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

Prepared for Members and Committees of Congress

The United States Trade Representative (USTR) and trade ministers from Costa Rica, El
Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic signed the Dominican
Republic-Central America-United States Free Trade Agreement (CAFTA-DR) on August 5, 2004.
Nearly one year later, it faced a contentious debate and close vote in both houses of the U.S.
Congress. The Senate passed implementing legislation 54 to 45 on June 30, 2005, with the House
following in kind 217 to 215 on July 28, 2005. President Bush signed the legislation into law on
August 2, 2005 (P.L. 109-53, 119 Stat. 462). The United States implemented the agreement on a
rolling basis as countries brought their laws and regulations into conformity with the obligations
of the agreement. El Salvador was the first country to implement the agreement on March 1,
2006. Costa Rica was the last, implementing the agreement on January 1, 2009, after a lengthy
procedural delay and national referendum.
The CAFTA-DR is a regional agreement with all parties subject to “the same set of obligations
and commitments,” but with each country defining its own market access schedule with the
United States. It is a reciprocal trade agreement, replacing U.S. unilateral preferential trade
treatment extended to these countries under the Caribbean Basin Economic Recovery Act
(CBERA), the Caribbean Basin Trade Partnership Act (CBTPA), and the Generalized System of
Preferences (GSP). It liberalizes trade in goods, services, government procurement, intellectual
property, and investment, and addresses labor and environment issues. Most commercial and farm
goods attain duty-free status immediately. Remaining trade will have tariffs phased out
incrementally over five to twenty years. Duty-free treatment will be delayed longest for the most
sensitive agricultural products. To address asymmetrical development and transition issues, the
CAFTA-DR specifies rules for transitional safeguards, tariff rate quotas, and trade capacity
The CAFTA-DR is not expected to have a large effect on the U.S. economy as a whole given the
relatively small size of the Central American economies and the fact that most U.S. imports from
the region had already been entering duty free under normal trade relations or CBI and GSP
preferential arrangements. Adjustments will be slightly more difficult for some sectors, but none
are expected to be severe. Supporters see it as part of a policy foundation supportive of both
improved intraregional trade, as well as, long-term social, political, and economic development in
an area of strategic importance to the United States. Opponents wanted better trade adjustment
and capacity building policies to address the potentially negative effects on certain import-
competing sectors and their workers. They also argued that the labor, intellectual property rights,
and investment provisions in the CAFTA-DR needed strengthening. This report discusses
negotiation issues and evolution of the CAFTA-DR agreement from the time negotiations
commenced on January 27, 2003 until its implementation by the last country on January 1, 2009.
It will not be updated.

U.S. Congressional Action..............................................................................................................1
Why Trade More Freely?.................................................................................................................3
The Impetus for a CAFTA-DR........................................................................................................5
U.S. Trade Relations with Central America and the Dominican Republic......................................9
U.S.-Central America Trade......................................................................................................9
U.S. Imports......................................................................................................................10
U.S. Exports......................................................................................................................12
U.S.-Dominican Republic Trade.............................................................................................13
U.S. Foreign Direct Investment...............................................................................................14
Review of the CAFTA-DR............................................................................................................15
Market Access.........................................................................................................................15
Textiles and Apparel.........................................................................................................16
Agriculture .................................................................................................................... .... 17
In ve stme nt ............................................................................................................................... 19
Services ................................................................................................................................... 20
Government Procurement.......................................................................................................21
Intellectual Property Rights.....................................................................................................22
Pharmaceutical Data Protection........................................................................................22
Labor and Environment...........................................................................................................23
Labor Issues......................................................................................................................24
Environmental Issues........................................................................................................26
Dispute Resolution and Institutional Issues............................................................................27
Trade Capacity Building.........................................................................................................28
Figure 1. Central America’s Direction of Merchandise Trade, 2003...............................................9
Table 1. Top Eight U.S. Merchandise Imports from Central America, 2004.................................11
Table 2. Top Eight U.S. Merchandise Exports to Central America, 2004.....................................13
Table 3. U.S.-Dominican Republic Merchandise Trade, 2004......................................................14
Table 4. U.S. Foreign Direct Investment (FDI) in CAFTA-DR Countries....................................14
Appendix A. Chronology of CAFTA-DR Negotiations................................................................30
Appendix B. Selected Economic Indicators..................................................................................32
Appendix C. U.S. Merchandise Trade with CAFTA-DR Countries..............................................33

Author Contact Information..........................................................................................................34

n August 5, 2004, the United States Trade Representative (USTR) and trade ministers
from Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican
Republic signed the Dominican Republic-Central America-United States Free Trade O

Agreement (the CAFTA-DR; see Appendix A, Chronology of Negotiations). The CAFTA-DR is
a regional trade agreement with all parties subject to “the same set of obligations and
commitments,” but with each country defining its own market access schedule with the United
States. It is a comprehensive and reciprocal trade agreement, replacing U.S. unilateral preferential
trade treatment extended to these countries under the Caribbean Basin Economic Recovery Act
(CBERA), the Caribbean Basin Trade Partnership Act (CBTPA), and the Generalized System of
Preferences (GSP).
The U.S. Congress did not consider implementing legislation for nearly a year after the CAFTA-
DR was signed because it was so controversial. On June 30, 2005, however, the Senate passed S.
1307 by a vote of 54 to 45. The House followed on July 28, 2005, passing H.R. 3045 by a vote of

217 to 215. President Bush signed the bill into law on August 2, 2005 (P.L. 109-53, 119 Stat.

462). El Salvador, Honduras, Guatemala, the Dominican Republic, and Nicaragua also ratified the
agreement, in that order. The CAFTA-DR was expected to enter into force on January 1, 2006,
but none of the ratifying countries had completed the legal and regulatory measures needed to
comply with the agreement. The USTR announced that the CAFTA-DR would take effect on a
rolling basis when countries fulfilled these obligations. It entered into force on March 1, 2006 and
was implemented for El Salvador, Honduras, Nicaragua, Guatemala, and the Dominican Republic
within the next year.
In Costa Rica, CAFTA-DR was highly controversial because it required major restructuring of
public sector monopolies over electricity, insurance, and telecommunications. Public sector
unions were at the center of this concern, but small farmers and other workers also voiced
opposition. Oscar Arias won a slim presidential victory in 2006 on a pro-CAFTA platform, but
opposition in the National Assembly was able to delay consideration of the agreement. In the end,
the Electoral Tribunal ruled in favor of a petition to hold a national referendum on the CAFTA-
DR. On October 7, 2007, with a 60% participation rate, the people of Costa Rica voted 51.6% to
48.4% in favor of CAFTA-DR. Following passage of 14 implementing bills in the Costa Rican
National Assembly, the United States implemented the agreement with Costa Rica on January 1,
2009. This report discusses negotiation issues and evolution of the CAFTA-DR agreement from
the time negotiations commenced on January 27, 2003 until its implementation by the last
country on January 1, 2009. It will not be updated.

The CAFTA-DR was the most controversial free trade agreement (FTA) vote since the North
American Free Trade Agreement (NAFTA) implementing legislation was passed in 1993. Many
lawmakers were uncomfortable with the agreement as written, particularly the labor provisions,
treatment of certain sensitive industries (sugar and textiles), investor-state relations,
pharmaceutical data protection, and basic sovereignty issues. It was also caught up in an
overarching congressional controversy over how trade negotiation objectives should be defined in

FTAs based on the Trade Promotion Authority (TPA) framework, as well as, concern by some 1
Members over the perceived ineffectiveness of the executive-legislative consultation process.
These issues were raised repeatedly in “mock markups” of draft implementing bills held by the
Senate Finance and House Ways and Means Committees on June 14 and 15, 2005, respectively.
The Senate Finance Committee voted 11-9 to approve the draft legislation, with one non-binding
amendment that would have extended the trade adjustment assistance program to cover workers
in services industries. The House Ways and Means Committee voted 25-16 for approval of the
draft legislation, also adding a non-binding amendment with “a requirement that the
Administration report on activities conducted by the CAFTA-DR countries and the United States
to build capacity on labor issues,” and a provision requiring monitoring of CAFTA-DR’s effects
on U.S. services industries. A “mock conference” was not held, to the expressed consternation of
some Members.
The Bush Administration sent the final implementing bill to Congress on June 23, 2005. It
included a new Section 403, the House amendment requiring that the Administration transmit
biennial reports on progress made in implementing the labor provisions, including the Labor
Cooperation and Capacity Building Mechanism. It also called for monitoring progress in meeting
the challenges outlined in the so-called White Paper on labor produced by the vice ministers of
trade and labor of the CAFTA-DR countries. Under TPA procedures, identical bills were
introduced jointly as H.R. 3045 and S. 1307 and referred to the House Ways and Means and
Senate Finance Committees.
The Senate Finance Committee acted first, favorably reporting out S. 1307 by voice vote on June
29, 2005. The House Ways and Means Committee followed suit, reporting favorably by a vote of

25 to 16 on June 30, 2005. The measure came before the full Senate on June 30, 2005, where,

following 20 hours of floor debate, S. 1307 passed 54 to 45. H.R. 3045 did not come before the
House until July 28, 2005, where, following two hours of debate, it narrowly passed 217 to 215.
On the same day, the Senate voted 56 to 44 to substitute H.R. 3045 for S. 1307, a necessary
procedural vote to comply with the constitutional requirement that revenue bills originate in the
House. President Bush signed H.R. 3045 into law on August 2, 2005 (P.L. 109-53, 119 Stat. 462).
Passage in the Senate was by a slimmer margin than with earlier trade agreements and required
accommodation outside the implementing legislation to labor, textile, and sugar interests. In a
letter from USTR Rob Portman to Senator Jeff Bingaman, the Administration promised to
allocate $40 million of fiscal 2006 foreign operations appropriations for “labor and environmental
enforcement capacity building assistance,” and to continue to request this level of funding in
budgets for fiscal years 2007 through 2009. Some $3 million is to be used for funding
International Labor Organization (ILO) reporting on progress in labor law enforcement and
working conditions in these countries. An additional $10 million annual commitment for five
years was made for transitional rural assistance for El Salvador, Guatemala, and the Dominican
Republic, or until these countries can qualify for anticipated assistance from the U.S. Millennium
Challenge Corporation.
In another letter, Secretary of Agriculture Mike Johanns assured Senator Saxby Chambliss and
Representative Bob Goodlatte, the respective agriculture committee chairs, that the

1 On TPA, see CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options, and Prospects for Renewal,
by J. F. Hornbeck and William H. Cooper.

Administration would not allow the CAFTA-DR to interfere with the operation of the sugar
program as defined in the Farm Security and Rural Investment Act of 2002 (the Farm Bill)
through FY2007, when it expires. In particular, he promised to take steps should additional sugar
imports due to the CAFTA-DR, NAFTA, and other trade agreements jeopardize the sugar
program operations by exceeding the import trigger threshold. Should this occur, the U.S.
Secretary of Agriculture agreed to preclude entry of additional sugar imports into the domestic
sweetener market by either making direct payments to exporters or using agricultural
commodities to purchase sugar to be used for nonfood use (ethanol production).
Separately, for the textile and apparel issues, promises were made to: (1) change the rules of
origin to require that all pocketings and linings come from the CAFTA-DR countries (rather than
third party countries like China); (2) negotiate a new stricter customs enforcement agreement
with Mexico before the CAFTA-DR cumulation rules take effect allowing Mexican inputs to be
used in CAFTA-DR textile and apparel products; and (3) require Nicaragua to increase use of
U.S. fabric to qualify as duty-free under their tariff preference levels.
Other accommodations were made to win House support of H.R. 3045, including passage in the
House on July 27, 2005, of the U.S. Trade Rights Enforcement Act (H.R. 3283). This bill would
allow greater recourse to pursue trade complaints against China and other non-market economies.
Not all interest groups, however, could be appeased. Despite efforts to win over all groups, the
sugar industry and some textile groups chose not to support the bill and strong Democratic
opposition remained over a number of other issues that may prove to be enduring challenges to
future trade agreements, if crafted from the CAFTA-DR framework.

