Justin NewberryMGT 328 – 001Professor Flores10/26/2008

Case Study 3The Central American Free Trade Agreement: Implications for International Business

In this paper, I will discuss the adoption and effects of the Central American Free Trade

Agreement (CAFTA) between the United States, El Salvador, Guatemala, Honduras, Nicaragua,

Costa Rica, and the Dominic Republic. I will discuss how CAFTA will have a greater impact on

Central America and the Dominican Republic than on the United States and how it will help this

region to become more competitive in the long run in the international market. Furthermore, I

will discuss the other types of international economic integration and briefly compare them with

CAFTA. Upon comparing CAFTA with these other forms of international economic integration,

I will discuss both the drawbacks and advantages of CAFTA and what its adoption ultimately

means for international trade and the quality of life in these Central American countries. Finally,

I will discuss which free trade model fits these Central American nations the best and how the

benefits of CAFTA ultimately outweigh the social costs in Central America.

The adoption of CAFTA, like the adoption of other free trade medians like the North

American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO), has been

met with some pessimism and sharp opposition by some who say that the agreement is just one

more median through which the United States will take advantage of the rest of the world and be

the only effective beneficiary. These voices note that freer trade through this agreement will

allow the United States to flood the markets of Central America and the Dominican Republic

with higher quality, cheaper goods that will put domestic businesses at a competitive

disadvantage and ultimately put them out of business. I shall disprove these claims later, but to

start, here is a good place to note that these voices do make light of one important fact in Central

America and the Dominican Republic: CAFTA will affect Central America more than the United

States. I differ from the claims that it will affect them negatively, however. It is true that with

reduced barriers to trade into these countries some businesses will be driven to either compete

more aggressively and effectively or be run out of business, however, it will ultimately benefit

the rest of the country and all the consumers in the fact that higher quality products at lower

prices will be readily available. This is the prevailing argument in almost all cases for increased

international trade because when governments construct high barriers making it difficult for

foreign trade, inefficient businesses benefit and the consumers suffer having to pay high prices.

With these barriers torn down, consumers nationwide in each of these countries will now have

access to higher quality products at lower prices and therefore a greater benefit is realized when

this is compared to the few businesses in countries such as the United States that have slightly

increased the size of their market. With this in mind, the issue of whether Central American

countries can compete is now brought into question.

Central American countries, or rather businesses in Central American countries, are

definitely up against a fight in order to stay competitive in the international market by entering

into CAFTA with the United States. As mentioned in the case study, products such as

information technology, agricultural and construction equipment, paper, pharmaceuticals, and

medical and scientific equipment will immediately enter into a tariff-free market in Central

America and cause some disruption in some of the businesses selling these products

domestically. However, the most important consideration in regard to these products is their

overall effect and benefit for the countries into which they are now going to be sold at lower

prices. This benefit is the future economic and infrastructural growth of these countries. With

these kind of products involving high technology, pharmaceuticals, and medical and scientific

equipment, the population of these countries will now find itself with much easier access to

higher quality healthcare and healthcare technologies as well as more advanced technology

ultimately resulting in a more healthy and productive workforce. With a more healthy and

productive workforce, these countries can make serious economic progress that had previously

been unachievable and become more competitive on the global scale. The important

consideration, therefore, is time. It is true that immediately jobs and businesses will be driven

out of the market because they cannot effectively compete with the United States right away.

But with the benefits to consumers trickling down through the aforementioned products that will

be more readily available in Central America, the competitiveness of these countries will

gradually rise back up and Central America will find itself just as competitive as the rest of the

world. This argument, therefore, must be applied and evaluated over the long run and opponents

of CAFTA must also think about the long term in order to provide the maximum benefit for

these countries.

I will now discuss the arguments against CAFTA. A valid argument made by some

opponents of CAFTA makes mention of the fact that it has been carried out in a somewhat

undemocratic manner. For example, the Costa Rican government’s disregard for indigenous

inclusion in the CAFTA treaty process proves to be a backward step to what free countries such

as the United States, a major proponent of CAFTA and a global economic superpower, seem to

advocate. In order for CAFTA to be effective and create forward economic and political

progress in these Central American countries and the Dominican Republic, it needs to be carried

out and put in place in a totally democratic way to be an example of economic progress through

the international free trade median. Another valid argument put forth by opponents of CAFTA is

that open free trade between these Central American countries (and the Dominican Republic)

and the United States, will only lead to domestic businesses in these countries not being able to

