CARIBBEAN BUSINESS
Local push for Cafta-DR trade agreement
Puerto Rico’s trade with the Dominican Republic could double with the approval of Cafta-DR
By Georgianne Ocasio Teissonniere of Caribbean Business
August 11, 2005
Cafta-DR, the Central America Free Trade Agreement, into which the Dominican Republic was later incorporated, managed to win legislative approval last week in the U.S. Congress after narrowly passing the House of Representatives by just two votes. The bill had passed the Senate relatively easily in June. The trade agreement between the Dominican Republic, Nicaragua, Guatemala, Honduras, El Salvador, and the U.S. will strip away barriers to trade by gradually eliminating all trade tariffs between the countries. About 80% of U.S. imports from the Cafta-DR region already enter duty free; U.S. exports, however, faced steep tariffs in the same countries.
Puerto Rico exports faced these same high tariffs, making it difficult for the island to win access to these countries and further expand local commerce. "There were all these tariff conditions against our products that were serving as artificial impediments to free trade that now will be gone, and we can benefit tremendously from that situation. At the same time, it will strengthen their economies and democracies, so it is a win-win situation...I only hope our entrepreneurs will take full advantage of it," commented Resident Commissioner Luis Fortuño. Jorge Silva Puras, executive director of the Puerto Rico Industrial Development Co. & secretary of the Department of Economic Development & Commerce, also is extremely optimistic about the potential local impact of the agreement.
"Puerto Rico, in particular, I would say, will benefit most from the agreement because of the island’s strong economic relationship with the Dominican Republic. A trade relationship, which had at one point reached $2 billion, in recent years had decreased to approximately $1.5 billion," stated Silva. "With Cafta-DR and the potential of Puerto Rico products being exported duty-free to the Dominican Republic, we estimate trade actually could double its historical levels."
Silva believes that while Latin American countries represent interesting trade opportunities for Puerto Rico, they won’t be as vital to the economic development of the island as the Dominican Republic because of its proximity and the existing economic relationship and interaction between both economies.
As part of the Cafta-DR agreement, the respective countries will be required to formalize and reform many of their fiscal and financial systems, making them more investment- and environment-friendly. Silva considers Puerto Rico services and financial sectors will be able to greatly contribute to that development, consequently benefiting the local and neighboring economies.
In addition to the services sector, technology and manufactured products are the sectors in which Silva sees the most opportunity for growth in Puerto Rico. "Sectors like engineering, architecture, and everything related to construction, which is an area with high exportation potential, will benefit, as well as the financial sector, banking, investment banking, insurance, etc.; these are areas where Puerto Ricans have become experts," said Silva, explaining that with the trade agreement, it will be easier for local companies to open offices in the respective countries, particularly in the Dominican Republic. Fortuño added that Puerto Rico’s agricultural exports, such as coffee, also potentially could benefit from Cafta-DR.
Some local concerns over the agreement pointed out that Cafta-DR could diverge foreign investment from Puerto Rico, especially considering the current economic condition on the island. "Puerto Rico doesn’t lose competitiveness; on the contrary, it makes us more competitive. The foreign investment we attract is very sophisticated. I don’t see any risk of that investment being diverted to these other countries," Silva stated.
Win-win situation
In reference to more universal opposition to the agreement, citing U.S. self-interest and labor conditions in the trade region, Fortuño pointed to World Bank estimates that show the treaty could increase the economies of the Dominican Republic and Central American countries about 13%, whereas not approving it would lead to economic shrinkage of 4.5%. "Certainly, it isn’t the panacea; it won’t solve every single issue every country has, but it is certainly better than not having it," concluded Fortuño.
During a recent speech at the Hispanic Alliance for Free Trade, President Bush, who launched heavy lobbying for the agreement days before the vote in the House of Representatives, commented: "This bill is more than a trade bill. This bill is a commitment of freedom-loving nations to advance peace and prosperity throughout the Western Hemisphere." He also described Cafta as a jobs program, emphasizing the potential economic growth that could result from the trade agreement.
As an example, the president mentioned California’s Haas Automation Co., the largest tool manufacturer in the U.S., which expects to increase sales to Central America tenfold if Cafta-DR goes into effect. Bush also pointed out the benefits of enforcing a regional partnership to remain competitive against Asian producers.
According to the Global Trade Atlas, in 2004, trade between the U.S. and the Cafta-DR region was more than $33 billion. The U.S. exported almost $16 billion in goods to the region, more than all exports to Russia, India, and Saudi Arabia combined. Cafta-DR would create the second-largest U.S. export market in Latin America, behind only Mexico, and the 14th-largest U.S. export market in the world.
Cafta-DR goes into effect Jan. 1, 2006, with the countries that already have approved the measure, which are the U.S., Guatemala, El Salvador, Guatemala, and Honduras. The Dominican Republic, Nicaragua, and Costa Rica have yet to give their final approval.