CAFTA-DR, more informally known simply as CAFTA, is a free trade agreement between the United States and six Central American countries (in brackets the date of ratification):
- El Salvador (2006)
- Honduras (2006)
- Nicaragua (2006)
- Guatemala (2006)
- Dominican Republic (2007)
- Costa Rica (2009)
Based on the model of NAFTA, the North American trade agreement between the U.S., Canada and Mexico, CAFTA-DR will eliminate tariffs on goods and products traded between the signatory countries within 2025. This means that, while tariffs were reduced to 0% immediately after ratification on most products, they remained in place for more politically sensitive sectors such as agriculture and textiles. Yet, the clock is ticking for all countries to progressively bring tariffs to 0% on all products within four years.
Origins of the CAFTA
The idea behind CAFTA was to bring all American countries in the Northern Hemisphere under a free trade area, in order to boost trade and economic growth in the region. As such, CAFTA goes beyond just lowering tariffs and duties, and also regulates parts of the internal markets of its members.
These include, for example, opening up the agricultural sector, liberalizing the telecommunications industry, and privatizing banking and insurance. Essentially, CAFTA pertains to that new breed of trade deals whose goal is not only to remove import duties, but to level the playing field between foreign and domestic companies.
Successes and Criticisms
The most important success of CAFTA is that it did boost trade between the signatory countries. At the end of 2019, the total amount of trade within the bloc (between the U.S. and the other countries) was about $58.5 billion. That is 50% more than what trade was in 2009.
Essentially, the U.S. exports plastics, paper, textiles, motor vehicles, machinery, medical equipment, and electrical/electronic products. The Central American countries export mostly commodities, such as sugar, coffee, tobacco, gold, silver, fruit, and other food, as well as electronic components and medical equipment. Tourism has been a notable benefiting sector in Central America.
Although most exports from Central America are agricultural products, CAFTA has been criticized for failing of taking into account the differences between the developed and subsidized farming industry in the U.S. and that of the developing nations, which consist primarily of small farms with little productivity. As such, the CAFTA has been criticized for putting the small Central American farmers out of business and forcing them into the maquiladora factories. Those are tax-free businesses created for the sole purpose of assembling intermediate goods from and to the U.S.
CAFTA was part of a project to create a pan-American free trade area that never occurred. While CAFTA may have benefited more the exporters in the U.S. (which registered a $6.8 billion trade surplus within the bloc in 2019) than the ones in the developing Central American nations, it did eliminate tariffs on most products and opened the doors to Central American firms to the largest market in the world.
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