Countries trade because it is in their national economic interest to do so, a proposition long
supported by theory and practice. Comparative advantage has been recognized for nearly 200
years as a core principle explaining the efficiency gains that can come from trade among
countries by virtue of their fundamental differences. It states that countries can improve their
overall economic welfare by producing those goods at which they are relatively more efficient,
while trading for the rest. Intra-industry trade is the other major insight that explains trade
patterns, in which the benefits from exchange among countries occur based on specialized
production, product differentiation, and economies of scale. Many Latin American countries have
liberalized trade policies recognizing the contribution that trade (and related investment) can
make to economic growth and development. As an important caveat, trade is at best only part of a
broad development agenda, and is no substitute for the promotion of political freedom,
macroeconomic stability, sound institutions, and the need for complementary social and economic 2
Comparative advantage provides the rationale for U.S.-Central American (and Dominican
Republic) trade in agriculture, textiles, apparel, and capital goods. Intra-industry trade (e.g.,

2 The role of trade is summarized well in: Rodrik, Dani. The New Global Economy and Developing Countries: Making
Openness Work. The Overseas Development Council, Washington, DC. 1999. p. 137, and Bouzas, Roberto and Saul
Keifman. Making Trade Liberalization Work. After the Washington Consensus: Restarting Growth and Reform in Latin
America. Kuczynski, Pedro-Pablo and John Williamson, eds. Institution for International Economics. Washington, DC.
March, 2003. pp. 158, 165-67.

goods within the same harmonized tariff system (HTS) code number) is based on specialized 3
production, but in this case relies in large part on differences in wages, skills, and productivity.
Certain specialized jobs have developed in Central America (and other developing countries),
where they frequently reside in production sharing (maquiladora) facilities. Economists have
come to refer to such specialized production as “breaking up the value added chain” and it
accounts for why products (and particularly parts thereof) as diverse as automobiles, computers,
and apparel are often made or assembled in Central America and other countries in partnership 4
with U.S. firms. This relationship, discussed in more detail later, provides the basis for much of 5
the labor policy debate on the CAFTA-DR, and FTAs more generally.
Measuring the benefits of freer trade is another difficult issue. There is a tendency to count
exports, imports, and the oft-misrepresented importance of the trade balance as indicators of the
fruits of trade. This approach often gives undue weight to exports at the expense of understanding
benefits from imports, where the gains from trade are better understood by their contribution to
increased consumer selection, lower priced goods, and improved productivity. For example, high-
tech intermediate goods imported from developed countries are the basis for future, more
sophisticated, production in developing countries. In developed countries, imports from
developing countries, whether final goods for consumers or inputs for manufacturing enterprises,
reduce costs and contribute to productivity and economic welfare. For all countries, exports are
the means for paying for these imports and their attendant benefits.
Three caveats related to negotiating FTAs are important. First, the discussion of costs and benefits
generally assumes that FTAs are implemented in a multilateral setting. In fact, given the slow
pace of World Trade Organization (WTO) negotiations, many countries are pursuing preferential
arrangements, that is, regional and bilateral agreements like the CAFTA-DR. Latin America is
full of them and depending on how they are defined, they may actually be trade distorting if they
promote trade diversion. This occurs when trade is redirected to countries within a limited
agreement that does not take into account countries outside the agreement, some of which may be
more efficient producers. Preferential trade agreements are also cumbersome to manage, requiring
extensive rules of origin, and economists disagree as to whether FTAs help or hinder the 6
movement toward multilateral trade liberalization.

3 This differs from the standard intra-industry case between two developed countries in which goods, such as
automobiles, are exchanged based on product differentiation and economies of scale and where differences in wage
levels are not a central factor.
4 For the theoretical foundation, see Krugman, Paul. Growing World Trade: Causes and Consequences, in Brookings
Papers on Economic Activity (1), William C. Brainard and George L. Perry, eds. 1995. pp. 327-76, and for the case in
Central America, see Hufbauer, Gary, Barbara Kotschwar, and John Wilson. Trade and Standards: A Look at Central
America. Institute for International Economics and the World Bank. 2002. pp. 992-96.
5 Note that this trend has not been a driving force in the aggregate unemployment rate of the United States, but does
affect the distribution of employment among sectors of the economy. It is also important to emphasize here that wage
levels are only part of the issue. Lower wages correlate closely with lower productivity, hence an abundance of low-
skilled (low productivity) workers attracts these types of jobs. For a overview of the methodology of measuring the
effects of changes in trade policy, see Rivera, Sandra A. Key Methods for Quantifying the Effects of Trade
Liberalization. International Economic Review. United States International Trade Commission. January/February 2003.
6 U.S. businesses operating in Latin America have had to interpret a difficult road map when dealing with multiple
arrangements defined in the Caribbean Basin Trade Partnership Act, the Andean Trade Preference Act, and the North
American Free Trade Agreement. Each distorts investment decisions in the region and can have a countervailing
influence on the others. Adding the many Latin American FTAs only makes the situation more confusing.

Second, trade, much like technology, is a force that changes economies. It increases opportunities
for internationally competitive sectors and challenges import competing firms to become more
efficient or do something else. This fact gives rise to the policy debate over adjustment strategies,
because while consumers and export sector workers benefit, some industries, workers, and
communities are hurt. Economists generally argue that it is far less costly for society to rely on
various types of trade adjustment assistance than opt for selective protectionism, the frequent and 7
forcefully argued choice of trade-affected industries. The public policy difficulty is that both 8
options have costs and benefits, but result in different distributional outcomes. Because trade
agreements raise difficult political choices for legislators in all countries, many of whom
represent both potential winners and losers, FTA provisions are typically limited in scope (so
continue to protect partially or completely certain products, industries, or sectors) and are phased
in over a long period of time (typically up to 15-20 years for very sensitive products).
Third, there are implications in the trade negotiation process for smaller countries’ bargaining
leverage when they choose to negotiate with a large country in a bilateral rather than multilateral
setting. Both Chile and the Central American countries realized early in the process that there
were negotiating issues over which they would be able to exert little or no leverage. Both
agreements, for example, do not address antidumping and subsidies, reflecting an ongoing
congressional concern, and negotiations on certain agriculture issues were also limited, given the
politically sensitive nature of this issue.

The United States was motivated by both commercial and broader foreign economic policy
interests in deciding to negotiate preferential trade agreements with Central America and the
Dominican Republic. Geopolitical and strategic concerns also sparked interest by all parties in
pursuing the CAFTA-DR. Proponents expected the CAFTA-DR to reinforce regional stability by
providing institutional structures that can undergird gains made in democracy, the rule of law, and
efforts to fight terrorism, organized crime, and drug trafficking. The CAFTA-DR may also be a
way to expand support for U.S. positions in the Free Trade Area of the Americas (FTAA), and
given that the January 2005 completion date has slipped, may also help rationalize the system of
disparate preferential trade agreements that currently define Western Hemisphere trade relations.
Critics of the CAFTA-DR pointed to equally broad themes, such as the pervasive social and
economic inequality in much of the region, and so supported strong labor and environment
provisions as important negotiating objectives. There was concern, for example, over the
adequacy of working conditions and enforcement of labor laws in the CAFTA-DR countries. The

7 For a recent and accessible treatment of this subject, see Kletzer, Lori G. and Howard Rosen. Easing the Adjustment
Burden on US Workers. In: Bergsten, C. Fred., ed. The United States and the World Economy. Washington, DC.:
Institute for International Economics, 2005. pp. 313-41.
8 It is important to note that when a staple, such as underwear, is produced abroad and sold in the United States as a
lower-priced import compared to a domestically produced good, it is equivalent to an increase in real income for the
U.S. consumer. This can be significant for low-wage workers in the United States. The same idea holds true for
industrial products and business consumers. So, there is atrade off in the trade policy decision between keeping
certain jobs through protection and losing the income gains, or keeping the income gains and losing certain jobs. One
public policy response has been to pass trade adjustment assistance legislation to help firms and workers transition
more quickly to new opportunities.

CAFTA-DR countries argued that the agreement is one of many forces that can have a positive
effect in raising labor standards, although it is not sufficient to accomplish this goal on its own.
With the proliferation of regional agreements around the world, trade negotiations have also
become a tactical issue of picking off gains where they are perceived relative to what other
countries are doing. It was repeatedly argued by the U.S. business community, for example, that
the U.S.-Chile agreement, the first FTA after NAFTA, was necessary to equalize treatment of
U.S. businesses competing with Canadian firms that already enjoyed preferential treatment with
Chile. The case was made for Central America as well, which has trade agreements with Canada
and Mexico, each with firms that compete with U.S. businesses in the region. Delays with WTO
and Free Trade Area of the Americas (FTAA) negotiations only reinforced this attitude.
In the context of regional trade agreements, history, geographic proximity, and economic 9
complementarities also made the CAFTA-DR an apparently logical step. Economic
fundamentals shaped a trade relationship based on exports of traditional agricultural products, and
later apparel. From the early days of independence, agricultural exports were the centerpiece of
Central American economic growth. The British controlled primary export production (coffee,
bananas, sugar, and beef) until about 1850, when U.S. interests won over. This trend continued 10
until the 1980s and passage of the Caribbean Basin Initiative (CBI). By becoming eligible for
unilateral preferential tariff treatment, U.S. investment increased in the region, fostering growth
in Central American export sectors.
A major change to the CBI relationship occurred with passage of the Caribbean Basin Trade
Partnership Act of 2000 (P.L. 106-200). In response to repeated concerns over trade benefits
negotiated with Mexico under NAFTA, Congress passed essentially NAFTA-equivalent treatment
for the CBI countries. CBTPA targeted preferences on textile, apparel, and other high-volume
export goods not covered under the original CBI legislation. The benefits were extended
temporarily for a period ending September 30, 2008, or until a beneficiary country enters into an 11
FTA with the United States.
The U.S.-Central American/Dominican Republic economic relationship changed importantly
under the CBTPA, creating an environment in which businesses forged strategic partnerships in
the increasingly complex world of textile and garment manufacturing. From 1974 until 1995,
global rules restricting trade in apparel between developed and developing countries (mostly
quotas) were set out in the Multifiber Arrangement (MFA) and its successor, the WTO-sponsored
Agreement on Textiles and Clothing (ATC), which served as a transitional arrangement to a
quota-free system begun on January 1, 2005. In this context, the CBTPA preferences provided an 12
import benefit for the region’s export sectors.
The United States created the CBI/CBTPA to foster Caribbean economic development and to
assist U.S. industry in responding to competition from similar production-sharing arrangements in
Asia that were taking a toll on U.S. production and employment in the textile and apparel

9 For an excellent economic history of the region, see Woodward, Ralph Lee Jr. Central America: A Nation Divided.
New York: Oxford University Press, third edition, 1999.
10 The Caribbean Basin Economic Recovery Act (CBERA – P.L. 98-67).
11 Extended to September 30, 2010 in P.L. 110-246, sec. 15408.
12 For more on the evolution of these trade preference arrangements, see CRS Report RL33951, U.S. Trade Policy and
the Caribbean: From Trade Preferences to Free Trade Agreements, by J. F. Hornbeck.

