Dominican RepublicCentral American Free
Trade Agreement
(DR-CAFTA)
An Overview by:
Quinn O’Reilly, Joshua Lin, and Abdirisak Mohamed

Background

The agreement

Opposition

Analysis

Conclusion
Outline

Trade agreement between Costa Rica, El
Salvador, Guatemala, Honduras,
Nicaragua, the Dominican Republic and
the United States

Countries finalized August 4th, 2004

First free trade agreement between U.S.
and smaller developing economies
The Countries

Population: 4,253,877

GDP: $48.63 billion

By sector:
Agriculture: 6.5%
Industry: 25.5%
Services: 68%
Costa Rica

Population: 7,185,218

GDP: $42.92 billion

By Sector:
Agriculture: 11.1%
Industry: 28.2%
Services: 60.7%
Dollarized in 2001
El Salvador

Population: 13,276,517

GDP: $69.21 billion

By sector:
Agriculture: 13.5%
Industry: 25.1%
Services: 61.4%
Guatemala
Population: 7,833,696
 GDP: $33.17 billion
 By sector:
Agriculture: 14.2%
Industry: 27.9%
Services: 57.9%

Honduras

Population:5,891,199

GDP: $16.53 billion

By sector:
Agriculture: 17.8%
Industry: 25.8%
Services: 56.5%
Nicaragua

Population: 9,650,054

GDP: $80.53 billion

By sector:
Agriculture: 10.5%
Industry: 21.3%
Services: 68.2%
Dominican Republic

Population: 307,212,123

GDP: $14.26 trillion

By sector:
Agriculture: 1.2%
Industry: 21.9%
Services: 76.9%
United States of America

Part of President Bush’s free trade plan

Well established ties through CBI

Politically feasible
Why?
Importance of textiles
Diversity
Trade Openness
Tariff Schedule

Countries encouraged to allow
competition and privatization of state
agencies.

Costa Rica: opening of insurance and
telecom industries

Universal access for all insurance
providers by Jan. 1st 2011
Competition

Foreign entities ensured same access as
domestic ones

Limited to certain government entities

In Honduras, this would apply to 169
government entities
Equal Access
Opposed by many labor leaders
 Massive protests in Central America
 Worries about workers’ rights

International Opposition
Strongly opposed by labor and Democrats
 House vote: 217-215
 Senate vote: 55-45
 Signed by President Bush August 2nd,
2005

U.S. Politics
•
There was a huge opposition to the DRCAFTA from both sides.
•
Central American countries’ opposition
was greater and thus resistance to the
agreement was more intense in Central
America.
Opposition

In the U.S. there was strong opposition
from several industry groups
◦ Domestic textile and apparel producers
◦ Sugar producers

El Salvador experienced strong objections
from the leftist Farabundo Marti Liberation
Front.

76% of Salvadorans polled in late 2005
said that CAFTA would not improve the
situation in El Salvador, or make matters
worse.

In Nicaragua opponents were concerned that
the FTA may lead to the privatization of
public services

In Guatemala a 2005 March 3 vote had to be
postponed because of ongoing popular
protests.

lack of transparency in the negotiations for
CAFTA in Central America

Three main opposition reasons:
 Agriculture
 Jobs
 Environment

In lower income countries, the economy
often depends heavily on agriculture and
small scale farming.

This fact made the trade agreement less
appealing to the citizens of Central America
for fear of being flooded with cheap
subsidized American products.

NAFTA was looked at as an example of how
subsidized American crops could destroy the
local markets.
Agriculture

There was fear of losing jobs from both
the United States and the Latin American
countries.

Americans feared outcomes similar to the
ones caused by NAFTA.

Many American companies outsourced to
Mexico after the signing of NAFTA costing
a staggering amount of jobs.
Jobs

Developing countries may have an “unfair”
competitive advantage.

lower standards being the basis for their
lower costs.

this in turn is reflected in lower prices for
goods that compete with those produced in
developed countries.
U.S. Job Concerns

Labor advocates concerned with countries
lack for adequate protection for workers’
rights.

Central American countries also feared job
loss in the agricultural sector.

Small farmers would not be able to
compete with subsidized goods.
Central America Job Concern

Fear of negative effects of trade, such as
pollution.

Concerned with weak laws and lax
enforcement mechanisms.

NAFTA also looked at as an example.
Environment

More trade

Increased welfare for CA

Increased Credibility for CA
Expectations of CAFTA

More trade

Increased welfare for CA
◦ Who Wins? Who Loses?

