In the month of August 2004, the United States (U.S.) of America signed a free trade agreement i.e. Dominican Republic-Central America United States Free Trade Agreement (CAFTA-DR) with the engagement of other countries…
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The Trade agreement is directed towards the elimination of the tariff as well as the non tariff barriers to a two-way trade with the enhancement of the rules and several other standards for the services, intellectual property rights (IPR), investments and other disciplines (Hornbeck, 2012). The agreement holds an underlying mechanism of an economic development perspective. One of the constraints of the economic development of an economy is poverty. Poverty alleviation has been a major political agenda of all the countries since a long time. Infusion of prosperity within an underdeveloped society helps in the eradication of violence, poverty as well as lack of opportunity. In today’s world, the poor section are suffering from the immense lack of resources and opportunities which include basic socioeconomic indicators of development viz, education, mobility in the job market, access of economic power etc (Jasso, 2008, pp. 1-2). Thus it is the primal duty of the government of every country to implement various optimal policies for uplifting the economic standards of the poor and bring economic development in the respective societies. The agreement of CAFTA was regarded as mammoth step towards entering into a larger free trade regime which would be encompassing around 34 economies in the North as well as the South America. The American business sector sought to reap tremendous benefits by the agreement with the access to the Central American market where they will be relocating their factories and utilize to the utmost the lower labor cost in those developing economies. The proponents among whom President George W. Bush was an indispensable figure argued in favor of the agreement that it would accelerate the trade dynamics with the expansion of trade markets and will lead to the reduction of the US trade deficit and will result in the establishment of the stability in the employment market of Central America. In the field of textile industries, the textile workers viewed the agreement as a little more than an outsourcing agreement where the American cloth will be penetrating the textile market of Central America along with the shipping back of the finished products assembled through the very low wages. The proponents argued that the agreement between the US and the Central America will develop a unique platform which will throw heavy competition to the Asian textile markets. The paper aims at investigating the financial benefits of establishing US textile industries in Central America with respect to a macroeconomic model and concentrates on the cost benefit analysis for making the decision of shifting the textile manufacturing base to Central America. Part one: Central America: Trends in Trade, Macroeconomics and Development There has been a pattern of restrictive macroeconomic policies followed in the Latin American countries which have been followed over the last fifteen years and has led to the development of a long period of sluggish economic performance. In the Central American countries there have been low fiscal revenues, falling growth rates with high rates of social inequalities. It is the case that the macroeconomic policies were lacking the capacities in promoting development. The Central American countries did not possess any control over the capital funds which were used in Columbia or in Chile (Nadal, 2001, p.15). There has been a trend in the Central American countries related to the development of the maquila industries. The word maquila has been derived from the Arabic word ‘makila’ which signifies the measurement for the capacity used in the milling for designing the proportional
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