What CAFTA Will Mean for Business and Trade in the Americas

By Chandri Navarro-Bowman and Melanie A. Frank

The U.S.-Dominican Republic- Central America Free Trade Agreement (DR-CAFTA or CAFTA), once fully implemented, will establish a free trade zone within seven signatory countries, including the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. The agreement eliminates import tariffs on a significant number of manufactured and agricultural goods, provides open markets in areas such as government procurement and trade in services, and establishes enforcement rules in intellectual property, investment, labor, and the environment. One of the most important aspects will be drastic changes in customs procedures, which will become more transparent and predictable.

CAFTA will yield drastic changes in customs procedures, which will become more transparent and predictable.

As a basic matter, CAFTA is intended to create a free trade zone for the signatory countries, which have committed to eliminating tariffs on goods and services over a 20-year period. The parties also established major procedural changes, such as advancements in customs administration and transparency capacity building, and dispute settlement procedures. Below are some of the key changes that will come from the agreement.

Tariff elimination. Duties on most industrial and consumer goods will be eliminated when CAFTA enters into force. Duties on other goods will be phased out over periods of up to ten years, although some agricultural goods will have longer periods for elimination of duties. In some cases, agriculture products may be subject to tariff rate quotas. The parties may later agree to speed up tariff phase-outs on a product-specific basis, which would need to be negotiated by the signatories with likely involvement from industry. The agreement also allows for temporary duty-free entry of certain items, such as professional equipment, display goods, and commercial samples.

Better customs procedures. Exporters and importers in the region often deal with inconsistent and unclear rules and arbitrary clearance procedures, which lead to delays in shipments and unnecessary costs. Under CAFTA, U.S. exporters will be able to obtain binding advance rulings on tariff classification, origin determinations, and other customs questions. In addition, governments must publish their customs laws on the Internet, and all customs fees on imports and exports will be limited to only the cost

of services rendered. U.S. companies will have rights to regulatory and judicial review of customs decisions in Central American countries.

Another important change is that U.S. exporters will no longer be required to sell goods and services through a local dealer but instead all will be able to sell directly to merchants and consumers throughout the region, eliminating an inefficient cost of doing business.

Big advancements will be made regarding customs treatment of express delivery services. Within one year of the effective date of CAFTA, Central American governments must provide a separate expedited procedure for express shipments, and such shipments will be able to clear customs prior to the arrival of the actual shipment. Most importantly, for the first time, the signatory countries will be required to clear express shipments from the port within six hours of submission of all necessary documents. These customs-related obligations will phase in over three years.

Open markets for U.S. services. CAFTA will provide new access to sectors such as telecommunications, express delivery, energy, tourism, construction, transport, and environmental, energy, computer, financial, and professional services.

Access to open and fair government procurement. Central American countries will be able to purchase U.S. goods, services, and technology in government procurement contracts without having to satisfy domestic sourcing requirements (and vice versa). Under the new rules, Central American governments must give advance public notice of all procurement opportunities. In addition, the agreement provides anti-corruption measures in government contracting so that all companies can be assured a fair and open process.

Investment. At the outset, CAFTA will establish specific protections for U.S. investors in the region. Parties will work further to develop an appellate mechanism for resolving investor-state disputes.

Labor rights and environmental protections. CAFTA requires merely that the signatory countries enforce their existing protections for workers and participate in arbitration over disputes. There also will be a first-ever citizen participation process to resolve trade-related environmental issues. Citizens will be able to file a complaint with the CAFTA Secretariat if they find a party not in compliance.

Enforcement of intellectual property rights. CAFTA requires the parties to comply with a variety of international trade agreements regarding intellectual property within specified timetables. The agreement also sets out specific rules regarding protection of trademarks, copyright, and patents and creates enforcement provisions that carry high monetary penalties for intellectual property violations.

Where do we go from here? With its significant tariff reductions for manufactured products, CAFTA is intended to provide new market access opportunities for a number of U.S. sectors, including producers of chemicals, plastics, cosmetics, textiles, fertilizer, construction equipment, building supplies, information technology, medical equipment, industrial machinery, environmental technologies, electrical power generation and distribution equipment, and automotive parts and equipment. These market access commitments were negotiated to take advantage of the growing consumer markets for such products in Central America. The demand for all of the products covered by CAFTA is expected to increase significantly. U.S. producers also will have new access to government procurement and services opportunities in Central America and will have protections over investments and intellectual property in the region.

Small and medium-sized U.S. companies will see particular benefits under CAFTA. The elimination of tariffs, new transparency in customs procedures, and reduction of regulatory red tape will open the door for more profitable, reliable exports to the region.

Markets for U.S. farmers and ranchers also will be expanded, as more than half of the current U.S. farm export to Central America and the Dominican Republic will become duty-free immediately, a change affecting products such as high-quality cuts of beef, soybeans, cotton, wheat, fruits and vegetables, and processed food products. The American Farm Bureau Federation estimates that CAFTA could expand U.S. farm exports by $1.5 billion each year.

With respect to imports, consumer industries and retailers will continue to benefit from the free trade region with the certainty that a free trade agreement brings—duty-free treatment in perpetuity that is not subject to the political whims of future administrations and legislatures. However, most do not expect a significant increase in imports because many products from the region already have been subject to duty-free treatment under the GSP (U.S. Generalized System of Preferences) and CBTPA (Caribbean Basin Trade Partnership Act) programs. To take advantage of the new CAFTA duty preferences, importers will need to be aware of the new documentation requirements including, for example, the very specific and sometimes complex “rules of origin.” Importers also will have better assurance that they are buying from a region with enforceable labor laws and environmental protections. In addition, under CAFTA the United States will be granting refunds of duties paid for many textile goods that previously entered the United States from countries that have implemented the agreement. Importers who may be eligible for these refunds should act promptly in order to comply with U.S. regulatory deadlines. Further, for future shipments, U.S. import processing fees will be reduced in many cases. Producers and retailers alike plan for these changes in duty rates and levels of trade.

is a partner with Hogan & Hartson, LLP, in Washington, D.C. is an associate with Hogan & Hartson, LLP.

Copyright 2007

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