct Investment
FTAs are often considered equally important for attracting
Katarina de la Rosa, CRS Research Associate, contributed
foreign direct investment (FDI) as they are about trade. FDI
to this report.
flows are a measure of a country’s foreign attractiveness.
An FTA can encourage FDI through two channels. First,
M. Angeles Villarreal, Specialist in International Trade
permanent preferential access to the U.S. market reassures
and Finance
potential investors that access to the largest market is more
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Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)

IF10394


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https://crsreports.congress.gov | IF10394 · VERSION 4 · UPDATED

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