May 13, 2005


The CAFTA Debate

Will the U.S. Congress turn its back on Central America’s fledgling democracies?

By Juan Carlos Pereira

During the 1980’s, Central America was a fierce battleground of the Cold War and a breeding ground for despotic dictatorships and totalitarian regimes. Today, the region is poised to enter into an historic free trade deal with the United States that represents its best chance for prosperity and economic growth in decades. Unfortunately, some in the U.S. Congress want to turn their back on America’s third border by failing to approve DR-CAFTA, the negotiated free trade deal, that will essentially extend NAFTA benefits to the Dominican Republic and the Central American countries of Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica.

This historic trade deal represents Central America’s best opportunity in a generation to shed its cold war image and debut onto the world market as a “near South” alternative to the far East for labor-intensive manufacturing and services operations. Competitive labor, logistics, and other basic costs, as well as an enviable geographic position just a couple hours’ flying-time from the U.S., have positioned Central America as a competitive export platform for the U.S market. Often overlooked, this region is an eager market of 37 million for U.S. name-brand goods and services.

Apart from opening markets and bringing new investment into the region, CAFTA will help shape Central America into an integrated, strongly democratic region with clear legal accountability and independent public institutions. Further harmonization, economic integration and institutional transformation is essential to speed up the astonishing economic and political progress achieved in the region over the last decade and a half. The agreement will serve as the foundation for closer economic ties with the United States, and will signify the end of a troubled chapter in the history of most of these nations.

Pre-ratification, the negotiation has already put the region on the short list of major foreign corporations interested in obtaining preferential access into the US market from a low-cost location. In Nicaragua, for example, the country’s burgeoning apparel industry experienced 22% growth in 2004 from foreign companies opening up operations on the presumption of the ratification of the agreement. Higher value-added operations such as automobile parts are also beginning to take root: one of these is a Japanese-Mexican joint venture between Yazaki Corporation and Mexico’s Xignux group that employs nearly 4,800 workers in Leon, Nicaragua to assemble wire harnesses for Ford pick up trucks and SUVs manufactured in the U.S. Continued growth, stimulated by the elimination of tariffs and trade barriers, will translate into the generation of thousands of new jobs with modest, yet steady, incomes for working class families. By giving them hope at home, CAFTA will keep tens of thousands of Central Americans in their native lands, curtailing illegal immigration which translates into less competition for US jobs.

DR-CAFTA will also put American products at an advantage because current trade preferences extended by the US under other agreements are unilateral—they give one way access to Central American goods into the US. This increases the cost of US exports and reduces their market access. With CAFTA, experts claim US agricultural exports will grow by nearly US$1 billion.

In the services sector, DR-CAFTA presents a first time opportunity for U.S. businesses to get equal treatment in the Central American market for telecommunications, insurance and financial services, as well as infrastructure, including energy, environmental, transportation, construction and engineering. U.S. service industries will have the right to operate businesses across borders and the right to establish a local presence in CAFTA countries. If the Agreement does not enter into force, these sectors will remain largely closed to US investment.

DR-CAFTA will also serve as an important defense against the emerging threat of China to the US and Central American textile and apparel sectors. Starting in January 2005, U.S. quotas on imports of Chinese garments disappeared. North and Central American textile and apparel manufacturers will have to compete directly with China on costs alone. Central America, already one of the U.S. textile industry’s largest markets for fabric, is a natural ally of the United States in its efforts to withstand a tidal wave of cheap Chinese garments. Under DR-CAFTA, textiles and apparel that meet the agreement’s rules of origin will be duty-free and quota-free immediately. This will allow the region to build a stronger, integrated, “quick response” value chain with which to differentiate itself against China. Without CAFTA, textile and apparel jobs in the U.S. and Central America will be on a collision course as they compete on an undifferentiated basis against China.

For both Central America and the United States, approving DR-CAFTA will result in faster economic growth, market access, and prosperity in years to come. The U.S. Congress should not turn its back on DR-CAFTA because ratification will send a signal to dozens of struggling democracies that the U.S. is a genuine partner and is willing to lend a hand though free trade which is the ultimate replacement for foreign aid.

Juan Carlos Pereira is a graduate of the Harvard Business School and Executive Director of ProNicaragua (, a public-private institution assisting businesses with offshoring in Nicaragua. Email him at

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