CAFTA-DR: A Resounding Success

By: John Murphy Issue: Global Trade Section: Jewel Of Collaboration

Accord is a “Win-Win” for Workers, Farmers, and Companies

CAFTA DR A Resounding Success Last January 1, Costa Rica became the last of seven signatory countries to implement the U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). CAFTA-DR entered into force over the first six months of 2006 between the United States and four Central American countries (El Salvador in March, Honduras and Nicaragua in April, and Guatemala in July). It entered into force with the Dominican Republic in March 2007.

While the agreement was only narrowly approved by Congress, it has proven to be a resounding success. It is creating new opportunities in Central America and the Dominican Republic for U.S. exporters, and its benefits are flowing directly to U.S. small businesses, manufacturers, farmers and ranchers, and textile and apparel workers, among others. It has also brought substantial benefits to Central America and the Dominican Republic in the form of major new investments, faster economic growth, and opportunities for small businesses.

Benefits for U.S. Workers, Farmers, and Companies

CAFTA-DR is a clear success in achieving its basic goal of boosting trade and, in turn, economic growth. Total trade between the United States and the other six CAFTA-DR countries is on track to surpass $46 billion in 2008, representing an expansion of more than 30% in just three years. U.S. exports to Central America and the Dominican Republic have risen by an even more impressive 55% between 2005 and 2008 and are projected to surpass $26 billion in 2008.

Some key U.S. export sectors saw even stronger growth over the 2005-2008 period. U.S. machinery exports to the region rose by 50% from $3.9 billion to $5.9 billion. The Chamber estimates that machinery exports to Central America and the Dominican Republic sustain more than 100,000 American jobs.

For American farmers and ranchers, the increase in sales has been dramatic. U.S. exports of agricultural products rose by an impressive 127% to $2.7 billion. Exports of cereals (grains), the largest component of U.S. farm sales to the region, doubled to $1.7 billion.

Belying criticism that the CAFTA-DR market is insignificant, U.S. exports to Central America and the Dominican Republic in 2007 exceeded U.S. exports to Italy, a G7 economy that is one of the largest, richest, and most sophisticated in the world.

While most economists reject the contention that trade deficits are by definition harmful to the U.S. economy, the prediction made by some opponents of CAFTA-DR that it would increase the U.S. trade deficit has not been borne out in practice. In fact,Beyond the statistics, the most impressive results under CAFTA-DR may be for smaller companies. Today, a quarter million small or medium-sized U.S. companies export. These smaller firms make up 97% of all exporters, and their overseas sales represent nearly a third of all U.S. merchandise exports.2 By 2006, nearly 20,000 U.S. companies were exporting to Central America and the Dominican Republic, and small businesses represented about 90% of all exporters.

For small exporters, a tariff of 20%, 10%, or even 5% can be enough to shut them out of foreign markets, and non-tariff barriers can be deal breakers. Consequently, trade agreements such as CAFTA-DR can provide outsized benefits for these smaller companies.

Before Congress approved CAFTA-DR in 2005, the U.S. Chamber and the Association of American Chambers of Commerce in Latin America (AACCLA) released a book entitled Faces of Trade with Central America and the Dominican Republic to highlight some 50 U.S. companies that were already benefiting from trade with these countries but that stood to do even better with a free trade agreement. CAFTA DR A Resounding Success The U.S. Chamber of Commerce recently revisited these firms and confirmed that many are drawing impressive benefits from the agreement.

One example is Mamá Lycha, of Houston, Texas, a food products firm. Since 2004, when the Chamber first interviewed the firm’s President Luis Padilla, the company has expanded its number of employees by 50%, from 12 to 18, and CAFTA-DR is one reason why the firm has achieved this growth. Mr. Padilla says, “We are just beginning to see the impacts of the CAFTA-DR agreement, but we hope that its provisions will continue to fuel our growth.”

the U.S. trade balance with these countries went from a $1.2 billion deficit in 2005 to a $3.7 billion surplus in 2007 and a projected $5 billion surplus in 2008

Another example is International Export Sales, of St. Rose, Louisiana, which sells supermarket equipment and light industrial refrigeration equipment. The number of jobs at this firm has grown at an even faster clip: the firm has gone from four employees to eight since the firm’s executives were first interviewed. Wilma Castro, Sales Manager with the company, reports: “Our business with Central America has increased 100% since CAFTA-DR took effect. I have found that when I explain to clients that they can now purchase my products without the tariffs they paid before CAFTA-DR, they buy more. I have won many new clients this year just by explaining to them the impact of CAFTA-DR on their purchase.”

CAFTA-DR also represents a lifeline for the U.S. textile industries. With the end of the global quota system covering trade in textiles in 2005, international competition for the textile and apparel sector has become much more intense. In this context, CAFTA-DR is proving to be an indispensable tool to ensure the continued competitiveness of the textile and apparel industry in the Western Hemisphere.

Between 2005 and 2008, U.S. exports to Central America and the Dominican Republic of inputs for the apparel industry — cotton and manmade fibers, filaments, and fabrics — rose by 20% to $2.7 billion. At a time when America’s textile and apparel sectors face unprecedented global competition, Central America and the Dominican Republic have proven to be excellent customers for these inputs. Calculating that the agreement would bring just such an outcome, nearly the entire U.S. textile and apparel supply chain supported Congressional approval of CAFTA-DR. This included farm and industry representatives ranging from cotton growers and yarn spinners to textile and apparel manufacturers.

