Central American Free Trade Agreement (CAFTA)

The Dominican Republic–Central America Free Trade Agreement, commonly called DR-CAFTA, is a free trade agreement (legally a treaty under international law, but not under U.S. law). Originally, the agreement encompassed the United States and the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, and was called CAFTA. In 2004, the Dominican Republic joined the negotiations, and the agreement was renamed DR-CAFTA.

DR-CAFTA has been approved by Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States.

In 2010, exports from the region were 31.9 billion US $, and imports to the region were 47.9 billion US $.

Facts on CAFTA

  • With the addition of the Dominican Republic, the trade group's largest economy, the region covered by DR-CAFTA is the second-largest Latin American export market for US producers, behind only Mexico, buying $15 billion USD of goods a year.
  • Two-way trade amounts to about $32 billion USD annually.
  • The goal of the agreement is the creation of a free trade area, similar to the North American Free Trade Agreement (NAFTA).
  • Under U.S. law, DR-CAFTA is a congressional-executive agreement.

Economic Development Stages of CAFTA

The United States approved the pact in July 2005.

In March 2006, El Salvador led the way as CAFTA went into effect for that country. In April 2006, Honduras and Nicaragua joined El Salvador as countries that have fully implemented the agreement. DR-CAFTA went into effect for Guatemala in July 2006. The Dominican Republic implemented the agreement in March 2007. And, in October 2007, Costa Rica backed the free trade agreement.

CAFTA is a necessary precursor to the execution of Plan Puebla Panama by the Inter-American Development Bank. The Plan includes construction of highways linking Panama City to Mexico City, Texas, and the rest of the US.

Advantages and Disadvantages of CAFTA

As approved by the countries involved, tariffs on about 80 percent of US exports to the participating countries were eliminated immediately, and the rest will be phased out over the subsequent decade. As a result, DR-CAFTA does not require substantial reductions in US import duties with respect to the other countries, as the vast majority of goods produced in the participating countries already enter the US duty-free due to the U.S. Government's Caribbean Basin Initiative.

So, DR-CAFTA does reduce tariffs. However, every nation in CAFTA remains free to set its overall tax level as it sees fit.

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