CRS Agriculture Policy Briefing Book
Agriculture in the U.S.-Central American
Free Trade Agreement (CAFTA)

Remy Jurenas
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Trade ministers for the United States, five Central American countries, and the Dominican Republic on August 5, 2004, signed the U.S.-Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) that, among other provisions, will eliminate almost all border protection on goods traded among them. Provisions dealing with agricultural trade -- mainly the terms of access for sensitive farm products -- proved to be, together with textiles, the most contentious issues addressed by trade negotiators. In response to action by the Dominican Republic's Congress to impose a 25% tax on soft drinks sweetened with imports of U.S. corn syrup -- intended to protect the country's sugar sector -- U.S. government officials, members of Congress, and affected U.S. sectors have warned that if the Dominican Republic government does not eliminate this tax, it is likely that the DR portion of the trade agreement will be dropped.

Many U.S. commodity organizations and agribusiness firms support the DR-CAFTA, expecting to see benefits from increased guaranteed access to the Central American and Dominican Republic markets. The U.S. sugar industry, however, strongly opposes the additional access given to sugar from the six countries, fearing its impact on domestic producers and processors and the precedent this sets for including sugar in the other FTAs that the Bush Administration is negotiating. The U.S. cotton and textile sector has deferred taking a stand, reflecting the concerns of textile firms. One farm organization opposes the agreement; another general farm organization, after analyzing DR-CAFTA's agricultural provisions, projects substantial export gains once fully implemented. Members of Congress are assessing the agreement's potential impact on the U.S. agricultural and food sectors among other factors as they formulate their positions on whether or not to approve it when submitted for consideration, likely not expected until 2005.

Overview of Agricultural Trade

In 2003, U.S. agricultural exports to Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic totaled $1.6 billion, and represented 2.6% of U.S. worldwide sales. Leading exports were coarse grains, wheat, soybean meal, rice, and animal fats. U.S. farm exports accounted for 11% of U.S. merchandise exports to the six countries, and have grown by one-third in value terms over the last decade.

Agricultural imports from these six countries equaled $2.3 billion (or 5% of all U.S. farm and food imports), and represented 14% of U.S. merchandise imports from these origins. Purchases of bananas, raw coffee, fresh fruit, sugar, and processed fruit and vegetables led the list. Agricultural imports have increased significantly (76%) in value terms over the last 10 years.

The United States and the six countries primarily use tariffs and quotas to protect their agricultural sectors. The average U.S. tariff on agricultural imports from this region is extremely low, reflecting the duty-free benefits the United States offers these countries under two unilateral trade preference programs. The average agricultural tariff levels applied by the Central American countries and the Dominican Republic, however, are much higher than that of the United States. These averages, though, mask the higher level of border protection the U.S. and the six other countries provide their most sensitive agricultural products through the use of quotas and other restrictive measures.

Negotiating Objectives

U.S. agricultural objectives in the DR-CAFTA negotiations were: (1) to eliminate tariffs, quotas, and other barriers to trade, and (2) provide adequate transition periods and relief mechanisms for the U.S. agricultural sector to adjust to increased imports of sensitive products from the region. The U.S. position called for no product or sectoral exclusions from the final agreement.

The Central American countries sought increased access to the U.S. market for beef, sugar, dairy products, fruits and vegetables. However, fears were expressed during the negotiations that opening up their markets to U.S. corn and rice would undermine the region's small subsistence farmers unable to compete against subsidies that U.S. producers receive under current farm programs.

DR-CAFTA's Main Agricultural Provisions

The United States and the six countries agreed to completely phase out tariffs and quotas -- the primary means of border protection -- on all but four agricultural commodities and food products in six stages: immediately, 5 years, 10 years, 12 years, 15 years, and more than 15 years. The most sensitive commodities -- fresh potatoes and fresh onions imported by Costa Rica, white corn imported by the other four Central American countries, and sugar entering the U.S. market -- will be treated uniquely. The size of the quotas established for these four commodities will increase about 2% each year in perpetuity; however, an import cap will always be in place. The tariff on entries above the quota level (frequently referred to as the over-quota tariff) will not decline, but stay at the current high levels that effectively serve to keep out additional imports.

For all other sensitive products that fall into any of the over 10 year transition periods, negotiators on all sides agreed to provide additional protection. While details vary by commodity and food product, these will take the form of tariff-rate quotas (TRQs) effective only during the transition to free trade, long tariff and quota phase-out periods, nonlinear tariff reductions, and the use of an import safeguard mechanism. A TRQ restricts the amount of a product that can be imported at a low or zero tariff rate (referred to as the "in-quota" quantity and tariff, respectively), and allows additional imports to enter but usually subject to a much higher, sometimes, prohibitive tariff (termed the "over-quota" tariff). Nonlinear refers to a practice referred to as "backloading," where most of the decline in a tariff occurs in the last few years of the transition period. Safeguards serve to protect agricultural producers from sudden surges in imports, triggered when quantities increase above, or prices fall below specified levels.

