Trade Agreement - USA and Dominican Republic - Coursework Example

Part Introduction: History of Dominican Republic: Dominican Republic gained independence in 1844. In 1861 they voluntarily returned to their former colonial Spanish empire but two years later a war was waged for independence again in 1865. What followed were mostly unsettled, dictatorship rules. The longest dictator that held leadership was Rafael Leonidas from 1930-61. In 1962 Juan Bosch was elected president but a military coup a year later upstaged him. In 1965 U.S. interfered to stop a civil war that was started by the deposed Bosch. In 1966 general elections were held in which Bosch was defeated by Joaquin Balaguer. This followed another 30 years of dictatorship and unrepresented rule but international reaction forced him to step down in 1996. Since then regular, fair elections have been held. Leonel Fernandez won election for a second term in 2004. Geographically the area is very small, compared to U.S., Dominican Republic is the size of Vermont and New Hampshire combined. Political conditions: Technically the Dominican Republic is a representative democracy with powers divided between executive, legislative and judicial branches. There is a multi party political system. From 1996 international observers have found that elections have been generally free and fair after a long tumultuous time period. Economy: There was no growth seen in the 1980s but in the early 90s the government initiated a program for economic reform opening up the country to foreign investment. Macroeconomic policies were also changed. The economy grew at a rate of 7.6% annually from 1996 to 2000. In the early 2000s many trading partners suffered recessions and demands fro Dominican republics exports decreased. There was also a domestic banking crisis in 2003 which led to the country getting into an agreement with IMF. After 2005 president Fernandez was successful in negotiating debt with Paris club member governments and London Club members. The economic growth then recovered to 7.8% from 2004 to 2007. The global economic crisis and the U.S recession hit the Dominican Republic hard. Exports, tourism and remittances fell, so in 2009 the Fernandez administration negotiated a new 28 month standby agreement with IMF, this agreement will aim to fix the unmet reform of previous agreement in the electricity sector and improving fiscal management. Trade: The most important trading partner of Dominican Republic is the U.S. Others are Western Europe, china and the neighbouring Haiti. Exports comprise of textiles, electronic products, tobacco, sugar, coffee and jewellery. Imports consist of petroleum, consumer products like automobiles etc and foodstuff. On September 5, 5005 the Dominican Republic ratified a free trade agreement with U.S and five other Central American countries. This agreement named CAFTA-DR started on March 1, 2007. Free trade zones account for the most of Dominican Republic’s revenues. U.S. alone bought $4.08 billion worth of exports, contributing to the eventual appreciation of Dominican peso against U.S. dollar. Textile is the major export though due to competition from Asia and a government compulsory increase in salaries there has been a 17% drop in textile imports. UNITED STATES: The United States of America is the most powerful nation in the world, centuries of existence has only proved to grow the country’s economy and power every year. The US has the largest and most powerful economy in the world. Since the great depression the markets have constantly improved and proved to be successful. In 2008 the recession hit but recently US has started to come out of it. There was a global economic recession, mortgage crisis, investment bank failures and a credit crunch that pushed US into recession. This was the greatest economic failure since the great depression. For stabilizing the market a $700 billion fiscal stimulus was created to help the economy recover. U.S. DOMINICAN REPUBLIC RELATIONS: Both countries have enjoyed a pleasant relationship. United States has always shown an interest in the democratic and economically healthy Dominican Republic. The country is the largest Caribbean economy, with a lot of bilateral trade with the US. The proximity to US is also a big factor which encourages trade. Close to 100,000 US citizens live in the Dominican Republic and more than 1 million Dominican individuals live in US which increases remittances for Dominican Republic. US has always been a supporter of Dominican republics fair politics, previously the country also intervened when there was a civil war raging. The republic also helps US law enforcement agencies and helps in issues of illegal immigration. In return Dominican Republic also helps US initiatives and supports in U.N. The United States also supports the current government of Fernandez to improve Dominican trade, to attract foreign private investment and to modernize the nation. US firms manufacturers of apparel, footwear and electronics account for much of the FDI in the Republic. “U.S. goods exports to the Dominican Republic in 2008 were U.S. $6.6 billion, up 8.4% from 2007, 23.3% from 2006 (pre-CAFTA-DR), and 136% from 1994 (the year prior to the Uruguay Round). The Dominican Republic was the United States' 33rd-largest goods export market in 2008. The Dominican Republic's exports to the U.S. in 2008 were U.S. $4 billion, a 5.6% decrease from 2007 but up 29% over the previous 14 years”1 Both countries try to take advantage of business opportunities in each other’s countries. The USAID is also involved in making the Republic more developed, fighting AIDS and improving healthcare, education system etc. Import/ Export in 2010: Exports made by US to Dominican Republic were worth $6579.3 million while imports were worth $3671.7 million. There are many trade advantages with Dominican Republic. The main advantage is due to the important strategic geographic location the country has. It is at a central point between USA and the Central American member countries. Maritime links have been established since decades which help in trading through different sea ports. Due to development a new hi tech port named Puerto Multimodal Caucedo has been constructed to further improve trade mechanics. Also culturally Dominican Republic is both a Latin American and Caribbean nation which provides a perfect bridge for other nations to exploit. Access is opened up to Central American nations and thereby to new potential markets. The largest trading partner however is USA with which the Dominican Republic has had strong cultural political and trade links. The proximity to US can also be exploited more, there is still more potential. The transportation costs are greatly decreased which makes it a great deal for trading partners. The country itself geographically is naturally gifted with fertile land, tropical climate which all leads to a variety of crops cultivated. Tourism is another thriving business, many tourist from US also visit Dominican Republic. The industrial sector has been greatly developed due to improving trade. Other than industrial sector and trade, there is also a growing population of English speaking Dominicans that are being hired as outsourced call centre agents. The problem lies in the power industry which is now being developed with constant investment. The Dominican Republic-Central America-United States Free Trade Agreement (DR-CAFTA) On May 28, 2004, the US, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua signed the U.S.