At ProNicaragua, the government investment agency in Managua, phones rang steadily during the last days of July. The reason: the impending vote in the U.S. House of Representatives on the Central American Free Trade Agreement.
"Once it became clear that CAFTA was going to pass, we had a record number of potential new investors visit us on fact-finding missions," said Carlos Sequeira, Nicaragua's chief negotiator for CAFTA. Some of those visitors, mostly in the apparel industry, later committed themselves to investing in Nicaragua after they received word that CAFTA had passed. It was a pleasant turnaround for Sequeira. He acknowledged that some investors had canceled planned investments in Nicaragua when rejection of CAFTA seemed likely.
North of the border, CAFTA's supporters see a quick payoff for U.S. companies that currently sell to the region. "There will be a very quick impact on trade in Central America," said John Hyatt, vice president at Irwin Brown & Co., a New Orleans customs broker and freight forwarder.
The agreement will immediately eliminate import duties on U.S. products that have been priced out of the market. For example, U.S. poultry exporters, long stymied by duty rates as high as 164 percent in Central America, will see their rates drop to zero. "It will make U.S. poultry competitive," Hyatt said.
Another major beneficiary, he predicted, will be U.S. automakers. Their exports to Central America, a region with no auto-assembly plants of its own, have been restricted as a result of local tariffs that range from 50 to 75 percent. Once those tariffs are eliminated, U.S. cars will more competitive against Asian vehicles.
It will be months before CAFTA takes effect. Although the governments of El Salvador, Honduras and Guatemala have already ratified CAFTA, three countries - Nicaragua, the Dominican Republic and Costa Rica - have yet to approve it. Sequeira expects Nicaragua and the Dominican Republic to ratify CAFTA within 60 days. He said ratification by Costa Rica could take two years. "The tradition is, Costa Ricans are the very last to jump," Sequeira said. Despite Costa Rica's absence, Sequeira expects CAFTA to formally go into effect by next January for the other six signatories. (The agreement allows the pact to take effect even before all signatories approve it.)
The real impact of CAFTA could take much longer, as multinational companies reassess their international supply chains and decide if they want to expand their presence in Central America.
Textiles and apparel are the industry most likely to benefit. A major appeal of CAFTA, Hyatt said, is that its preferences will be permanent, unlike those of the U.S.-Caribbean Basin Trade Partnership Act, enacted in 2000 to provide preferences from 24 U.S. trading partners that use U.S. materials and then re-export them to the United States. Hyatt said relatively few U.S. companies have taken advantage of the Caribbean act's preferences to invest and source in Central America. The reason, he said, is that the Caribbean act was only for eight years. By contrast, "CAFTA locks the preferences in stone."
After CAFTA takes effect, most of the new investments will be in low-value-added apparel assembly. "Right now, we are most interested in apparel because it employs a lot of people," Sequeira said. Nicaragua's population is growing rapidly, and the country must create 2.5 million new jobs over the next 15 years. "Over the next 10 years, we hope to train our labor force, and jump into higher value activities. We have to look beyond low-value-added apparel into textiles and fabrics," he said.
CAFTA's benefits may not be enough to counter the overwhelming presence of China and other Asian countries in global markets, Hyatt said. "They will have to compete against China, India, Bangladesh and Indonesia, which are vertically integrated," he said. Nicaragua, the poorest country in Central America, offers the region's lowest wages, along with proximity to the U.S. market. But Sequeira admits that Nicaraguan labor productivity is poor, as is much of the region's infrastructure. He said the average speed of a truck traveling on a major Costa Rica-Guatemala route is only 15 miles an hour. "It's hard to compete against areas where it is 50 miles an hour," he said.
Greg Mastel, chief international trade adviser at Miller & Chevalier, a Washington-based international law firm and a former chief economist for the Senate Finance Committee, said that although apparel is a traditional starting point for economic development, Central America faces a tough challenge in that sector. "China has made such an impact, it will be hard for Central America to make a big dent," he said. "The numbers for China are pretty overwhelming."
The long-term impact of any major trade agreement is harder to predict than its supporters or opponents usually anticipate, Mastel said. "My experience from NAFTA is that it is not a light-switch phenomenon that goes on instantly with companies," he said. "Many companies that have benefited the most from NAFTA were not deeply focused on NAFTA when it was approved by the U.S. Congress" in 1993, Mastel said. "Many electronics companies that now benefit from cross-border plants in both the U.S. and Mexico only vaguely thought about NAFTA at the time, and did not have such plants in mind."
He said industries besides apparel that could emerge in the region include agricultural commodities, and assembly plants for electronics, automobiles, chemicals and other products. Another possible winner is tourism, which hopes to take advantage of relatively low prices, pristine rain forests and beaches, and proximity to the U.S. market. Following in the footsteps of Costa Rica, which has carved out a major market in high-end eco-tourism, Nicaragua is luring hotel developers with a wide range of tax incentives, including 80 to 90 percent exemptions on income taxes, import taxes and value-added taxes. "CAFTA will put Nicaragua more on the map in the mind of U.S. investors," said Maria Rivas, Nicaragua's minister of tourism.
Rivas said U.S. investors already contribute nearly 40 percent of foreign investment in tourism. With assistance from Costa Rican experts, Nicaragua and Costa Rica are jointly developing and selling "eco-tours" that combine four days in each country at such luxurious "eco-lodges" as Morgan's Rock, on Nicaragua's unspoiled Pacific Coast. Hilton and Marriott will soon be opening hotels in Nicaragua. CAFTA will make it possible for hotel developers throughout the region to stock their hotels with a wide range of U.S.-made furnishings and consumer products that were previously subject to high duties.
All this will inevitably spark increased ocean-carrier services to the region. Carriers, however, are watching cautiously. When the Caribbean Basin Trade Partnership Act was enacted in 2000, some ocean carriers introduced new vessels on routes to the region, because they expected "exponential growth," Hyatt said. "With CAFTA, you will see some exponential growth, but the carriers got burned the last time around and they will take a wait-and-see" approach.
Mark Miller, spokesman for Crowley Liner Services, said his company will carefully assess how quickly trade expands as a result of CAFTA before making any moves to increase service. "With the passage of CAFTA, the stage has been set for market growth both southbound from the United States and northbound from Central America and the Dominican Republic," Miller said. He said Crowley, with more than 40 years in the Central American trade, has increased sailings and added services over the years as markets have developed. "We plan to take a similar approach to accommodate new customers and/or new commodities that may begin to move as a result of CAFTA."