Updated August 22, 2019
Dominican Republic-Central America-United States Free Trade
CAFTA-DR is a free trade agreement (FTA) among the
United States, Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua, and the Dominican Republic. It
eliminates on a reciprocal basis tariff and non-tariff barriers
on goods, services, and agriculture, building on U.S.
unilateral trade preferences begun under the 1983
Caribbean Basin Initiative (CBI). The agreement reinforces
U.S. support for trade liberalization and expansion as a
foundation of broader foreign economic, political, and
security policies in the region.
Milestones. Negotiations began in January 2003 with the
Dominican Republic joining in January 2004. The CAFTADR agreement was signed on August 5, 2004. The Senate
passed implementing legislation 54 to 45 on June 30, 2005,
with the House following in kind 217 to 215 on July 28,
2005. It was signed into law on August 2, 2005 by President
Bush (P.L. 109-53). The agreement entered into force on a
rolling basis: with El Salvador, Honduras, Nicaragua, and
Guatemala by July 1, 2006, the Dominican Republic on
March 1, 2007, and Costa Rica on January 1, 2009.
CAFTA-DR Provisions. The agreement has 22 chapters,
including provisions on tariff and non-tariff barrier
elimination, rules of origin, customs procedures, sanitary
and phyto-sanitary measures, government procurement,
investment, trade in services, intellectual property rights
protection, labor, environment, and dispute settlement.
Trade Preferences. The agreement replaced U.S.
unilateral preferential trade treatment extended to
CAFTA-DR countries under the Caribbean Basin Economic
Recovery Act (CBERA), the Caribbean Basin Trade
Partnership Act (CBTPA), and the Generalized System of
What Are Supporting Views?
Proponents of CAFTA-DR view the agreement as an
instrument to boost trade and economic growth, enhance
prosperity in CAFTA-DR countries, increase employment
opportunities, and strengthen broader relations with
countries in the region. Supporters also view the agreement
as a way to reinforce economic stability and encourage
regional economic integration. Deeper economic ties with
the United States can complement foreign policy objectives
in promoting democracy, the rule of law, and efforts to fight
organized crime, migration and drug trafficking. Some
studies suggest that the agreement has been an effective
tool for promoting worker rights protection and advancing
social issues in the political agenda of Central America and
the Dominican Republic.
What Are Opposing Views?
When CAFTA-DR was being considered, many lawmakers
were concerned about possible effects on U.S. labor and
sensitive industries (sugar and apparel), as well as other
trade issues such as intellectual property rights protections
and investor-state relations. Some policymakers wanted
better trade adjustment and capacity building policies to
address potential negative effects on vulnerable sectors in
partner countries, such as the apparel industry and
agriculture. Ongoing criticisms of the agreement point to
the region’s pervasive social and economic inequality, poor
working conditions and inadequate enforcement of labor
laws. Since the agreement’s entry into force, labor groups
and human rights advocates contend that some countries
have failed to comply with their labor obligations. Critics
argue that governments in the region are unable or
unwilling to provide labor reforms and need to strengthen
enforcement mechanisms related to the FTA worker rights
What are the Effects of the Agreement?
CAFTA-DR deepened the trade partnership between the
United States and partner countries by transitioning the
relationship from one of trade preference arrangements to a
binding reciprocal FTA among the parties. The agreement’s
more flexible rules of origin than those under trade
preference programs provided incentives for regional
integration among Central America and the Dominican
Republic. It also enhanced trade-related rules and
disciplines for services, especially in telecommunications,
intellectual property rights protection, government
procurement, and investment.
More sophisticated and higher-value exports from CAFTADR countries have grown since the agreement’s entry into
force, while exports of light manufactures such as apparel
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
years, while trade in higher-value products such as medical
equipment has increased. However, because most U.S.
imports from the region had already been duty free under
normal trade relations or trade preference programs and
imports from CAFTA-DR countries represents a small
portion of overall U.S. imports, CAFTA-DR’s effect on the
U.S. economy has been small.