-Central America Free Trade Agreement. On August 5, 2004 the Dominican Republic also joined this agreement after separate negotiations with the U.S; the agreement was now titled as DR-CAFTA The agreement was signed as a regional deal but all countries were given the right to have their own separate trading schedules on a bilateral basis. All the rules that would govern the market trading of good, property, investment, labour etc were properly defined. Under this agreement more than 80% of U.S consumer and industrial exports and half of farm exports to Central American countries were rendered duty free. And for the Central American countries all the non textile and non agricultural goods could enter US duty free. Tariffs were reduced for other goods too. This agreement has proved to be a controversial one as many parties see is as somewhat one sided, and also don’t think that it addresses the problems of central America’s local market correctly. It is a very long term agreement which ensures that the affected will be seen after several years and this why the eventual outcome of DR-CAFTA is uncertain. There is a difference in wages, skill sets, and productivity between Dominican Republic and America but this is offset by the comparative advantage that the country has in textiles and apparel products. As the agreement term has progressed specialized jobs have been created which help in making the industry better and more competitive. Diverse products are made and assembled in the Dominican Republic with the partnership of huge US firms increasing the amount of jobs available. Free trade has always been a difficult issue no matter what the region is, no matter which countries are involved. It’s always a sensitive concept of which the true outcome can’t be understood or perhaps measured. There is a tendency to just count the imports and exports as the brilliant results but often the other affects are ignored. For US it was easy to see that it would be beneficial to engage in trade with the Dominican Republic. The geographic proximity was the most important point. Also external forces do make a country engage in more trade efforts with other underdeveloped countries. The US business community also realized the vast business opportunities that are in place in Dominican Republic. But some problems that the US had to consider under this agreement were that first of all there is disparity between the two regions. US is obviously more powerful and can be seen by certain parties as exploiting their advantage. Secondly, the Dominican Republic has seen its worse political moments in the past; such a volatile situation does not help in good trade. And lastly these kinds of trade agreements increase pressure over the expectations of outcomes. The textile products are of special focus as they are the Dominican Republic’s speciality; they provide them with comparative advantage over other countries. Cheap labour, low cost materials all help in promoting the industry. This is the product that is most exported to America. American companies have also realized the advantage of manufacturing their clothing products overseas and then transporting them inside the country. The disadvantage of this is of course that providing other country with jobs and factories means losing out on providing the same to the citizens of USA. But for them the added incentive of low cost is incomparable. U.S.-Dominican Republic Trade The Dominican Republic trade is dominated with the US more than any other Central American nation. 85% of the exports go to USA, and the imports comprise of 49$. Due to recession these figures have declined however. Part 2  Write about the protection of a domestic industry from foreign competition (Dominican Republic) and the trade- agreement Protection of a developing nations’ industry is always a tough task. There are two viewpoints, one says that opening up to free trade improves the economic situation and results in more jobs, while the other says that it leads to the local industries being destroyed. In the case of Dominican Republic however these concerns don’t stand. The country’s economy has improved steadily since opening up to FDI and entering into agreements with US. New factories have opened up resulting in more jobs. USAID has invested heavily into the country’s education system also which helps in making the population more literate and increasing their skill set;. A lot of his educated population is hired in call centres outsourced by American companies. Another advantage is that when foreign companies are working in a developing nation there is a trickle down effect that helps in improving the lifestyle and living conditions of everyone. More jobs open up, there is an increase in wages and everything helps in making the situation better. When foreign companies invest they want to make sure they work in the best possible environment with competitive machinery and labour. This improves the working methods the Dominican Republic already had in place. New technology takes place of the rather primitive methods. Textile and apparel industry has flourished over the recent years due to the constant interest shown by America. Both the exports and locally manufactured products have increased the economic level. American companies have realized the advantage textile industry holds, they can get their products manufactured there with cheaper labour, get the product back to US with low transportation cost and then sell their product. Over all the trade agreement has only helped in making the Dominican republic’s economic situation better, in fact since the US is coming out of recession these existing ties should be further exploited to make more profit. REFERENCES: Hornbeck, J F. The Dominican Republic-Central America-United States Free Trade Agreement (dr-Cafta). Washington, D.C.: Congressional Information Service, Library of Congress, 2005. Print. "Dominican Republic." U.S. Department of State. Web. 24 Nov. 2011. . "Foreign Trade - U.S. Trade with Dominican Republic." Census Bureau Home Page. Web. 24 Nov. 2011. . "CIA - The World Factbook." Welcome to the CIA Web Site — Central Intelligence Agency. Web. 24 Nov. 2011. . "Dominican Republic's Trade Advantages." Dominican Republic News & Travel Information Service. Web. 24 Nov. 2011. . Read More