compete with American companies providing higher quality goods and services at lower costs

and subsequently being run out of business. This will, in turn, lead to an immediate loss of jobs

in these countries and will lower the overall prosperity. This argument, however as I have

already mentioned, does not take the long term effects into account. With higher quality

products in areas such as advanced technology and medical equipment, the consumers will

benefit greatly through lower prices and more access to these things. With more access to

improved health care and health care technology, the workforce will become healthier, and a

healthier workforce ultimately translates into a more productive workforce able to compete more

effectively in the world market. Additionally, with more advanced technology flowing into the

countries, businesses will be able to take advantage and employ this technology to improve

efficiency of their business organization, record keeping, and service/production time, ultimately

resulting in substantial economic growth and competitiveness on the global scale. Therefore, as

it can be seen, CAFTA will ultimately result in the long term benefit of El Salvador, Guatemala,

Honduras, Nicaragua, Costa Rica, and the Dominican Republic.

As aforementioned, CAFTA will improve the quality of life for the majority of Central

Americans by providing higher quality goods such as advanced information technology,

agricultural and construction equipment, pharmaceuticals, and medical and scientific equipment

at notably lower prices. This will immediately benefit the consumers because they will

obviously be paying less, but this will also benefit the majority of Central Americans in another

way as well. This benefit is in the fact that in the long run, improved efficiency in various

business and production fields and in the agricultural sector will be realized because improved

technologies and more modern agricultural equipment will result in higher productivity, more

advanced jobs, and the drive for higher education in these countries in order to fill these more

advanced jobs. Additionally, with greater access to improved health care technologies and more

access to pharmaceuticals, the populations of these countries will find themselves healthier,

happier, and more productive in the long run.

I will now describe the other models of regional trade accords and then proceed to

describe which model fits the Central American nations best. The three important trade accords

mentioned in this case study were: free trade agreements (FTAs), customs unions (CUs), and

common markets (CMs). Free trade agreements are the first step in international economic

integration between countries. In a free trade area, all barriers to trade are removed, but

members determine their own individual trade policies with regard to nonmembers. Both

NAFTA (Mexico, the United States, and Canada) and CAFTA (the United States, El Salvador,

Guatemala, Honduras, Nicaragua, Costa Rica, and the Dominican Republic) are modeled in this

fashion. Customs unions are the second step in international economic integration between

countries and they extend to adopt between all members a common trade policy regarding

nonmember countries. An example of this model is found in the Andean Pact (Bolivia,

Columbia, Ecuador, Peru, and Venezuela). Common markets are the third step in the

international economic integration between countries. Common markets accept the provisions of

the previous two models and then go on to provide that there be free movement of factors of

production between member countries. An excellent example of a common market agreement is

between Brazil, Argentina, Paraguay, Uruguay, and Venezuela in the Southern Cone Common

Market (MERCOSUR). As mentioned in the case study, MERCOSUR has the potential to bring

promising results. This is because it has the ability, with no trade barriers, a united trade policy

in regard to nonmembers, and the free movement of factors of production, to unite South

America and bring overall economic progress that will trickle down to the individual countries.

This unification is needed to compete globally with economic superpowers such as the United

States just because of its sheer population and high production capacity, which in economic

terms translates to very high economies of scale. It is therefore that the common market model

(like MERCOSUR) would fit the Central American nations best as well because they all have

relatively small populations compared to the United States and in order to realize economies of

scale and efficiently compete in the global marketplace, they need a uniting free trade policy in

regard to nonmember nations and the free movement of factors of production. This is not to say,

however, that CAFTA is not an important step for Central America. As trade barriers are taken

down and some economic progress is realized in these countries as I have just described, further

steps can be taken to further economic progress in these countries.

As I have made clear throughout this case study, I believe, in accordance with most

arguments toward the establishment of freer international trade, that the benefits of freer

international trade (in this case, through the establishment of CAFTA) will outweigh the social

costs in Central America. Although some domestic businesses will be run out of the marketplace

by American businesses with higher economies of scale, consumers will ultimately benefit in the

marketplace from lower prices and more access to innovations in advanced medical, scientific,

and other technologies, which will all in the long run contribute to a healthier, happier, and more

productive population in these countries. With these technological, health care, and scientific

advancements in place, economic growth can take place and these countries can ultimately

become more competitive in the global market. Upon this progress, if the countries decide to

take the further steps in economic integration to a common market (like that of MERCOSUR),

further economies of scale and further international competitiveness can be realized.