The ratification of the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) by the Dominican Republic in late 2005 is expected to mark a sea change in the way that business is conducted between the US and the republic and the five central American signatories to the treaty.
But, say Dominicans, it may also mark a shift in the way that business is conducted: the treaty insists on new public procurement principles and standards of transparency and, despite an expected drop off in tariff revenue and more stringent business rules, it has been described as “changing the dynamics of world trade” and is being well received by the country’s business community.
Change in trade
At the moment, more than 80% of Dominican goods enter the US tariff-free. From that perspective, the agreement can be seen as a win for the US. It is certainly presented as such by the US administration: on the Senate’s passing of the agreement in July 2005, President George W Bush said he was proud it had “acted to advance America’s economic and national security interests by [ensuring] that free trade is fair trade”. He added: “By lowering trade barriers to American goods in central American markets to a level now enjoyed by their goods in the US, this agreement will level the playing field and help American workers, farmers and small businesses.”
Some proponents of CAFTA in the US have pushed the agreement in terms so bullish as to imply that the US is the sole victor of a zero-sum game. Others are more measured: DR-CAFTA will, they say, give “a substantial competitive advantage to US agriculture” and “serve the US by combating terrorism and other illegal activities”. Some US perspectives emphasise the non-trade aspects of the agreement: a Republican senator from Arizona described it as “a little trade agreement with small economic consequences for our country but a huge national security issue with enormous implications for our entire foreign policy”.
Mixed reaction
In the Dominican Republic, business watches and waits. Reduced tariffs, the logic dictates, will result in more trade and investment. A lower price of doing business will lead to lower prices, increasing imports, foreign exchange earnings and standards of living; and vertical integration of production across the region will assist all parties in competing with Asia.
Not all Dominicans are convinced that the agreement will make a great deal of difference. Leading local economist Carlos Despradel says: “We’ve been a member of the Caribbean Basin Agreement for over 20 years… yes, it does mean some internal reforms and makes investment easier, but the difference might be psychological more than practical.”
Others are more upbeat and insist that CAFTA will lead to a wholesale re-apprehension of the way business is done. “With DR CAFTA, new transparency requirements will help in a number of ways,” a businesswoman told The Banker. “The government will be obliged to give more public information about how things are done. Processes and institutions should be improved, and I really do expect this to have a positive effect on investment.”
Income losses
Dominican lawyer Vilma Arbaje, one of the country’s chief negotiators on DR-CAFTA, outlines the scale of adjustment that the Dominican Republic will be required to make. “We already enjoy preferential treatment with the US but at the moment, 85% of US goods pay duties to enter our country. As soon as [DR-CAFTA] takes effect, they will be free of duties. Loss of income from tariffs is going to be about 3bn pesos ($90.6m) over the next two years, and 20bn pesos loss from exchange commission.”
But there are plus points, she says. “It opens up lots of new trade and investment opportunities. The agreement, for example, encapsulates new country of origin rules; we can now import some semi-manufactured goods and raw materials from outside the country, and export the finished products as having Dominican origin.”
More transparency
The other intention is that a clear and robust framework for investment in goods and services lures more US investors to establish operations in the republic for export outside of the DR-CAFTA region, taking advantage of the republic’s special relationship within the Caribbean Community and Common Market (Caricom) and the EU – with transparency.
Aware of the country’s reputation for murky dealings, Ms Arbaje says: “Chapter 18 of the agreement consecrates an obligation to transparency and the struggle against corruption. It also establishes a mechanism by which [governments] must make information public. And it defines what is corruption and who can be prosecuted for corrupt behaviour, wherever the parties happen to be located.”
Enshrined in chapter 9 are rules on government procurement, making public bidding obligatory for the acquisition of different services where contract values exceed new thresholds. There is a grace period for the implementation of the chapter but Ms Arbaje thinks that some companies that were previously complacent about the preparation of competitive tenders might get a jolt.
“It’s a difference in the way of doing things. Many public institutions do [use public bidding to award contracts] but sometimes the participation is only local. This should change how public works are contracted,” she says.
Recent legislation suggests that the public sector is already “moving toward DR-CAFTA” in terms of openness and non-discrimination, she adds.
Beyond CAFTA
About 85% of Dominican trade is with the US – but the country by no means ignores the rest of the world. Juan Guilliani, at the republic’s ministry of foreign affairs, says that trade with near-neighbour Puerto Rico is worth $1.4bn a year, mainly in exporting agricultural and agro-industrial products, and importing manufactured and semi-manufactured goods.
The EU is also a “good friend” to the Dominican Republic, he says. It provides 18 times more financial assistance by way of grants, subsidies and aid through the EU Economic Development Fund than does the US. As a member of the Africa, Caribbean and Pacific Group, exports of cocoa and bananas receive preferential treatment. World Trade Organization (WTO) elimination of preferences could “prove difficult”, he says, but the government is well represented in Brussels, where it is negotiating a trade co-operation agreement due for completion by the end of 2006 “to compensate for WTO policy”.
The country has also timetabled negotiations on free trade agreements with Taiwan, Canada and Colombia, in addition to seeking integration into Mercosur, says Mr Guilliani.
If DR-CAFTA does what it says it will do, it will go well beyond being a trade agreement; it will augur a tectonic shift in the way Dominicans do business.
