While the Congressional debate on the Central American Free Trade Agreement (Cafta) is at least a couple of months away, editorials and commentaries are popping up all over. Sugar trade is at the heart of many of the writings, but there is broad interest across the U.S. economy. The six countries of the agreement have 43 million people, are closer geographically to the United States than many other trading partners and have roughly the same amount of trade with the United States as Australia. They are ripe for more integration with the U.S. economy at a time when cross-border economic integration is increasingly the norm throughout the world.

Cafta is actually a package of six individual agreements between the United States and El Salvador, Guatemala, Honduras, Nicaragua, Costa Rica and the Dominican Republic. Agreements with the first four countries were announced in December 2003. Costa Rica had additional concerns about opening its service industries and did not reach agreement until late January 2004. The Dominican Republic and the United States reached agreement in March 2004. In mid-November the U.S. Trade Representative, Robert Zoellick, began actions to separate the Dominican Republic from Cafta because of a 25 percent tax on drinks containing high fructose corn syrup that was enacted after the details of the trade agreement had been completed. This analysis assumes that all six countries will be part of the final package debated by Congress.

The issues in the agreement can be broken into three categories: general business issues, agriculture, except sugar, and sugar. The six countries together are already the 13th largest trading partner for the United States and the second largest in Latin America after Mexico. Total two way trade for 2003 was $32 billion, with the Dominican Republic having almost $9 billion of the total.

Roughly 80 percent of U.S. consumer and industrial goods would immediately become duty free, with tariffs on the other products phased out over 10 years. Business groups consider Cafta as a two way street. They see opportunities to export telecommunications, financial services, construction, engineering, medical equipment and manufactured products. Intellectual property rights for software, music, patents and trademarks are strengthened. They also see opportunities to buy inputs, including sugar, and to partner with local firms for production of consumer goods. Guatemala and the Dominican Republic are already significant suppliers of clothing. They will become more important for companies that want a sourcing alternative to China that is closer to home and not dependent on West Coast ports that are straining to handle the current Pacific Rim trade.

U.S. agriculture’s current stake in trade in the region is smaller than for other businesses, but the potential for growth is large. U.S. agricultural exports to the six countries were about $1.5 billion in 2002 and accounted for 40 percent of total agricultural imports. This is down from 50 percent in the mid-1990s as other countries have negotiated bilateral agreements. Average bound tariffs under WTO commitments on U.S. agricultural exports range from 35 to 60 percent with average applied tariffs of 11 percent. About half of current U.S. agricultural exports will become duty free immediately. These include items like cotton, wheat, soybeans, some fruits and vegetables, processed food products and wine. Other items will get improved access, but tariffs will be phased out over 15 years for most products and for all products in 20 years. These include beef, pork, dry beans, vegetable oil, poultry, rice, corn and dairy products.

Most U.S. agricultural imports from the six countries already come in duty free under most favored nation (MFN) tariffs and Caribbean Basin Initiative (CBI) preferences. Agricultural imports were $2 billion in 2002, mostly coffee, tropical fruits and sugar. If the agreement is ratified and producers are confident that markets will remain open, the region could become a larger supplier of some fruits, vegetables and meat products, but with growing domestic economies and limited acreage for increased production, the potential is limited.

One growing imported product is ethanol. Under the CBI, these countries have duty free access to the U.S. for ethanol made from regional feedstocks. Ethanol from non-regional feedstocks is limited under the CBI to 7 percent of total U.S. consumption. Cafta does not change these basic provisions. It does provide El Salvador and Costa Rica with specific shares of the existing CBI quota.

The six countries of Cafta currently have access to the U.S. sugar market through a tariff-rate quota (TRQ), which allows an established amount of sugar to enter at a nominal tariff rate. Their total current TRQ is 311,700 metric tons, with the Dominican Republic having 185,335 metric tons. The total minimum TRQ for sugar agreed to by the United States under the Uruguay Round Agreement of the GATT for all importing countries is 1.25 million short tons raw value (1.13 million metric tons). Total U.S. production of sugar for the 2004/05 crop is estimated at 7.7million metric tons raw value.

CAFTA provides a first year increase in TRQ of 109,000 metric tons (10,000 for the Dominican Republic and 99,000 metric tons for the other five, 2000 metric tons of which is for organic sugar from Costa Rica that is under the specialty sugar TRQ). A country must be a net exporter of sugar to use the extra TRQ. The extra TRQ increases to 150,000 metric tons in the 15th year, and then grows by 2 percent a year into perpetuity. The tariff rates on shipments above the TRQ remains at over 100 percent.