industries. Still, U.S. textile and particularly apparel industries have been hit hard by foreign 13
competition, resulting in a total job loss of over 540,000 employees from 1998-2002. The textile
industry (e.g., fiber, yarns, fabric) has remained marginally competitive through use of
sophisticated production technologies. The apparel manufacturing industry (e.g., shirts, pants,
undergarments) by contrast, is highly labor intensive, and in striving to reduce costs, has moved
production offshore to lower-wage countries.
As defined in the CBTPA, U.S. firms, through subsidiary or contractual arrangements, are
required to use mostly U.S. textiles as inputs to products that are assembled and exported back to
the United States—a mutually beneficial strategy. In 2002, some 56% of U.S. apparel and textile
imports from Central America was assembled from U.S. materials, compared to less than 1% for 14
apparel imports from China. Although this was a controversial move because of the reliance on
foreign low-wage workers to the detriment of some U.S. employment, many economists argued
that the alternative would have been an even greater and more rapid loss of textile and garment 15
jobs to Asian competitors that use no U.S. inputs.
With the removal of textile and apparel quotas in January 2005, the trade picture changed again.
The CAFTA-DR countries were already losing U.S. market share, which from 1997 to 2002
declined from 11.7% to 9.4%. Over the same time period, China’s market share increased from
9.1% to 13.0%. Given that U.S. textile and apparel imports from CAFTA-DR countries are
heavily concentrated in products previously covered by quotas, the dominance of China and other
low-cost Asian producers is likely to continue. CAFTA-DR producers are less competitive on a
pure cost basis because of their higher labor costs relative to some countries in Asia, the CBTPA
requirement to use more expensive U.S. inputs, and the additional administrative costs associated 16
with U.S. preferential trade requirements.
Low-cost labor, however, is not the only or even the most important factor driving 17
competitiveness. Studies suggest that the economic and social networks that developed between
U.S. and Central American firms effectively created a niche market in the region for certain
apparel that has held up even with the growing presence of China in the market. This relationship
was made possible by the proximity of production, operational efficiencies, and quick turn around
times for meeting increasingly shortened deadlines demanded by large retailers. In a post-quota
trading world, these advantages may allow a certain portion of textile and apparel production to
remain in the CAFTA-DR countries. Although CAFTA-DR country representatives have

13 United States International Trade Commission (USITC). The Economic Effects of Significant U.S. Import Restraints.
Publication 3701. Washington, DC, June 2004. p. 60.
14 USITC. Production-Sharing Update: Developments in 2001. Industry Trade and Technology Review. November
2003. pp. 22 and B-1-4.
15 Chacón, Francisco. International Trade in Textile and Garments: Global Restructuring of Sources of Supply in the
United States in the 1990s. Integration and Trade, Vol. 4, No. 11, May-August 2000. Inter-American Development
Bank, Washington, D.C. and United States International Trade Commission. Production-Sharing Update:
Developments in 2002. Industry Trade and Technology Review. November 2003. p. 12.
16 United States International Trade Commission. Textiles and Apparel: Assessment of the Competitiveness of Certain
Foreign Suppliers to the U.S. Market. USITC Publication 3671. Washington, D.C. January 2004. pp. 1-12, 3-22, and 3-
17 A more subtle distinction made by one economist notes that,How comparative advantage is created matters. Low-
wage foreign competition arising from an abundance of workers is different from competition that is created by foreign
labor practices that violate norms at home. Low wages that result from demography or history are very different from
low wages that result from government repression of unions.” See Rodrik, Dani. “Sense and Nonsense in the
Globalization Debate.” Foreign Policy. Summer 1997. p. 28.

emphasized that the passage of the free trade agreement is a critical component for maintaining 18
this strategy, it is not certain that it can counter the long-term trend in market share loss to Asia.
Strategic considerations were important, but ultimately it is fair to ask what each country expects
to gain commercially from the detailed agreement that has emerged. The dollar value of U.S.
trade with Central America makes the region the United States’ third largest Latin American
trading partner, right behind Brazil, but a far distant third from Mexico. Still, these are small
economies (see Appendix B for economic data) and although firms engaged in this trade may
find its effects significant, total CAFTA-DR trade in 2004 represented only 1.5% of U.S. foreign
commerce, and so can be expected to have only a small macroeconomic effect.
For the United States, an FTA is a more balanced trade arrangement than the unilateral
preferences provided in the CBI/CBTPA. Market access issues (e.g., tariff rates, quotas, rules of
origin) were core negotiating areas. Although Central American and Dominican tariffs were
already relatively low, they were reduced further. In particular, U.S. business interests wanted
equal or better treatment than that afforded to exports from Canada and Mexico based on their
FTAs with Central American countries. Permanent and clarified trade rules also supported the
joint production arrangements already in place between U.S. firms and those in the region.
Finally, a bilateral agreement offered the United States a chance to deepen other trade
commitments that affect some of its most competitive industries, including rules covering the
treatment of intellectual property, foreign investment, government procurement, e-commerce, and
From the Central American and Dominican perspectives, reducing barriers to the U.S. market
(especially for textile and agricultural products) was cause enough to proceed. The CAFTA-DR
also made permanent and expanded U.S. benefits given under the CBTPA legislation, but which
require reauthorization by Congress. Permanence in trade rules is an enticement for U.S. foreign
direct investment (FDI), which in turn can support the region’s export driven development
The CAFTA-DR countries also faced important vulnerabilities, such as the possibility that U.S.
agricultural exports of key staples, such as corn and rice, might overwhelm their small markets.
Sensitivity to these and other key industry sectors were addressed in the extended tariff phase-out
and safeguard schedules, and as a matter of development policy, by CAFTA-DR country efforts to 19
diversify the agricultural sector into non-traditional exports and non-farm employment.
Finally, there were two significant negotiation challenges. The first was the need for better
Central American integration as part of CAFTA-DR, which historically has been hampered.
Having multiple trade rules and rules of origin in a small sub-region would complicate the trade
picture. For the CAFTA-DR to work well, the United States needed assurance that goods would

18 USITC, Textiles and Apparel, pp. 3-33, 4-2-4. Gereffi, Gary. The Transformation of the North American Apparel
Industry: Is NAFTA a Curse or a Blessing? Integration and Trade. Vol. 4, No. 11. May-August 2000. Inter-American
Development Bank. pp. 56-57.
19 The CAFTA-DR countries have begun new exports projects in areas such as miniature vegetables, cut flowers, cable
manufacturing, among others, in expectation that moving beyond subsistence agriculture and textile manufacturing is
critical to achieve economic diversification and development. What distinguishes this effort from the earlier
agricultural export model is the emphasis on integrating small producers into the export system. The idea is not only to
tap into naturally small production capabilities, but to help bring social development to areas that previously were not
integrated into the agricultural export development model. It is still a relatively small effort and its widespread
application has yet to be fully realized, but the CAFTA-DR countries see the FTA as supporting this strategy.

flow efficiently within the region, which will be a significant benefit of the agreement. Second,
there was a difference in negotiating capacity between Central America and the United States.
U.S. and multilateral offers to assist these countries in developing such capacity were viewed as
generous, but also a little self-serving, which required sensitivity in the negotiation process.

“Docking” the Dominican Republic FTA to CAFTA added the largest of six trading partners
covered by the CAFTA-DR agreement. Total U.S. trade with the Dominican Republic in 2004
was one-third greater than with either Costa Rica or Honduras, which tie as the next largest U.S.
trading partner in Central America. What made the process feasible was the Dominican
Republic’s willingness to accept the basic framework and rules of CAFTA, while negotiating
market access and some other issues bilaterally, as was done with each of the five Central
American republics. In addition, the Dominican Republic’s economy and export regime are, in
many ways, similar to those of Central America. U.S.-Dominican Republic trade was added to an
earlier version of this report and is discussed in more detail separately.
Because of its huge size and geographical proximity, the U.S. market is a natural destination for
Central American exports. Merchandise trade with the United States has dominated Central
America’s foreign commerce for 150 years, and as seen in Figure 1, remains in that role today.
Figure 1. Central America’s Direction of Merchandise Trade, 2003
Data Source: IMF, Direction of Trade Statistics, 2004 Yearbook.

The United States is by far the largest of Central America’s trading partners, accounting for some
56% of its exports and 44% of its imports. The rest of Latin America collectively is the next
largest trading partner, accounting for 25% of Central America’s exports and 31% of its imports.
The European Union and Asia together account for about 14% of Central American exports and

21% of imports.

This distribution is not uniform throughout the region. Honduras, for example, exports 67% of its
merchandise goods to the United States, compared to 44% for Costa Rica. Honduras also has the
highest import percentage from the United States at 53% compared to Nicaragua’s 25%, which is
the lowest. Total trade (exports plus imports) with the United States is also somewhat uneven
country by country. Costa Rica accounts for 30% of total Central American trade with the United
States, whereas Nicaragua amounts to only 5% of the total. Guatemala, Honduras, and El
Salvador account for 25%, 22%, and 18% respectively.
Trade volume with the United States varies among countries, but in most cases the trend has been
one of growth at a rate higher than the average for U.S. trade with the world. Over the past five
years, U.S. exports to Central America grew by 34.7% (25.3% including the Dominican
Republic), compared to 17.6% with the world and 21.2% with Latin America as a whole (see
Appendix C for the data). U.S. imports from Central America increased by 19.3% (15.4%
including the Dominican Republic) over the same time period, compared to 43.4% from the
world and 51.4% from Latin America. Importantly, in 2003 some 80% of imports from Central
America and the Dominican Republic entered the United States duty free under either normal 20
trade relations (NTR) status or the CBI or GSP programs.
For 2004, although trade growth varied among the five countries, U.S. export growth to Central
America doubled average export growth to the world, with all five countries experiencing solid
growth. U.S. imports from Central America, by contrast, grew by less than half that of average
import growth from the world. As these trends suggest, the United States tends to run small
merchandise trade deficits with all the Central American countries and the Dominican Republic.
In part, this is the nature of a production-sharing trade relationship, where parts and materials are
sent abroad for value-added processing and then returned to the United States. Importantly, when
services trade is added to the trade balance, the United States tends to run trade surpluses with all
these countries. This trend, too, is indicative of the basic relationship between the United States, a 21
service-based economy, and developing countries.
Nearly three-quarters of U.S. imports from Central America fall into three main categories: fruit
(mostly bananas) and coffee; apparel; and integrated circuits. These three distinct categories, for
various reasons, are not traded uniformly by the five countries (see Table 1). First, Central
America has traditionally exported bananas and coffee, which is dominated by Costa Rica and
Guatemala. Coffee has actually declined for all countries except Costa Rica and constitutes only

3.8% of U.S. imports from the region. This reflects the competitive nature of trade in coffee,

20 United States International Trade Commission. U.S.-Central America-Dominican Republic Free Trade Agreement:
Potential Economywide and Selected Sectoral Effects. USITC Publication 3717. August 2004. p. 7.
21 This trend is not disputed, but the U.S. Department of Commerce does not disaggregate U.S. bilateral services trade
data with the Central American countries. Estimates are provided in some of the Country Commercial Guides produced
by the U.S. Department of Commerce based on foreign country reporting.

which is grown in vast quantities by Brazil, Colombia, and countries in Africa as well. Banana
trade has also declined in importance and accounts for only 5.0% of U.S. imports from Central
Table 1. Top Eight U.S. Merchandise Imports from Central America, 2004
($ millions)
Product and HTS Number Total C.R. Hon Guat El Sal Nic
Total U.S. Imports 13,172 3,333 3,641 3,155 2,033 991
Knit Apparel (61) 5,108 253 2,013 1,261 1,364 216
Woven Apparel (62) 2,415 265 729 686 357 379
Edible Fruit & Nuts (08) 1,037 490 172 359 0 14
-Bananas (0803) (657) (245) (129) (273) (0) (11)
Electrical Mach. (85) 983 719 172 1 18 73
-Integrated circuits 8542 (489) (489) (0) (0) (0) (0)
Optical/Med. Equip. (90) 492 480 0 12 0 0
Spices, Coffee, Tea (09) 512 150 45 216 49 52
-Coffee (0901) (504) (148) (43) (213) (49) (52)
Fish and Seafood (03) 293 60 133 22 6 74
Mineral Fuel, Oil (27) 186 0 0 180 6 0
Other 2,146 916 377 418 233 183
Top 8 as % of Total 83.7% 72.5% 89.6% 86.8% 88.5% 81.5%
Data Source: U.S. Department of Commerce.
Note: HTS = Harmonized Tariff Schedule
Second, knit and woven apparel has become the primary export goods for all countries except
Costa Rica and accounts for nearly 57% of total U.S. imports from Central America. Because of
the CBTPA benefits, some 56% of textiles and apparel imported from the six CAFTA-DR
countries in 2002 was assembled from U.S. fabric (from U.S. yarns). Of that amount, the
Dominican Republic had 33% of the total followed by Honduras with 30%, El Salvador with
18%, Costa Rica with 9%, Guatemala with 8%, and Nicaragua with 2%. Under the CBTPA, these
countries may engage in greater value-added operations such as cutting and dyeing, which has
allowed them to remain selectively competitive with low-cost Asian exports. These restrictions 22
are further relaxed under the CAFTA-DR. The USITC points out that the CAFTA-DR countries
have been losing market share to Asia since at least 1997, and the CAFTA-DR is seen as a way to 23
help abate this trend.
Third, Costa Rica attracted $500 million in foreign direct investment for a computer chip
assembly and testing plant, which has become its major export generator. This investment was
augmented by an additional $110 million in October 2003 for the production line of “chipsets” for
personal computers. In 2004, U.S. imports of integrated circuits constituted 18% of total imports

