	Introduction

On August 5, 2004, the United States entered into the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic (hereafter the CAFTA-DR countries). 109-53 ). CAFTA-DR entered into force with El Salvador, Honduras, Nicaragua, and Guatemala by July 1, 2006, the Dominican Republic on March 1, 2007, and Costa Rica on January 1, 2009. This report follows up on congressional interest by providing an analysis of the trends in trade and investment since CAFTA-DR entered into force six years ago. Background and Rationale for CAFTA-DR

Historically, the United States has entered into free trade agreements (FTAs) and unilateral trade preference programs with developing countries in the pursuit of both economic and foreign policy goals. In 1983, the U.S. Congress passed the Caribbean Basin Initiative (CBI—formally the Caribbean Basin Economic Recovery Act— P.L. CAFTA-DR builds on this precedent, but makes preferential access comprehensive, reciprocal, and permanent while also enhancing rules and other disciplines on trade. Equally important for the United States were enhanced rules covering multiple disciplines including trade in services, intellectual property rights, sanitary and phytosanitary regulations, investment, government procurement, labor, and environment, among others. CAFTA-DR Trade Rules

Market access is at the center of free trade agreements and refers to provisions that govern barriers to trade such as tariffs and quotas. It is a starting point for raising questions over the possible effects of CAFTA-DR.

		CAFTA-DR Direction of Trade

There have been three major changes in the direction of CAFTA-DR trade over the last decade, including the period of time the agreement has been in force:
first, although the United States remains the CAFTA-DR countries' dominant trade partner, U.S. trade has fallen relative to other countries; second, trade with China and Mexico has increased; and third, intra-Central America trade and integration has increased and deepened. In addition, analysis of the technology content of CAFTA-DR country exports suggests that the agreement supports the trend of the United States being the largest market for technology-enhanced exports, ranging from low-technology apparel to high-technology medical equipment and integrated circuits. Also, because a large portion of CAFTA-DR exports entered the United States duty free prior to implementation of the agreement, the United States International Trade Commission (USITC) model predicted that the marginal trade effects of the accord would be a relatively larger increase in U.S. exports, as appears to be the case, so far. Textiles and Apparel

From 2000 to 2011, aggregate U.S. exports of apparel, yarns, and fabrics declined from 33.4% to 12.4% of total U.S. exports to the CAFTA-DR countries. It has shifted to other higher value-added goods. The Dominican Republic has seen little agricultural export growth except for sugar and tobacco, and Guatemala, Nicaragua, and Honduras have seen slight increases in fruit, fish, and specialized coffee exports, demonstrating some shift in production to nontraditional exports. A non-exhaustive list includes support for private sector investment, infrastructure, education, and good governance, including an efficient and predictable regulatory framework. Differences in growth of exports and FDI seem to correlate closely with similar trends in these variables. The data suggest that CAFTA-DR has supported a long-term trend in the region toward trade and investment liberalization, encouraging diversification into higher value-added, and in some cases, technology-enhanced goods. U.S. exports have grown, with gains in agriculture and more modest growth in manufactured goods. Deteriorating security and governance capabilities in some countries further complicate the trade and investment environment.
On August 5, 2004, the United States entered into the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR). Congress passed the implementing bill on July 28, 2005 (P.L. 109-53) and CAFTA-DR entered into force with El Salvador, Honduras, Nicaragua, and Guatemala by July 1, 2006, the Dominican Republic on March 1, 2007, and Costa Rica on January 1, 2009. This permanent, comprehensive, and reciprocal trade agreement eliminates tariff and non-tariff barriers to two-way trade, building on unilateral trade preferences begun under the 1983 Caribbean Basin Initiative (CBI). It enhances rules and other standards for services, intellectual property rights, government procurement, and investment, and other disciplines. It also reinforces Congress's historical support for trade as a foundation of broader foreign economic, political, and security policies in the region. This report supports congressional interest with an analysis of the trade and investment trends since CAFTA-DR entered into force.
CAFTA-DR reinforces trade and investment trends that have been emerging at least over the past decade. The United States remains the region's dominant trade partner, but its share of total trade has begun to decline. Intra-Central America trade and trade with China have seen the largest growth. Still, the United States (1) has vibrant trade in intermediate goods reflecting increasingly integrated production with the region; (2) provides the largest portion of foreign direct investment to the region; and, (3) remains the largest market for high-technology content exports. Because U.S. tariffs were already relatively low, the United States International Trade Commission model predicted that U.S. exports would rise slightly faster than imports, which so far has been the case.
One important indicator is the change in composition of trade. The United States has seen strong growth in exports of mineral fuels, machinery, cereals, yarns, and fabrics. Historically, the CAFTA-DR region has exported agricultural products and later apparel and other assembled goods to the United States. For over the past decade, more sophisticated and higher-value exports have grown, including specialized machinery goods (e.g., small aviation motors), electrical goods (e.g., integrated circuits), and medical equipment, while exports of light manufactures such as apparel have stagnated, or in some cases, declined. Agricultural trade has increased moderately and remains a combination of traditional exports (e.g., coffee and bananas) with little growth in higher value nontraditional goods (e.g., pineapple and sweet peppers).
These aggregate trends, however, mask important country differences. As examples of moving up the value chain, Costa Rica has increased nontraditional production in both its manufacturing and agricultural sectors, and so has experienced the largest growth in exports. Similarly, Nicaragua has begun to enter the assembly manufacturing sector and so experienced the second highest rate of trade growth. The other four countries have seen their exports stagnate or decline for multiple reasons, including dependence on the highly competitive apparel trade, lower levels of investment, public security problems, and broader governance and policy concerns.
CAFTA-DR reinforces the idea that growth in trade correlates closely with policies that promote economic stability, private investment in production, public investment in education, infrastructure, logistics, and good governance in general. Countries with worsening security and governance problems face additional problems in benefitting from CAFTA-DR. It is also important to promote productivity in part by avoiding delays in making necessary adjustments to trade liberalization, focusing public and private resources on trade facilitation, developing strategies for trade diversification, and examining CAFTA-DR trade rules (especially for textiles and apparel) that have perhaps inadvertently hindered trade growth expected from the accord.