Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR)

Overview

CAFTA-DR is a free trade agreement (FTA) among the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. It eliminated on a reciprocal basis tariff and nontariff barriers on goods, services, and agriculture, building on U.S. unilateral trade preferences under the 1983 Caribbean Basin Initiative (CBI). The agreement reinforces U.S. support for trade liberalization as a foundation of broader economic, political, and security policies in the region.

What Are Supporting Views?

Proponents of CAFTA-DR view the agreement as an instrument to boost trade and economic growth, enhance prosperity in the United States and CAFTA-DR countries, increase employment opportunities, and strengthen broader relations with countries in the region. Supporters also view the agreement as a way to reinforce economic stability and encourage regional economic integration. Deeper economic ties with the United States can complement foreign policy objectives in promoting democracy, the rule of law, and efforts to fight organized crime, migration, and drug trafficking. Some studies suggest that the agreement has been an effective tool for promoting worker rights protection and social issues on the political agenda of Central America and the Dominican Republic.

What Are Opposing Views?

When CAFTA-DR was considered, many lawmakers were concerned about possible effects on U.S. labor and sensitive industries (sugar and apparel), as well as other trade issues, such as intellectual property rights protections and investor-state relations. Some policymakers wanted better trade adjustment and capacity building policies to address potential negative effects on vulnerable sectors, such as the apparel industry and agriculture. Ongoing criticisms of the agreement point to the region's pervasive social and economic inequality, poor working conditions, and inadequate enforcement of labor laws. Labor groups and human rights advocates contend that some countries have failed to comply with their labor obligations. Critics argue that governments in the region are unable or unwilling to provide labor reforms and need to strengthen enforcement mechanisms related to the FTA worker rights provisions.

What Are the Effects of the Agreement?

CAFTA-DR deepened the trade partnership between the United States and partner countries by transitioning the relationship from one of trade preference arrangements to a binding reciprocal FTA among the parties. The agreement's more flexible rules of origin than those under most trade preference programs provided incentives for regional integration among Central America and the Dominican Republic. It also enhanced trade-related rules and disciplines for services, especially in telecommunications, intellectual property rights protection, government procurement, and investment.

More sophisticated and higher-value exports from some CAFTA-DR countries have grown since the agreement's entry into force, while exports of light manufactures such as apparel from other countries have benefitted. Agricultural trade has increased moderately. The share of apparel exports from CAFTA-DR to the United States has declined slightly over the past 10 years, while trade in higher-value products such as medical equipment has increased. However, because most U.S. imports from the region had already been duty free under normal trade relations or trade preference programs and imports from CAFTA-DR countries represents a small portion of overall U.S. imports, CAFTA-DR's effect on the U.S. economy has been small.

Regional Integration

CAFTA-DR reinforced regional integration with rules of origin that allow for greater production-sharing among Central American and Mexican producers using U.S. inputs. Harmonized rules of origin and lower trade barriers have enhanced regional competitiveness by increasing coproduction relationships and greater economies of scale, as well as increased regional market access more generally. This includes reciprocal trade rules for U.S. duty-free treatment of imports assembled from inputs produced in Central America or Mexico. For example, fabric and yarns produced in the United States are used in apparel production in CAFTA-DR countries, with final goods receiving duty-free treatment in the United States.

According to the USITC, the rules of origin changes and tariff reductions have been more liberalizing for CAFTA-DR countries than estimated. Their geographic proximity to the United States has allowed them to have greater access to U.S. textile inputs quicker than other FTA partners with reduced shipping costs and an overall increase in trade.

Merchandise Trade Trends

The United States is the dominant trade partner for CAFTA-DR parties. U.S. trade with CAFTA-DR partner countries increased since the agreement's entry into force. In 2021, U.S. exports to all CAFTA-DR countries totaled $38.7 billion, while U.S. imports totaled of $29.9 billion. The United States had a trade surplus of $8.8 billion with these countries as shown in Figure 1.

