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Impact of CAFTA-DR on the Economy of Costa Rica, Central America, and the Dominican Republic

by | Jun 28, 2024

The Free Trade Agreement between Central America, the Dominican Republic, and the United States (CAFTA-DR) has been a key tool for economic integration, job creation, and commercial development since its implementation in 2006. With a strong focus on job creation, this agreement seeks to eliminate tariff barriers, facilitate trade, and encourage foreign direct investment. Almost two decades after its implementation, evaluating the impact of the CAFTA-DR  on the participating economies is crucial using the most recent macroeconomic data available. The agreement has not only boosted economic growth but also led to the creation of numerous jobs, contributing significantly to the social well-being of the region.

Trade Growth

Since the entry into force of CAFTA-DR, member countries have experienced a significant increase in their foreign trade. According to data from the World Bank, the volume of goods and services exported by the region has grown by 5% annually on average. This growth has been particularly notable in sectors such as textiles, agricultural products, and light manufacturing, which have found a robust market in the United States, a testament to the strength of the trade relationship. For example, exports of textiles and clothing from Honduras to the United States increased by more than 50% in the first ten years of the agreement. Likewise, Costa Rica has seen an increase in the export of technological products and services, consolidating itself as a technological hub in the region.

Foreign Direct Investment

Foreign Direct Investment has been one of the largest beneficiaries of CAFTA-DR. The liberalization of markets and the legal guarantees offered by the treaty have attracted a constant influx of foreign capital, providing a significant boost to the region’s economies. In 2023, according to the Economic Commission for Latin America and the Caribbean (ECLAC), the region received approximately $15 billion in FDI, with Costa Rica and the Dominican Republic leading this indicator. Costa Rica, in particular, has used the agreement to diversify its economy. It has attracted significant investments in the information technology and biotechnology sectors, a clear sign of the agreement’s role in fostering economic diversification and attracting high-value sectors, reassuring the region about the long-term economic benefits of the agreement.

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Challenges and the Impact of CAFTA-DR

One of the main challenges is the competition that local producers face against subsidized products from the United States, especially in the agricultural sector. While more diversified economies, such as Costa Rica and the Dominican Republic, have taken advantage of the opportunities of the agreement, countries with economies more dependent on a single sector, such as Nicaragua and El Salvador, have seen more limited growth.

Future Outlook

As the global economy faces new challenges, including high inflation, geopolitical tensions, and post-pandemic economic uncertainty, CAFTA-DR countries must strengthen their cooperation and seek to diversify their economies further. Initiatives to improve infrastructure, education, and technological innovation will be crucial to maintaining competitiveness and attracting sustainable investments.

The impact of CAFTA-DR has been positive on the economies of its member countries, increasing trade, foreign investment, and employment. However, it has also presented challenges that require strategic policies to ensure more sustainable economic development. The key will be the ability of these countries to adapt and maximize the opportunities offered by the treaty while addressing the internal barriers that limit their full potential.

Case Study: Costa Rica

Costa Rica has been one of the largest beneficiaries of CAFTA-DR, becoming a model of how a country can transform its economy through trade and foreign investment. With a diversified economy, Costa Rica has taken advantage of the treaty to attract investments in high-value-added sectors such as technology, biotechnology, and medical services. Multinational companies such as Intel, Microsoft, and Amazon have established significant operations in the country, generating employment and technology transfer. The services sector has grown significantly, with exports representing 45% of the country’s total exports in 2023. However, despite these successes, Costa Rica faces important challenges, such as improving its infrastructure. Education remains critical to ensure that the workforce can meet the demands of an increasingly sophisticated market. Costa Rica must continue investing in education and technology, especially semiconductors, to maintain its competitiveness and consolidate the benefits of CAFTA-DR.

The impact of CAFTA-DR on the economies of Central America and the Dominican Republic has been transformative. The agreement has facilitated substantial trade and foreign direct investment growth, benefiting more diversified economies like Costa Rica and the Dominican Republic. These countries have successfully attracted investments in high-value sectors, leading to increased economic diversification and technological advancement. However, challenges remain, particularly for less diversified economies that struggle with competition from subsidized U.S. products. Moving forward, CAFTA-DR member countries must strengthen cooperation, invest in infrastructure and education, and foster technological innovation. These nations can ensure sustainable economic development and continued prosperity in an increasingly competitive global market by addressing these challenges and maximizing CAFTA-DR’s opportunities.

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