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Changing with CAFTA
LatinFinance / March 2007

By Larry Luxner

The six Spanish-speaking nations of Central America are all expected to enjoy healthy economic growth this year — ranging from 4% in El Salvador and Nicaragua to 7% in Panama.

In some cases, this is thanks to DR-CAFTA, the free-trade agreement which aims to eliminate tariffs and duties among the United States, the Dominican Republic and Central America.

Exactly one year ago, El Salvador became the first country in Central America to implement DR-CAFTA trade accord, followed a month later by Honduras and Nicaragua, and then by Guatemala. The Dominican Republic and Costa Rica have yet to implement DR-CAFTA, while Panama was never included.

In that year, exports from Central America to the United States have increased by over 21%, according to René León, El Salvador's ambassador in Washington.

"CAFTA is not in itself the magical remedy to all of Central America's problems, just a tool for development and opportunity," he said. "But with three months of positive growth since August, CAFTA is helping to diversity our export base. We are right now exporting not only textiles and apparel, but also agribusiness products, IT products, auto parts and ethnic products to the U.S.," he said. "More and more companies are investing in El Salvador due to CAFTA."

Norman García, director of the Trade Investment and Competitiveness program at FIDE, the Honduran government promotions agency, said he lobbied hard for CAFTA's passage while ambassador to the United States.

"The implementation of CAFTA guarantees that we will not lose any investment already in Honduras," he said. "We will continue to penetrate and have access to the largest and richest market in the world. If it weren't for CAFTA, all this investment would be gone. We would lose 125,000 jobs and the equivalent of $1.8 billion, just in the apparel industry."

García said that thanks to CAFTA, Honduras is now the No. 2 exporter of wire harnesses to the U.S. auto industry, after Mexico, with 12 factories churning out $400 million worth of product each year.

In Nicaragua, DR-CAFTA — combined with the lowest wages in the region, only 76 cents an hour — has sparked a big interest on the part of investors, particularly in the textile and apparel sector.

Juan Carlos Pereira, executive director of the investment promotions agency Pro-Nicaragua, said exports jumped 18% last year, while new investment incresed by 16%.

"CAFTA just passed, so investment takes time to implement, but we're going to see big increases for both exports and investment in 2007," he said.

In the meantime, North Carolina-based ITC-Cone Denim plans to build a 600,000-sq-foot fabric mill on the outskirts of Managua. The $100 million facility will employ 600 people directly and support an additional 10,000 jobs in the cut-and-sew garment manufacturing sector.

Pereira explained that under DR-CAFTA, Nicaragua is the only Central American country that's negotiated a 9-year Tariff Preference Level. That allows local texile mills to use 100 million sq-meter equivalents of fabric from anywhere in the world to produce garments in Nicaragua — while still meeting the rules-of-origin requirements to export to the United States free of duties and quotas.

In addition, Arnecom, a Mexican-Japanese venture, is investing $10 million to expand a Managua factory that already employs 5,000 people in the manufacture of wire harnesses for the auto industry.

The recent election of longtime leftist Daniel Ortega as president of Nicaragua hasn't scared away too many foreign investors.

"There was definitely a wait-and-see approach in December and early January. Projects were put on hold," he said. "But Ortega has given some very clear messages about his interest in attracting investment and maintaining the rules of the game for investors. Most of the projects that were on hold are now back on track."

Costa Rica has yet to implement DR-CAFTA because of stiff opposition from labor unions and oppposition parties, though the country's legislature has begun hearings to open up the government's insurance monopoloy to competition — a CAFTA requirement. In addition, the Instituto Nacional de Seguros have signaled an intent to compete in the insurance market throughout Central America, with plans to enter Nicaragua first.

Meanwhile, the United States and Panama have wrapped up negotiations on a separate bilateral free trade agreement after almost a year's stalemate. Government procurement relating to a proposed $5.25 billion expansion of the Panama Canal was among the final issues resolved, with Panama ensuring that a percentage of contracts will be set aside for domestic companies. vUnder the FTA, over 88% of U.S. exports of consumer and industrial goods to Panama would become duty-free immediately, with remaining tariffs phased out over 10 years. The accord includes "zero-for-zero" immediate duty-free access for key U.S. sectors including farm and construction equipment, IT products and medical and scientific equiment. Other key sectors will also obtain "significant" access to the Panamanian market, including motor vehicles, auto parts, paper, wood products and chemicals.

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