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The Central American Free Trade Agreement (CAFTA) is an agreement between the United States, five Central American countries – Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua – and the Dominican Republic.

How was CAFTA born?

CAFTA was inspired by the success of the North American Free Trade Agreement (NAFTA – now replaced by the USMCA) and represents the first multilateral free trade agreement between the United States and developing economies.

After two years of negotiations, the United States signed the CAFTA implementing legislation on August 2, 2005, followed by El Salvador, Honduras, Nicaragua and Guatemala in 2006, the Dominican Republic in 2007 and the Costa Rica in 2009. Dominican Republic joined, it was called the Dominican Republic-Central America Free Trade Agreement (CAFTA-RD).

CAFTA may be a relatively small free trade agreement (FTA), but it follows a similar vein to larger agreements like this: removing tariffs and fees for handling goods to open and increase trade. bilateral between participating countries.

CAFTA is expected to be fully implemented by January 1, 2025, when the tariff elimination process will be completed and tariffs on all U.S. imports and exports will be removed.

The agreement created many business opportunities for the United States while promoting economic integration and development and improving stability within participating countries. Between the ratification of the agreement in 2005 and 2013, annual trade between member countries almost doubled.

What is CAFTA?

The most important aspect of CAFTA is duty-free trade. For imports and exports of products to qualify for duty-free treatment, they must comply with the rules of origin of the agreement. These are largely inspired by NAFTA and the Free Trade Agreement between the United States and Chile. The latest updates to the CAFTA rule of origin can be found through the United States International Trade Commission. Harmonized tariff list.

In addition to duty-free trade, the agreement also addresses:

• Customs administration process
• Public markets
• Investment
• Telecommunications
• E-commerce
• Intellectual property rights
• Environmental and sustainability standards
• Labor
• Agriculture

What are the advantages of CAFTA?

In 2018, the total merchandise trade between member countries was $ 57.9 billion.

For the United States, the CAFTA commercial zone represents the third largest export market in Latin America behind Brazil and Mexico. The U.S. Department of Commerce reports that the deal has benefited a wide range of U.S. businesses, from textile and plastics exporters to cotton, corn and rice producers, and machine and motor vehicle manufacturers.

Costa Rica privatized its banking, telecommunications and insurance sectors shortly after CAFTA entered into force. As a result, the country has benefited from increased foreign investment in its insurance and telecommunications sectors, which has helped boost its economic growth.

Today, the Dominican Republic exports about half of its goods to the United States, which consists mainly of sugar, coffee and tobacco.

What are the disadvantages of CAFTA?

Like most trade agreements, CAFTA has come under criticism.

Participants in Central America were negatively affected by US government subsidies to agribusiness, in much the same way Mexico was affected by NAFTA. Before the DCFTA, for example, Honduras had enjoyed a trade surplus in agricultural products, but today it suffers from a trade deficit.

Meanwhile, the economic growth promised by CAFTA supporters has not been fully realized. In El Salvador, Honduras and Guatemala, growth is slower than in the rest of Latin America, with this economic stagnation considered responsible for drug and gang violence as well as forced migration.

The deal has also been criticized for causing a drop in clothing exports to the United States, raising the cost of drugs in Central American countries and ignoring labor abuses.

Will Nicaragua be excluded from CAFTA?

In early 2020, President Trump announced his intention to change CAFTA, excluding Nicaragua of the agreement due to the socio-political upheavals that the country has experienced in recent months and years. A report from the Organization of American States (OAS) details several cases of human rights violations.

In June 2021, U.S. Senators from the Democratic and Republican parties – Marco Rubio, Bill Cassidy, John Cornyn, Dick Durbin, Patrick Leahy, Jim Risch, and Todd Young – sent President Biden a letter urging it to hold the Nicaraguan regime accountable for its actions. They encouraged him to review the country’s participation in CAFTA.

Speaking of the Nicaraguan president’s democratic election crackdown, Acting Assistant Secretary of State for Western Hemisphere Affairs Julie Chung said the Biden administration examine Nicaragua’s involvement in trade “if the November elections are not free and fair.”

Others say Nicaragua’s retention in CAFTA could help level the outflow of immigration to Central America.

Image Credit: metamorworks / Shutterstock.com

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