Figure 1. U.S. Merchandise Trade with CAFTA-DR Partners ($ in billions)

Source: Compiled by CRS using data from Global Trade Atlas.

The top destination for U.S. exports to the region in 2021 was the Dominican Republic, followed by Guatemala, Costa Rica, Honduras, El Salvador, and Nicaragua. The leading supplier of U.S. imports from the region was Costa Rica, followed by the Dominican Republic, Honduras, Guatemala, Nicaragua and El Salvador.

In 2021, major U.S. exports to CAFTA-DR countries included petroleum and coal products (20%); oil and gas (6%); oilseeds and grains (5%); fibers, yarns, and threads (4%); and oilseeds and grains (4%).

Major U.S. imports from CAFTA-DR countries included apparel (28%); medical equipment and supplies (13%); fruits and tree nuts (12%); tobacco products (5%); and motor vehicle parts (5%).

Foreign Direct Investment

FTAs are often considered equally important for attracting foreign direct investment (FDI) as they are about trade. FDI flows are a measure of a country's foreign attractiveness. An FTA can encourage FDI through two channels. First, permanent preferential access to the U.S. market reassures potential investors that access to the largest market is more stable. Second, enhanced investment rules protect investors.

The United States is the largest investor in CAFTA-DR countries, although the stock of FDI in some countries has decreased in recent years, according to the Bureau of Economic Analysis. Investment is also influenced by macroeconomic conditions, making it difficult to assess the FTA's impact. The manufacturing sector is the leading recipient of U.S. FDI in the region. El Salvador has the highest stock of U.S. FDI, followed by Costa Rica and the Dominican Republic. Costa Rica and the Dominican Republic have the highest wage rates and manufactured exports in the region, indicating that labor costs are not the only factor in attracting FDI.

Labor Issues

The labor chapter was a strong point of contention in the CAFTA-DR congressional debate, divided largely along party lines and revolving around three issues: whether CAFTA-DR countries' laws complied with International Labor Organization (ILO) core principles; the countries' ability to enforce their laws; and whether the labor chapter could compel legal compliance and enforcement. In a 2005 report by the labor ministers, CAFTA-DR countries recognized that they lacked the financial resources and technical expertise to enforce good labor practices. The United States has submitted three labor complaints under CAFTA-DR dispute settlement provisions, alleging that the Dominican Republic, Honduras, and Guatemala failed to comply with their commitments. The United States has engaged extensively with the three governments to resolve the cases and negotiated labor action plans with each country. The cases have been slow moving. It took three years from the time of the AFL-CIO submission against Honduras to the issuance of a Department of Labor Report. One case—against Guatemala by the United States in 2010, which the United States did not win—proceeded past the consultation stage of the dispute settlement process but did not find there was a sustained or recurring course of action or inaction that was in a manner affecting trade.

Issues for Congress

The rising number of trade agreements throughout the world has implications for U.S. trade policy in the Western Hemisphere. The United States has FTA agreements with eleven Latin American countries, three of which are parties to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Difficult socioeconomic conditions in the Central America region, combined with natural disasters and poor governance, have contributed to ongoing challenges regarding migration and lack of employment opportunities. Policymakers may consider options to complement CAFTA-DR and build upon this economic relationship. Possibilities could include a trade facilitation agenda to make trade more efficient, an anti-corruption mechanism related to trade, such as that included in the U.S.-Brazil "mini trade deal", or an enhanced commercial dialogue with CAFTA-DR countries and other Latin American countries to advance the U.S. trade policy agenda in the Western Hemisphere. Some policymakers have proposed expanding CAFTA-DR rule-of-origin flexibilities in the apparel sector to support further FDI in this sector. Policymakers may also consider how the Biden Administration's action to revoke Nicaragua's quota of U.S. sugar imports may affect the relationship with the region, particularly in the context of economic relations.