Cepeda Impact of CAFTA

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Published on January 22, 2008

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Impact of CAFTA:  Impact of CAFTA Memphis, TN, May 15, 2006 J. Cepeda ExcelAG,Corp. ALINA Treasurer CAFTA:  CAFTA A CLOSER LOOK J. Cepeda ExcelAG,Corp. ALINA Treasurer The Central American Free Trade Agreement Who are the CAFTA partners?:  Who are the CAFTA partners? The United States of America and Central America: El Salvador Guatemala Honduras Nicaragua Costa Rica Dominican Republic Why CAFTA makes sense?:  Why CAFTA makes sense? A strong trade partnership: The total trade between the US and Central America amounted $23.2 billion in 2003. If we include Dominican Republic along with Central America, the total trade amounted $31.9 billion in 2003. Why CAFTA makes sense? :  Why CAFTA makes sense? Because CAFTA/USA are strong trade partners The US is the most important trading partner for every Central American country, and for the region as a whole. US companies’ exports to CAFTA countries are higher than those to Spain, Israel, Eastern Europe or Egypt. US exports to CAFTA countries are equivalent to those to Russia and India combined. US imports from CAFTA countries are larger than those from Argentina, Chile or South Africa. 50% of Central American imports are originated in the US, while almost 50% of CAFTA’s exports are destined to the US. US Trade with CAFTA & DR:  US Trade with CAFTA & DR Agricultural Trade:  Agricultural Trade Agriculture depends heavily on trade — U.S. farmers sell approximately one-third of what they produce overseas. CAFTA represents a real opportunity to increase agricultural exports to a combined market the size of California. Elimination of CAFTA trade barriers promises growth for U.S. agricultural exports. CAFTA will resolve sanitary and phytosanitary disputes that have blocked U.S. exports to the region. CAFTA countries are already good markets for U.S. agricultural products. The United States is CAFTA’s single largest source of agricultural products. Tariffs on products such as breakfast cereals, soups, cookies and pet food will receive immediate duty-free treatment. CAFTA also will increase access to the region for U.S. pork and eliminate Central American tariffs on high-quality beef. US Agricultural Trade with CAFTA:  US Agricultural Trade with CAFTA U.S. agricultural exports in 2004 to the six countries covered by the DR-CAFTA (Costa Rica, the Dominican Republic, El Salvador, Guatemala,Honduras, and Nicaragua) totaled $1.7 billion, and represented almost 3% of U.S. worldwide sales (see Table 1). These countries combined represented the seventh largest export market for U.S. agricultural products after Canada, Japan, Mexico, China , South Korea, and Taiwan. Leading exports were corn, wheat, rice, soybean meal, and tobacco. The Dominican Republic was the largest market with $462 million in sales that accounted for 27% of all agricultural exports to the region, followed by Guatemala ($383 million with a 23% share). U.S. farm exports accounted for 11% of total U.S. merchandise exports to the six countries, and have increased 56% in value terms since 1995. Exports US AG IMPORTS FROM CAFTA:  US AG IMPORTS FROM CAFTA 2004 Agricultural imports from CAFTA countries equaled almost $2.5billion, or nearly 5% of all U.S. farm and food imports (see Table 1). CAFTA countries ranked as the fourth-largest source of U.S. agricultural imports in 2004. U.S. purchases of bananas, raw coffee, other fresh fruit, raw cane sugar, and fresh and frozen vegetables led the list. Costa Rica was the largest supplier of food products shipping $899 million, or 37% of all agricultural imports from the region, followed by Guatemala ($784 million, or 32%). U.S. farm imports accounted for 14% of total U.S. imports from CAFTA countries, and have grown by 23% in dollar terms over the last decade. IMPACT of CAFTA on Ag Trade:  IMPACT of CAFTA on Ag Trade A quantitative analysis of the U.S. International Trade Commission (ITC) projects that 12% of CAFTA’s overall export gains would flow to U.S. agriculture. Two-thirds of the export gains would be realized by the U.S. manufacturing (36%) and textile (30%) sectors (see Table 3). Textile imports from the six countries would account for almost all of the growth in total U.S. imports under full implementation of the agreement, according to the ITC. Additional U.S. agricultural imports would represent almost 2% of the import change under DR-CAFTA. The ITC analysis shows small negative changes in imports of manufactured products, energy and other raw materials, and services. CAFTA is strategic for the US textile industry:  CAFTA is strategic for the US textile industry US textile exports to CAFTA countries are growing CAFTA will keep competitive