The announcement last week that the Senate Finance Committee will hold a hearing on the Central American and Dominican Republic Free Trade Agreements (CAFTA-DR) on April 6 has put the agreements “in play.” President Bush will officially send the legislation to Congress which will begin a 90 day time period for Congress to consider the agreements. Like all trade agreements, CAFTA-DR is full of details, but the policy issues are simple.
CAFTA-DR is six separate trade agreements between the United States and the Central American countries of Guatemala, Costa Rica, Nicaragua, Honduras and El Salvador and the Dominican Republic in the Caribbean. Each country has its own specific trade issues that were best negotiated one at a time. The common thread behind all of the agreements is free trade in almost all products by the end of 15-20 year transitions period.
The agreements are a classic, textbook case of complementary economic relationships that will lead to better economic outcomes for all parties. The U.S. is a developed country with mature markets looking for growing markets nearby. The other six countries have 44 million people with average yearly incomes of $2,000 to $8,000 per year and cannot supply all of their consumers’ demands as populations and incomes grow. They also need access to capital and markets for products.
The six countries already have preferential access to U.S. markets under the Caribbean Basin Initiative (CBI) and Most Favored Nation (MFN) preferences for developing countries. According to the U.S. Trade Representative’s office, close to 80 percent of the imports to the U.S. from CAFTA-DR already come in duty free, with 99 percent of the agricultural items coming in duty free.
Increased trade is part of a virtuous circle where increased trade accelerates economic growth which results in more trade which further reinforces economic growth. Many economists have estimated the potential for demand growth for U.S. products under CAFTA-DR. While these have generally been positive, the extent of market growth will largely be determined by the seven governments’ willingness to let the agreements work for freer trade.
Increased economic growth in the six developing countries through trade is the key to the agreements. If the agreements are allowed to operate as designed, increased trade will likely far exceed even the most optimistic forecasts. If the participating governments seek ways to limit the impact of the agreements, the outcome will be lost opportunities for economic growth.
In agriculture the U.S. and the CAFTA-DR countries are more complementary than competitive. The U.S. has large expanses of grain and oilseed production areas that are not present in the CAFTA-DR countries. The U.S. also has advanced processing capabilities across a wide range of food products including items like cocoa that are produced in third countries and processed in the U.S. before moving to the other CAFTA-DR countries.
There are commodities like sugar with competition. The CAFTA-DR countries will get increased access to the U.S. sugar market over the next 20 years, but access will continue to be limited at the end of the transition time.
Winter fruits and vegetables are another concern. With a limited land area for food production, the competition is not likely to be huge but it could be significant for specific products.
Beef is a market where there could be specialized competition. A market is developing within the U.S. for grass fed beef produced without the use of inorganic fertilizers, pesticides and hormones. Some of the beef growing areas of countries like Nicaragua could choose to specialize in this type of beef. Modern restaurants in large CAFTA-DR cities are likely to seek more grain fed beef where the U.S. has a clear economic advantage.
The mobility of capital, technology and production systems has raised concerns that increasing government regulations in this country will cause a shift to the CAFTA-DR. That is a distinct possibility for some agricultural commodities, but the physical size of the countries limits the amount of agriculture that could move to those countries.
Further integration of agriculture among the countries will be helpful on issues like pest control in fruits and vegetables and livestock diseases. As travel and trade between counties have increased, even without trade agreements, animal and plant protection has taken on added importance. Coordinated regulatory programs are essential for eliminating pest hazards.
The U.S. will also gain on sanitary and phyto-sanitary issues. At times this is as important as tariff reductions as can be seen by the current impasse with Japan over beef. The CAFTA-DR countries are moving toward recognizing the U.S. meat inspection system as equivalent to their own which would simplify exporting meat to those countries.
El Salvador, Honduras and Guatemala have already passed the necessary legislation for CAFTA-DR. These countries are reducing tariffs and other restrictions more than the U.S. and have voted for more economic growth.
CAFTA-DR enhances the cooperation among governments that is necessary for individual consumers and businesses to pursue economic cooperation across international borders. The agreements provide a level of certainty that has been missing for many years.