CAFTA: The Gift That Keeps on Giving

The author, a Nicaraguan diplomat, highlights key provisions in the free trade agreement that took effect this month and also outlines numerous benefits that have been realized over the past few years.

By Alvaro Baltodano

This month, August 2008, a Cumulation mechanism within the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA or CAFTA for short) will go into effect, allowing the use of raw material from Mexico and the United States in the manufacturing of woven apparel in Nicaragua to be exported tax-free into Mexico or the United States.

The use of this benefit is subject to a cap of 100 million square meters of fabric distributed on a "first come, first served" basis, and may later be increased to 200 million square meters. Additionally, CAFTA allows the use of this mechanism to include other nations with whom CAFTA countries and the United States both have free trade agreements. (Canada is a possible candidate to be included in this mechanism once the region concludes a trade agreement with that country.)

Additionally, another amendment to CAFTA comes into effect that will allow Nicaragua to enjoy the following benefits:

* The quota of 100 million square meters will remain constant after the fifth anniversary of the trade agreement until its expiration in 2014. Prior to this amendment, after 2010 the quota would have been reduced to 20 million per year. 

*  Nicaragua will be granted an additional 1.5 million square meters of Tariff Preference Levels (TPLs) for wool products, specifically for wool suits for men.

* The list of specific products that may apply to the rule of "single transformation" will be extended to allow companies to import textiles from any non-CAFTA country, manufacture their garments in Nicaragua and export them duty-free to the United States without quota limitations.
These products include boxer shorts, brassieres, woven pajamas, woven girls' dresses, women's wool coats, baby wear, and cotton dresses, among others.

Within textiles and apparel, one of our most dynamic sectors, Nicaragua was able to obtain special benefits distinct from the rest of the countries in the region.

In addition to the common benefits the Central American countries obtained, Nicaragua was the only nation in the region to be granted the benefit of TPLs, which allow tax-free entry into the United States of apparel manufactured with textiles and thread of non-CAFTA countries. This provision covers up to 100 million square meters per year during a nine-year period once the agreement enters into effect.

These preferential tariff levels will allow the local industry to expand and evolve from a basic industry to an integrated high-value sector focused on style and design.

These tariffs will also have a positive impact on the Nicaraguan industry as they will allow a period of transition while new investments strengthen the textile sector. These efforts will result in the creation of new jobs and bolster the country's economy. A fully integrated textile industry will enable the country to produce all the components needed for apparel manufacturing and promote new investments under the Free Trade Zone Regime.

Some of the benefits obtained by Nicaragua in the original CAFTA agreement include:

* Preferential access to the largest market in the world - the United States

* The attraction of high-quality foreign direct investments that create job opportunities, promote technology transfer and corporate social responsibility.

* Insertion into competitive world markets.

* Improvement of the country's export infrastructure.

The impact of CAFTA in Nicaragua has been experienced mainly through the growth of the number of companies that operate under the Free Zones Regime, especially in the textiles and apparel sector. Nicaragua is the country with highest growth rate in exports of apparel to the United States under CAFTA.

Unmistakable Growth

Already, CAFTA is demonstrating a significant impact on companies that operate under the free trade zone in Nicaragua:

* Free zone tenants increased from 99 in 2005 to 119 in June 2008, a 20 percent increase.

* Exports increased from $724 million in 2005 to $1.24 billion in 2007, rising 72 percent.

* Employment grew from 75,000 in 2005 to 85,156 in 2007, an 18 percent increase.

* The exports of the textiles and apparel sector grew from 203.8 million square meters in 2005 to 285.5 million square meters in 2007, representing a 40 percent increase in export volume.

* In terms of value, exports grew from $715.5 million in 2005 to $968.17 million in 2007, a 35 percent increase in value.

* In 1996, exports of Nicaragua to the United States totaled $142.1 million, before surging 581 percent to $968 million in 2007.

* Nicaragua has the second highest value per square meter of fabric exported among the members of CAFTA.

Nicaragua has entered a period of economic liberalization and integration to global markets in order to stimulate and develop its national economy. Currently, we have signed free trade agreements with the United States, Dominican Republic and Central America (DR-CAFTA), Mexico and Taiwan.

Nicaragua is also in the process of negotiating a free trade agreement with the European Union, and is discussing preferential market access with Venezuela, Bolivia, Argentina and Brazil, in order to become a key export platform to the markets of North and South America.

About The Author

Alvaro Baltodano serves as presidential delegate for investment promotion for Nicaragua; executive secretary for the free zones corporation and technical secretary for the National Free Trade Zones Commission. He is also member of the government commission for relations with the private sector in Nicaragua. A retired general of the Nicaraguan army, he is now a leading businessman in the agricultural industry and a member of the inner circle of the Sandinistas. He also served as a Nicaraguan congressman at the Central American parliament.

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