Think Tank: Targeted CAFTA-DR Modernization Needed

The Atlantic Council issued a brief arguing for modernizing CAFTA-DR, and held an event Nov. 19 to bring attention to the report. The report said that rules of origin "for textiles, autos, and electronics should be updated to reflect modern regional value chains and incentivize near-sourcing."

They said that modernizing CAFTA-DR, the Dominican Republic-Central America Free Trade Agreement, is in the U.S.'s strategic interest, to keep its dominant trading position in Central America, keep China from replacing it, obtain affordable goods from nearby, and to help these countries prosper.

It also recommended that an update tackle trade facilitation, including digital single windows, mutual recognition of trusted traders and e-certificates of origin.

Antonio Ortiz-Mena, a nonresident senior fellow in the Atlantic Council's Latin America center, said, "Trade facilitation sometimes gets less attention than it deserves."

At the event, Ortiz-Mena was asked whether allowing CAFTA-DR members to accede to the USMCA was practical.

"Honestly, I think it's not viable, for both technical reasons -- accumulation of origin -- and political reasons," he said. The former Mexican trade negotiator said the USMCA review is complicated enough.

He also said that bilateral agreements -- which seems to be the direction the U.S. is going with its recent release of frameworks for Guatemala and El Salvador -- are not durable, and therefore, not helpful to businesses deciding where to invest or source.

The report said the danger of this approach is "fragmentation of regional rules and possible erosion of regional integration."

Ideally, a trade agreement would "have zero tariffs, but that's not the main game, it's certainty," Ortiz-Mena said. While the frameworks eliminate tariffs on some goods, "they can be raised again. They don't deal with the uncertainty issue," he said. "I see these frameworks as more of temporary fixes."

The panel talked about how action under Section 301 to remove Nicaragua from the FTA might affect the regional production patterns.

Atlantic Council Economic Security Group member Kristie Pellecchia Loiacono said she was just reading that Costa Rica depends heavily on Nicaraguan imports.

Juan Sebastian Chamorro, former Nicaraguan deputy minister of finance, and a former presidential candidate who was jailed during his campaign by the country's dictator, said that 55% of Nicaraguan exports are destined for the U.S., and 36% of the country's GDP is from exports. He projects losing the trade benefit would cost the country 5 points of GDP in the first year. However, Chamorro said people shouldn't see the economic punishment as the U.S.'s fault, but rather brought on by Nicaragua's leaders' abuses. He noted that more than 12% of Nicaragua's population has left the country since 2018. (He is also in exile after being released from almost two years in prison.)

In response to a question on how CAFTA-DR's textile rules of origin should change so that Central American apparel can be more competitive with Asian exporters, Chamorro disagreed with the premise.

For T-shirts, he said, "Nicaragua has in several cases been the main exporter to the U.S., competing with Bangladesh, India and other countries. The problem is not a matter of productiveness but creating a second wave of transformation."

He pointed to Costa Rica, which has moved up the value chain to medical devices.

However, the International Trade Commission issued a report last year that said Bangladesh and Indonesia are both more competitive than Central American suppliers, since they have moved up the value chain from T-shirts.

"The industry developed by specializing in jeans and T-shirts, but has evolved to produce a wide variety of garments owing to its size, capacity, and availability of technical skills," the ITC wrote, and noted that U.S. buyers imported $7.1 billion of apparel from Bangladesh in 2023, up by almost 50% since 2013. In contrast, Nicaragua exported just under $2 billion in apparel that year.