22 United States International Trade Commission. Production-Sharing Update: Developments in 2001. Industry Trade
and Technology Review. November 2003. pp. 13, 22, B1-4.
23 USITC, Textiles and Apparel, p. 1-12.

from Costa Rica. Similar importance may be seen in the imports of Costa Rica’s medical
equipment, another indicator of its relatively sophisticated production capabilities. Costa Rica is
the fastest growing and most diversified trader in Central America, which explains, in part, why it 24
has outpaced its neighbors on the development path.
The CAFTA-DR is intended to build on these trends, support export diversification, and provide a
long-term stable trade environment that will increase U.S. foreign investment in the region.
Evidence is already seen in alternative agricultural exports such as cut flowers and miniature
vegetables (in multiple CAFTA-DR countries), as well as, developing maquiladora operations to
supply coil wrapped cables for the automotive sector (Honduras) and adapting apparel cutting
technology to supply insulation for aircraft engines (Costa Rica). Many non-apparel items that the
United States imports from Central America face minimal or no tariffs. Bananas, coffee, oil, most
fish products, and Costa Rica’s integrated circuits and medical equipment enter duty free. Some
enter the United States under preferential arrangements, but the majority is free of duty under
normal (most favored nation—MFN) tariff rates. Rules on U.S. apparel imports were enhanced
and made permanent under CAFTA-DR.
As seen in Table 2, the major U.S. exports to Central America include electrical and office
machinery (computers), apparel, yarn, fabric, and plastic. Many of these goods are processed in
some form and re-exported back to the United States under production-sharing arrangements. For
example, nearly 60% of electrical machinery exports to Central America is integrated circuits
going to Costa Rica for processing and re-export. The same may be said for fabric and yarns that
are exported to all countries, sewn and otherwise assembled, and re-exported back to the United
States. Some of these goods are consumed in the CAFTA-DR countries along with capital goods
(machinery and parts) and agricultural products.
Similar trends for U.S. import trade are evident in U.S. exports. In 2004, 78% of knit apparel and
76% of knit, cotton, and yarn fabric went to Honduras and El Salvador. Although the United
States exports machinery and parts to all five countries, electrical machinery and particularly
integrated circuits, are sent to Costa Rica. All five countries import U.S. cereals and some, such
as corn and rice, are among the more import sensitive products for the CAFTA-DR countries 25
because they are staple crops and grown by small, often subsistence farmers.
The significant aspects of this trade structure are that it reflects: 1) the continued historical trend
of (largely duty-free) regional dependence on the large U.S. market as an important aspect of
trade and development policy; 2) a deepening economic integration; and 3) growing U.S. direct
investment over the long run.

24 Hufbauer, Kotschwar, and Wilson, op. cit., p. 1003.
25 USITC, Production-Sharing Update: Developments in 2001. Industry Trade and Technology Review. July 2002. pp.
39-42, B1-4

Table 2. Top Eight U.S. Merchandise Exports to Central America, 2004
($ millions)
Product and HTS Number Total Costa Rica Hon Guat El Sal Nic
Total U.S. Exports 11,388 3,304 3,077 2,548 1,868 592
Elec Machinery (85) 1,698 1,092 175 206 157 68
-Integrated circuits 8542 (828) (822) (0) (5) (1) (0)
Machinery (84) 1,031 301 205 256 205 69
-Office Mach. Pts (8473) (207) (68) (26) (62) (32) (19)
-Computer Parts (8471) (136) (43) (20) (32) (26) (10)
Cotton Yarn, Fabric (52) 780 18 412 241 84 23
Mineral Fuel (27) 712 93 239 313 57 10
Knit/Crocheted Fabric 60 688 38 351 24 272 3
Plastic (39) 657 253 123 181 87 13
Knit Apparel (61) 624 101 312 33 176 2
Cereals (10) 559 156 92 118 125 68
-Corn (1005) (242) (71) (31) (65) (64) (10)
-Wheat and Meslin 1001 (167) (38) (28) (34) (46) (21)
-Rice (1006) (149) (46) (33) (18) (16) (37)
Other 4,639 1,252 1,168 1,176 705 336
Top 8 as % of Total 59.3% 62.1% 62.0% 53.8% 62.3% 43.2%
Data Source: U.S. Department of Commerce.
Note: HTS = Harmonized Tariff Schedule
The Dominican Republic is the 28th largest U.S. export market (6th in Latin America) and ranks as stth
the 41 largest import country (8 in Latin America). More so than any of the Central American
countries, Dominican trade is dominated by the United States (see Table 3 for bilateral trade
The United States absorbs 80% of its exports, with 12% going to other developed countries and
only 8% entering developing countries. The Dominican Republic imports 50% of its merchandise
goods from the United States, 13% from other developed economies, and 37% from various
developing countries. Although the largest of the CAFTA-DR trading partners, U.S. exports grew
by only 1.6% in 2004 as the Dominican Republic continued to recover from a severe recession.
The joint-production arrangements are evident in apparel and jewelry-making industries. Apparel
and textiles constitute 16% of U.S. exports and 48% of U.S. imports. Other significant U.S.
exports include various types of machinery, refined oil products, and plastic. Other important U.S.
imports include medical instruments, electrical machinery, tobacco, and plastic. In many ways,
the structure of the U.S.-Dominican trade is similar to that of U.S.-CAFTA trade, and hence the
economic logic of “docking” it to the Central American agreement.

Table 3. U.S.-Dominican Republic Merchandise Trade, 2004
U.S. Exports (by product $ millions U.S. Imports (by product $ millions
and HTS Number) and HTS Number)
Electrical Machinery (85) 529 Woven Apparel (62) 1,147
Knit Apparel (27) 379 Knit Apparel (61) 889
Cotton Yarn, Fabric (52) 301 Medical Instruments (90) 417
Oil (not crude) (27) 291 Electrical Machinery (85) 393
Plastic (39) 235 Precious Stones/Jewelry(71) 341
Machinery (84) 230 Tobacco (24) 227
Precious Stones/Jewelry(71) 219 Iron and Steal (73) 161
Cereals (10) 185 Footwear (64) 137
Other 1,974 Other 816
Total 4,343 Total 4,528
Top 8 Exports as % of Total 54.5% Top 8 Imports as % of Total 82.0%
Data Source: U.S. Department of Commerce.
Note: HTS = Harmonized Tariff Schedule
The CAFTA-DR countries also benefit from foreign direct investment (FDI) as part of the trade
relationship with the United States, which is the largest foreign investor in all six countries. To the
extent that an FTA can be considered a stabilizing factor in economic relationships, it is expected
to encourage more FDI and thereby promote longer term economic growth and development.
U.S. FDI in the CAFTA countries is presented in Table 4.
Table 4. U.S. Foreign Direct Investment (FDI) in CAFTA-DR Countries
($ millions)
Country 1999 2000 2001 2002 2003
Costa Rica 1,493 1,716 1,835 1,802 1,831
El Salvador 621 540 464 684 779
Guatemala 478 835 311 303 294
Honduras 347 399 227 181 270
Nicaragua 119 140 157 250 261
Total Central America 3,058 3,630 2,994 3,220 3,435
Dominican Republic 968 1,143 1,116 983 860
Total CAFTA-DR 4,026 4,773 4,110 4,203 4,295
Data Source: U.S. Department of Commerce. Bureau of Economic Analysis. Available at Data are stock of FDI on a historical-cost basis.
The trends suggest that U.S. direct investment in the area is relatively small and has stagnated or
grown erratically in recent years. Some countries have fared better than others and net foreign

investment may increase or decrease because of both economic and political trends, as well as
opportunities in other parts of the world that can affect business decisions. Investment patterns
have been skewed toward Costa Rica, which has over half of U.S. FDI in Central America.

One aspect of the congressional debate over trade agreements focused on their potential economic
effects on the United States. Congress mandated that the United States International Trade
Commission (USITC) assess these effects and it released its final report in August 2004. This
report provides quantitative and qualitative estimates of the CAFTA-DR effects on the U.S.
economy as a whole and for selected sectors. Overall, it found that the “welfare value” or
aggregate effect on U.S. consumers and households of trade liberalization under the CAFTA-DR
would be approximately $166 million (less than 0.01% of GDP) for each year the agreement is in 26
With respect to trade flows, the reduction of relatively higher tariff rates on U.S. goods is
expected to increase U.S. exports more than imports with the region. The USITC model estimates
that when the CAFTA-DR is fully implemented, U.S. exports to the CAFTA-DR countries will
increase by $2.7 billion or 15%, while imports will increase by $2.8 billion, or 12%. The effect of
this trade growth on aggregate U.S. output and employment is estimated to be minimal. The
largest sector increases were estimated to occur for U.S. grains (0.29% for output and 0.31% for
employment) and the greatest decrease to occur for sugar manufacturing (-2.0% for both output 27
and employment). These estimates are in line with expectations voiced prior to the negotiations
that the marginal effects of the CAFTA-DR would be small, but positive for the U.S. economy as
a whole, given the CAFTA-DR countries had small and already largely open economies.
The rest of this section briefly summarizes the major negotiation issues and references the ITC’s
conclusions with respect to each major issue area, where applicable. Emphasis is given to those
sectors and issues expected to be most affected by the agreement, or that generated the most
contentious policy debate.
Market access refers to provisions that govern barriers to trade such as tariffs, quotas, safeguards,
and rules of origin, which define goods eligible for tariff preferences based on their regional
content. CAFTA-DR replaces and enhances in a permanent agreement U.S. preferential market
access extended unilaterally under the Caribbean Basin Economic Recover Act (CBERA), the
Caribbean Basin Trade Partnership Act (CBTPA), and the Generalized System of Preferences
(GSP), which require periodic congressional reauthorization (except CBERA). Agriculture and
textile/apparel goods, Central America’s major exports, were the most important and difficult
market access issues to resolve.

26 USITC, U.S.-Central America-Dominican Republic Free Trade Agreement, p. 64. The study reviews literature on the
CAFTA-DR and makes estimates of the economywide and sectoral effects of trade liberalization under CAFTA-DR
based on a computable general equilibrium (CGE) model. For details, see pages xiv, 2, and Appendix D.
27 Ibid., pp. xxii and 64-70.

