Thomas | 16 July 2021
What is the Dominican Republic-Central American Free Trade Agreement (CAFTA-DR)?
by Laura Ross
The Central American Free Trade Agreement (CAFTA) is a deal between the U.S., five Central American nations — Guatemala, El Salvador, Honduras, Costa Rica, and Nicaragua — and the Dominican Republic.
How Did CAFTA Come About?
The CAFTA was inspired by the success of the North American Free Trade Agreement (NAFTA — now replaced by the USMCA) and represents the first multilateral free trade agreement between the U.S. and developing economies.
After two years of negotiations, the U.S. signed the implementation legislation for the CAFTA on August 2, 2005, followed by El Salvador, Honduras, Nicaragua, and Guatemala in 2006, the Dominican Republic in 2007, and Costa Rica in 2009. Since the Dominican Republic joined, it has been called the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR).
The CAFTA might be a comparatively small Free Trade Agreement (FTA) but it follows a similar vein to bigger deals of its kind: removing tariffs and merchandise processing fees to open up and increase bilateral trade between the participating countries.
The CAFTA is due to be fully implemented by January 1, 2025, by which time the duty phase-out process will reach completion and tariffs on all U.S. imports and exports will be removed.
The agreement has created many commercial opportunities for the U.S. as well as driving economic integration and development and improving stability within the participating countries. Between the agreement’s ratification in 2005 and 2013, annual trade between the member nations almost doubled.
What Is the CAFTA?
The most significant aspect of the CAFTA is tariff-free trade. For product imports and exports to qualify for tariff-free treatment, they must comply with the agreement’s rules of origin. These are largely informed by the NAFTA and U.S.-Chile Free Trade Agreement. The CAFTA rule of origin’s latest updates can be found via the U.S. International Trade Commission’s Harmonized Tariff Schedule.
Alongside tariff-free trade, the agreement also addresses:
- Customs administration processes
- Government procurement
- Electronic commerce
- Intellectual property rights
- Environmental and sustainability standards
What Are the Benefits of the CAFTA?
In 2018, the total trade of goods between member nations was $57.9 billion.
For the U.S., the CAFTA trade area represents the third-largest export market in Latin America behind Brazil and Mexico. The U.S. Department of Commerce reports that the deal has benefited a wide range of U.S. businesses from exporters of textiles and plastics to growers of cotton, corn, and rice, and manufacturers of machinery and motor vehicles.
Costa Rica privatized its banking, telecommunications, and insurance industries shortly after the CAFTA took effect. As a result, the country has enjoyed increased foreign investment in both its insurance and telecommunication industries, which has served to boost its economic growth.
Today the Dominican Republic exports approximately half of its goods to the United States, which principally consists of sugar, coffee, and tobacco.
What Are the Drawbacks of the CAFTA?
Like most trade agreements, the CAFTA has faced criticism.
Central American participants have been negatively impacted by the U.S. government’s subsidizing of agribusiness, in much the same way that Mexico was affected under NAFTA. Pre-CAFTA, for example, Honduras had enjoyed a trade surplus in agricultural products, but today it suffers from a trade deficit.
Meanwhile, the economic growth promised by proponents of the CAFTA hasn’t been fully realized. In El Salvador, Honduras, and Guatemala, growth is slower than the rest of Latin America, with this economic stagnation considered responsible for drug and gang violence as well as forced migration.
The agreement has also been criticized for instigating a drop in apparel exports to the U.S., driving up the cost of medicines in Central American nations, and ignoring labor abuses.
Will Nicaragua Be Excluded from the CAFTA?
In early 2020, President Trump voiced his intention to amend the CAFTA, excluding Nicaragua from the deal due to the socio-political upheaval the country has endured in recent months and years. A report from the Organization of American States (OAS) details several cases of human rights violations.
In June 2021, U.S. senators from both the Democratic and Republican parties — Marco Rubio, Bill Cassidy, John Cornyn, Dick Durbin, Patrick Leahy, Jim Risch, and Todd Young — sent President Biden a letter urging him to hold the regime in Nicaragua responsible for its actions. They encouraged him to review the country’s participation in the CAFTA.
Speaking of the Nicaraguan president’s democratic election repression, Acting Assistant Secretary of State for Western Hemisphere Affairs Julie Chung said the Biden administration will review Nicaragua’s involvement in trade “if the November elections are not free and fair.”
Others say, keeping Nicaragua in the CAFTA could help to level out the immigration exodus in Central America.