Increased Credibility for CA
◦ What will this mean?
Expectations/Unkowns of CAFTA
Effects of CAFTA: Growth
•GDP
•In
•
growth jumped as free trade was implemented
2006 Central America experienced 6% growth
Urban population increases purchasing power
GDP Growth
12
10
8
Costa Rica
6
Dominican Republic
%
El Salvador
Guatemala
Honduras
4
Nicaragua
2
0
2000
-2
2001
2002
2003
2004
2005
2006
2007

Consumers and Producers took advantage of new
incentives

Total imports and total exports rose universally
for CA

Especially true for imports and exports to the US
◦ In 2006: Nicaragua’s total exports to the US grew by
29% ,
◦ Costa Rica’s exports to the US grew by 35%
◦ In 2006: Honduras’ imports from the US grew by almost
30%
Effects of CAFTA: Increased Openness
Imports
18000.000
16000.000
14000.000
Millions of US$
12000.000
Costa Rica
10000.000
Dominican Republic
El Salvador
Guatemala
8000.000
Honduras
Nicaragua
6000.000
4000.000
2000.000
0.000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Exports
12000.000
10000.000
Millions of $
8000.000
Costa Rica
6000.000
Dominican
Republic
El Salvador
4000.000
Guatemala
2000.000
0.000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Investor confidence in CA increased
◦ This is due to credibility added from US partnership

This caused FDI and Capital Stock to rise rapidly

Ex. Foreign investment Guatemala rose from ~$200 million
in 2004 to over $600 million in 2006
◦ Note: The majority of the increase was in the manufacturing sector
Effects of CAFTA: Increased
Investment
FDI in Central America
2500
Millions of current $
2000
1500
Costa Rica
Dominican Republic
El Salvador
Guatemala
Honduras
1000
Nicaragua
500
0
2000
2001
2002
2003
2004
2005
2006
2007

Investment went to manufacturing

Lead to fall in US manufacturing

Lead to decrease in agriculture
Who Gained, Who Lost?

Remember: Early criticisms

Agriculture seems to have fallen

Two Explanations:
◦ Growth in manufacturing (shown before)
◦ US farms
Agriculture
Central American Rice
P
S
PCA
D
Q
Central American Rice
P
S
PUS
PCA
D
Q
Central American Rice
P
S
PUS
PCA
P’US
D
Q

In 2006 it cost Nicaraguan farmers $8.45 to
produce 100 lbs rice

It cost US farmers $9.04 to produce 100 lbs rice

The US government subsidized US farmers
$10.45 for every 100 lbs rice produced

US farmers sold 100 lbs of rice in Nicaragua for
$7.65, under what it cost the Nicaraguan farmer
to produce
Agriculture

The quota system under CAFTA is a sliding scale
◦ Today: US rice can account for 43% of rice in Nicaragua
◦ 2015: US rice can account for 73% of rice in Nicaragua
◦ 2019: No limit

It will take time to see how the agricultural
sector is fully affected by CAFTA
Why haven’t effects set in?

Early indications seem to confirm many of
the predictions of CAFTA
◦
◦
◦
◦

Overall Gain
Increased Credibility
Loss in CA Agricultural sector
Loss in US Manufacturing sector
It’s still too early to conclude what the
long run effects are











DR-CAFTA: Challenges and Opportunities for Central America (Central
America Department and Office of the Chief Economist Latin America and
Caribbean Region)
Oakland Institute (http://www.oaklandinstitute.org/?q=node/view/182)
CIA World Factbook
Oakland Institute (http://www.oaklandinstitute.org/?q=node/view/182)
Global Exchange, CAFTA Monitoring, year 1
(http://www.globalexchange.org/campaigns/cafta/CAFTAMonitoringYR1.pd
f)
CAFTA: Trends and Impacts (http://www.shareelsalvador.org/programs/advocacy/CAFTAYear2_monitoring_eng.pdf)
http://fpc.state.gov/documents/organization/50155.pdf
http://globaledge.msu.edu/newsandviews/businessreviews/gbr2-3.pdf
http://www.nisgua.org/themes_campaigns/trade_development/cafta/CAF
TA%20opposition%20in%20Guatemala.pdf
http://www.au.af.mil/au/awc/awcgate/crs/rl31870.pdf
Office of the United States Trade Representative:
http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-drdominican-republic-central-america-fta
Sources