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

Updated August 22, 2019 Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) Overview 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. CAFTA-DR Facts 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 Preferences (GSP). 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 provisions. 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. Regional Integration 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 $7.5 billion in 2018 as shown in Figure 1. Figure 1. U.S. Merchandise Trade with CAFTA-DR Partners ($ 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. Labor Issues 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 and Finance Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) IF10394 Disclaimer This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role. 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