By selling their inputs to apparel manufacturers in Central America and the Dominican Republic — where fabric and other inputs are cut and sewn into garments for export — all parties have been better able to cut costs, stay competitive, and hold onto customers.

Benefits for Central America and the Dominican Republic

Similarly, CAFTA-DR is delivering benefits for Central America and the Dominican Republic in the form of economic growth and expanding trade and investment. According to the International Monetary Fund, the Central American countries enjoyed average economic growth rates above 5% in 2006 and 2007, their highest since the early 1990s. The Dominican Republic achieved growth rates in this period approaching 10%. These improvements are not due to any one factor, but growing trade and investment are clearly paying benefits for the region.

Central American and Dominican exports to the United States rose by about 10% between 2005 and 2008 and are projected to approach $20 billion in 2008 (up from $18 billion in 2005). This is less vigorous growth than seen in U.S. exports to Central America and the Dominican Republic, but the six countries have succeeded in one key trade goal they envisioned under CAFTA-DR, namely, diversifying their exports. CAFTA DR A Resounding Success For example, El Salvador’s exports to the United States of non-traditional exports (i.e., all exports other than textiles, apparel, and coffee) rose at an annual rate of 33% over the first two years after CAFTA-DR’s entry into force. These nontraditional exports today account for twice the share of total exports they did in 2005. Similar export diversification is evident in the other Central American countries and the Dominican Republic, with value-added agricultural and agribusiness products playing a prominent role in this success story.

During the negotiations for CAFTA-DR, most political leaders in Central America and the Dominican Republic cited the prospect of attracting more foreign direct investment (FDI) as the key development opportunity presented by the accord. In this area, the six countries are reaping remarkable benefits.

According to the United National Economic Commission for Latin America and the Caribbean (ECLAC), Costa Rica and Honduras attracted FDI in 2006 and 2007 at triple the annual average rate they did in 1998-2002 (years that offer a reasonable benchmark for comparison). El Salvador attracted FDI at twice the rate it did in 1998-2002, and the other three countries attracted 31-58% more FDI annually than they did in the same reference period. While CAFTA-DR has only now entered into force for Costa Rica, the expectation that it would do so soon is widely viewed as an important factor in its success in attracting more FDI.

This is a remarkable performance for Central America and the Dominican Republic, and it strongly suggests that the trade agreement and the region’s integration have allowed it to attract investor attention at a new level.

According to ECLAC, these countries have recently attracted far more FDI relative to the size of their economies than the Latin American average. In fact, they outperformed the Latin American giants, Brazil and Mexico, by a wide margin, and were bested only by Panama and Chile. The Latin American countries with the worst performance by this measure were Ecuador, Bolivia, and Venezuela.

As in the United States, many small companies in Central America and the Dominican Republic are benefiting from trade under the agreement. For example, Muebles Guayacán, a small company located near Antigua, Guatemala, makes furniture, doors, and other wood products. With the help of the Trade Capacity Building Institute in New Orleans, which was created as part of the CAFTA-DR process, the owner of Muebles Guayacán was introduced to some construction companies, including a woman who was in the market for doors for post-Katrina reconstruction in Louisiana. So far a deal worth $135,000 is in the offing, an astronomical sum for a small manufacturer in semi-rural Guatemala.

In El Salvador, Pahnas, a tamale and pupusa exporting company, has quadrupled its sales from $200,000 in 2004 to $800,000 in 2006 by taking advantage of new duty-free access to U.S. markets. The company’s Rodolfo Papini says, “We are currently selling to 17 supermarkets in Miami, and CAFTA-DR made this possible.” In addition, companies from around the world are looking at Central America and the Dominican Republic in a new light thanks to CAFTA-DR, and they are directing investment to the region and creating jobs. For example, Nina Simone, a Brazilian shoe manufacturer, is investing $3.5 million in El Salvador and will create 400 jobs during the first year of operations. The firm reports it would not have invested in El Salvador had it not been for CAFTA-DR.

Benefits for All

CAFTA-DR has proven to be a resounding success. By giving U.S. workers, farmers and companies a level playing field in Central America and the Dominican Republic, the agreement has brought real benefits to the United States. It has also brought benefits to Central America and the Dominican Republic in the form of new investment, faster economic growth, and opportunities for small businesses. With such a strong “early harvest” from the agreement, its long-term benefits are likely to be even more impressive — a clear “win-win” for the United States, Central America, and the Dominican Republic.

John Murphy is Vice President for International Affairs at the U.S. Chamber of Commerce.

1 The trade statistics in this document are from the Foreign Trade Division of the U.S. Census Bureau, U.S. Department of Commerce. Figures for 2008 are based on data through September 2008 and projections for the final quarter of the year. 2 The small business export statistics in this document are from the International Trade Administration, U.S. Department of Commerce. 3 Export diversification statistics provided by the Embassy of El Salvador, Washington, D.C. 4 Foreign Investment in Latin America and the Caribbean 2007, United National Economic Commission for Latin America and the Caribbean (ECLAC).