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Central America-Dominican Republic-United States Free Trade Agreement (CAFTA) 2007: Good Outlook

CAFTA faces 2007 with the likely implementations in two more countries and the start of free trade talks with the European Union.

As leaders from Central America, Panama and the Dominican Republic met in San Jose over the weekend, the mood was generally upbeat. And with good reason.

The region is the only one in Latin America that both has a free trade agreement with the United States and likely will be the first to have one with the European Union. And the host, Costa Rican president Oscar Arias, managed to get his wish of a rotating trade negotiator with the EU instead of a single negotiator, as the other countries in the region had favored. Arias also went into the meeting with another victory: A key committee in the Costa Rican congress had finally approved CAFTA after months of debate.

"CAFTA's outlook in 2007 looks good," says Isaac Cohen, president of Washington D.C.-based consultancy InverWay and former Washington director of the United Nations Economic Commission for Latin America (ECLAC).

The summit also made progress on customs harmonization. A formal agreement on a customs union will likely be signed early next year, according to U.S.-based consultancy Global Insight. So far, the countries have agreed on customs regulations for pharmaceuticals, cosmetics, hydrocarbons, sanitary and phytosanitary rules and plan to reach agreement on common rules for cross-border trade of services.

"A customs union ...would ... facilitate negotiations of a trade agreement with the European Union (EU) and work as a prerequisite to a cross-Atlantic scheme," Global Insight said in a recent commentary.

COSTA RICA AND DR PENDING

The Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR or best known simply as CAFTA), was signed by six Latin American countries in August 2004, but has been implemented in only four so far. The Dominican Republic is expected to implement it soon after its lawmakers passed additional laws required for the United States to certify the country as ready. Meanwhile, Costa Rica's assembly will likely ratify the treaty before May, according to Global Insight.

"Costa Rica needs to gain approval from ..Congress, because it risks missing the deadline caused by the expiration of President Bush's authorization to negotiate the Trade Promotion Authority, or fast track, next July," Cohen points out. "The DR is better positioned since the Dominican Senate has already approved the agreement [and] it is a matter now of adopting the implementation requirements in Washington for its entering into force."

Last week, the international affairs commission in Costa Rica's congress approved CAFTA in a majority vote after debating the treaty for 272 hours, according to Costa Rican presidency minister Rodrigo Arias. "The voting of six to three in favour of CAFTA-DR now opens the way for a debate in the Lower house, expected to start in earnest on 15 January 2007," Global Insight reports. "President Oscar Arias expects the regional commercial arrangement to be ratified by the Congress by 30 April next year, the day when extraordinary Congressional sessions end."

Allthough Arias will get the necessary majority in congress, he will have to face strong protests from CAFTA opponents, Global Insight warns. "Costa Ricans are split almost equally on CAFTA-DR and protests are set to abound in the run-up to an approval as the opposition tries to make its pleas heard in the streets for lack of leverage in the legislature," the consultancy says. "Arias will have to handle the opposition carefully to avert major disruption in 2007."

GOOD TIMING

For the countries in which it has entered into force, 2007 will be the first year of full implementation, Cohen points out. "The wisdom of its early approval is confirmed given the recent political changes in the legislative branch in Washington," Cohen says. "These changes indicate that there will be more emphasis in the enforcement of labor and environmental rules, but the initial impact in exports, imports and investment will begin to be perceived. "

In November, the U.S. Democratic Party won a majority of seats in both the U.S. Senate and House of Representatives and key Democrats have signalled changes to U.S. trade policy. They will likely only pass approval of free trade agreements with Colombia and Peru if side agreements on labor and the environment are signed.

Eliot Engel, who is the likely chairman of the US House of Representatives' subcommittee on Western Hemisphere affairs when congress assumes in January, visited the Dominican Republic earlier this month to study the situation of Haitian workers as well as the positive and negative effects of CAFTA on the DR.

EU NEGOTIATIONS

Negotiations with the EU will likely take place during the first quarter next year, according to Cohen. However, the Central American countries have already been preparing for the talks.

"Central America has made some decisive steps towards unifying its tariff structures and implementing a sub-region customs union, a pre-requisite to trade talks with the EU," Global Insight said in a commentary today.

A EU agreement will boost trade as well as bring more European investments into Central America, says Edgar Heinemann, chairman of Guatemalan development agency Fundesa.

The EU formally announced it planned to start free trade talks with Central America during the summit of EU-Latin American leaders in Vienna in May. (See Central America's Vienna Victory)

BENEFITS OF CAFTA

Central American exports likely received a boost from CAFTA this year, especially in the last quarter, according to a forecast from the Inter-American Development Bank. Nicaragua and Costa Rica posted the strongest results, at 19.7 and 17.6 percent respective growth, and El Salvador (4 percent) and Honduras (-4 percent), the weakest.

"Although disappointing, these results should be taken with a pinch of salt since data for maquila exports is not yet available for all countries and the estimates do not take into account the last quarter of the year, a period where the coming into effect of the CAFTA-DR agreement (except for Costa Rica) might have given a extra boost to Central America?s exports," the IDB said in a recent report.

Meanwhile, U.S. IT companies are among those expected to benefit most from CAFTA, according to Fernando D. Sedano, an economist with U.S.-based Manufacturers Alliance/MAPI. Overall, 99 percent of U.S. exports of electronics and instrumentation receive immediate duty-free access under the CAFTA-DR, which compares to pre-CAFTA-DR average tariffs ranging from 2.1 percent to 5.5 percent, he points out in a recent report. Other sectors with good U.S. export potential include include capital goods, chemicals, environmental technologies, electrical power generation and distribution equipment, and automotive parts and services equipment.

Despite the good news, a key challenge for Central America is to fully take advantage of CAFTA, Cohen argues. "For the Central American governments and private sectors the main challenge consists in implementing the agreement, to benefit from all the opportunities that CAFTA opens in exports and imports, attraction of foreign investment and the enforcement of rules, which will improve the investment climate," he says.