the US vs. China in a quota-free world:  CAFTA will keep competitive the US vs. China in a quota-free world CAFTA’s apparel exports to the US are made with more than 90% of US inputs (yarns, fabrics, sewing threads, trims, packaging, linings), compared with apparel imports from China whose industries use none US components. In a world post 2005, CAFTA will help the US textile and apparel industry to be competitive vis a vis non-quota exports from China, India, Pakistan, Vietnam, and others. CAFTA provisions such as: Cumulation, De-minimis, Yarn forward, Short supply, Special provisions for woven fabrics, are critical to US industry competitiveness, and for US exports to the region. Why CAFTA is a good agreement for the US textile industry?:  CAFTA is the 2nd largest buyer of US textiles in the world: 90 percent of apparel exports from CAFTA to the US are made with US yarns. 80 percent of apparel exports from CAFTA to the US uses US fabric. 90 percent of apparel exports from CAFTA to the US contains US sewing threads. Why CAFTA is a good agreement for the US textile industry? CAFTA is a great market for US exports :  CAFTA is a great market for US exports A larger market than Australia: Total U.S. exports to Central America and DR in 2003 were $15 billion, while total U.S. exports to Australia during the same year totaled only $12.5 billion For textile product exports, the CAFTA countries are the 2nd largest buyer of US textile goods totaling $4.3 billion behind Mexico at $5.3 billion. Canada is in third place with $3.5 billion. Who Benefits From CAFTA?:  Who Benefits From CAFTA? U.S. Textile and Apparel Industry U.S. cotton growers and fiber producers U.S. yarn spinners U.S. fabric manufacturers U.S. apparel manufacturers U.S. Farmers Animal feed producers Grain producers: wheat, corn, soybeans. Poultry and pork producers Fruit and nuts producers: apples, grapes, strawberries. U.S. High-tech and IT Companies U.S. Service Providers Banks, insurance companies, transportation U.S. Investors More business opportunities, better business climate, stronger IPR protection, predictability. U.S. Tourism Industry U.S. Consumers CAFTA CRITICAL ISSUES:  CAFTA CRITICAL ISSUES Critical Issues :  Critical Issues CAFTA-DR requires important reforms of the domestic legal and business environment that: Encourage competitive business development and investment, Protect intellectual property rights, Promote transparency and rule-of-law in the democratic systems that have solidified in the region over the past decade. CAFTA-DR is an important instrument to support U.S. national security interests; CAFTA promotes closer economic cooperation among the Central American countries, advancing regional integration to greater peace and stability in the region. How will CAFTA impact Integration?:  How will CAFTA impact Integration? CAFTA-DR free trade agreement is modeled after U.S. free trade agreements with Chile and Singapore, and the United States is currently negotiating similar bilateral agreements with Colombia, Ecuador, Panama, and Peru. Although CAFTA has preferential access to the U.S. market under the Caribbean Basin Initiative, CAFTA-DR will make this access permanent, providing greater predictability for both domestic and foreign investors. CAFTA-DR provides enhanced market access to the United States, including reduced local content requirements. And it goes beyond trade to include investment flows, financial and government services, and property rights. How will CAFTA impact Integration?:  How will CAFTA impact Integration? Mexico's experience under the North American Free Trade Agreement (NAFTA) suggests that CAFTA-DR will provide a boost to trade and foreign direct investment flows, and should spur economic growth (see Chart 4). Estimates by Hilaire and Yang (2003) suggest that output could increase by 1.5 percent as a result of the agreement. While the impact will vary by country, it could be substantially larger due to: Accumulation of capital, Changes in specialization patterns, Stronger productivity spillovers. Slide25:  Social Challenges For CAFTA to be successful it needs::  For CAFTA to be successful it needs: Complementary policies, including measures to: Improve the investment climate, Foster labor mobility, Help address the negative effects that some groups could face during the transition period Need for more policy Coordination ?:  Need for more policy Coordination ? Without appropriate regulation, supervision, and (in certain areas) policy coordination, the benefits of integration could be limited. In the case of Central America, more coordination may be needed in areas such as: Taxes, The financial sector, Exchange rate policy. Taxes are underfunded in CAFTA:  Taxes are underfunded in CAFTA Tax Coordination:  Tax Coordination CAFTA-DR makes the