Each traded good falls into one of eight tariff elimination “staging categories,” which define the
time period over which customs duties will be eliminated. Each country negotiated a list of its
most sensitive products for which duty-free treatment is delayed. For manufactured goods, duties
on 80% of U.S. exports were eliminated immediately, with the rest phased out over a period of up 28
to 10 years. For agricultural goods, duties on over 50% of U.S. exports were eliminated
immediately, with the rest phased out over a period of up to 20 years. In some cases, duty-free
treatment is “back loaded” and will not begin for 7 or 12 years after the agreement takes effect.
For the CAFTA-DR countries, 100% of non-textile and non-agricultural goods enter the United 29
States duty free immediately. Safeguards are retained for many products over the period of duty
phase out, but antidumping and countervailing duties were not addressed in the CAFTA-DR,
leaving all U.S. and other country trade remedy laws fully enforceable, as required under Trade
Promotion Authority (TPA).
The CAFTA-DR has less restrictive provisions governing textile and apparel imports than those
in the CBTPA. It removes all duties on textile and apparel imports that qualify under the
agreement’s rules of origin, retroactive to January 1, 2004, and allows for special safeguard
measures during the duty phase-out period. The permanence of the provisions and the more
accommodating rules of origin and administrative guidelines may generate a marginal increase in
apparel imports from the region. These provisions are intended to address the decline in U.S.
market share of textile and apparel imports from the region over the past five years, most of
which have been displaced by Asian products, despite the enhanced preferential treatment that 30
Congress afforded to Central American and Dominican imports under the CBTPA.
Central American and Dominican apparel has been entering the United States duty free for years,
if it is assembled from U.S. yarn and fabric under the so-called “yarn forward” rule. The
difference from the CBTPA is that duty-free access applies to textiles and garments assembled
from components made in either the CAFTA-DR countries or the United States, rather than just 31
the United States. Exceptions to this rule include an enhanced “cumulation rule,” which allows
duty-free treatment for a limited quantity of woven apparel assembled from components made in
Canada and Mexico, to help U.S. textile firms invested in these countries. In addition, there are
exceptions for specified products (affecting less than 10% of trade), goods with limited amounts
of material from third countries, and for tariff preference levels (TPLs) given to a few imports
from Nicaragua and Costa Rica.
Although these rules were widely supported, some textile producers registered concern that they
are overly restrictive and therefore limited in their intended effect of helping the region compete
(by lowering costs) in the U.S. market against Asian imports. U.S. and CAFTA-DR firms that
produce for the U.S. market wanted as much flexibility as possible to use fabrics from third
countries. Others feared, however, that they are too generous and that if customs procedures are
not well implemented, they could harm U.S. producers by increasing opportunities for the illegal
transshipment of fabrics or goods originating from outside the region, such as China. There was

28 Ibid., p. 25.
29 Office of United States Trade Representative. Free Trade with Central America: Summary of the U.S.-Central
America Free Trade Agreement. p. 1. Hereafter cited as the CAFTA Summary. It may be found at
30 USITC, U.S.-Central American-Dominican Free Trade Agreement, pp. 28-29.
31 See: CRS Report RS22150, DR-CAFTA, Textiles, and Apparel, by Bernard A. Gelb.

also considerable debate over the expansion from the CBTPA of the “short-supply” list. This is
the list of goods given duty-free access if made from materials that are determined to be
commercially in “short supply” in the United States. The CAFTA-DR may also increase U.S.
exports of textiles, which have risen significantly under CBTPA. On balance, however, the
USITC study estimated that it “will likely have a negligible impact on U.S. production or 32
Concerns raised by certain sectors of the textile and apparel industry required assurances from the
Bush Administration before support would be given to the CAFTA-DR. Promises were made to:
(1) change the rules of origin for textiles and apparel to require that all pocketings and linings
come from the CAFTA-DR countries (rather than third party countries like China); (2) negotiate a
new stricter customs enforcement agreement with Mexico before the CAFTA-DR cumulation
rules take effect allowing Mexican inputs to be used in CAFTA-DR textile and apparel products;
and (3) require Nicaragua to increase use of U.S. fabric to qualify as duty-free under their tariff
preference levels. These assurances are not part of the formal CAFTA-DR, but have been 33
implemented nonetheless.
Domestic support programs were not addressed in the CAFTA-DR, which focused on reducing
tariffs and increasing quota levels, the most costly trade-distorting policies. Average applied
tariffs on agricultural goods by most CAFTA-DR countries are relatively low, ranging from 7% to
23%. Most agricultural imports face no tariff in the United States. For all countries, the pressing
challenge was negotiating tariff rate quotas (TRQs—see below) for their most sensitive 34
products. Agricultural products have the most generous tariff phase-out schedules, with up to 20
years for some products (e.g., rice and dairy). This approach acknowledges that the agricultural
sectors bear most of the trade adjustment costs and that they will require time to make the 35
transition to freer trade.
All agricultural trade eventually becomes duty-free except for sugar imported by the United
States, fresh potatoes and onions imported by Costa Rica, and white corn imported by the other
Central American countries. These goods will continue to be subject to quotas that will increase,
after a certain period, by approximately 2% each year in perpetuity, with no decrease in the size 36
of the above-quota tariff. Over half of current U.S. farm exports to Central America became
duty free upon implementation, including high quality cuts of beef, cotton, wheat, soybeans,
certain fruits and vegetables, processed food products, and wine.

32 Inside U.S. Trade. CAFTA Textile Rules Pave Way for Increase in Foreign Fabric Use. December 19, 2003 and
Press Release. NTA Denounces CAFTA as Threat to U.S. Textile Industry. December 18, 2003 and USTR, CAFTA
Summary, p. 2 and USITC, U.S.-Central American-Dominican Republic FTA, p. 30-32. Nicaragua received special
preferential treatment for certain “non-originating apparel goods(Annex 3.27) and Costa Rica received limited special
treatment for certain wool apparel goods (Annex 3.28).
33 Washington Trade Daily, Tide Rising for CAFTA—Portman, July 26, 2005.
34 For more details, including sanitary and phytosantiary (SPS) provisions, see CRS Report RL32110, Agriculture in
the U.S.-Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), by Remy Jurenas.
35 Salazar-Xirinachs, Jose M. and Jaime Granados. The US-Central America Free Trade Agreement: Opportunities and
Challenges. In: Schott, Jeffrey J. ed. Free Trade Agreements: US Strategies and Priorities. Washington, D.C. Institute
for International Economics. 2004. pp. 245-46.
36 CRS Report RL32110, Agriculture in the U.S.-Dominican Republic-Central American Free Trade Agreement (DR-
CAFTA), by Remy Jurenas.

Many other transitional provisions exist. Agricultural products are subject to tariff-rate quotas, or
limits on the quantity of imports that can enter the United States before a very high tariff is
applied. The phased reduction in agriculture protection also includes the transitional use of
volume-triggered safeguards, or applying an additional duty temporarily on products that are 37
being imported in quantities deemed a threat to the domestic industry. Export subsidies are
eliminated except when responding to third party export subsidies.
Sugar was the most controversial agricultural issue to resolve and U.S. sugar growers and
processors were vehement opponents of the agreement to the end. The U.S. agreed to slight
numerical increases in sugar quotas for all six countries. Sugar and sugar-containing products
imported under the U.S. quota system enter the United States duty-free, but exports above the
quota face prohibitive tariffs. Raw sugar receives the largest quota by volume, 28% of the total
U.S. sugar quota for the world was filled by the CAFTA-DR countries in 2003, and was a major
issue for this agreement. The U.S. market accounts for only 14% of the region’s sugar exports, 38
representing less than 10% of the region’s sugar production.
The CAFTA-DR raises the U.S. quota by an amount equal to 35% of the current quota in year
one, rising to 50% by year 15, after which the quota increases each year slightly in perpetuity.
This may seem large, but the USITC notes that the initial increase amounts to only 1% of U.S.
production and consumption of raw sugar in 2003, and that the overall effects of the sugar
provisions may be small. Two studies done by the USITC and Louisiana State University
estimated that the sugar provisions could result in a decline in sugar prices of 1% (USITC) and

4.6% (LSU), with perhaps largely offsetting employment effects in the sugar producing and 39

sugar-containing product industries. The United States may impose a sugar price mechanism to
compensate Central American sugar exporters in lieu of according them duty-free treatment, but a
key issue for some Members of Congress was defining precisely how this mechanism will work.
Nonetheless, the sugar producing industry remained unsatisfied with these provisions. The Bush
Administration responded in a letter from Secretary of Agriculture Mike Johanns to Senator
Saxby Chambliss and Representative Bob Goodlatte, the respective agriculture committee chairs,
assuring the industry that the CAFTA-DR would not be allowed to interfere with the operation of
the sugar program as defined in the Farm Security and Rural Investment Act of 2002 (the Farm
Bill). In particular, he agreed to act should additional sugar imports due to the CAFTA-DR,
NAFTA, and other trade agreements cause the import trigger threshold of 1.532 million short tons
per year to be exceeded and threaten the sugar program operations. The U.S. Secretary of
Agriculture agreed that in such a case, he would preclude entry of additional sugar imports into
the domestic sweetener market by either making direct payments to exporters or using
agricultural commodities to purchase sugar to be used for nonfood use (ethanol production). This
offer also proved inadequate to bring about sugar industry support for the CAFTA-DR.
Increasing grain exports was another important goal for the United States. Wheat is not grown in
the CAFTA-DR countries and there is already largely free trade in this commodity. Staples for the

37 For example, in the case of beef, the Central American countries have agreed to the immediate elimination of tariffs
on U.S. prime and choice cuts, but have a 15-year tariff phase-out on other products, with a backloaded schedule (no
tariff reductions in the early years) and a safeguard. The United States has a 26% out-of-quota tariff on beef that will be
phased out over 15 years, with the quota schedule defined for each country.
38 USITC, U.S.-Central American-Dominican Free Trade Agreement, p. 35.
39 Ibid., pp. 38-40.

CAFTA-DR countries, such as rice and white corn, however, remain protected and there is a
complicated system for phasing out TRQs on U.S. exports over a 15-20 year period. As with
sugar imports to the United States, U.S. exports of corn and rice will increase slowly due to the
highly restrictive TRQs and special safeguard measures. The USITC estimates that changes in the
quantity of exports from the United States will be small at first and rise by perhaps 20% by the
end of the TRQ phase-out period. The USITC suggests that the long-run effect may be small
(1.2% of total U.S. grain exports), but notes that the “potential increase in grains exports offers 40
significant market opportunities for U.S. white and yellow corn growers and U.S. rice growers.”
Despite the lengthy transition period toward freer trade under the CAFTA-DR, concerns remain
over the potentially harmful effects to Central America, particularly to the small commercial and 41
subsistence farmers, of further opening its markets to U.S. agriculture. Three recent studies,
however, agree that overall, increased agricultural trade can also be one source of Central
American rural development. In addition to increasing Central American agricultural exports, the
majority of households are net consumers of agricultural goods, and so stand to gain from lower
prices, the equivalent to an increase in family income. Because subsistence farmers’ produce
generally does not reach the market, they are unlikely to be affected greatly by changes in market 42
Still, for the minority of rural net producers of agricultural goods, economists also agree that
adjustment policies are essential, beginning with targeted income assistance. For rural areas to
benefit fully from the CAFTA-DR, there is also a critical need for increased investment in
transportation and communications infrastructure, education, and more fully developed financial
services. These measures would improve agricultural productivity, help transition workers toward
alternative crops or non-farm employment, and integrate the rural economy more fully with the
national and international economy. Without concerted effort in adjustment assistance, the poorest 43
segments of rural Central America may remain vulnerable to the negative effects of freer trade.
In 2003, the United States’ stock of foreign direct investment (FDI) in the CAFTA-DR countries
was $4.3 billion, which represents only 1.4% of U.S. FDI in Latin America and the Caribbean.
Some 43% of the FDI in CAFTA-DR countries went to Costa Rica, followed by the Dominican
Republic with 20%. The United States has advocated clear and enforceable rules for foreign
investment in all trade agreements, which is largely accomplished by “standard” language
requiring national and most-favored-nation (nondiscriminatory) treatment. The CAFTA-DR
clarifies rules on expropriation and compensation, investor-state dispute settlement, and the
expeditious free flow of payments and transfers related to investments, with certain exceptions in

40 Ibid., pp. 43-47.
41 Oxfam International. A Raw Deal for Rice Under CAFTA-DR. Briefing Paper #68. 2004.
42 Todd, Jessica, Paul Winters, and Diego Arias. CAFTA and the Rural Economies of Central America: A Conceptual
Framework for Policy and Program Recommendation. Inter-American Development Bank. Washington, D.C.
December 2004. pp. 43-50, Mason, Andrew D. Ensuring that the Poor Benefit from CAFTA: Policy Approaches to
Managing the Economic Transition. Draft of Chapter 5 in forthcoming book. The World Bank. Washington, D.C.
March 25, 2005. pp. 25-26, 35, and Arce, Carlos and Carlos Felipe Jaramillo. El CAFTA y la Agriclutura
Centroamericana. Paper presented at the World Bank Regional Conference on International Trade and Rural Economic
Development, Guatemala. February 21-22, 2005. p. 17.
43 Ibid.

