HONDURAS & EL SALVADOR
Enactment of the Central American Free Trade Agreement (CAFTA) between the United States and five Central American nations will benefit both regions by encouraging multilateral trade and forging new commitments on labor rights; providing the participating nations with a firm base on which to build stronger economies.

In January 2002, President George W. Bush announced his intention to pursue a free trade pact with five countries in Central America – Honduras, El Salvador, Costa Rica, Guatemala, and Nicaragua. Although two-way trade between the U.S. and Central America is already worth nearly $25bn annually, it marked a fresh commitment to forge a stronger partnership. There are also plans to integrate the Dominican Republic into the agreement.
The Central American Free Trade Agreement (CAFTA) is now a fundamental part of the region’s broader efforts to promote economic integration as well as open more trade routes with America. U.S. exports to the CAFTA group totaled $11.5bn in 2002, a 42% rise since 1996. Imports were worth around $13bn. The region has also become a popular location for U.S. investment, especially export-led industries. The pact is designed to move forward the goal of a Free Trade Area of the Americas agreement by 2005.

Many in the region see CAFTA as a catalyst for change. The process is expected to accelerate the pace of political and economic reform in each of the member states. During the past decade, Central American countries have established democratic systems of government and begun implementing economic reforms to promote privatization and competition, and to open markets. Huge advances have been made in Honduras and El Salvador in terms of policy reform and liberalization.

To take full advantage of the trade talks, each country must invest in projects that improve competitiveness by reducing the logistical costs of doing business and facilitating trade. Transition programs for non-competitive sectors are equally important. The region is raising its institutional capacity to administer the complex group of trade and investment obligations involved. Investment in critical infrastructure is also a priority.

Massive changes have already taken place. With an agreement planned for early 2004, the five member states have worked hard to eliminate intra-regional trade barriers. There is now harmonization on more than 90% of all tariffs. Not so long ago, the idea would have been unimaginable.

CAFTA is seen as part of a longer term development strategy. The ultimate goal is to create productive employment, to raise income levels and increase social wellbeing. The majority of Central America’s people still live in rural areas with high poverty levels. It is essential that these people are given access to the full range of opportunities.

The rejuvenation of regional integration is one of the most significant side effects of the agreement. Continuous dialogue among member states across a broad spectrum of issues in addition to trade has led to the realization that the region must stand united in the face of globalization. CAFTA is expected to make the entire region more attractive to foreign investors, creating a larger domestic market with greater access to North America.