Background

A recent report lays out several changes that lawmakers could consider to the CAFTA-DR free trade agreement between the U.S. and six Latin American countries, but as yet there is no clear path forward on any such measures in Congress.

CAFTA-DR eliminated tariff and non-tariff barriers on goods, services, and agriculture on a reciprocal basis between the U.S., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. It was in effect for all partner countries by Jan. 1, 2009.

According to a recent report from the Congressional Research Service, U.S. trade with CAFTA-DR partner countries has increased since the agreement’s entry into force. Major U.S. exports to these countries in 2021 included petroleum and coal products (20 percent), oil and gas (6 percent), oilseeds and grains (5 percent), and fibers, yarns, and threads (4 percent), while major U.S. imports included apparel (28 percent), medical equipment and supplies (13 percent), fruits and tree nuts (12 percent), tobacco products (5 percent), and motor vehicle parts (5 percent.) Total U.S. exports to partner countries in 2021 totaled $38.7 billion while imports totaled $29.9 billion, giving the U.S. an $8.8 billion trade surplus with the region.

CAFTA-DR has had benefits for partner countries as well. The report states that the agreement reinforced regional integration with rules of origin that allow for greater production-sharing among Central American and Mexican producers using U.S. inputs. For example, fabric and yarns produced in the U.S. are used in apparel production in CAFTA-DR countries, with final goods receiving duty-free treatment in the U.S. The report highlights a finding by the International Trade Commission that the agreement’s rules of origin changes and tariff reductions have been more liberalizing for partner countries than estimated, noting that their geographic proximity to the U.S. has allowed them to have greater access to U.S. textile inputs quicker than other FTA partners with reduced shipping costs and an overall increase in trade.

There have been other benefits for these countries as well. More sophisticated and higher-value exports from some of them have grown since the agreement’s entry into force, while exports of light manufactures from others have benefitted. The share of apparel exports from the region to the U.S. has declined slightly but trade in higher-value products such as medical equipment has increased and agricultural trade has risen moderately as well.

Nevertheless, the report states, difficult socioeconomic conditions, natural disasters, and poor governance in Central America have contributed to ongoing challenges regarding migration and lack of employment opportunities in the region. U.S. policymakers may therefore want to consider changes to CAFTA-DR, with some possibilities including a trade facilitation agenda to make trade more efficient, an anti-corruption mechanism related to trade (such as the one included in the U.S.-Brazil “mini trade deal”), or an enhanced commercial dialogue with Latin American countries to advance the U.S. trade policy agenda in the Western Hemisphere. In addition, some have proposed expanding CAFTA-DR rule-of-origin flexibilities in the apparel sector to support further foreign direct investment in this sector.

Nicole Bivens Collinson, head of ST&R’s international trade and government relations practice, said asome members of Congress are trying to figure out how to enhance CAFTA-DR in the face of these challenges, including in the areas of trade facilitation and logistics. While a number of related bills have been introduced, she said, nothing has been solidified at this point.

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