cases subject to legal proceedings (e.g., bankruptcy, insolvency, criminal activity). Transparent
and impartial dispute settlement procedures provide recourse to investors.
Two investment issues stood out. First, an investor-state provision, common in U.S. bilateral
investment treaties (BITs) and used in earlier FTAs, was included. It allows investors alleging a
breach in investment obligations to seek binding arbitration against the state through the dispute
settlement mechanism defined in the Investment Chapter. U.S. investors have long supported the
inclusion of investor-state rules to ensure that they have recourse in countries that do not
adequately protect the rights of foreign investors. Since bilateral investment treaties are usually
made with developing countries that have little foreign investment in the United States, such a
provision was thought unlikely to be used in the United States. Circumstances changed, however,
under NAFTA when Canada used investor-state provisions to raise “indirect expropriation” 44
claims against U.S. state environmental regulations.
Although none of the claims filed against the United States has prevailed, Congress instructed in
TPA legislation that future trade agreements ensure “that foreign investors in the United States are
not accorded greater substantive rights with respect to investment protections than United States
investors.” In response, Annex 10-C of the CAFTA-DR states that “except in rare circumstances,
nondiscriminatory regulatory actions by a Party that are designed and applied to protect
legitimate welfare objectives, such as public health, safety, and the environment, do not constitute
indirect expropriations.” This provision and another that allow for early elimination of
“frivolous” suits were intended to address congressional concerns, but there is uncertainty about
how well the changes will operate.
Second, the CAFTA-DR countries requested greater flexibility in the treatment of certain
sovereign debt. Annex 10-A allows sovereign debt owed to the United States that has been
suspended and rescheduled not to be held subject to the dispute settlement provisions in
investment chapter, with the exception that it be given national and MFN treatment. Annex 10-E
extends from six months to one year the amount of time required before a U.S. investor may seek
arbitration related to sovereign debt with a maturity of less than one year. Both provisions are
intended, in the event of a financial crisis, to keep the CAFTA-DR from interfering in any
sovereign debt restructuring process, and are viewed by the U.S. Treasury as an accommodation
to Central American interests.
The United States is the largest services exporter in the world and services trade presented a
number of hurdles given that the Central American countries have adopted few commitments of
the WTO’s General Agreement on Trade in Services (GATS). There were also many industry-
specific barriers that existed, such as: barriers to foreign insurance companies in Guatemala;
“heavy” regulation licensing of foreign professionals in Honduras; local partner requirements in
some financial services in Nicaragua; and numerous services monopolies in Costa Rica 45
(insurance and telecommunications). The CAFTA-DR provides broader market access and
greater regulatory transparency for most industries including telecommunications, insurance,

44 Indirect expropriation refers to regulatory and other actions that can adversely affect a business or property owner in
a way that istantamount to expropriation.” This issue and many cases are discussed in CRS Report RL31638, Foreign
Investor Protection Under NAFTA Chapter 11, by Robert Meltz.
45 USTR. 2004 National Trade Estimate Report on Foreign Trade Barriers. Washington, D.C. 2004.

financial services, distribution services, computer and business technology services, tourism, and
others. Banks and insurance firms have full rights to establish subsidiaries, joint ventures, and
branches. Regulation of service industries is required to be transparent and applied on an equal 46
basis and e-commerce rules are clearly defined, a critical component of delivering services.
The USITC suggests that the CAFTA-DR likely will have little effect on U.S. services imports
because the market is already largely open. It does anticipate opportunities for U.S. firms to
expand into Central America. In particular, Costa Rica agreed to the eventual opening of its state-
run telecommunications and insurance industries, where there has been strong political resistance 47
to privatization and deregulation. Unlike the other countries, doing so constitutes a major
structural adjustment for the Costa Rican economy, has implications for Costa Rican social
policy, and required amending domestic laws, all of which was difficult for their legislature to
support if they did not receive concrete tradeoffs in other areas, such as agriculture and textiles.
Negotiators resolved these issues in two week-long discussions held in January 2004 and their
detailed commitments are presented in the relevant chapters of the CAFTA-DR. Because of this
continued sensitivity, however, the CAFTA-DR was delayed until after a national referendum
supported moving ahead with the agreement.
None of the CAFTA-DR countries is a signatory to the WTO Agreement on Government
Procurement and complaints against purchasing processes vary from dissatisfaction with opaque
and cumbersome procedures in Costa Rica to outright corruption in Guatemala. El Salvador,
Nicaragua, and Honduras passed new government procurement laws in 2000/01, and in general,
there have been improvements in all countries in dealing with project bidding, although 48
transparency issues remain. Some analysts believe this is due in part to a lack of incentives
given that many of these countries will not be able to compete in the U.S. government 49
procurement market.
The CAFTA-DR grants non-discriminatory rights to bid on contracts from Central American
ministries, agencies, and departments, with the exception of “low-value contracts” and other
exceptions. It also calls for procurement procedures to be transparent and fair, including clear
advance notices of purchases and effective review. Specific schedules detailing exceptions and
limitations were written by each country, covering such diverse issues as the sale of firearms to
supplying school lunch programs. In addition, each country provided a list of subnational
governments (e.g., states and municipalities) that agree to adhere to the government procurement
provisions. The CAFTA-DR also makes clear that bribery is a criminal offense under the laws of
all countries. In general, the provisions are supported by U.S. businesses interested in doing or 50
expanding opportunities in the region.

46 USTR, CAFTA Summary, p. 2-3.
47 Salazar-Xirinachs and Granados, op. cit., p. 260.
48 USTR, 2004 National Trade Estimate Report on Foreign Trade Barriers.
49 Salazar-Xirinachs and Granados, op. cit., p. 253.
50 USTR, CAFTA Summary, p. 5.

All Central American countries are revising, or have revised, their intellectual property rights
(IPR) laws and are closing in on complying with the WTO Agreement on Trade-Related Aspects
of Intellectual Property Rights (TRIPS). That said, all countries are subject to criticism for falling
short of either clarifying or enforcing penalties for noncompliance and in some cases have simply
not adopted reforms that many U.S. industries (e.g., sound and video recordings, pharmaceuticals,
book publishing, computer software) consider necessary to protect their intellectual property.
Piracy, incomplete or inadequate legal protection, and enforcement capacity remain problems and
ongoing concerns exist across the range of IPR issues of patents, trademarks, and copyrights, 51
covering print, electronic, and other media.
The IPR provisions in the CAFTA-DR go beyond those in the WTO. They provide that all
businesses receive equal treatment and that the CAFTA-DR countries ratify or accede to various
international IP agreements. Trademark holders benefit from a transparent online registration
process and special system to resolve disputes over internet domain issues, among other
improvements. Copyright provisions clarify use of digital materials (exceeding TRIPS standards)
including rights over temporary copies of works on computers (music, videos, software, text),
sole author rights for making their work available online, extended terms of protection for
copyrighted materials, strong anti-circumvention provisions to prohibit tampering with
technologies, the requirement that governments use only legitimate computer software, the
prohibition of unauthorized receipt or distribution of encrypted satellite signals, and rules for
liability of internet service providers for copyright infringement. Patents and trade secrets rules
conform more closely with U.S. norms. End-user piracy is criminalized and all parties are
required to authorize the seizure, forfeiture, and destruction of counterfeit and pirated goods. The 52
CAFTA-DR also mandates statutory damages for abuse of copyrighted material.
The CAFTA-DR goes a long way toward meeting U.S. business IPR protection needs and the
USITC suggests that many industries will benefit from higher revenue if the new standards can be
enforced. Even if laws are changed to conform to the CAFTA-DR commitments, however,
enforcement problems will likely continue and technical assistance may be needed to help 53
develop the necessary capabilities.
To bring a patented drug to market, a drug company must demonstrate through clinical trials that
the drug is safe and effective. Under U.S. patent law, the data used to establish these claims are
protected from use by generic manufacturers for five years from the time the drug is introduced in
a country’s market. Similar language was adopted in the IPR chapter of the CAFTA-DR. This
provision became controversial in November 2004 when the Guatemala legislature changed its
laws, adopting World Trade Organization (WTO) language that would have limited data
protection to five years from the time a drug is brought to market in the first country (e.g., the
United States), rather than from the presumably later time that it might be introduced in a second
country (e.g., Guatemala).

51 Ibid and 2004 National Trade Estimate Report on Foreign Trade Barriers.
52 Ibid., p. 4-5.
53 USITC, U.S.-Central America-Dominican Republic Free Trade Agreement, p. 101.

The USTR argued that this change was a breach of the CAFTA-DR commitments and threatened
to delay implementing legislation until the law was changed. Guatemala reversed the data
protection law, to the disappointment of many who argued that the CAFTA-DR provisions could
delay access to future generic drugs. Given that data protection and patent protection often run
concurrently, however, it is debatable whether the introduction of future generic drugs will be
further inhibited by this provision. An August 5, 2004 side agreement among all signatories
further clarifies that “obligations” under Chapter 15 of the CAFTA-DR do not affect a country’s
ability “to take necessary measures [e.g., compulsory licensing for generic drugs] to protect
public health by promoting access to medicines for all,” in particular those needed to combat
epidemics such as HIV/AIDS, tuberculosis, and malaria, among others. Critics, however, would
have preferred that the side agreement include an explicit exception to the data protection 54
requirement for cases where compulsory licensing under the WTO rules might be invoked.
Perhaps the greatest challenge to the CAFTA-DR arose over concerns about the labor and
environment chapters. It has become widely accepted that labor and environment provisions
should be part of modern trade agreements. There is considerable disagreement, however, over
how aggressive language in trade agreements should be in addressing these issues.
From an economic perspective, labor and environment advocates in the United States argue that
developing countries may have an “unfair” competitive advantage because their lower standards
are the basis for their lower costs, which in turn are reflected in lower prices for goods that 55
compete with those produced in developed countries. It follows from this argument that the
difference in costs is an enticement to move U.S. investment and jobs abroad. On the other hand,
economists have argued that developing countries have a comparative advantage in labor costs
consistent with the free trade model and studies suggest that these cost differentials are usually
not high enough to determine business location alone—productivity remains the primary decision 56
factor. Further, many economists view trade liberalization as part of the overall development 57
process that, in and off itself, can promote social change. Developing countries are also

54 U.S. Congress. House of Representatives. Committee on Ways and Means. Dominican Republic-Central America-
United States Free Trade Agreement Implementation Act. H.Rept. 109-182. pp. 50-51. The side agreement is available
at and for a summary of the debate, see Brevetti, Rosella. CAFTA Opponents Blast U.S. Stance on
Guatemalan Data Protection Law. International Trade Reporter. BNA, Inc. March 10, 2005. See also: CRS Report
RS21609, The WTO, Intellectual Property Rights, and the Access to Medicines Controversy, by Ian F. Fergusson.
55 The difference is that in most developing countries, the social costs associated with environmental degradation,
pollution, and poor working conditions may not be captured in, or are external to, the market price (so-called external
costs). Through legal, regulatory, and tax measures, developed countries require that businesses correct, or pay for,
many of these social problems, thereby internalizing these costs to the business, where they are then reflected in the
final (relatively higher) price of the good or service in the market place.
56 See Stern, Robert M. Labor Standards and Trade. In: Bronckers, Marco and Reinhard Quick, eds. New Directions in
International Economic Law: Essays in Honor of John H. Jackson. The Hague: Kluwer Law International. 2000. pp.
427-28 and 436 and CRS Report 98-742, Trade with Developing Countries: Effects on U.S. Workers, by J. F.
Hornbeck. Productivity and wage levels are, however, highly correlated. See Rodrik, Sense and Nonsense in the
Globalization Debate, pp. 30-33.
57 In addition to the external costs addressed in this section, it is interesting to note that there is some broader evidence
that FTAs have not “forced a race to the bottom of regulatory standards,” but to the contrary, that policy convergence is
affected more by countries agreeing to “norms of governance via cooperation through international agreements. See
Drezner, Daniel W. Globalization and Policy Convergence. International Studies Review. Vol. 3, Issue 1, Spring 2001.
pp. 75 and 78.

