Impact of CAFTA-DR's Environmental Provisions on Member Countries and Firm-Level Environmental Voluntary Mechanisms

Impact of CAFTA-DR's Environmental Provisions on Member Countries and Firm-Level Environmental Voluntary Mechanisms

Dina Frutos-Bencze
DOI: 10.4018/978-1-4666-6224-7.ch015
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The specific aim of this chapter is to examine and describe the impact of CAFTA-DR's environmental provisions on strategy formulation and development decisions of domestic and multinational firms in member countries. This chapter also provides an overview of CAFTA-DR's member countries and the theoretical framework by which the impact of the treaty's environmental provisions are assessed. Finally, the chapter examines how voluntary mechanisms of environmental self-regulation such as ISO 14001 have impacted the strategy of domestic and international firms. The latest trends in the region are presented in charts and tables.
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Cafta-Dr Background

The negotiations of the Free Trade Agreement between the United States and five Central American countries: Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica were initiated on January 27, 2003. The treaty was called the Central American Free Trade Agreement, or CAFTA. The five Central American countries signed the treaty in 2004. In 2006, the Dominican Republic joined the list of member countries and since then the treaty is commonly known as CAFTA-DR. In the extant literature, this free trade agreement is referenced by several abbreviations including: CAFTA, DR-CAFTA, CAFTA-DR and US-DR-CAFTA. For consistency purposes, this treaty will be referred to as CAFTA-DR throughout this chapter. The term CAFTA-DR region refers only to the region comprised by the Central American member countries and the Dominican Republic.

The initial intent of this trade agreement was the creation of new economic opportunities through the traditional free trade arrangements that include lowering and eliminating tariffs, opening of markets to foreign investors, reducing barriers to services, and promoting transparent practices that altogether facilitate trade and investment and further increase regional integration among the seven member countries. The agreement has a complementary policy agenda addressing local competitiveness, property rights, labor, and environmental issues.

In 2006, Guatemala, El Salvador, Honduras, and Nicaragua began the treaty implementation. A year later, the Dominican Republic started the implementation process. In Costa Rica, the official treaty implementation began in January, 2009. As of 2013, the treaty is in force for all seven member countries (USTR, 2005, 2013).

CAFTA-DR is unique in that it is the first free trade agreement between a large and developed country, the United States, and a group of smaller developing countries. The combined Gross Domestic Product (GDP) of the five Central American countries and the Dominican Republic is approximately half percent (0.5%) of the GDP of the United States. CAFTA-DR provisions require that the majority of goods and services are deregulated. Some of these goods and services in Central America include agricultural products, manufactured products, public services such as healthcare, energy (electricity), and other sectors which were traditionally state monopolies such as telecommunications, and the financial sector. In return, the U.S. has pledged to increase the market access for certain production such as textiles and agricultural products like sugar (Hornbeck, 2005a; USTR, 2005). This free trade agreement also provides the United States a chance to pursue other issues of commercial importance such as intellectual property rights, foreign investment, environmental and labor regulations, government procurement, e-commerce, and financial services (Hornbeck, 2005b).

From the CAFTA-DR region perspective, the reduction of barriers of trade to their largest export market which is the United States and the ability to increase foreign direct investment (FDI) were significant incentives to proceed with the treaty. It is expected that CAFTA-DR will potentially increase not only U.S. foreign direct investment in the region, but also from the rest of the world. In other words, CAFTA-DR seemed the right fit to complement Central America’s general strategy of developing economically through increased trade and investment (Hornbeck, 2005a).

However, the signing of CAFTA-DR was not without controversy. In all member countries, a vigorous debate about the benefits as well as the potential negative consequences took place. Supporters of CAFTA-DR emphasized the long-term U.S.-Central American and Dominican Republic trade relationship had always been a crucial one. Since the 1980s, agricultural export initiatives have been a critical component of the economic development of Central America and the Dominican Republic. Supporters of CAFTA-DR also stressed that strategic and geopolitical issues must be considered and that the treaty had the potential of reinforcing stability through the provisions that mandate the creation and development of legal frameworks and institutional structures that support democracy. If such structures and frameworks are in place, then the rule of law would prevail and narco-trafficking and organized crime, for example, would be deterred.

Key Terms in this Chapter

ISO 14001 Standard: Standard that establishes the guidelines for improvement of an environmental management system.

CAFTA-DR: Central American Free Trade Agreement-Dominican Republic.

FDI: Foreign Direct Investment.

Pollution Haven Hypothesis: Generated when free international trade leads to the relocation of dirty goods production from high income and strict environmental regulation countries to low income, low environmental regulation countries.

GRI: Global Reporting Initiative a non-profit organization that promotes economic sustainability.

EKC: Environmental Kuznets Curve.

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