Case Study for FTA

Case Study for FTA

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Case Study for FTA

Free trade is the most efficient way to open to the global market. It provides avenues for a country to export its surplus resources to other countries and import the goods and services they require. Free Trade Agreements (FTAs) aim at reducing or removing the obstacles to international trade, and facilitates cross-border movement of goods and services. Governments sign these treaties to ensure that all countries involved, benefit from the agreement. Despite the benefits that result from free trade, it is also crucial to note that some industries within the country will be affected. The United States (U.S.) has FTAs with several countries and economic blocs. The Dominican Republic-Central America Free Trade Agreement commonly known as CAFTA-DR was signed on August 5, 2004 (Office of the United States Trade Representative, n.d.). It involved the U.S., five Central American countries and the Dominican Republic. The five Central American states include El Salvador, Nicaragua, Guatemala, Costa Rica and Honduras.

Free trade has resulted in increased production among the CAFTA-DR member states. Each country has specialized in the production of specific products and services in which they have a comparative advantage. With specialization, all countries have benefited from the efficiencies derived from increased output and economies of scale. For example, agricultural exports from the U.S. to the other six member countries increased by 84% between 2005 and 2010. Imports by U.S. from CAFTA-DR countries also increased from $2.7 in 2005 to $4.1 billion in 2010 (Office of the United States Trade Representative, n.d.). This growth was significantly attributed to reduction of tariffs and duty-free access to Central America. In addition, the enormous market has motivated businesses to increase their production.

CAFTA-DR has improved the efficiency of resource allocation and production in member states. Efficiency in production has also been catalyzed by the increased competition from foreign industries. To have an advantage over their competitors, firms in member countries have adopted innovative production methods, the use of new technology, better advertising and distribution methods. Consumers in member states have also benefited from the free trade agreement. This is because they have a wider selection of goods and services. Increased competition has ensured that goods and services are available at competitive prices.

When CAFTA-DR countries import or export goods and services between themselves, they benefit from foreign exchange. The U.S, dollar is the most commonly used currency in cross-border trade. Other member states can, therefore, take advantage of a strong foreign currency to purchase products and services from other countries. Both employment and unemployment come along with the agreement. There has been the creation of employment in industries that are involved in exports. More people have been employed to meet the demand for exported goods and services. However, the competition from imports led to unemployment in certain industries. Jobs created because of the existence of free trade, outnumber those that have been lost. According to Ribando and the Library of Congress (2005), employment in the U.S. textile industry grew by 16% since the CAFTA-DR was signed in 2004.

CAFTA-DR has resulted to economic growth in all the seven countries. This is attributed to improved living standards and increased incomes. Nevertheless, the CAFTA-DR also came with various evils that have affected member countries. Removal of trade barriers such as tariffs resulted in structural unemployment, in some states. In the Dominican Republic, employment in the textile and apparel industry dropped by 12% in 2007 (Mander, 2008). The rate of unemployment in the industry started increasing when the government reduced tariffs on imports. Moreover, economic instability in one state will affect all countries involved in the CAFTA-DR. This is because there will be a shortage of goods and services produced in those countries.

Unlike the United States, most countries that form the CAFTA-DR are developing economies. This means that the industries are not on equal playing fields. Smaller industries find it difficult to penetrate and establish themselves in aggressive business environments. Some countries have also become a dumping site for cheap and poor-quality goods and services. This has made it exceedingly hard for efficient industries to thrive in such unfair competitive markets.

Non-FTA countries should open up to other countries to allow for free trade of goods and services. A huge percentage of the world’s GDP is found in non-FTA countries. These countries are mainly composed of developing nations. This is mainly attributed to the fact that they are reluctant to signing free trade agreements. Many non-FTA countries rely on tariffs from imports to finance their economies. Increased foreign competition may result to the collapse of domestic industries. These, among many other factors, will weaken their economies. When implementing a free trade agreement, it should not appear to be biased. It is crucial for all member countries to export goods and services in which they have specialized. In return, they should import products from other countries in order ensure balance of trade. Even though it is not perfect, the Dominican Republic-Central America Free Trade Agreement provides an excellent example on how developed, developing and under-developed countries can come to an agreement and how all parties can benefit from free trade.

Reference:

Mander, B. (2008, April 23). US economy threatens Dominican Republic. Financial Times. Retrieved from http://www.ft.com/intl/cms/s/0/1ec611da-116c-11dd-a93b-0000779fd2ac.html#axzz2ZHpPuXVu

Office of the United States Trade Representative. (n.d.). CAFTA-DR Agriculture. Retrieved from http://www.ustr.gov/about-us/press-office/fact-sheets/2011/may/cafta-dr-agriculture

Ribando, C., & Library of Congress. (2005). DR-CAFTA: Regional issues. Washington, D.C.: Library of Congress.