The Central America Free Trade Agreement–Dominican Republic (CAFTA-DR) or CAFTA was a historical agreement that saw a long-standing struggle for acceptance until finally brought into effect in 2004.
Established to remove customs duties, trade tariffs, and a range of other expenses incurred due to inter-country trade practices, CAFTA was one of the earlier pacts between the US and a group of developing countries.
What is CAFTA?
The CAFTA-DR is the US’s first free trade agreement (FTA) with several Central American economies of Guatemala, Costa Rica, Honduras, Nicaragua, El Salvador, and the Dominican Republic.
Listed below is the timeline of how CAFTA came into being.
- Negotiations on free trade between the five Central American countries and the US began in 2002, with the Dominican Republic joining the talks in 2003.
- On August 5, 2004, all the nations signed the agreement, which came to be known as CAFTA-DR.
- The US Congress in July 2005 passed the deal, and President George W. Bush made it into law on August 2, 2005, nearly a year after it was signed.
Costa Rican Resistance of the CAFTA-DR
Except for Costa Rica, all member nations had accepted the agreement by 2007. Costa Rica’s approval stalled due to massive domestic resistance from a few civil society and labor groups. Costa Rican voters ratified the deal in a nationwide referendum in 2007, which took effect in the country in January 2009.
What is the purpose of CAFTA?
The CAFTA-DR encourages increased trade and investment relations, prosperity, and stability in the area and along the southern border of the US. The treaty intends to offer the US better market access and stimulate economic prosperity in Central American nations and the Dominican Republic. The countries have repeatedly emphasized achieving this through increasing export diversification and direct investments.
The CAFTA-DR proposed the immediate elimination of specific tariffs. Further, it required the phasing of other tariffs over the next 15-20 years. The agreement's enforcement abolished duties on over half of all agricultural exports from the US.
What are the main components of CAFTA?
The following are the various components of the agreement:-
- A National Action Plan (NPA) for increasing trade capacity within each Central American nation, as part of the agreement.
- CAFTA would cement current trade agreements between the US and other Central American countries. The agreement will also abolish tariffs on 80% of US industrial goods, as well as over half of US agricultural goods sent to Central America, effective immediately.
- CAFTA would lift prohibitions on US participation in numerous government-run sectors of the Central American economy and ensure the protection of intellectual property.
- CAFTA also expects its members to maintain their labor laws. Failure to do so might result in penalties of up to $15 million for every offense.
Which countries are involved in the CAFTA Trade Agreement?
The US, El Salvador, Honduras, Guatemala, Nicaragua, Dominican Republic, Costa Rica are part of the CAFTA trade bloc.
Below is the timeline of their ratification.
- El Salvador became the first CAFTA-DR state to ratify the pact, and the Congress approved the agreement on December 17, 2004.
- On March 3, 2005, Honduras accepted the CAFTA, followed by Guatemala on March 10, 2005.
- The US Congress passed the deal in July, and President George W. Bush signed the bill into law on August 2, 2005.
- On October 10, 2005, Nicaragua ratified the pact.
- On September 6, 2005, the Dominican Republic's Chamber of Deputies approved the CAFTA-DR and forwarded it to the President for ratification. The Dominican Republic signed the agreement on March 1, 2007.
- Costa Rica decided on a referendum to allow its residents to vote on whether or not to ratify CAFTA. The Costa Rican population voted in favor of the accord on October 7, 2007.
The US president issued a proclamation on February 28, 2006, putting into effect what is now known as the CAFTA-DR.
The following dates were when each of these countries brought the pact into effect.
- El Salvador: March 1, 2006
- Honduras: April 1, 2006
- Nicaragua: April 1, 2006
- Guatemala: July 1, 2006
- Dominican Republic: March 1, 2007
- Costa Rica: January 1, 2009.
Rules of Origin and Origin Procedures
The US commodities exported to the partner nations must originate from the listed countries as specified in CAFTA's rules of origin section to qualify for special consideration under the CAFTA-DR.
Unless specified otherwise in chapter IV of the CAFTA-DR, only the following qualify as an originating commodity:
If it is obtained or manufactured solely in the US, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, or Nicaragua.
An item manufactured entirely in a signatory nation using non-originating materials (i.e., materials from countries other than those mentioned above) that meet the origin rule provided in annex 4.1 of the accord.
A product entirely manufactured in the US or one of the CAFTA member nations, only using materials that are already sourced in the US.
There are a few other considerations to be noted when specifying goods under the CAFTA-DR.
- De Minimis rule
All non-originating materials used in manufacturing the completed item that doesn’t change in tariff classification are considered originating. That is, if the total value of all those non-originating materials doesn’t exceed 10% of the adjusted value of the product, i.e., the de minimis amount.
- Indirect materials
Indirect materials, irrespective of where they are manufactured, are considered originating materials. An indirect material is a product utilized in manufacturing, testing, or inspection of another product but isn’t physically integrated.
- Fungible goods and materials
Fungible items or materials are products or materials that have interchangeable commercial purposes and possess roughly the equivalent qualities. Importers are allowed to claim a fungible product or material as originating on three occasions:-
- The importer, exporter, or manufacturer has physically separated each fungible goods or material.
- The importer, exporter, or manufacturer has used any inventory management system recognized in Generally Accepted Accounting Principles.
- Alternatively, it is to be accepted by the party where the fungible item is produced.
Originating products, goods, or materials from one or more CAFTA-DR parties integrated into a product in the territory of another CAFTA-DR nation are regarded as originating materials of a party in which the integration occurs.
What are the Benefits of CAFTA?
The CAFTA-DR has enhanced customs administration and eliminated technical trade hurdles. It covers topics such as the following:-
- Government procurement
- Electronic commerce
- Transparency and intellectual property rights
- Environmental protection
The CAFTA-DR has significantly benefited Nicaragua, Costa Rica, and the Dominican Republic, for each of which the US is a primary export market. Costa Rica profited from more significant foreign investments in the telecommunications and insurance industries, which were opened recently to private companies by the government. With the implementation of CAFTA-DR, the Costa Rican government substantially privatized the banking, telecommunications, and insurance industries. This significantly aided its economic growth.
Challenges and Drawbacks of CAFTA
The CAFTA-DR, however, had some debilitating consequences. For starters, Honduras saw a dip in trade surplus in agricultural goods before the CAFTA-DR. It had a trade imbalance for years following the CAFTA-DR, something the country didn’t experience before the FTA.
Many farmers relocated to their nations following the CAFTA-DR after taking up jobs in apparel factories in the US. However, many other factories relocated to Vietnam, China, and other low-wage countries. This resulted in lower garment exports to the US than in the pre-CAFTA-DR era.
El Salvador, Honduras, and Guatemala experienced slower economic development than the rest of Latin America. This financial insecurity contributed to the growth of the drug trade, resulting in the emigration of many residents to the US.
What is the difference between NAFTA and CAFTA?
After the North American Free Trade Agreement (NAFTA), the CAFTA-DR rules of origin were substantially modeled. Essentially, the two only have one key difference, in addition to a differing year of signing.
The NAFTA was a trilateral guideline-based trade agreement signed in 1994 by North America, Canada, and Mexico.
The CAFTA is a treaty signed in 2004 by the US and other Central American nations.
Is CAFTA-DR still in effect?
Under the CAFTA-DR, all tariffs on US industrial and consumer exports were eliminated in 2015, with agricultural duties removed by 2020. The agreement will be completely implemented on January 1, 2025. By then, everything will be duty-free.
However, to be eligible for protectionist measures under the CAFTA-DR, the items must comply with the appropriate origin standards outlined in annex 4.1.