CAFTA-DR reinforced regional integration with rules of
origin that allow for greater production-sharing among
Central American and Mexican producers using U.S.
inputs. Harmonized rules of origin and lower trade barriers
have enhanced regional competitiveness by increasing coproduction relationships and greater economies of scale, as
well as increased regional market access more generally.
Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)
This includes reciprocal trade rules for U.S. duty-free
treatment of imports assembled from inputs produced in
Central America or Mexico. For example, fabric and yarns
produced in the United States are used in apparel
production in CAFTA-DR countries, with final goods
receiving duty-free treatment in the United States.
According to the USITC, the rules of origin changes and
tariff reductions have been more liberalizing for CAFTADR countries than estimated. Their geographic proximity to
the United States has allowed them to have greater access to
U.S. textile inputs quicker than other FTA partners with
reduced shipping costs and an overall increase in trade.
Merchandise Trade Trends
The United States is the dominant trade partner for
CAFTA-DR parties, although its market share has fallen
slightly over the past decade. In 2018, 45% of exports from
CAFTA-DR countries went to the United States, down
from 52% in 2005, while 39% of their imports came from
the United States, compared to 40% in 2005. U.S. trade
with partner countries increased since the agreement’s entry
into force. In 2018, U.S. exports of $32 billion were higher
than U.S. imports of $25 billion. However, aggregate U.S.CAFTA-DR bilateral trade data show that between 2008
and 2018, growth in U.S. exports (29%), was slightly lower
than U.S. imports (30%), although the U.S. trade balance
grew from a surplus of $6.0 billion in 2008 to a surplus of
$7.5 billion in 2018 as shown in Figure 1.
Figure 1. U.S. Merchandise Trade with CAFTA-DR
($ in billions)
Source: Compiled by CRS using data from Global Trade Atlas.
In 2018, major U.S. exports to CAFTA-DR countries
included petroleum and coal products (22%); oil and gas
(6%); fibers, yarns and threads (5%); oilseeds and grains
(5%); resin and synthetic rubber products (3%); and
communications equipment (3%). Major U.S. imports
included apparel (32%); fruits and tree nuts (13%); medical
equipment and supplies (11%); motor vehicle parts (5%);
tobacco products (4%); and electrical equipment (1%).
Foreign Direct Investment
FTAs are often considered equally important for attracting
foreign direct investment (FDI) as they are about trade. FDI
flows are a measure of a country’s foreign attractiveness.
An FTA can encourage FDI through two channels. First,
permanent preferential access to the U.S. market reassures
potential investors that access to the largest market is more
stable. Second, enhanced investment rules protect investors
in other countries.
The United States is the largest investor in CAFTA-DR
countries, although the stock of FDI in some countries has
decreased in recent years, according to the Bureau of
Economic Analysis. Investment is also influenced by
macroeconomic conditions, making it difficult to assess the
FTA’s impact. The services sector is the leading recipient
of FDI in the region. El Salvador has the highest stock of
U.S. FDI in the region, followed by the Dominican
Republic, and Costa Rica. Costa Rica and the Dominican
Republic have the highest wage rates and manufactured
exports in the region, indicating that investment is not
necessarily drawn to low-cost producers.
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) core principles; the countries’
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. The
United States has submitted three labor complaints under
CAFTA-DR dispute settlement provisions, alleging that the
Dominican Republic, Honduras, and Guatemala failed to
comply with their commitments. The United States has
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
and Progressive Agreement for Trans-Pacific Partnership
that formed after the United States’ withdrawal from the
Trans-Pacific Partnership. The United States may consider
other options to build upon this economic relationship. One
possibility could be to consider a trade facilitation agenda
to make trade more efficient. Latin American countries are
increasingly searching for ways to work together as a
region. The United States could consider increasing
commercial dialogues with them to advance its trade policy
agenda in the Western Hemisphere.
Katarina de la Rosa, CRS Research Associate, contributed
to this report.
M. Angeles Villarreal, Specialist in International Trade
Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)
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