Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)

Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)

Updated July 22, 2022
Dominican Republic-Central America-United States Free Trade
Agreement (CAFTA-DR)
Overview
industries (sugar and apparel), as well as other trade issues,
CAFTA-DR is a free trade agreement (FTA) among the
such as intellectual property rights protections and investor-
United States, Costa Rica, El Salvador, Guatemala,
state relations. Some policymakers wanted better trade
Honduras, Nicaragua, and the Dominican Republic. It
adjustment and capacity building policies to address
eliminated on a reciprocal basis tariff and nontariff barriers
potential negative effects on vulnerable sectors, such as the
on goods, services, and agriculture, building on U.S.
apparel industry and agriculture. Ongoing criticisms of the
unilateral trade preferences under the 1983 Caribbean Basin
agreement point to the region’s pervasive social and
Initiative (CBI). The agreement reinforces U.S. support for
economic inequality, poor working conditions, and
trade liberalization as a foundation of broader economic,
inadequate enforcement of labor laws. Labor groups and
political, and security policies in the region.
human rights advocates contend that some countries have
failed to comply with their labor obligations. Critics argue
CAFTA-DR Facts
that governments in the region are unable or unwilling to
Milestones. Negotiations began in January 2003. The
provide labor reforms and need to strengthen enforcement
CAFTA-DR agreement was signed on August 5, 2004. The
mechanisms related to the FTA worker rights provisions.
Senate passed implementing legislation 54 to 45 on June 30,
What Are the Effects of the Agreement?
2005, with the House fol owing in kind 217 to 215 on July
CAFTA-DR deepened the trade partnership between the
28, 2005. It was signed into law on August 2, 2005 (P.L.
United States and partner countries by transitioning the
109-53). The agreement entered into force on a rol ing
relationship from one of trade preference arrangements to a
basis: with El Salvador, Honduras, Nicaragua, and
binding reciprocal FTA among the parties. The agreement’s
Guatemala by July 1, 2006, the Dominican Republic on
more flexible rules of origin than those under most trade
March 1, 2007, and Costa Rica on January 1, 2009.
preference programs provided incentives for regional
CAFTA-DR Provisions. The agreement has 22 chapters,
integration among Central America and the Dominican
including provisions on tariff and nontariff barrier
Republic. It also enhanced trade-related rules and
elimination, rules of origin, customs procedures, sanitary
disciplines for services, especially in telecommunications,
and phyto-sanitary measures, government procurement,
intellectual property rights protection, government
investment, trade in services, intel ectual property rights
procurement, and investment.
protection, labor, environment, and dispute settlement.
More sophisticated and higher-value exports from some
Trade Preferences. CAFTA-DR replaced U.S. unilateral
CAFTA-DR countries have grown since the agreement’s
preferential trade treatment to partner countries under the
entry into force, while exports of light manufactures such as
Caribbean Basin Economic Recovery Act (CBERA), the
apparel from other countries have benefitted. Agricultural
Caribbean Basin Trade Partnership Act (CBTPA), and the
trade has increased moderately. The share of apparel
Generalized System of Preferences (GSP).
exports from CAFTA-DR to the United States has declined
slightly over the past 10 years, while trade in higher-value
products such as medical equipment has increased.
What Are Supporting Views?
However, because most U.S. imports from the region had
Proponents of CAFTA-DR view the agreement as an
already been duty free under normal trade relations or trade
instrument to boost trade and economic growth, enhance
preference programs and imports from CAFTA-DR
prosperity in the United States and CAFTA-DR countries,
countries represents a small portion of overall U.S. imports,
increase employment opportunities, and strengthen broader
CAFTA-DR’s effect on the U.S. economy has been small.
relations with countries in the region. Supporters also view
Regional Integration
the agreement as a way to reinforce economic stability and
CAFTA-DR reinforced regional integration with rules of
encourage regional economic integration. Deeper economic
origin that allow for greater production-sharing among
ties with the United States can complement foreign policy
Central American and Mexican producers using U.S.
objectives in promoting democracy, the rule of law, and
inputs. Harmonized rules of origin and lower trade barriers
efforts to fight organized crime, migration, and drug
have enhanced regional competitiveness by increasing
trafficking. Some studies suggest that the agreement has
coproduction relationships and greater economies of scale,
been an effective tool for promoting worker rights
as well as increased regional market access more generally.
protection and social issues on the political agenda of
This includes reciprocal trade rules for U.S. duty-free
Central America and the Dominican Republic.
treatment of imports assembled from inputs produced in
Central America or Mexico. For example, fabric and yarns
What Are Opposing Views?
produced in the United States are used in apparel
When CAFTA-DR was considered, many lawmakers were
concerned about possible effects on U.S. labor and sensitive
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Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)
production in CAFTA-DR countries, with final goods
Economic Analysis. Investment is also influenced by
receiving duty-free treatment in the United States.
macroeconomic conditions, making it difficult to assess the
According to the USITC, the rules of origin changes and
FTA’s impact. The manufacturing sector is the leading
tariff reductions have been more liberalizing for CAFTA-
recipient of U.S. FDI in the region. El Salvador has the
DR countries than estimated. Their geographic proximity to
highest stock of U.S. FDI, followed by Costa Rica and the
the United States has allowed them to have greater access to
Dominican Republic. Costa Rica and the Dominican
U.S. textile inputs quicker than other FTA partners with
Republic have the highest wage rates and manufactured
reduced shipping costs and an overall increase in trade.
exports in the region, indicating that labor costs are not the
Merchandise Trade Trends
only factor in attracting FDI.
The United States is the dominant trade partner for
Labor Issues
CAFTA-DR parties. U.S. trade with CAFTA-DR partner
The labor chapter was a strong point of contention in the
countries increased since the agreement’s entry into force.
CAFTA-DR congressional debate, divided largely along
In 2021, U.S. exports to all CAFTA-DR countries totaled
party lines and revolving around three issues: whether
$38.7 billion, while U.S. imports totaled of $29.9 billion.
CAFTA-DR countries’ laws complied with International
The United States had a trade surplus of $8.8 billion with
Labor Organization (ILO) core principles; the countries’
these countries as shown in Figure 1.
ability to enforce their laws; and whether the labor chapter
could compel legal compliance and enforcement. In a 2005
Figure 1. U.S. Merchandise Trade with CAFTA-DR
report by the labor ministers, CAFTA-DR countries
Partners
recognized that they lacked the financial resources and
($ in bil ions)
technical expertise to enforce good labor practices. The
United States has submitted three labor complaints under
50
CAFTA-DR dispute settlement provisions, alleging that the
40
Dominican Republic, Honduras, and Guatemala failed to
comply with their commitments. The United States has
30
engaged extensively with the three governments to resolve
20
the cases and negotiated labor action plans with each
country. The cases have been slow moving. It took three
10
years from the time of the AFL-CIO submission against
-
Honduras to the issuance of a Department of Labor Report.
One case—against Guatemala by the United States in 2010,
(10)
which the United States did not win—proceeded past the
consultation stage of the dispute settlement process but did
Exports
Imports
Trade Balance
not find there was a sustained or recurring course of action

