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Summary

On May 28, 2004, the United States, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua signed the U.S.-Central America Free Trade Agreement (CAFTA). On August 5, 2004, the Dominican Republic, having completed separate negotiations with the United States, was added to the agreement in a subsequent signing by all parties. The new agreement was titled the Dominican RepublicCentral America-United States Free Trade Agreement, or the DR-CAFTA. Since negotiations began in January 2003, it has been a complicated and controversial agreement, becoming more so in September 2004, when the Dominican Republic passed a revenue bill that included a 25% tax on beverages that contain high-fructose corn syrup. With this breech of the proposed DR-CAFTA, the USTR recommended that the Dominican Republic be excluded from the implementing legislation unless this tax is changed. Some Members of Congress have come out against this option. The DR-CAFTA was negotiated, in part, as a regional agreement in which all parties would be subject to the "the same set of obligations and commitments," but with each country defining its own separate schedules for market access on a bilateral basis. The DR-CAFTA is a comprehensive and reciprocal trade agreement, which distinguishes it from the unilateral preferential trade arrangement between the United States and these countries as part of the Caribbean Basin Initiative (CBI). It defines detailed rules that would govern market access of goods, services trade, government procurement, intellectual property, investment, labor, and environment. Under the DR-CAFTA, more than 80% of U.S. consumer and industrial exports and over half of U.S. farm exports to Central America would become duty-free immediately. For the DR-CAFTA countries, 100% of non-textile and nonagricultural goods would enter the United States duty free immediately. Many goods would have tariffs phased out incrementally so that duty-free treatment is reached in 5, 10, 15, or 20 years from the time the agreement takes effect. Duty-free treatment would be delayed longest for the most sensitive products, and in some cases, the tariff reductions would not begin until 7 or 12 years into the agreement. To address asymmetrical development and transition issues, the DR-CAFTA specifies rules for transitional safeguards, tariff rate quotas (TRQs), and trade capacity building. The DR-CAFTA is controversial. Supporters see it as part of a policy foundation supportive of both improved interregional trade, as well as long-term social, political, and economic development. Concerns remain in all participating countries, however, over the negative effects on certain import-competing sectors and their workers. Labor rights issues in some DR-CAFTA countries have caused organized labor to come out against the agreement, despite arguments that trade contributes to long-term economic growth, poverty reduction, and development. All these economic issues, however, are necessarily balanced against the politics of trade, which makes the outcome of the DR-CAFTA uncertain.

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