On February 28, 2007 President Bush issued a proclamation to implement the Central American Free Trade Agreement – Dominican Republic (CAFTA-DR) with the Dominican Republic, the fifth of the six countries to join the U.S. in the agreement. As with the other countries, the Dominican Republic had to adopt legislation and regulations to meet its obligations. Changes in intellectual property rights and government procurement completed that process. Implementation has been slower than hoped, but the go-slow approach will reduce problems in the future.
CAFTA-DR was signed by the leaders of the six countries in August of 2004. The U.S. House of Representatives approved implementation legislation in June of 2005, followed by the Senate in July. President Bush signed the legislation in August. The agreement became effective for El Salvador on March 1, 2006, followed by Honduras and Nicaragua on April 1 and Guatemala on July 1. Costa Rica is the only country that has not implemented the agreement.
With a population of 8.6 million people, a middle class of 3.8 million and 63 percent of the people in urban areas, the Dominican Republic is the largest of the six markets for U.S. agricultural exports at $629 million in calendar year 2006 and the largest positive trade balance at $301 million. U.S. exports are heavily weighted toward bulk and intermediate products with coarse grains at $148 million, soybean meal $90 million, tobacco $82 million and wheat $68 million. The two largest consumer oriented categories are dairy and red meat with each at $17 million. Total U.S. agricultural exports to the Dominican Republic in 2006 increased by 21 percent. Total imports to the U.S. grew by 26 percent to $328 million, with sugar the largest category at $135 million and fruits, vegetables and juices the next largest at $59 million.
Implementation of CAFTA-DR in the Dominican Republic does not mean that U.S. suppliers have a guaranteed market. According to the U.S. agricultural attaché, globalization has allowed other suppliers to enter the market, the domestic food industry is becoming more competitive, and the government is negotiating free trade agreements with countries like Taiwan and the EU. The tariff rate quotas in CAFTA-DR will slow the development of meat, dairy, bean and rice markets, and sanitary and phyto-sanitary requirements can still act as import barriers. These non-tariff barriers for meats will be overcome when the Dominican Republic accepts the U.S. meat inspection system and eliminates the need for individual plant approvals.
The Costa Rican situation is much different than U.S.-Dominican Republic trade. In calendar year 2006 the U.S. exported $320 million of agricultural products to Costa Rica, an increase of 7 percent from 2005. Imports to the U.S. from Costa Rica for 2006 increased by 27 percent to $1.163 billion. According to estimates by the Economic Research Service of USDA, 99 percent of agricultural imports from Costa Rica enter the U.S. duty free. Bulk commodities accounted for two-thirds of U.S. exports to Costa Rica in 2006, led by course grains at $76 million, soybeans $60 million, wheat $41 million and rice $37 million. About 85 percent of U.S. imports from Costa Rica are consumer oriented, led by fresh fruits other than bananas and plantains at $448 million and bananas and plantains at $282 million and nursery products and cut flowers at $71 million. The two most important bulk commodity imports are coffee at $136 million and sugar at $34 million.
Costa Rica is a trading nation with free trade agreements with Canada, Mexico and Chile. They are also members of the Cairns group of countries that supports freer trade in the WTO negotiations. Legislation on CAFTA-DR was delayed because of the presidential election in February of 2006. The new President Oscar Arias, who also served as president in the late 1980s, is a staunch supporter of CAFTA-DR, but has not been able to bring it to a vote in Congress because of debate in the country over the need to privatize state-run insurance and telecommunications monopolies. A recent Supreme Court decision appears to have cleared the way for a vote in Congress where supporters claim they have the two-thirds majority needed for passage. Costa Rica has until March 1, 2008 to approve implementation legislation for the agreement.
Agriculture has been an issue in the debate, but not a deciding factor. Small farmers are concerned about competing with much larger farms in the U.S. Beef production is the largest source of direct and indirect employment and uses the largest amount of land. CAFTA-DR implementation will immediately remove tariffs for beef offal and prime and choice cuts, but since Costa Rican cattle are grass fed that would have little short-run impact on beef production. With a yearly per capita income of over $4,000, consumers can afford to eat meat, but appear to be more willing to diversify their diets with chicken rather than pay for higher priced beef items.
The first three countries to implement the agreement, El Salvador, Honduras and Nicaragua, have almost a year of experience under the agreement. U.S. agricultural exports to the countries have increased by 16 percent, 31 percent and 11 percent, respectively. Exports to the U.S. are much more variable with El Salvador down by 4 percent, Honduras down 1 percent and Nicaragua up 28 percent. The decline in exports for El Salvador was due to lower sugar exports after a surge in 2005, while the decline in Honduras was mostly in fresh fruit. Nicaragua had a sharp increase in coffee exports.
If the Costa Rican Congress approves implementation legislation in the coming weeks, all seven countries can give full attention to making the agreements work. That will be the true test of the success of the agreements in improving economic growth in all of the countries.