The DR-CAFTA: A Focus on the Regional Impact
The following summary was prepared by Jennifer Maul, Junior Fellow Carnegie Endowment for International Peace
The Carnegie Endowment hosted a forum with Carlos Felipe Jaramillo and Daniel Lederman, the co-authors of the recent World Bank study on the potential impact of the U.S. free trade agreement with Central America and the Dominican Republic.
Carlos Felipe Jaramillo, co-author of “DR-CAFTA: Challenges and Opportunities for Central America”: CAFTA is projected to have an overall positive impact on the Central American countries by increasing trade and investment. While it will only expand access to the U.S. market at the margins, it will secure this access and make it permanent, which will lead to more trade and deeper integration. This secure access will also result in more investment that could in addition lead to improved regulations. Prior to the implementation of NAFTA, studies consistently underestimated the effects the agreement would have on Mexican exports to the United States. CAFTA is also projected to increase exports from Central America to a higher level than under the current trade preferences the region currently receives. According to empirical studies, free trade agreements also tend to attract more investment for countries and increase per capita income (an additional .6% growth) that can reduce poverty. One of the concerns about CAFTA is that the agreement will cause a decrease in food prices. But for the vast majority of people in the region, lower food prices will benefit families. In urban areas, over 95% of families will see an increase in their purchasing power. In the worst case scenario, approximately 20% of rural families will see their incomes fall, but the vast majority of rural families will see their incomes rise as they are net buyers. Some of these potential losers will be among the extremely poor, and while the overall impact on food prices is expected to be small even minor drops in income for this group can have a large impact. Sensitive crops will have long transition periods (approximately 20 years) in order to help affected people cope. The Central American countries are faced with the challenge of fulfilling the opportunities that CAFTA presents to the region. CAFTA is not a silver bullet that will solve all of the problems of the region. Countries need to develop complementary policies and continue with reforms already underway to be able to move forward with economic development.
Sandra Polaski, Carnegie Endowment, Director of the Trade, Equity, and Development Project: I applaud the authors of the report for focusing on the complementary policies that are needed for the countries in the region to enjoy any benefits from DR-CAFTA. However I would emphasize that the complementary policies are not discretionary enhancements but are absolutely necessary because the agreement contains provisions that could seriously harm poor households and hold back, not benefit, development in Central America. The benefits of DR-
Finances will also be scarce. as the European Union already does. Let’s hope those funds are actually appropriated and targeted properly to assist those households that will lose from DR-CAFTA implementation. The Central American countries will also be able to make positive changes within the context of CAFTA. redistribution of wealth and benefits is rare. Democratic and institutional reform needs to continue in the region. which is one of the most unequal regions in the world. The region is at risk of losing jobs in the maquila sector to Asia. All countries in the region are also considering complementary agendas to CAFTA. So far. Impoverished communities will be able to develop if they have secured access to a market such as the United States. with the exception of Costa Rica. In fact.CAFTA are only marginal. The World Bank study shows what CAFTA is capable of doing for these countries. co-authors of “DR-CAFTA: Challenges and Opportunities for Central America”: It is imperative for the Central American countries to develop a complementary agenda and to work with those segments of society that are the most vulnerable. and CAFTA would help propel the region. but should be used to raise other important issues. Even small drops in income for those living in extreme poverty can mean the difference between adequate nutrition and hunger. since the authors point out that tariff reductions required by DR-CAFTA will reduce total government revenues in the region. After Mexico signed NAFTA.
Guillermo Castillo. The United States. The normal prescription for trade adjustment is that the winners should compensate the losers. While CAFTA is a trade agreement and not a social pact. policy responses to help the poor face an uphill struggle since political will is often lacking and institutional capacity to do so is weak. the United States has only indicated a willingness to contribute funds for rural development in Central America in order to secure a crucial Senate vote for DR-CAFTA. it did not
. Ambassador of Costa Rica: Central America does not want to remain in the status quo. should provide support for trade adjustment assistance in these countries and target that assistance specifically to poor households and workers who will be adversely affected. Ambassador of Guatemala: The option of not ratifying CAFTA will not be beneficial for Central America. the debate over ratification has already caused Central American political parties to make historic promises for institutional reforms. as the authors rightly point out. 29 factories have already closed in Guatemala alone because approval of CAFTA was taking too long.
Answers to audience questions by Daniel Lederman and Carlos Felipe Jaramillo. But in Central American. CAFTA will not solve all of the region’s problems. In these countries. Extreme poverty is concentrated in the rural areas and policymakers therefore need to pay special attention to transitional assistance for rural households and subsistence farmers.
Tomás Dueñas. but the risks are real and will affect the most vulnerable and poorest parts of society.
.S. so CAFTA will potentially bypass them completely. the region has still seen an increase in textile and apparel exports since the end of the quotas in the beginning of 2005 (even while exports from China have skyrocketed). Central America is a net gainer from the U. While NAFTA has not been bad for Mexico. Although the textile and apparel sector is not the long-run solution for development in Central America.proceed with reforms. Maintaining agricultural protections is therefore not the solution to long-term structural rural poverty. While the rules of origin are still too restrictive for textiles.S. agricultural subsidies. Many subsistence farmers in these countries do not buy or sell in the markets. it missed an opportunity that the Central American countries should now capitalize on. subsidies since it is a net importer of food. Despite the criticism of U. it remains an important sector in the region and can be used to develop other areas of the economy (as Costa Rica has done).