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Regional Integration: Promoting Global Business

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CAFTA, the Central America Free Trade Agreement, or commonly known as the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), is a free trade agreement. In international trade, free trade is an idealized market model, often stated as a political objective, in which trade of goods and services between countries are not hindered by government imposed tariffs (taxes on imports) or non-tariffs (Wikipedia, 2007).

CAFTA became known as DR-CAFTA in 2004 after the Dominican Republic joined the association. Initially the agreement included the United States, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. To date, Costa Rica has not formally sanctioned the new agreement yet, but that it is a priority and will be looked at within the next few months. In March 2006, DR-CAFTA entered into force for El Salvador. Honduras and Nicaragua followed one month later, and Guatemala in July. The Dominican Republic Senate has already approved the agreement and is expected to pass it soon after the Dominican administration adopts the implementation requirements from Washington for its entering into force (Chamber of Commerce, 2007).

According to the Office of the United States Trade Representative, the case for CAFTA is based on the growth, opportunity and democracy of the aforementioned regions. The agreement will eliminate 80% of tariffs on U.S. goods exported to these regions. Even though these countries are small, they represent big consumer markets. Central America and the Dominican Republic heads the second largest U.S. export market in Latin America, closely trailing Mexico. The rest of the tariffs will be phased out over the next decade. This will give American businesses, workers and farmers even greater access to 44 million Central American consumers.

Central America and the Dominican Republic has become America's tenth largest export market globally with exports to the region totaling $15 billion annually. The American Farm Bureau has predicted that CAFTA could increase U.S. farm exports by $1.5 billion annually (OUSTR, 2005). Other industries, including information technology, construction, paper and pharmaceutical products will also benefit considerably from this agreement.

Advantages of the CAFTA Agreement

The Office of the United States Trade Representative has outlined the advantages of CAFTA as follows:

* Leveling the playing field for U.S. workers and farmers

Currently, almost 80% of products from Central America and the Dominican Republic already enter the United States duty-free. This is a direct result from unilateral preference programs such as the Caribbean Basin Initiative (CBI) and the Generalized System of Preferences (GSP). The American market is already open. CAFTA opens the region's market to farm products, goods, and services from the U.S.

* Strengthening Freedom and democracy

During the 1980's, Central America experienced civil wars, dictatorship, chaos and Communist Insurgencies. The region is still not entirely 100% economically stable and still requires support from the U.S. Leaders in the region are open to creating a stronger economy, supporting the United States in the war on terrorism, fighting corruption and battling crime. Unfortunately, anti-reform groups in the region are still around. CAFTA has become a way to fight the above challenges and open doors for positive results to occur.

* Textiles: Uniting to compete with Asia

Central America and the Dominican Republic is the second largest world maker for U.S. textile fabrics and yarn. The region therefore purchases large amounts of fabric and yarn from the U.S. The industry will support U. S. markets and jobs only if they purchase all yarn and fabric from the U.S. All garments made in the region will therefore be quota- and duty-free under the Agreement only if American materials are used. Since the expiration of global quotas on textiles/apparel at the end of 2004, regional producers face a constant competitive challenge from Asian imports. CAFTA ultimately provides these garment-makers and their suppliers of fabric and yarn, a critical edge in competing with Asia.

* Strong protections for Labor and the Environment

Labor laws in the region are generally in line with International Labor Organization (ILO) laws. Unfortunately, the enforcement of labor laws needs more attention and resources. CAFTA is specifically designed to respond, improve enforcement and expand resources.

* Sugar exports

CAFTA will not have a destabilizing effect on the U.S sugar program. An increase under CAFTA will still cause U.S. imports to fall below levels set for sugar imports in the Farm Bill.

Disadvantages of the CAFTA Agreement




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