concerned with sovereignty issues related to specifying standards in trade agreements and the
possibility that they can be misused as a disguised form of protectionism.
The labor chapter proved to be the biggest point of contention in the CAFTA-DR debate, divided
largely along party lines. The opening paragraph of the chapter states that all parties reaffirm their
commitments under the United Nations International Labor Organization (ILO). These are
defined in the ILO’s 1998 Declaration on Fundamental Principles and Rights at Work as: (1) the
freedom of association and the effective recognition of the right to collective bargaining; (2) the
elimination of all forms of forced or compulsory labor; (3) the effective abolition of child labor; 58
and (4) the elimination of discrimination in respect of employment and occupation.
Disagreement revolved around three issues. First, whether the CAFTA-DR countries had laws
that complied with ILO basic principles. Second, the ability of these countries’ to enforce their
laws. Third, and most importantly, capacity of the CAFTA-DR Labor Chapter to compel legal
compliance and enforcement of ILO fundamental principles.
The Central American countries entered the debate early when they requested the ILO to conduct
a study of their labor laws. The final 2003 report is subject to interpretation and has been used to
bolster both sides of the argument as to whether the CAFTA-DR countries guarantee core ILO 59
principles. Some interpreted the report to affirm that the CAFTA-DR countries’ laws comply
with internationally recognized labor standards. In response, Democratic Members of the House
Ways and Means Committee pointed out deficiencies in many of their laws in a letter sent to the
USTR’s office. It identified 20 Central American laws that fail to meet core ILO principles, all
cases related to freedom of association or collective bargaining, as opposed to discrimination, 60
compulsory labor, or child labor.
In April 2005, with the assistance of the Inter-American Development Bank, the CAFTA-DR
country ministers of trade and labor released a study of their countries’ shortfalls in meeting and
enforcing core labor principles. Although it documented that all countries had made recent
changes to their labor laws, there was clear recognition for the need to harmonize some laws
better with ILO principles, as well as, address enforcement of key infractions such as employment
discrimination (pregnancy testing), abuses in free trade zones (application of labor laws), and the 61
need to dedicate more resources to enforcement.

58 Article 16.8 of the Labor Chapter also has a list of internationally recognized labor rights that includes all of these
rights plus “acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and
59 United Nations. International Labor Organization. Fundamental Principles and Rights at Work: A Labour Law
Study: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua. Geneva, 2003.
60 Letter to the Honorable Peter Allgeier. April 4, 2005. If Honduras and Guatemala are eliminated, concerns in this
letter would focus on the use of solidarity associations, onerous strike requirements, and inadequate protection against
anti-union discrimination.
61 Ministers of Trade and Labor. The Labor Dimension in Central America and the Dominican Republic. Building on
Progress: Strengthening Compliance and Enhancing Capacity. April 2005.

The debate over the adequacy of labor laws was not resolved to the satisfaction of any party, but
there was little disagreement that labor law enforcement is an ongoing problem and that
unionization is not widespread. The CAFTA-DR countries have admitted in their own report that
many lack the financial resources and technical expertise to enforce adequately good labor
practices, a problem that will also take time and resources to overcome.
The Labor Chapter in the CAFTA-DR defines certain labor standards for all member countries
and the dispute settlement mechanism for arbitrating formal complaints against noncompliance. It
closely follows language set out in Trade Promotion Authority (TPA) legislation on the principal 62
negotiating objectives of the United States with respect to labor. The USTR made note of this
fact and further argued that the chapter goes beyond earlier FTAs through a Labor Cooperation
and Capacity Building Mechanism that will support a mutual approach to improve working
conditions in CAFTA-DR countries by: (1) ensuring effective enforcement of existing labor laws;
(2) working with the ILO to improve existing labor laws and enforcement; and (3) building local
capacity to improve workers rights.
Critics charged, however, that the CAFTA-DR labor provisions were too weak because they give
different weight to the following three provisions: (1) the effective enforcement of domestic labor
laws; (2) the reaffirmation of commitments to ILO basic principles; and (3) “non-derogation”
from domestic standards (not weakening or reducing protections to encourage trade and 63
investment). The first provision, failure to enforce domestic labor laws, can be formally
challenged in the dispute resolution process as defined in the CAFTA-DR. Dispute resolution is
not available for the other two provisions, although they are supported in principle (Articles 16.2
and 16.6).
There was also concern over the differences between labor and other dispute settlement
provisions. If a commercial dispute remains unsettled, the country faces the possibility of a
suspension of benefits “of equivalent effect” (Article 20.16), resulting in the raising of tariffs, or
payment of a monetary assessment (fine) equal to 50% of what a dispute panel determines is “of
equivalent effect.” This article does not apply to the disputable labor provision. The difference is
that the option for failing to resolve a labor dispute is a monetary assessment paid by the country,
which is capped at $15 million per year, per violation, with recourse to an equivalent dollar value
of suspended benefits (higher tariffs) if the fine is not paid. The fine is paid into a fund operated
by the country in question and is to be expended for “appropriate labor initiatives.”
U.S. labor advocates have charged that “the labor provisions of the CAFTA-DR will not protect 64
the core rights of workers in any of the six countries participating in the agreement.” Many

62 The 2002 TPA vote itself was highly contentious in large part because of the disagreement over how the principal
negotiating objectives with respect to labor were defined.
63 Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC). The U.S.-Central America Free Trade
Agreement. March 19, 2004. p. 6, and Lee, Thea M. Assistant Director for International Economics, AFL-CIO.
Comments on the Proposed U.S.-Central American Free Trade Agreement, before the USTR Trade Policy Committee,
November 19, 2002.
64 LAC, ibid., p. 1.

Members of Congress concurred, believing that the “enforce your own laws” standard, as well as
the limited dispute settlement provisions, would be ineffective at compelling countries to meet
basic ILO standards. It was also argued that they are a step backward from the provisions
allowing for the suspension of trade benefits found in U.S. unilateral preferential trade
arrangements, such as the Caribbean Basin Initiative (CBI) and the Generalized System of
Preferences (GSP). In these, the United States has the option to suspend trade benefits (reimpose
tariffs) if a country does not comply with provisions of the agreement, including the labor section.
Democrats cited a number of examples, including CAFTA-DR countries, where sanctions, or 65
threats thereof, compelled changes in labor laws. Further, capping the assessment in a labor
dispute at $15 million and having the assessment paid into a fund in the offending country was
seen as a largely ineffective mechanism for compliance.
Supporters of the Labor Chapter argued that the agreement encourages countries to improve their
laws, making the “enforce your own laws” a meaningful standard, that the CBI option for trade
sanctions is less appealing in a reciprocal free trade agreement where the United States is also
subject to the discipline, and further, that trade sanctions are a “blunt” instrument, punishing all
export workers whose products would come under the sanctions, potentially worsening their
situation rather than improving it. It was also argued that sanctions have not been a widely used
tool over the lives of the CBI and GSP programs, and to the contrary, that an annual $15 million
fine per violation is a potentially significant deterrent for the CAFTA-DR countries. Finally,
technical assistance, cooperation, and transparency were presented as more effective tools in the 66
long run to bring about change in Central America.
Only time will tell if the CAFTA-DR labor provisions provide support and possibly effective
punitive responses to encourage deeper labor rights reforms in Central America. These provisions
are similar to those found in other FTAs for which Congress passed implementing legislation,
including Chile, Singapore, Morocco, and Australia (Jordan’s labor provisions were different in
some places). Many Members may have accepted that those countries had adequate labor laws,
even if there were enforcement or other concerns. This perception was clearly lacking for the
CAFTA-DR countries, despite efforts to make transparent their deficiencies and to correct some
laws and enforcement problems. Hence, broader support was never reached in Congress over the 67
adequacy of these provisions in the CAFTA-DR.
Major goals included protecting and assuring strong enforcement of existing domestic
environmental standards, ensuring that multilateral environmental agreements are not undermined
by trade rules, promoting strong environmental initiatives to evaluate and raise environmental
performance, developing a systematic program of capacity-building assistance, and assuring that
environmental provisions in FTAs are subject to the same dispute resolution and enforcement 68
mechanisms as are other aspects of the agreement.

65 See U.S. Congress. House of Representatives. Committee on Ways and Means. Dominican Republic-Central
America-United States Free Trade Agreement Implementation Act. H.Rept. 109-182. pp. 47-50.
66 Ibid., pp. 4-6. See also: Gresser, Edward. The Progressive Case for CAFTA. Progressive Policy Institute. Policy
Brief. July 2005. pp. 4-6.
67 Indeed, incorporating mandatory adherence to the ILO basic principles would later become standard language for the
Peru, Panama, and Colombia bilateral FTAs.
68 See, Principles for Environmentally Responsible Trade. Another

The USTR argued that congressional objectives on environmental issues have been met in the
proposed CAFTA-DR agreement. It includes language requiring all countries to enforce their
laws and regulations and also creates an environmental cooperation agreement with a framework
for establishing a cooperation commission and a process to conduct capacity building. All parties
agree to commit to establish high levels of environmental protection and to open proceedings in 69
the administration and enforcement of laws and regulations.
Advocates raised the issue of the environmental effects of trade, particularly in developing
countries that may have weak laws and lax enforcement mechanisms, but the environmental
provisions were not the most contentious issues in the CAFTA-DR. Many of these same
advocates have conceded that trade agreements have not led to catastrophic pollution problems
nor encouraged a “regulatory race to the bottom.” In fact, there has also been a certain
acknowledged degree of success, by having environmental issues addressed in the body of FTAs,
in side agreements on environmental cooperation, and through technical assistance programs, the
latter of which developing countries can use to respond to specific problems. Advocates still
noted that much can be improved, such as tightening enforcement language and ensuring that the
United States allocates financial resources to back up promises of technical assistance,
particularly in the case of Central America, where commitment to “public accountability” is 70
questioned in some cases.
The Trade and Environment Policy Advisory Committee supported most of the environment
provisions in the CAFTA-DR and particularly the enhanced public participation process
negotiated by the State Department in a side agreement. The dispute settlement provisions,
effectively the same rules governing labor disputes, were accepted as striking the “proper
balance.” The advisory committee still raised a number of specific environmental concerns, and
questioned whether the CAFTA-DR would be able to meet congressional objectives on capacity 71
building without concrete funding for the program. In response, the seven countries signed a
supplemental Environmental Cooperation Agreement (ECA) on February 18, 2005. It calls for a
new unit to be established in the Secretariat for Central American Integration to administer public
submissions or complaints made on enforcement issues. The ECA is intended to address both
short-and long-term environmental goals, including providing for a monitoring process, but does
not address concerns over funding for the implementation of environmental initiatives.
The dispute resolution chapter was modeled on previous FTAs, in which disagreements are
intended to be resolved cooperatively via a consultative process. If this approach is not
successful, the process moves to the establishment of the Free Trade Commission of cabinet-level

important issue for the United States is ensuring that its higher environmental standards defined in law and regulation
not be compromised by challenges of protectionism. See CRS Report RL31638, Foreign Investor Protection Under
NAFTA Chapter 11, by Robert Meltz.
69 For more details on congressional interest in environmental provisions in trade agreements, see CRS Report
RS21326, Trade Promotion Authority: Environment Related Provisions of P.L. 107-210, by Mary Tiemann.
70 See Audley, John. Environment and Trade: The Linchpin to Successful CAFTA Negotiations? Carnegie Endowment
for International Peace. Washington, D.C. July 2003.
71 Trade and Environment Policy Advisory Committee on the Central American Free Trade Agreement. The U.S.-
Central American Free Trade Agreement. March 12, 2004.

