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• U.S. Department of State
• University of North Texas Libraries

Summary

On January 27, 2003, negotiations began on the U.S.-Central America Free Trade Agreement (CAFTA). Nine meetings are scheduled for 2003 between the United States and the five Central American Common Market countries: Guatemala; Honduras; El Salvador; Nicaragua; and Costa Rica, with all parties having expressed confidence that the agreement can be completed by year-end. This report provides background and analysis on the proposed CAFTA and will be updated periodically. U.S. interests in CAFTA are broad, but the dollar value of U.S. trade with Central America represents less than 1% of U.S. foreign commerce. Thus, CAFTA may expand trade at the margin, but the effects will be small on a macroeconomic level, although no doubt important to those firms affected by the regional trade. For the United States, market access (especially for agricultural products) is a key issue. U.S. business interests generally want equal or better treatment than that afforded to exports from Canada and Mexico under their own free trade agreements with Central America. As highlighted in recent negotiations with Chile, a bilateral agreement also affords the United States a chance to delve into other issues of commercial importance such as intellectual property rights, government procurement, foreign investment, e-commerce, and services, particularly financial services. From the Central American perspective, reducing barriers (especially for textile and agricultural products) to their largest export market and attracting foreign direct investment are cause enough to proceed. This point is directed specifically at improving and making permanent the trade benefits Central America currently enjoys under the Caribbean Basin Initiative (CBI) programs, but which require periodic reauthorization by Congress. CAFTA also would potentially increase U.S. foreign direct investment, which has been instrumental in the creation of the production sharing (maquiladora) manufacturing industries in the region. In short, CAFTA fits into Central America's strategy of developing economically through increased trade and investment. CAFTA supporters highlight the long-term U.S.-Central American trade relationship. From the early days of independence, agricultural export promotion has been key to Central American economic growth and since 1984, the Central American nations have enjoyed a preferential trading position with the United States as beneficiaries of the CBI. More recently, U.S. trade and investment interests have turned to apparel manufacturing in maquiladoras. Geopolitical and strategic concerns are also important; CAFTA may reinforce stability by providing institutional structures that will undergird gains made in democracy, the rule of law, and efforts to fight terrorism, organized crime, and drug trafficking. CAFTA may also be a way for the United States to garner support for the Free Trade Area of the Americas. CAFTA doubters point to equally broad themes, such as the pervasive social and economic inequality perpetuated by existing economic systems, and question whether CAFTA will perpetuate or perhaps worsen the status quo. For this reason, the labor and environment provisions will be important negotiating areas to follow. U.S. firms competing with Central American imports have also registered concern.

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