Negotiators also committed to work towards resolving sanitary and phytosanitary barriers to agricultural trade, focusing on particular problems and delays in meat and poultry inspection procedures.

Market Access for U.S. Agricultural Products to Central America and the Dominican Republic

The Office of the U.S. Trade Representative (USTR) states the agreement will grant immediate duty-free status to more than half of the U.S. farm products now exported to the six countries. For the Central American countries, such treatment will apply to high-quality beef cuts, cotton, wheat, soybeans, certain fruits and vegetables, processed food products, and wine. U.S. exports of corn, cotton, soybeans, and wheat to the Dominican Republic will benefit from similar treatment. Central American tariffs and quotas on most other agricultural products (pork, beef, poultry, rice, other fruits and vegetables, yellow corn, and other processed products) will be phased out within a 15-year period. Longer transition periods will apply to imports from the United States of rough/milled rice and chicken leg quarters (18 years) and dairy products (20 years). Dominican Republic tariffs and quotas on most U.S. agricultural products (beef, pork, and selected dairy and poultry products) will be eliminated over 15 years. 20-year transitions will cushion the impact of the entry of U.S. chicken leg quarters, rice, and certain dairy products (cheese and milk products).

With the Central American countries viewing white corn as their most sensitive agricultural commodity (produced by subsistence farmers and used as a staple to make tortillas), negotiators agreed to establish a quota (i.e., equal to the current import level) that increases about 2% annually in perpetuity. Unlike all other imported commodities, there will be no reduction in the over-quota tariff for white corn. U.S. exports of fresh potatoes and onions to Costa Rica will be subject to quotas that increase slowly in perpetuity and face permanent high over-quota tariffs.

USTR further states that U.S. agricultural products will have "generally better" access to the Central American countries than given like imports from Canada, Europe, and South America. These countries have also agreed to "move toward recognizing export eligibility for all U.S. plants inspected under the U.S. food safety and inspection system."

Market Access for Central American and Dominican Republic's Agricultural Products to the U.S. Market

Almost all of the value of the agricultural imports from the six countries already enters the U.S. market duty free. CAFTA, according to USTR, "will consolidate those benefits [immediately] and make them permanent." For the U.S. sensitive agricultural products (sugar, peanuts, dairy products, tobacco, and cotton), U.S. negotiators granted these countries additional access in the form of quotas. Some of these preferential quotas are set equal to these countries' current level of exports to the United States. The preferential quotas for sugar are in addition to the minimum level of access these countries now have to the U.S. market.

Under the agreement, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic secured access to the U.S. market for an additional 107,000 metric tons (MT) of sugar in year 1, a 34% increase over their current combined 311,700 MT quota. These six countries already account for 28% of the U.S. raw cane sugar quota. By year 15, they would have duty-free access for an additional 151,140 MT of sugar. Afterwards, this preferential quota would increase by 2,640 MT annually in perpetuity. The U.S. over-quota tariff would stay at the current high level (about 73%) indefinitely.

Reaction to, and Analysis of, DR-CAFTA's Agricultural Provisions

Many U.S. agricultural commodity and food organizations support DR-CAFTA, expecting their producer-members and exporters to benefit from the market openings negotiated. Though organizations individually earlier this year announced their support as details became available, 39 groups as a coalition on March 22, 2004, sent a letter to President Bush "to underscore their support" for this trade agreement that they see "will expand U.S. agriculture exports and put U.S. agriculture on an equal footing with its competitors in these markets."

The U.S. sugar industry opposes DR-CAFTA, claiming that the additional sugar imports allowed under their provisions combined with those envisioned in additional FTAs being negotiated "will destroy the domestic sugar industry ... and overwhelm an already abundantly supplied market." The industry has continually advocated that sugar trade issues be instead addressed multilaterally in the World Trade Organization trade negotiations. Its membership wrote to President Bush (January 15, 2004), and the lead U.S. agricultural trade negotiator (March 23), to restate its opposition and to request that the Administration reconsider and withdraw the sugar access commitments offered the Central American countries and the Dominican Republic, respectively. USTR points out that the additional access granted all six countries will equal about 1.3% of U.S. sugar production in year 1, increasing to 1.9% in year 15. Separately, the National Cotton Council has called upon Congress to defer considering CAFTA until its textile provisions are "thoroughly reviewed and significantly improved."

The National Farmers Union opposes the agreement, stating that CAFTA "offers few benefits" to U.S. farmers and "will adversely impact domestic producers of sugar, fruit, vegetable, dairy and other commodities." In its preliminary assessment, this farm organization claimed that CAFTA does not address exchange rate issues, labor and environmental standards, and tariffs.

The American Farm Bureau Federation (AFBF) backs CAFTA, stating that U.S. agriculture has much to gain. According to its economic analysis of the agricultural provisions, the AFBF projects that CAFTA will result in an estimated $945 million increase in U.S. agricultural exports to the five Central American countries when fully implemented in 20 years. The analysis acknowledges the U.S. sugar industry will experience costs as a result of the increased access to the domestic sugar market granted these countries -- an estimated $73 million by year 20.

