Dominican Republic- Central American Free Trade Agreement (DR-CAFTA) An Overview by: Quinn O’Reilly, Joshua Lin, and Abdirisak Mohamed

Outline Background The agreement Opposition Analysis Conclusion

The Countries Trade agreement between Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic and the United States Countries finalized August 4 th, 2004 First free trade agreement between U.S. and smaller developing economies

Costa Rica Population: 4,253,877 GDP: $48.63 billion By sector: Agriculture: 6.5% Industry: 25.5% Services: 68%

El Salvador Population: 7,185,218 GDP: $42.92 billion By Sector: Agriculture: 11.1% Industry: 28.2% Services: 60.7% Dollarized in 2001

Guatemala Population: 13,276,517 GDP: $69.21 billion By sector: Agriculture: 13.5% Industry: 25.1% Services: 61.4%

Honduras Population: 7,833,696 GDP: $33.17 billion By sector: Agriculture: 14.2% Industry: 27.9% Services: 57.9%

Nicaragua Population:5,891,199 GDP: $16.53 billion By sector: Agriculture: 17.8% Industry: 25.8% Services: 56.5%

Dominican Republic Population: 9,650,054 GDP: $80.53 billion By sector: Agriculture: 10.5% Industry: 21.3% Services: 68.2%

United States of America Population: 307,212,123 GDP: $14.26 trillion By sector: Agriculture: 1.2% Industry: 21.9% Services: 76.9%

Why? Part of President Bush’s free trade plan Well established ties through CBI Politically feasible

Importance of textiles

Diversity

Trade Openness

Tariff Schedule

Competition Countries encouraged to allow competition and privatization of state agencies. Costa Rica: opening of insurance and telecom industries Universal access for all insurance providers by Jan. 1 st 2011

Equal Access Foreign entities ensured same access as domestic ones Limited to certain government entities In Honduras, this would apply to 169 government entities

International Opposition Opposed by many labor leaders Massive protests in Central America Worries about workers’ rights

U.S. Politics Strongly opposed by labor and Democrats House vote: Senate vote: Signed by President Bush August 2 nd, 2005

There was a huge opposition to the DR- CAFTA from both sides. Central American countries’ opposition was greater and thus resistance to the agreement was more intense in Central America. Opposition

In the U.S. there was strong opposition from several industry groups ◦Domestic textile and apparel producers ◦Sugar producers

El Salvador experienced strong objections from the leftist Farabundo Marti Liberation Front. 76% of Salvadorans polled in late 2005 said that CAFTA would not improve the situation in El Salvador, or make matters worse.

In Nicaragua opponents were concerned that the FTA may lead to the privatization of public services In Guatemala a 2005 March 3 vote had to be postponed because of ongoing popular protests. lack of transparency in the negotiations for CAFTA in Central America

Three main opposition reasons:  Agriculture  Jobs  Environment

In lower income countries, the economy often depends heavily on agriculture and small scale farming. This fact made the trade agreement less appealing to the citizens of Central America for fear of being flooded with cheap subsidized American products. NAFTA was looked at as an example of how subsidized American crops could destroy the local markets. Agriculture

There was fear of losing jobs from both the United States and the Latin American countries. Americans feared outcomes similar to the ones caused by NAFTA. Many American companies outsourced to Mexico after the signing of NAFTA costing a staggering amount of jobs. Jobs

Developing countries may have an “unfair” competitive advantage. lower standards being the basis for their lower costs. this in turn is reflected in lower prices for goods that compete with those produced in developed countries. U.S. Job Concerns

Labor advocates concerned with countries lack for adequate protection for workers’ rights. Central American countries also feared job loss in the agricultural sector. Small farmers would not be able to compete with subsidized goods. Central America Job Concern

Fear of negative effects of trade, such as pollution. Concerned with weak laws and lax enforcement mechanisms. NAFTA also looked at as an example. Environment

Expectations of CAFTA More trade Increased welfare for CA Increased Credibility for CA

Expectations/Unkowns of CAFTA More trade Increased welfare for CA ◦Who Wins? Who Loses? Increased Credibility for CA ◦What will this mean?

Effects of CAFTA: Growth GDP growth jumped as free trade was implemented In 2006 Central America experienced 6% growth Urban population increases purchasing power

Effects of CAFTA: Increased Openness Consumers and Producers took advantage of new incentives Total imports and total exports rose universally for CA Especially true for imports and exports to the US ◦In 2006: Nicaragua’s total exports to the US grew by 29%, ◦Costa Rica’s exports to the US grew by 35% ◦In 2006: Honduras’ imports from the US grew by almost 30%

Effects of CAFTA: Increased Investment Investor confidence in CA increased ◦This is due to credibility added from US partnership This caused FDI and Capital Stock to rise rapidly Ex. Foreign investment Guatemala rose from ~$200 million in 2004 to over $600 million in 2006 ◦Note: The majority of the increase was in the manufacturing sector

Who Gained, Who Lost? Investment went to manufacturing Lead to fall in US manufacturing Lead to decrease in agriculture

Agriculture Remember: Early criticisms Agriculture seems to have fallen Two Explanations: ◦Growth in manufacturing (shown before) ◦US farms

P Q S D P CA Central American Rice

P Q S D P CA Central American Rice P US

P Q S D P CA Central American Rice P US P ’ US

Agriculture In 2006 it cost Nicaraguan farmers $8.45 to produce 100 lbs rice It cost US farmers $9.04 to produce 100 lbs rice The US government subsidized US farmers $10.45 for every 100 lbs rice produced US farmers sold 100 lbs of rice in Nicaragua for $7.65, under what it cost the Nicaraguan farmer to produce

Why haven’t effects set in? The quota system under CAFTA is a sliding scale ◦Today: US rice can account for 43% of rice in Nicaragua ◦2015: US rice can account for 73% of rice in Nicaragua ◦2019: No limit It will take time to see how the agricultural sector is fully affected by CAFTA

Early indications seem to confirm many of the predictions of CAFTA ◦Overall Gain ◦Increased Credibility ◦Loss in CA Agricultural sector ◦Loss in US Manufacturing sector It’s still too early to conclude what the long run effects are

Sources DR-CAFTA: Challenges and Opportunities for Central America (Central America Department and Office of the Chief Economist Latin America and Caribbean Region) Oakland Institute ( CIA World Factbook Oakland Institute ( Global Exchange, CAFTA Monitoring, year 1 ( f) f CAFTA: Trends and Impacts ( elsalvador.org/programs/advocacy/CAFTAYear2_monitoring_eng.pdf) elsalvador.org/programs/advocacy/CAFTAYear2_monitoring_eng.pdf A%20opposition%20in%20Guatemala.pdf A%20opposition%20in%20Guatemala.pdf Office of the United States Trade Representative: dominican-republic-central-america-fta dominican-republic-central-america-fta