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To: average american student

The U.S.-Central America Free Trade Agreement
(CAFTA):

Challenges for Sub-Regional Integration Summary

On May 28, 2004, the United States signed the U.S.-Central America Free TradeAgreement (CAFTA) with Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. In addition, the Dominican Republic concluded a similar bilateral free
trade agreement (FTA) with the United States on March 15, 2004, which is expected to be signed in July 2004 and integrated with CAFTA to be considered as a single
legislative package. Enacting the agreement requires the U.S. Congress to pass implementing legislation and that similar action be undertaken in the other countries.
As required under Trade Promotion Authority (TPA) legislation (P.L. 107-210), prior to any congressional consideration of implementing legislation, the Bush
Administration is required to send to Congress supporting materials within 60 days of entering into the agreement.
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 flexibility of this framework allowed Costa Rica to negotiate longer, and for a slightly different arrangement than the other four Central American countries,
each of which also negotiated separate schedules. It also allows for the Dominican Republic to be added at a later date. CAFTA is a comprehensive and reciprocal trade
agreement, which distinguishes it from the CBI unilateral preferential arrangement between the United States and these countries. It defines detailed rules that would
govern market access of goods, as well as services trade, government procurement, intellectual property, and investment.

Under 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. To address asymmetrical development and transition issues, CAFTA
specifies rules for lengthy tariff phase-out schedules as well as transitional safeguards and tariff rate quotas (TRQs) for sensitive goods. Although many goods would attain
immediate duty-free treatment, others 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 for the more sensitive products, and in some cases, the tariff reductions would not begin until 7 or 12 years into the agreement. CAFTA is controversial and faces political uncertainty. Supporters hope that CAFTA can be part of a policy foundation supportive of both improved intraregional trade and long-term social, political, and economic development. Concerns remain, however, over the negative effects on certain sectors and employees of the
U.S. economy, and that a balanced outcome may be difficult to achieve if the FTA fails to accommodate sufficiently the adjustment costs also facing certain Central
American workers, small farmers, and other groups. The history some CAFTA countries have of poor labor rights enforcement raises questions over whether the
labor provisions will adequately promote social development.


On May 28, 2004, the United States Trade Representative (USTR) Robert B. Zoellick and trade ministers from Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua signed the U.S.-Central America Free Trade Agreement (CAFTA),
formally concluding the negotiation phase (see Appendix 1, Chronology of CAFTA Negotiations). Enacting the agreement requires that the U.S. Congress pass implementing legislation, and that parallel action be undertaken in the legislatures of the other countries. Prior to congressional consideration of implementing legislation, the Bush Administration is required under Trade Promotion Authority (TPA) legislation (P.L. 107-210) to send supporting materials to Congress within 60 days of entering the agreement.

These include a description of changes to existing laws necessary to bring the United States into compliance with CAFTA, the final legal text, a draft implementing bill, statement of administrative action, and an explanation of how it will meet congressional negotiation objectives set out in TPA. In addition, the Dominican Republic concluded a similar bilateral free trade agreement (FTA) with the United States on March 15, 2004, which is expected to be signed in July 2004 and integrated with CAFTA to be considered as a single legislative package. CAFTA is a complicated and controversial agreement and because of congressional resistence to it, the Bush Administration does not anticipate sending the agreement to Congress until after the November 2004 elections.

This update provides background and analysis on CAFTA, including new information on the Dominican Republic, and will continue to be updated periodically.

-snip-

Why Trade More Freely?
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. Intraindustry trade is the other major insight that explains trade patterns. Larger markets allow for benefits from exchange among countries to 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 have on economic growth and development. As an important caveat, trade is at best only part of a broad development agenda, which must also

CRS-2
1 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, D.C. 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, D.C. March, 2003. pp. 158, 165-67.

2 This case 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.


3 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.

4 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 recent 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. include promotion of political freedom, macroeconomic stability, sound institutions, and adequate levels of savings and investment, among many other factors.

1 Comparative advantage and perhaps intra-industry trade provide the rationale for U.S.-Central American (and Dominican Republic) trade. Comparative advantage is at the heart of exchange between developing and industrialized countries, such as


Central America trading fruit and coffee for U.S. grains, cereals, and capital goods. Intra-industry trade (e.g. goods within the same harmonized tariff system (HTS) code
number) is based on specialized production, but in this case relies in large part on differences in wages, skills, and productivity.

2 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 with U.S. firms.

3 This relationship, discussed in more detail later, provides the basis for much of the labor policy debate on CAFTA, and FTAs more generally.

4
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,

-end snip-

http://usembassy.or.cr/Cafta/crstlc.pdf


29 posted on 02/18/2005 6:35:37 PM PST by demlosers
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To: demlosers
Under 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.

Thanks for finding this and posting. Whew! I was starting to think from the isolationist rhetoric being posted that the US was DOOMED to communism instead of more capitalism.

Unfortunately, I see none have replied so I guess they didn't think they had to read anything factual that might conflict with their knee-jerk hand-wringing.

60 posted on 02/18/2005 11:45:03 PM PST by Once-Ler (Beating a dead horse for NeoCon America)
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To: demlosers
Under 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. To address asymmetrical development and transition issues, CAFTA specifies rules for lengthy tariff phase-out schedules as well as transitional safeguards and tariff rate quotas (TRQs) for sensitive goods.

Clearly, this is an unconstitutional restriction on the U.S. government's ability to intervene in the market. We're all going to lose our jobs! It's a race to the bottom!

72 posted on 02/19/2005 6:06:15 AM PST by 1rudeboy
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