San José, Costa Rica, since 1956

How Has CAFTA Affected Other Countries?

While not yet a certainty in Costa Rica, the Central American Free-Trade Agreement with the United States (CAFTA) has been in effect for just over a year in five of the countries that have signed on to the pact – the United States, El Salvador, Guatemala, Honduras and Nicaragua – and just a few months in the Dominican Republic.

How has it gone? Hard to tell in many areas, but here’s a rundown of feedback provided to The Tico Times:

United States of America

Population: 301 million

Per-capita GDP: $43,500

Treaty Ratified: Aug. 2, 2005

In the overall picture, the balance of trade with CAFTA countries has shifted in favor of the United States.

In 2004, the United States was running a $1.91 billion trade deficit with signatory countries. That means the trade giant was importing more goods from those countries than it was exporting to them. That situation has reversed, however.

By 2006, the United States was marking an annual trade surplus of $717.1 million to signatory countries, and that trend is continuing so far in 2007, according to numbers from the U.S. Census Bureau.

At this point, that’s not much of a surprise.

All CAFTA countries, including the Dominican Republic, already had privileged access to the U.S. markets thanks to the Caribbean Basin Initiative, which unilaterally dropped U.S. trade barriers to favored countries.

This means CAFTA did not create many new markets for the Dominican Republic and Central American countries, and none of them expected exports to the United States to suddenly jump.

U.S. exporters, however, did get access to new markets through the treaty when the other countries dropped their trade barriers to U.S. goods, which helps explain the swing in the trade balance.

One fear in many signatory countries was that subsidized U.S. agriculture products would flood in and swamp local providers. Indeed, from 2005 to 2006, imports of U.S. agricultural products certainly increased.

According to numbers from the U.S. Foreign Agriculture Services Department, agriculture exports to the Dominican Republic and Central American partners jumped $345 million to $2.2 billion, a high since the government began keeping track in 1970.

During the first half of this year, exports were up 21% over the same period in 2006. What has also jumped, however, are U.S. imports of agricultural goods from the region. The United States went from importing $2.7 billion to $3.07 billion in 2006, an increase of $370 million and also a statistical record.

El Salvador

Population: <7 million

Per-capita GDP: $4,900

CAFTA implemented: March 2006

In El Salvador, the first CAFTA country along with the United States to ratify the agreement, proponents of the pact say trade boomed last year, but opponents say it has left many without jobs.

Salvadoran exports to the United States grew 68% in 2006, excluding maquila exports, according to Economy Minister Yolanda de Gavidia. A larger proportion of Salvadoran exports to the United States are non-traditional products (that is, not just shrimp, sugar and coffee).

Ethyl alcohol, plastics, metal machinery and electronics have seen important export growth. A majority of El Salvador’s exports – 56% – go to the United States, which is El Salvador’s biggest trading partner. Meanwhile, imports of U.S. products grew 23% in 2006.

Yellow corn, wheat, plastic, electronic parts for telecommunications and computers are among the top imports that benefited from CAFTA.

Other sectors of Salvadoran society haven’t done so well, say CAFTA opponents. One particularly sensitive sector was the black market for pirated music, movies and software. The International Data Corporation estimated that before CAFTA was implemented, 80% of the software in the country was pirated.

Some 60,000 families in El Salvador generated income by selling pirated CDs, DVDs and software, according to Ligia Guevara of the Salvadoran human rights organization the Foundation of Studies for Applied Rights (FESPAD).

Since CAFTA was implemented, tens of thousands of jobs have been lost,Guevara said.


Population: 7.4 million

Per-capita GDP: $3,100

CAFTA Implemented: April 2006

CAFTA’s effect on the Honduran economy has so far been mixed. Export growth has continued apace with the trend of the last decade, and in 2006 exports grew by 12.4% according to Central Bank figures.

Yet exports to the United States actually fell 0.8% from 2005 to 2006, adding to another trend that has been going on since Hurricane Mitch devastated the Honduran export economy in 1998: a growing trade deficit.

The deficit stood at $3.49 billion at the end of 2006, thanks to an $879 million jump in imports, meaning Honduras is spending much more on imports than it is earning with its exports.

Guillermo Matamoros, an economist with the Economic and SocialResearchCenter of the Honduran National Business Council, downplayed CAFTA’s effect on the trade deficit, saying it is more a result of the country’s exchange rate policy.

He also pointed to a burgeoning boom in the country’s textile industry, aided by CAFTA. New business parks are popping up to broaden the country’s garment manufacturing sector.

Another large sector is in its infancy, yet growing: auto parts. The country’s auto wiring manufacturing has attracted such large multinationals as Alcoa, which Matamoros said could become the “Intel of Honduras,” referring to the microchip giant’s impact on Costa Rica’s economy.

Matamoros said he thinks Honduras is following in the economic footsteps of its northern neighbor Mexico, which grew at first with the textile industries and continued its growth with auto parts manufacturing. However, CAFTA opponents such as the Honduran Coalition for Citizen Action point out that, in 2006, national production of food staples like corn and beans have dropped 14.3% and 38.5%, respectively, suggesting cheap U.S. agricultural imports may be taking their toll on the nation’s farmers.

According to numbers from the U.S. Trade Representative, U.S. agricultural imports to Honduras were up 31% – the highest of all the signatory countries.


Population: 5.6 million

Per-capita GDP: $3,100

CAFTA implemented: April 2006

Thanks to generous rules-of-origin provisions the United States granted exclusively to the Nicaraguan textile sector under CAFTA, the poorest country in Central America did not have to wait long for the benefits of the free-trade agreement to be felt in this small economy.

Under bilateral terms negotiated with the United States within the framework of CAFTA, Nicaragua received the competitive advantage of being the only country to get a nine-year Tariff Preference Level (TPL) that allows the textile industry here to use 100 million-Square Meter Equivalents (SMEs) of fabric from any part of the world to manufacture garments in Nicaragua and still meet rules-of-origin requirements for duty-free import to the United States.

That, coupled with the lowest wages in Central America (around $0.76/ hour), has translated into a “textile boom” that started here in the weeks following Nicaragua’s ratification of CAFTA in October 2005. Since then, more than a dozen textile and garment manufacturing companies have confirmed new investment in Nicaragua, totaling $256.5 million and generating some 8,650 new jobs, according to investment-promotion group ProNicaragua.

Nicaragua’s overall exports grew by 22.16% compared to the same period in 2006, before CAFTA entered into force in April of that year.


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