RSM Resources

In 1994, the United States signed an open markets accord with Canada and Mexico. The North American Free Trade Agreement (NAFTA) reduced or eliminated tariffs and opened new sectors of all three economies to competition. As a result of that accord, Canada and Mexico are the largest export markets for U.S. firms at $212 billion and $124 billion,respectively.

Today, U.S. companies are finding more open doors to neighbors. The Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), signed in 2005, gives U.S. companies access to open markets in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. (The agreement was known as just CAFTA until the Dominican Republic joined.)

Although U.S. markets have been open to imports from these countries for years, high tariffs typically applied to most U.S. products exported to CAFTA-DR nations.Under CAFTA-DR, tariffs dropped by 80 percent immediately and continued lowering over the next 10 years.

"This agreement levels the playing field for U.S. companies," says Mark Siegelman, an international trade specialist with the U.S. Department of Commerce’s Office of Latin America and the Caribbean.

CAFTA-DR countries are not economic powerhouses, according to the CIA’s World Factbook.The smallest of the six nations, Costa Rica, has a population of just 4 million people. The largest of the Latin American and Caribbean nations included in the pact is Guatemala. But its 12 million people are among the region’s poorest, with an annual per capita income of $4,900.

"When you look at each country, [the market] doesn’t seem so large, "Siegelman says. But taken as a whole, "It’s quite a sizable market."

U.S.companies now sell about $15 billion in products to CAFTA-DR signatories, making it a larger export market than Russia and Indonesia combined.

Trade grows in key sectors

Early signs indicate U.S. companies are taking advantage of these new markets. Since the agreement took effect last year, U.S. exports to several CAFTA-DR countries have reported double-digit increases: Guatemala (29percent), Nicaragua (19 percent), El Salvador (19 percent) and Honduras(14 percent).

When the U.S. Commerce Department tabulates final figures for 2006, exports to CAFTA-DR nations could top $17 billion.

Business is expected to boom in several sectors. The American Farm Bureau Federation reports crop exports to the region could climb by $1.5 billion annually. The Office of the United States Trade Representative expects equipment manufacturers in the fields of medicine, science, agriculture and construction to benefit from lower tariffs in the region. Paper, information technology and pharmaceutical sales might also rise.

But Siegelman also sees new business opportunities for service firms in architecture, construction, telecommunications and other areas.

The United States is already the largest exporter of goods and services to CAFTA-DR countries, representing about one-third of all Guatemalan and Nicaraguan imports, about half of the Dominican Republic’s imports, and nearly three-fourths of Honduran imports.

Those percentages could increase in coming years as U.S. businesses take advantage of increasingly open Latin American and Caribbean markets.

Commerce Secretary Carlos M. Gutierrez put it this way: "We are opening up more markets. Our businesses are taking advantage."

"Stepping stone" to Latin America

Timothy J. Kehoe, University of Minnesota economist, believes U.S. companies should view CAFTA-DR nations as a stepping stone to the rest of Latin America, which includes the large economies of Brazil ($1.6 trillion GDP) and Argentina ($599 billion GDP).

"Latin America is big, and right now we’re trading heavily with only one part of it," Kehoe says.

That is likely to change. The United States signed free trade agreements with Colombia ($366 billion GDP) and Peru ($181 billion GDP) last year;both pacts are awaiting congressional approval. Kehoe believes many other Latin American nations also want to open their markets to competition.

"It’s inevitable that we’re going to have more trade relationships with our neighbors in the Western Hemisphere," Kehoe says.

How can growing companies position themselves to take advantage of new opportunities through CAFTA-DR and across all of Latin America? By establishing contacts, marketing expertise, distribution markets and other infrastructure throughout the region.

"You can apply that [knowledge] to Colombia and Peru," Kehoe says. "Those are gigantic markets."

CAFTA countries at-a-glance:

Source: CIA World Factbook

Costa Rica

Population: 4.1 million

Population growth: 1.45%

GDP: $48.7 billion

GDP growth rate: 4.7%

"Costa Rica’s basically stable economy depends on tourism, agriculture, and electronics exports. Foreign investors remain attracted by the country’s political stability and high education levels, and tourism continues to bring in foreign exchange. The current administration has made it a priority to pass the necessary reforms to implement [CAFTA-DR]."

Guatemala

Population: 12.3 million

Population growth: 2.27%

GDP: $60.6 billion

GDP growth rate: 3.9%

"Guatemala is the largest and most populous of the Central American countries with a GDP per capita roughly one-half that of Brazil, Argentina, and Chile.... The 1996 signing of peace accords, which ended 36 years of civil war, removed a major obstacle to foreign investment, and Guatemala since then has pursued important reforms and macroeconomic stabilization."

Honduras

Population: 7.3 million

Population growth: 2.16%

GDP: $22.1 billion

GDP growth rate: 5.2%

"Honduras,the second poorest country in Central America is banking on expanded trade under the US-Central America Free Trade Agreement (CAFTA) and on debt relief under the Heavily Indebted Poor Countries (HIPC)initiative. Growth remains dependent on the economy of the U.S., its largest trading partner."

El Salvador

Population: 6.8 million

Population growth: 1.72%

GDP: $33.2 billion

GDP growth rate: 4%

"The smallest country in Central America, El Salvador has the third largest economy, but growth has been minimal in recent years. Hoping to stimulate the sluggish economy, the government is striving to open new export markets, encourage foreign investment, and modernize the tax and healthcare systems. The current government is committed to opening the economy to trade and investment, and has embarked on a wave of privatizations extending to telecom, electricity distribution, banking,and pension funds."

Nicaragua

Population: 5.6 million

Population growth: 1.89%

GDP: $16.8 billion

GDP growth rate: 2.5%

"Nicaragua,the second poorest country in the Western Hemisphere, has low per capita income and widespread underemployment. In October 2005,Nicaragua ratified [CAFTA-DR], which will provide an opportunity for Nicaragua to attract investment, create jobs, and deepen economic development."

Dominican Republic

Population: 9.1 million

Population growth: 1.47%

GDP: $73.7 billion

GDP growth rate: 7.2%

"The Dominican Republic is a Caribbean representative democracy that enjoyedstrong GDP growth until 2003. Growth turned negative in 2003 withreduced tourism, a major bank fraud, and limited growth in the U.S.economy (the source of about 80 percent of export revenues), but recovered in 2004 to 2006. The Dominican Republic’s development prospects improved with the ratification of [CAFTA-DR]."