need for tax coordination in Central America more urgent. In the absence of such coordination, harmful tax competition could lead to a "race to the bottom. Countries may lower tax rates or concede unnecessary tax privileges to attract foreign direct investment, eroding the already low revenue-to-GDP ratios, which average 13 percent of GDP (see Chart 5). In particular, the adoption of a "code of conduct" could help avoid a further reduction in corporate tax revenue. With increased regional integration, other areas of tax policy and administration might also benefit from increased coordination, including strengthening the base of corporate profit taxes (beyond streamlining of tax incentives and exemptions) by introducing a coordinated treatment of transfer pricing, concealed profit distribution, accounting standards, and a minimum income tax. Exchange Rate Arrangements:  Exchange Rate Arrangements Exchange rate systems in Central America varies from official dollarization (El Salvador and Panama) to crawling pegs (Cost Rica, Honduras, and Nicaragua) to independent floats (Guatemala and the Dominican Republic). Should the Central American economies reevaluate their long-run exchange rate options ?. They might consider moving toward increased flexibility and inflation targeting, adopting a common currency (either independently floating or pegged), or full dollarization. Increased synchronization of business cycles and a reduction in inflation differentials with the United States has taken place between 1993 and 2003 (see Chart 6). However, even after taking into account the expected impact of further CAFTA-DR–related integration with the United States, Central America is still less suitable for a common currency than Western Europe was in the 1970s. Is CAFTA ready for Dollarization?:  Is CAFTA ready for Dollarization? CAFTA :  CAFTA Opportunities & Risks for the Agchem Industry Opportunities Impact on CAFTA’s approval:  Opportunities Impact on CAFTA’s approval Expected increase on export market crops. EPA registered products will get a preferential status during the registration review process. Intellectual property rights will be respected, promoting registration of new technologies. American agchem companies will have better access to the CAFTA markets Risks Impact on CAFTA’s approval:  Risks Impact on CAFTA’s approval Lobbying to CAFTA governments from multinational agchem companies have promoted/imposed unfair business conditions for generic companies. Currently regulations on CAFTA countries facilitate monopoly and unfair trade practices, by wrong interpretation of IP rights and demanding greater protection of test data for agchem (10 years) than for pharmaceuticals (5 years). Product registration regulations make almost impossible to get new registrations for generics….and promote monopoly. As a result no NEW registrations have been granted in the last 3 years…..preventing fair competition and promoting monopoly. Risks Impact on CAFTA’s approval:  Risks Impact on CAFTA’s approval Some examples: Guatemala: Unreasonable fall back patents filed to stop generics competition (i.e.: Patent on tank mixes of Glyphosate on transgenic corn) A big company sued the government to get cancellation of generic Paraquat’s registrations. Risks Impact on CAFTA’s approval:  Risks Impact on CAFTA’s approval Some examples: Costa Rica: Authorities unilaterally suspended existing approved registration laws and imposed a new one to prevent commercialization of other generic registrants. Will impose FAO impurities profile requirements, although the countries lack approved/qualified laboratories. Risks Impact on CAFTA’s approval:  Risks Impact on CAFTA’s approval Some examples: Trinidad: A big company filed patent protection on Fipronil recently, although molecule was originally patented in 1988. Trinidad’s patent laws are covered by European laws. Fipronil was patented in Europe in 1988. Risks Impact on CAFTA’s approval:  Risks Impact on CAFTA’s approval Some examples: Honduras: A big company sued registration authorities for its approval of generic Paraquats. Nicaragua: Crop Life is requesting authorities the original registration dossier from generic companies………although confidential information from registrants is protected by law. Summarizing Impact on CAFTA’s approval:  Summarizing Impact on CAFTA’s approval CAFTA trade agreement give American companies greater opportunities for market expansion Some critical issues must be resolved for us to fully benefit Must be aware of need to have fair trade practices in CAFTA markets, to prevent unfair competition. Any questions….?:  Any questions….? The United States of America and Central America: El Salvador Guatemala Honduras Nicaragua Costa Rica Dominican Republic

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