or inaction that was in a manner affecting trade.
Source: Compiled by CRS using data from Global Trade Atlas.

Issues for Congress
The top destination for U.S. exports to the region in 2021
The rising number of trade agreements throughout the
was the Dominican Republic, followed by Guatemala,
world has implications for U.S. trade policy in the Western
Costa Rica, Honduras, El Salvador, and Nicaragua. The
Hemisphere. The United States has FTA agreements with
leading supplier of U.S. imports from the region was Costa
eleven Latin American countries, three of which are parties
Rica, followed by the Dominican Republic, Honduras,
to the Comprehensive and Progressive Agreement for
Guatemala, Nicaragua and El Salvador.
Trans-Pacific Partnership. Difficult socioeconomic
In 2021, major U.S. exports to CAFTA-DR countries
conditions in the Central America region, combined with
included petroleum and coal products (20%); oil and gas
natural disasters and poor governance, have contributed to
(6%); oilseeds and grains (5%); fibers, yarns, and threads
ongoing challenges regarding migration and lack of
(4%); and oilseeds and grains (4%).
employment opportunities. Policymakers may consider
Major U.S. imports from CAFTA-DR countries included
options to complement CAFTA-DR and build upon this
apparel (28%); medical equipment and supplies (13%);
economic relationship. Possibilities could include a trade
fruits and tree nuts (12%); tobacco products (5%); and
facilitation agenda to make trade more efficient, an anti-
motor vehicle parts (5%).
corruption mechanism related to trade, such as that included
in the U.S.-Brazil “mini trade deal”, or an enhanced
Foreign Direct Investment
commercial dialogue with CAFTA-DR countries and other
FTAs are often considered equally important for attracting
Latin American countries to advance the U.S. trade policy
foreign direct investment (FDI) as they are about trade. FDI
agenda in the Western Hemisphere. Some policymakers
flows are a measure of a country’s foreign attractiveness.
have proposed expanding CAFTA-DR rule-of-origin
An FTA can encourage FDI through two channels. First,
flexibilities in the apparel sector to support further FDI in
permanent preferential access to the U.S. market reassures
this sector. Policymakers may also consider how the Biden
potential investors that access to the largest market is more
Administration’s action to revoke Nicaragua’s quota of
stable. Second, enhanced investment rules protect investors.
U.S. sugar imports may affect the relationship with the
region, particularly in the context of economic relations.
The United States is the largest investor in CAFTA-DR
countries, although the stock of FDI in some countries has
M. Angeles Villarreal, Specialist in International Trade
decreased in recent years, according to the Bureau of
and Finance
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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 6 · UPDATED