How Will CAFTA-DR Benefit Consumers? (Costa Rica vs Honduras vs US)

If you have ever wondered how CAFTA-DR will benefit consumers, you have come to the right place.

Because CAFTA-DR has 3 or more participants involved, it is a multilateral trade agreement. At its core, the purpose of this trade agreement is to improve the economies of the participants, which also includes the consumer.

But how will CAFT-DR benefit consumers, really?

CAFTA-DR benefits consumers in many ways, including:  1. Increased access to foods and services that the member countries don’t produce, 2. Lower prices, 3. High quality goods and services, 4. Innovation, 5. Manufactured goods and technologies.

The Central America Free Trade Agreement (CAFTA) is a trade agreement between the US and Central American countries. CAFTA essentially started in 2004. The Dominican Republic joined later, and the name changed from CAFTA to CAFTA-DR. 

The acronym for the U.S.A. - Central America free trade agreement is CAFTA-DR and is considered a treaty under international law and includes these 7 countries: 

1. Guatemala 
2. Honduras
3. El Salvador 
4. Nicaragua 
5. Costa Rica 
6. Dominican Republic, and
7. United States

While easing cross-border trade sounds like a good idea on paper, how will consumers benefit in reality? 

Let’s explore this now!

Here are 5 ways CAFTA-DR will benefit consumers:

1. Increased Access to Foods and Services That the Member Countries Don’t Produce

Every country in CAFTA-DR is different in terms of soil and even climatic conditions. The differences lead to a variety of agricultural goods, especially textiles, fruits, and vegetables, which form a significant portion of exports. Consumers, especially in the US, will start seeing new products on their shelves when the trade agreement comes into full effect.

2. Lower Prices

CAFTA-DR aims at, among other things, the gradual lifting and, finally, the total elimination of trade tariffs. When traders pay less to avail goods to the market, they charge consumers less because there are no extra costs to cover.

3. High Quality Goods and Services

A free trade agreement means lowering restrictions at the borders to facilitate the exchange of goods and services. This grants more traders free market access, resulting in increased competition. Companies will improve the quality of goods and services to beat the competition, and the consumers will benefit.

4. Innovation

Some of the goods and services are not universal in nature meaning they are only effective in select geographical regions. Companies providing such services must be innovative when venturing into new CAFTA-DR markets. Due to increased innovation, consumers will have access to new products specifically tailored to satisfy their needs.

5. Manufactured Goods and Technologies

Raw goods such as horticulture, grains, and crude oil form the bulk of US imports from the smaller CAFTA-DR members like the Dominican Republic. The US Department of Commerce says that the smaller members have been receiving and will continue enjoying manufactured goods from the US. These include electronics, refined petroleum products, textiles, motor vehicle technologies, medical equipment, and farm machinery.

This is an example from the World Integrated Trade Solution visualization tool, showing Guatemala's largest trading partners including El Salvador, Honduras, Nicaruagua, and Costa Rica giving consumers the option to purchase a wider range of products and services. 

How Does CAFTA-DR Work?

Like any trade agreement, CAFTA-DR is literally an example of comparative advantage in action.

This means that countries who are good at producing particular products or services should sell (export) to other countries that cannot produce the same product or service as efficiently. 

The main assumption is that not all nations produce all goods efficiently and will benefit from trading with one another.

For example, one of Honduras’ top exports is textiles. And one of Guatemala’s top exports are bananas.

This means it is more efficient for Honduras to purchase bananas from Guatemala to feed their consumers than it is for Honduras to grow and harvest their own bananas. Similarly, it is more efficient for Guatemala to purchase textiles from Honduras than it is for Guatemala to manufacture their own.

This is an example from the World Integrated Trade Solution visualization tool, showing Honduras’ exports to El Salvador, ranging from metals, food products, chemicals, animals, vegetables and more,  giving their consumers the option to purchase a wider range of products and services. 

CAFTA-DR works similarly to NAFTA (North American Free Trade Agreement). 

