The Central American Free Trade Agreement (known as CAFTA) is an agreement between the United States, five Central American nations (Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua), and the Dominican Republic. It was signed May 28, 2004, and was approved by an extremely narrow margin by the U.S. Congress on July 27, 2005. The National Assemblies in El Salvador, Guatemala and Honduras have approved the agreement, and the National Assemblies in Nicaragua, Costa Rica, and the Dominican Republic have yet
to vote on the accord.

CAFTA creates a “free trade” zone similar to that of the North American Free Trade Agreement (NAFTA), and is widely considered to be a stepping stone to the larger Free Trade Area of the Americas (FTAA) that would encompass 34 economies.

Fast Track Negotiations in The United States
The Bush Administration aggressively pursued the CAFTA negotiations on a very short timeline. Whereas NAFTA took more than seven years to negotiate and the FTAA has been negotiated for almost a decade, CAFTA was completed in one calendar year. Negotiations for CAFTA began in January 2003, shortly after the U.S. Congress approved a bill to confer Trade Promotion Authority (or “Fast Track”) to the White House. Under “Fast Track,” Congress is limited to an up or down vote and cannot amend a trade agreement.

An Asymmetric Agreement
CAFTA is the first “sub-regional” agreement to be negotiated between such unequal trading partners. The combined GDP of Central America is equal to 0.5 percent of U.S. GDP. CAFTA requires market liberalization for the majority of goods and services in Central America-- including agriculture, manufacturing, public services and government procurement. In return, the U.S. has promised increased market access for certain sectors in Central America, including textiles and a limited increase in sugar quotas. Rigorous impact assessments of CAFTA have not been conducted in Central America. Rather, Central Americans are forced to judge the potential impact based upon the ten-year record of NAFTA. Analysts expect that-- as occurred in Mexico-- CAFTA will attract foreign direct investment and boost Central American exports in certain sectors, but will provide little benefit to the rural and urban poor of the region.

CAFTA: Good for U.S. Businesses
Supporters of CAFTA, including many multinational corporations based in the United States, hope it will improve access to foreign markets and produce lower tariffs. Companies such as Microsoft and Intel estimate that CAFTA will offer benefits such as an 11 percent increase in high-tech imports to Central American countries and the Dominican Republic, the elimination of barriers to e-commerce as well as the protection intellectual property. Nike is one of the many companies that lobbied for the Congressional approval of CAFTA. In reaction to the forces lobbying against the agreement, Nike said that “With the exception of apparel and footwear, the United States has unilaterally provided these countries open access to the U.S. market for the past 20 years. This agreement, over time, eliminates the remaining U.S. tariffs on apparel and footwear and provides the U.S. reciprocity into these six markets by opening these markets fully for U.S. exports.” It is recognized that there is some level of protectionism inherent to this agreement, but the agreement itself mandates that the protections will be phased out. Without the agreement, no such guarantees would be in place.

Companies such as Microsoft and Intel estimate that CAFTA will offer benefits such as an 11 percent increase in high-tech imports to Central American countries and the Dominican Republic, the elimination of barriers to e-commerce as well as the protection intellectual property.

Nike also confronts the objections that the agreement does not adequately protect environmental standards or labor standards. They claim that all six Central American countries taking part in the agreement have adopted laws consistent with core labor standards as established through the International Labor Organization (ILO) as well as other key environmental agreements. While these statements are vague, and do not meet the charges that the standards are inadequate, their point is that by being a part of a trade agreement there are standards, with mechanisms for monitoring and evaluation. Without the agreement, there would not be any need for countries to adhere to these codes. Conversely, this partnership may codify slack standards rather than forcing countries to strive for stricter terms with the end goal of gaining added market access. As Nike states, “Much more progress needs to be made, particularly in the area of effective application and enforcement of these laws, but we are convinced that economic development and an enhanced level of capacity building will further the process of reform in these countries significantly.”

CAFTA: Not Honest Trade
Detractors, including trade unions and sugar farmers, criticized inadequate environmental and labor standards. According to U.S. Representative Rep. Jane Harman (D-CA), “CAFTA's penalties for failing to enforce labor and environmental laws provide no real deterrent against abuses, and it offers no incentives to improve standards over time. CAFTA actually weakens labor protections by removing an existing oversight mechanism available under our current system of trade preferences for the region.” Based on the narrow 217 to 215 vote in the House of Representatives, the issue that CAFTA would force the U.S. to compete with countries whose wage, worker safety and pollution standards are dramatically lower than those in the United States clearly resonates with many legislators.

CAFTA was opposed by organized labor because it does not include protections for workers’ right to form a union or safe work conditions.

U.S. Representative Blumenauer (D-Ore.) shared these thoughts on the CAFTA agreement, “For me, it is clear that CAFTA does not include meaningful environmental and labor standards, it would seriously under-fund promises to help those negatively affected by trade and it seriously harms countries that rely heavily on an agricultural economy.... Our egregious (U.S.) Farm Bill has locked us into subsidies that do not promote free trade and have already caused much harm to other countries’ farmers. We need to pay attention to the hard lessons NAFTA imposed on struggling Mexican farmers.” He goes on to say, “CAFTA is not honest trade, since it protects certain industries, such as sugar and rice, and minimizes the regulations that can improve standards for the countries involved. Interestingly enough, this Congressman rejected the agreement because it guarantees too much protection for U.S. sugar farmers, and U.S. sugar farmers lobbied against the accord because it will strip them of some of the protections they currently enjoy. Furthermore, CAFTA was vehemently opposed by organized labor because it does not include protections for workers’ right to form a union or safe work conditions.

It depends on how much Free Trade results from the Free Trade Agreement
Economic trends point out that the world is experiencing an increase in economic inequality. The poor are getting comparatively poorer, and the rich much richer. Many people, like June Arunga, feel that the increased opportunities that are direct results of free trade agreements will allow more people to help themselves out of poverty. Under CAFTA, will the United States and its Central American trading partners to rise to the occasion and eliminate tariffs, as well as meet higher environmental and labor standards-- benefiting the citizens of all participating countries? Or will it allow them to retain both their protections and their inferior standards-– hurting the citizens of all participating countries?



To read more about CAFTA on Global Envision, check out these articles:

CAFTA's Close Call A Warning to US Policy Makers
CAFTA's Close Call A Warning to US Policy Makers The CAFTA debate is now in the past. But as Washington looks ahead to much larger initiatives at the WTO, in the western hemisphere and perhaps in Asia, the debate offers valuable lessons on the handling of American trade politics, and the need to complement trade policies with new initiatives in competitiveness and finance.

Free Trade and Poverty
Free trade agreements such CAFTA - don't only spur trade growth, but also bring increased foreign investment. Many companies are more willing to invest millions and billions of dollars if dispute resolutions are provided, intellectual property is protected and increased transparency takes place in government procurement and key public entities like Customs.

Other websites with interesting articles on this topic:

The Pros and Cons of Pursuing Free-Trade Agreements by the U.S. Congressional Budget Office.

Protectionism by Jagdish Bhagwati.

FAQs on Free Trade by The CATO Institute.

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