This report is prepared for IMM by Agostino von Hassell and Mark C. Bella of The Repton Group. Von Hassell provides IMM’s monthly Molders Economic Index. You can contact them at (212) 750-824 or by e-mail at [email protected].

The Central American Free Trade Agreement is the new kid on the trading block. For American molders quick on their feet, export opportunities abound. IMM walks you through the potentials.

Having been inundated by the numerous reviews of Nafta following its much-publicized 10-year anniversary, many U.S. molders might not be anxious to associate themselves with an entirely new free trade regime. Yet, for those businesses looking for a good alternative to investing in Asia or wishing to expand their global sales, the new Central American Free Trade Agreement, or Cafta, might very well be worth the effort.

Cafta will further open an export market worth more than $15 billion in 2003 to U.S. producers by immediately eliminating tariffs on more than 80% of U.S. consumer and industrial products. But as with Nafta, after the initial fanfare fades away, U.S. molders will inevitably need to ask the key question, “What does this trade agreement mean for me?”

For manufacturers already directly selling to this market, a quick look at the agreement’s tariff reduction schedules gives an indication of the treaty’s immediate financial repercussions. However, for those companies just beginning to explore the possibilities of this market, or for those producers supplying industries that sell to this market, a more detailed look at the agreement and our current trade patterns is in order.

The Agreement

The Cafta market encompasses the nations of El Salvador, Guatemala, Nicaragua, Honduras, Costa Rica, the Dominican Republic, and the United States. The agreement itself is widely predicted to be approved by Congress later this year, although some congressional analysts have theorized that the Bush administration might be politically motivated to postpone the vote on Cafta until after the November 2004 elections.

Once passed, U.S. producers will have access to a market whose population is now almost 45 million and whose combined GDP purchasing power parity is almost $200 billion, with a combined average GNP per capita purchasing power parity of more than $4600.

The agreement will maintain limited duties on 20% of industrial products, while removing all tariffs on the remaining 80% of products. For those products that retain protections, Cafta establishes a clear schedule for reductions.

Since January, the United States Trade Representative (USTR) has had the draft text of the Cafta agreement posted on its website (www.ustr.gov/new/fta/Cafta/text/index.htm). This text is currently being updated so as to include the individual market access schedule for the Dominican Republic, which officially signed on to Cafta in March.

Exporters and other interested parties can view the individual market access schedules for each of the Cafta signatories to learn about their initial duty rates and unique tariff elimination plans. U.S. molders will be happy to know that most priority U.S. plastics exports will be granted immediate duty-free status; the remaining plastics categories will be granted an adjustment period of five or 10 years over which duty levels will be annually diminished until they have been completely eliminated.

It is worth noting that duty rates on some plastic items deemed highly sensitive by Central American states will not be required to reduce duty levels annually, but will instead be allowed to wait until the end of their adjustment period. A schedule in annex 3.3 of the draft agreement provides a guide for the different staging categories applied to the elimination process, and additional staging categories can also be found in the general notes for each of the participating countries.

This treaty, unlike the recent bilateral free trade agreements with Singapore and Chile, will include progressive labor and environmental regulations that can be monetarily enforced through independent and transparent dispute settlement procedures. These new regulations should help level the playing field for molders competing with imports from this region.

Dispute settlement panels will also serve to enforce other Cafta rules, offering new and comprehensive protections to all forms of foreign investment, including manufacturing or general business operations, debt, concessions, contracts, and intellectual property rights. The treaty also guarantees that U.S. businesses receive substantially the same legal rights and protections afforded to their Cafta counterparts that do business in the United States.

Cafta and Plastics

Looking at the plastics market specifically, U.S. imports of plastic products (NAICS-3261) from these countries measured almost $145 million in 2003, representing an increase of about $100 million over the last five years. Similar domestic plastics exports reached almost $370 million, more than double the 1998 trade figures. Within this market, the Dominican Republic and Costa Rica are by far the largest consumers and producers of plastic products, respectively importing around $140 million and $135 million of U.S. plastics in 2003 (see Figure 1).

Leading End Markets

Aside from direct trade in plastic products, U.S. molders also should consider the health of some of this region’s major plastics-consuming industries. To help U.S. manufacturers identify these key export markets, the U.S. Foreign Commercial Service and the U.S. Dept. of State publish an annual market report that highlights several of the leading nonagricultural export industries. This information allows us to take a closer look at some of the more promising import markets.

Mexico’s Mistakes

The ability of Central American governments to capitalize on the increased trade and investment that the treaty engenders will ultimately determine the importance of this agreement. For example, critics have argued that Mexico would have captured more of the business that eventually flowed to Asian economies had it more closely followed the path set by countries like China, South Korea, and Taiwan, all of which were able to direct foreign investment more effectively toward the development of infrastructure and to better provide businesses with capital to modernize. Mexico’s weak infrastructure has helped to drive up the cost of important commodities like gas and electricity, which are actually cheaper in the U.S. market, and significantly cheaper—around 40%—in the Chinese market.

At this point, Central America possesses sufficient economic incentives to attract investment and spur growth. In fact, the U.S. General Accounting Office recently estimated that manufacturing wages in Honduras were 92% less than in Mexico and that similar Dominican wages were 67% less than Mexican wages. Aside from cheap labor costs, the average purchasing power of its citizens is roughly equal to that of China and around double that of India.

With the essential economic factors conducive to development, responsibility for growth lies firmly on the shoulders of the Central American governments. If these governments can take their cue from successful Asian economies and actively pursue the development of an investment-friendly economy, this market could easily commandeer some of Asia’s growing investment and production, a situation on which established U.S. molders could easily capitalize.