The U.S. International Trade Commission (USITC) on August 26 issued its analysis of the DR-CAFTA. With respect to the agreement's agricultural provisions, the ITC estimates a $276 million net gain for the U.S. agricultural sector if all provisions were fully implemented immediately ($328 million in additional exports, offset by a $52 million increase in imports). Its report also took a closer look at how two commodity sectors would be affected over time. U.S. corn and rice exports would see little change in the short term, but as the Central American countries' quota commitments grow, exports will rise. The ITC estimates that by the end of the 15-20 year TRQ phase-out, annual U.S. grain exports to the region likely will increase by at least 20% ($120 million) -- broken out between corn ($75 million), rough rice ($35 million), and milled rice ($10 million). Although the long-run impact of these additional sales is small (1.2% of 2003 grain exports worldwide), the ITC views the potential as offering significant market opportunities for U.S. producers.

The ITC stated the agreement's sugar provisions are likely to result in a "small increase" in U.S. sugar and sugar-containing product (SCP) imports from the region. Lower prices (calculated at about 1%) due to increased imports "likely would have an adverse impact on production and employment for U.S. sugar producers" and "likely would benefit production and employment for U.S. producers of certain SCPs, particularly for products containing a relatively high proportion of sugar."

Executive Branch and Congressional Roles

President Bush on February 20, 2004, and on March 25, notified Congress of his intent to enter into FTAs with the five Central American countries, and with the Dominican Republic, respectively. These actions initiated the timetable the President may follow in submitting one or both trade agreements to Capitol Hill, and the steps Congress would then take to consider legislation that the Administration proposes to implement them. The process and procedures are laid out in the Bipartisan Trade Promotion Authority (TPA) Act of 2002 (Section 2105 of P.L. 107-210).

USTR, on March 22, made public the reports of the trade advisory committees laying out their positions and views on CAFTA. The Agricultural Policy Advisory Committee's opinion is that CAFTA "will improve opportunities for U.S. agricultural exports" by providing for "eventual duty-free, quota-free access on essentially all products." Most of the commodity-oriented agricultural technical advisory committees (ATAC) for trade favor the agreement, pointing out the benefits associated with increased market access in the region. The sweeteners ATAC reported mixed views. Sugar industry representatives expressing the majority opinion oppose the increased access to the U.S. market the five countries receive for their sugar, pointing out its effects on U.S. sugar producers and the threat posed to the domestic sugar program. The sugar users in the minority support the agreement, acknowledging the "modest but meaningful improvement" in Central American sugar access. These committees issued separate reports on the agricultural provisions in the FTA with the Dominican Republic on April 23.

Though CAFTA was signed on May 28 and the FTA with the Dominican Republic on August 5, TPA authority gives the President discretion as to when to submit the agreement and implementing legislation to Congress. In light of strong congressional opposition to CAFTA, the Bush Administration and congressional leaders have signaled that DR-CAFTA will not be submitted to Congress until after the November 2004 elections. Though the Dominican Republic's President in early October did sign the fiscal reform package that includes a tax on beverages sweetened with corn syrup, he also requested the country's Senate to eliminate this tax, arguing such action is necessary to honor commitments made in the FTA. The AFBF, Corn Refiners' Association, and U.S. corn growers have signaled they cannot support the Dominican Republic's inclusion in the DR-CAFTA unless this tax is removed.

Resources

The U.S.-Central American Free Trade Agreement (in the CRS Trade Electronic Briefing Book).

CRS Report RL31870, The U.S.-Central America Free Trade Agreement (CAFTA): Challenges for Sub-Regional Integration.

CRS Report RS21868, U.S.-Dominican Republic Free-Trade Agreement, and CRS Report RS21718, Dominican Republic: Political and Economic Conditions and Relations with the United States.

American Farm Bureau Federation, Implications of a Central American Free Trade Agreement on U.S. Agriculture (.doc), March 2004.

U.S. Department of Agriculture, Foreign Agricultural Service, U.S. & Central America Free Trade Agreement. Site includes fact sheets for several commodities.

U.S. International Trade Commission, U.S.-Central America-Dominican Republic Free Trade Agreement: Potential Economywide and Selected Sectoral Effects (.pdf), Publication 3717, August 2004. Chapter 3 includes qualitative analyses of DR-CAFTA impacts on sugar and SCPs (pp. 38-48) and corn, rice, and wheat (pp. 48-55). Chapter 4 (pp. 67-80) provides a quantitative assessment on the U.S. economy, including changes in trade flows of key agricultural products.

U.S. Trade Representative, U.S.- Central American Free Trade Agreement and Dominican Republic Free Trade Agreement. One fact sheet (.pdf) details CAFTA's agricultural provisions; another fact sheet (.pdf) briefly summarizes the agricultural provisions in the FTA with the Dominican Republic. Others address CAFTA's sugar and ethanol provisions.

CRS Contact: Remy Jurenas (7-7281)

Page last updated October 8, 2004.


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