The goal is to create economic opportunities by eliminating barriers to services, opening markets, and eliminating tariffs. Governments commit to allowing foreign firms into their local markets by lessening or totally eliminating measures protecting domestic products. Signatories also commit to other matters like transparency, protecting international property rights, and the progress of some political cause.

CAFTA-DR impacts cooperation in the following 7 areas:

1. Investment

CAFTA-DR also prohibits governments from discriminating against investors from member countries when they initiate investments. For instance, an investor from Costa Rica can freely invest in your country's territory. Basic protections investors enjoy include:

• Government procurement
• Free transfer of investment funds
• Protection from the surrender of proprietary rights unless required by customary international law
• Ability to enroll critical managerial personnel from different nationalities
• Equal treatment of domestic and foreign CAFTA-DR investors
• “Performance requirements” limitations

2. Cross-Border Exchange of Goods and Services

Under CAFTA-DR every member country has an obligation to treat all traders equally in their local markets. For instance, the US should give equal privileges to Guatemalan firms providing services in the country just as they would American companies. However, the firm must create a local presence to get permission to supply services or goods on a cross-border basis.

3. Provision of Financial Services

CAFTA-DR has rules and regulations governing the provision of financial services between member countries. The main goal is to eliminate discrimination when providing financial services to foreigners. For instance, the free trade agreement dictates that no signatory member will favor its own suppliers over those from other countries. Therefore, foreign nationals can access more financial institutions than before and even form part of the senior management in those institutions.

4. Agriculture

CAFTA-DR demands the administration of tariffs in a non-discriminatory, transparent manner that is minimally burdensome and responds to the current market conditions. In simple language, member countries will lift export subsidies that they charge on agricultural goods heading to a CAFTA-DR member country.

5. Political Standards

CAFTA-DR ties member states to the enforcement of specific political standards. For instance, signatory members commit to protecting the environment through enforcing established environmental laws. A good example is the CAFTA-DR Environmental Cooperation Agreement.

In summary, member countries will cooperate to solve issues related to shared environmental concerns. CAFTA-DR also binds members to internal laws guiding labor standards as the International Labor Organization requires.

6. Intellectual Property Rights

CAFTA-DR member countries must agree to enforce treaties that protect intellectual property rights. Member countries should:

• Protect current geographical indications, for example, trademarks, from violations by later marks or geographical indications
• Provide efficient and transparent regulations on protecting geographical indications
• Protect copyrights of the authors for their entire life plus an extra seventy years for both individual and corporate works.
• Member countries should not interfere with or circumvent digital management technology rights. CAFTA-DR members should avail patents for new inventions and confirm their use on known products.

The free trade agreement prohibits revoking patents arbitrarily. A country thinking of revoking a patent should provide enough justifiable reasons. Pharmaceutical corporations are given the right to keep their test data private. Additionally, any information submitted by a company seeking marketing approval shall be protected from exploitation by other interested firms.

7. Dispute Resolution

CAFTA-DR acts as a judge between two conflicting member countries who cannot resolve their disputes after 30 days. You don't want to fight and there is no one to separate the fight and arbitrate between the two of you. A similar case applies to free trade agreements. The agreement will provide a directive on the international law the two countries cannot agree on. If the conflicting parties are still unsatisfied with the directive, the aggrieved party can suspend another law equal to that within its jurisdiction.

For more information about CAFTA-DR and why it was created, please see:

What is CAFTA-DR, and why was it created?

For a helpful article about the Five Most Important Decisions in International Marketing, please visit:

The Five Most Important Decisions in International Marketing

For a helpful checklist format to help you get started in international marketing, please visit:

International Marketing Strategies PDF (Free checklist)

References

1. https://www.fas.usda.gov/newsroom/cafta-dr-trade-partnership-works#:~:text=Competitive%20producers%2C%20like%20U.S.%20grain,not%20grown%20here%20at%20home.
2. https://ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/free-trade
3. http://www.cei.org/sites/default/files/Fran%20Smith%20-%20CAFTA-DR%20Can%20Free%20Trade%20Hold%20Up%20to%20Special%20Interest%20Siege.pdf