representatives, and finally an arbitral panel. Arbitral panels are intended to broker mutually
acceptable resolutions, including providing for compensation, if appropriate. If a mutually-agreed
solution is not found, the complaining party may resort to a suspension of benefits of equivalent
effect. This result may also be challenged, and final resolution, as well as how the suspension of
benefits are to be administered are set out in guidelines. Resolving labor and environmental
disputes will be handled slightly differently (see previous section). All dispute resolution
procedures are defined in Chapter 20. Administrative and other technical matters (e.g.,
transparency issues) of trade agreement implementation were also addressed by this working
Even before detailed discussions began on the CAFTA-DR, the Central American countries were
apprehensive over the possibility of being overwhelmed by the resource and experience
advantage that the United States had to negotiate and comply with liberalized trade rules. Hence,
the need for trade capacity building, which may be classified into three distinct areas beyond
trade negotiation capabilities. First, the ability to identify priorities, including where the major
adjustment costs (losers) are expected to be and how to respond to them. Second, the ability to
develop resources to implement the agreement, including institutional, financial, and analytical 72
resources. Third, the capacity to benefit from the CAFTA-DR. The agreement created a
permanent Committee on Trade Capacity Building to continue work begun in the negotiation
process, and recommendations in the agreement call for one of its first priorities to be customs
The third category, however, is arguably the most challenging. It refers to the ability of a business
to: compete in a larger market; learn how to export and use imports (as inputs) more to its
advantage; tap into global finance; navigate customs and trade logistics problems; and in other 73
ways make the transition from local producer to international player. This will be a difficult
challenge for many Central American firms, particularly if barriers to world trade are reduced
outside the U.S.-Central American relationship (WTO/FTAA) putting increasing pressure on
marginally productive businesses. The joint-production relationship already established in textiles
and garments suggests that certain firms have already developed some expertise in meeting these
From the outset of negotiations, the United States advocated assisting the Central American
countries. Each Central American country prepared a National Action Plan based on a review of
its “trade-related” needs. Assistance is being provided by the United States government through
the U.S. Trade and Development Agency, Agency for International Development, and the
Department of State, among others; private groups (corporate and non-government
organizations—NGOs); and five international organizations (the Inter-American Development
Bank—IDB, Central American Bank for Economic Integration—CABEI, United Nations
Economic Commission on Latin America and the Caribbean—ECLAC, Organization of
American States—OAS, and the World Bank).

72 This typology of capacity issues was developed by Bernard Hoekman of the World Bank. Earlier versions of this
report mentioned a fourth area, trade negotiation capacity.
73 Ibid.

The CAFTA-DR includes a Committee on Trade Capacity Building to coordinate these types of
activities. U.S. inter-agency funding in support of CAFTA-DR trade capacity building peaked as
the agreement came to completion, including $20 million for labor and environmental technical
assistance in the FY2005 budget. Maintaining formal support for these programs, including
ongoing financial commitments, is one challenge supporters of these programs emphasize. This is
also true for the trade capacity building efforts in specific non-commercial areas, such as
enforcing labor and environmental commitments.

Date Milestone
January 16, 2002 President George W. Bush announces his intention to explore a free trade
agreement (FTA) with Central America.
August 6, 2002 President Bush signs the Trade Act of 2002 (P.L. 107-210), which includes Trade
Promotion Authority (TPA).
October 1, 2002 President Bush, as required under TPA, formally notifies Congress of his intention
to negotiate a U.S.-Central America Free Trade Agreement (CAFTA) with
Guatemala, El Salvador, Honduras, Costa Rica, and Nicaragua.
November 19, 2002 USTR holds public hearings on CAFTA.
January 27, 2003 The first of nine rounds begins in San Jose, Costa Rica.
August 4, 2003 USTR Zoellick formally notifies Congress of intent to negotiate an FTA with the
Dominican Republic.
December 17, 2003 CAFTA negotiations conclude in Washington, DC. Costa Rica requests further
negotiation on telecommunications, insurance, agriculture, and textile market access
January 5-9, 2004 Costa Rica and the United States hold first round of bilateral discussions on CAFTA.
January 12-16, 2004 First round of negotiations with Dominican Republic held.
January 19-24, 2004 Costa Rica and United States hold second round of bilateral discussions on CAFTA.
January 25, 2004 Costa Rica and United States agree to CAFTA provisions.
January 28, 2004 USTR releases draft version of CAFTA to public.
February 20, 2004 President Bush formally notifies Congress of his intention to sign CAFTA.
March 15, 2004 The United States and the Dominican Republic conclude a bilateral FTA and the
USTR announces it will be “docked” to CAFTA.
March 24, 2004 President Bush formally notifies Congress of his intention to sign the U.S.-
Dominican Republic FTA.
April 9, 2004 USTR releases draft text of the FTA with the Dominican Republic.
May 28, 2004 The USTR and trade ministers from the Central American countries sign CAFTA in
Washington, D.C.
August 5, 2004 The USTR and trade ministers from the Dominican Republic and Central America
sign the CAFTA-DR agreement in Washington, D.C.
December 17, 2004 Salvadoran legislature ratifies the CAFTA-DR 49 to 35.
March 3, 2005 Honduran legislature ratifies the CAFTA-DR 100 to 28.
March 10, 2005 Guatemalan legislature ratifies the CAFTA-DR 126-12.
April 13, 2005 Senate Finance Committee holds hearing on CAFTA-DR.
April 21, 2005 House Ways and Means Committee holds hearing on CAFTA-DR.
June 14, 2005 Senate Finance Committee holds “mock markup” on draft implementing legislation
and informally approves it 11 to 9, with one non-binding amendment.
June 15, 2005 House Ways and Means Committee holds “mock markup” on draft implementing
legislation, informally approving it 25 to 16 with one non-binding amendment.

Date Milestone
June 23, 2005 President Bush sends final text and required supporting documents of the CAFTA-
DR implementing bill to Congress.
June 23, 2005 Identical legislation is introduced in the House and Senate as H.R. 3045 and S. 1307.
June 29, 2005 Senate Finance Committee orders S. 1307 favorably reported by voice vote, with no
written report.
June 30, 2005 House Ways and Means Committee orders H.R. 3045 favorably reported by a roll
call vote, 25 to 16.
June 30, 2005 S. 1307 agreed to in the Senate, 54 to 45.
July 25, 2005 H.R. 3045 reported by the House Committee on Ways and Means (H.Rept. 109-
July 26, 2005 House Committee on Rules provides a closed rule for consideration of H.R. 3045
under which debate is limited to two hours and all points of order against
consideration of H.R. 3045 are waived (H.Rept. 109-186).
July 28, 2005 H.R. 3045 agreed to in the House, 217 to 215.
July 28, 2005 Senate agrees to substitute H.R. 3045 for S. 1307, 56 to 44.
August 2, 2005 President Bush signs H.R. 3045 into law (P.L. 109-53; 119 Stat. 462)
September 6, 2005 Dominican Republic ratifies CAFTA-DR. Chamber of Deputies passes bill 118 to 4,
Senate passed bill 27 to 3 on August 26.
October 9, 2005 Nicaraguan General Assembly ratifies CAFTA-DR by a vote of 49 to 37.
March 1, 2006 The United States implements CAFTA-DR for El Salvador.
April 1, 2006 The United States implements CAFTA-DR for Honduras and Nicaragua.
July 1, 2006 The United States implements CAFTA-DR for Guatemala.
March 1, 2007 The United States implements CAFTA-DR for the Dominican Republic.
October 7, 2007 Costa Rica referendum supports CAFTA-DR 51.6% to 48.4%.
January 1, 2009 The United States implements CAFTA-DR for Costa Rica.

(year 2003 data, except where otherwise indicated)
Costa El Guat-Hon-Nicar-Dom.
Rica Salvador emala duras agua Rep.
GDP ($ billions) 17.5 14.7 24.0 6.8 2.7 20.5
GDP Growth (%) 5.0 2.2 2.4 1.5 2.3 -1.3
GDP Growth 1980-1990 (%)a 3.0 0.2 0.8 2.7 -1.9 3.1
GDP Growth 1990-2002 (%)a 4.9 4.3 4.0 3.1 4.3 6.0
PPP Per Capita Gross National 8,560 4,190 4,030 2,540 2,350 6,270
Inflation (%) 9.3 2.8 5.5 9.8 6.1 28.0
Current Account Balance (% of -5.9 -4.5 -4.3 -7.6 -17.6 4.5
Pop. Below $1 per day (%)c 2.0 31.1 16.0 23.8 45.1 <2.0
Human Development Index 42 105 119 115 121 94
(HDI) Rank
Sources: World Bank, World Development Indicators 2004, pp. 14-15, 54-55, and 178-83, United Nations, Human
Development Report, 2003, and IMF website.
Note: HDI is a composite measure (education, income, and life expectancy) of average achievement in human
development. A lower ranking is better: e.g., United States (7), Italy (21), and South Korea (30). The 2003 report
reflects data for year 2001.
a. Average annual percent growth.
b. Gross national income (GNI) converted to international dollars using purchasing power parity rates. An
international dollar has the same purchasing power over the GNI as a U.S. dollar has in the United States.
GNI, formerly represented as GNP by the World Bank, is a different, but similar measure as GDP. Data are
for year 2002.
c. Percentage of population living on $1 per day or less, most recent survey year.

($ millions)
% %
Country 1999 2000 2001 2002 2003 2004 Change Change
2003-2004 1999-2004
U.S. Exports
Costa Rica 2,381 2,460 2,502 3,117 3,414 3,304 -3.2% 38.8%
Honduras 2,370 2,584 2,416 2,571 2,826 3,077 8.9% 29.8%
Guatemala 1,812 1,901 1,870 2,044 2,263 2,548 12.6% 40.6%
El Salvador 1,519 1,780 1,760 1,664 1,821 1,868 2.6% 23.0%
Nicaragua 374 379 443 437 502 592 17.9% 58.3%
Dominican 4,100 4,473 4,398 4,250 4,205 4,343 3.3% 5.9%
Total 12,556 13,577 13,389 14,083 15,031 15,732 4.7% 25.3%
Mexico 86,909 111,349 101,296 97,470 97,412 110,775 13.7% 27.5%
LACa 55,153 59,283 58,157 51,551 51,946 61,426 18.3% 11.4%
Latin 142,062 170,632 159,453 149,021 149,358 172,201 15.3% 21.2%
World 695,797 781,918 729,100 693,103 724,771 817,936 12.9% 17.6%
U.S. Imports
Costa Rica 3,968 3,539 2,886 3,142 3,364 3,333 -0.9% -16.0%
Honduras 2,713 3,090 3,127 3,261 3,313 3,641 9.9% 34.2%
Guatemala 2,265 2,607 2,589 2,796 2,947 3,155 7.1% 39.3%
El Salvador 1,605 1,933 1,880 1,982 2,020 2,053 1.6% 27.9%
Nicaragua 495 589 604 679 770 991 28.7% 100.2%
Dominican 4,287 4,383 4,183 4,169 4,455 4,528 1.6% 5.6%
Total 15,333 16,141 15,269 16,029 16,869 17,701 4.9% 15.4%
Mexico 109,721 135,926 131,338 134,616 138,060 155,843 12.9% 42.0%
LACa 58,464 73,348 67,370 69,503 78,829 98,749 25.3% 68.9%
Latin 168,185 209,274 198,708 204,119 216,889 254,592 17.4% 51.4%
World 1,024,618 1,218,022 1,140,999 1,161,366 1,257,121 1,469,671 16.9% 43.4%
U.S. Balance of Trade
Costa Rica -1,587 -1,079 -384 -25 50 -29
Honduras -343 -506 -711 -690 -487 -564
Guatemala -453 -706 -719 -752 -684 -607

% %
Country 1999 2000 2001 2002 2003 2004 Change Change
2003-2004 1999-2004
El Salvador -86 -153 -120 -318 -199 -185
Nicaragua -121 -210 -161 -243 -268 -399
Dominican -187 90 215 81 -250 -185
Total -2,777 -2,564 -1,880 -1,947 -1,838 -1,969
Mexico -22,812 -24,577 -30,042 -37,146 -40,648 -45,068
LACa -3,311 -14,065 -9,213 -17,952 -26,883 -37,323
Latin -26,124 -38,642 -39,256 -55,098 -67,531 -82,391
World -328,821 -436,104 -411,899 -468,263 -532,350 -651,735
Source: Table created by CRS from U.S. Department of Commerce data.
a. Latin America and the Caribbean, except Mexico.
J. F. Hornbeck
Specialist in International Trade and Finance, 7-7782