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Building on the Successes of Free Trade in Central America

A four-day visit to Central America by Under Secretary of Commerce Christopher A. Padilla in February was an opportunity to observe the benefits of free trade between the United States and the region.

by Pierce Nixon

U.S. trade with Central America has been growing recently, thanks in part to the U.S.–Central America–Dominican Republic Free Trade Agreement (CAFTA-DR). On February 25–28, 2008, Under Secretary of Commerce Christopher A. Padilla visited three CAFTA-DR members—Costa Rica, Honduras, and Nicaragua—to discuss the status of the agreement and to view the benefits that have been realized since its adoption.

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Under Secretary of Commerce Christopher A. Padilla (left) and Costa Rican President Oscar Arias (right) in San José, Costa Rica.
Under Secretary of Commerce Christopher A. Padilla (left) and Costa Rican President Oscar Arias (right) in San José, Costa Rica, on February 28, 2008, during Padilla’s four-day visit to Central America. The two officials discussed the final steps that Costa Rica must take to fully implement CAFTA-DR. (U.S. Department of Commerce photo)


Final Steps to Implementation

In August 2004, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States signed CAFTA-DR. The agreement has been implemented on a rolling basis as the signatories meet the agreement’s commitments.

On March 1, 2006, El Salvador became the first CAFTA-DR member to enjoy free trade with the United States. Honduras and Nicaragua followed suit on April 1, 2006; Guatemala on July 1, 2006; and the Dominican Republic on March 1, 2007.

CAFTA-DR requires member states to implement the agreement within two years after it took effect on March 1, 2006. Despite approving CAFTA-DR in a public referendum in October 2007, Costa Rica is still the only signatory to have not yet implemented the agreement. On February 28, 2008, the other CAFTA-DR signatories agreed to give Costa Rica an extra seven months—until October 1, 2008—so its legislature can complete the implementing process.

Increased Trade

Since the adoption of CAFTA-DR, regional trade has increased dramatically, creating a boon for U.S. exporters. In 2007, the United States exported $22.4 billion to CAFTA-DR countries, a 14.4 percent increase from 2006. The U.S. trade surplus with those countries also enjoyed a dramatic increase, growing from about $1 billion in 2006 to almost $3.7 billion in 2007. That increase reversed a U.S. trade deficit of nearly $1.2 billion in 2005, the year before CAFTA-DR.

Merchandise exports reported in 2007 (billions of dollars)
Costa Rica:
Dominican Republic:
El Salvador:
Honduras: $4.46
Total: $22.41
Source: U.S. Department of Commerce, Bureau of the Census.


Investment, Social Development

Closer trade relationships in Central America have created an attractive environment for U.S. investors in the region. From 1997 to 2006, Costa Rica received twice as much foreign direct investment from U.S. investors than from the rest of the world combined, accounting for $1.6 billion in 2006. Also that year, U.S. direct investment in Nicaragua totaled $261 million.

While businesses are enjoying success, citizens of CAFTA-DR countries are realizing the social benefits that increased trade can bring. “CAFTA-DR is an example of how free trade agreements can boost U.S. exports and also improve the quality of life for our partners in the Western Hemisphere,” Padilla noted in a statement made before his departure.

U.S. firms have made significant contributions to projects in the region that support economic prosperity, social development, and environmental conservation. In 2006, for example, Merck donated hundreds of thousands of doses of much-needed medicines to local charities, such as the Catholic Medical Mission Board. Other popular recipients of U.S. corporate philanthropy include projects that support environmental protection and education.

Strengthening Ties

One major goal of Padilla’s recent visit was to strengthen the trade and investment relationship between the United States and Central America, as well as to ensure the completion of CAFTA-DR.

Padilla began his trip in Honduras. He visited the capital city of Tegucigalpa on February 25 and the main business city of San Pedro Sula on February 26. He then traveled to Nicaragua on February 27, visiting the capital city of Managua. Padilla attended a trade show of leading Nicaraguan exporters and addressed the American Chamber of Commerce of Nicaragua, where he outlined many of the benefits that CAFTA-DR has brought to the country and the region. He also met with President Daniel Ortega and other senior Nicaraguan officials to discuss the importance of a sustained commitment by Nicaragua to a free market economy and to free trade.

“American companies have made new and long-term investments, creating jobs and new opportunities for thousands of Nicaraguans,” said Padilla in his speech in Managua. “If the world hears that Nicaragua is committed to democracy and free markets, the world will come here to invest and help Nicaragua grow.”

On February 28, Padilla traveled to San José, Costa Rica, where he met with President Oscar Arias and senior government leaders and urged swift passage of several bills needed for that country’s full inclusion in CAFTA-DR. Among the bills, Costa Rican legislators are working on measures that would protect intellectual property rights and make adjustments to the telecommunications industry so the country will conform to the agreement.

Extending Success to Peru, Colombia

An immediate goal for CAFTA-DR is the inclusion of Costa Rica. But CAFTA-DR can also exemplify the success of free trade agreements as tools for strengthening economies and for promoting democracy in other regions. Many hope that CAFTA-DR’s accomplishments will be repeated by the recently approved free trade agreement between the United States and Peru and the pending free trade agreements with Colombia, Panama, and South Korea—countries that have seen increases in U.S. trade over the past several years.

Pierce Nixon is an editorial intern with the Office of Public Affairs of the International Trade Administration. Mark Siegelman of the Market Access and Compliance unit of the International Trade Administration contributed to this article.