WorldCity Business Magazine

An island of high hopes

by Joachim Bamrud

SANTO DOMINGO In Jarabacoa, a village in the central mountainous region of the Dominican Republic, sometimes called “Switzerland in the tropics,” Isaac Eben Ezra runs a successful flower business. Like many Dominican companies, Flordom, exports a good portion of its products to the United States. In fact, it’s one of the top ten Dominican exporters to South Florida. But Eben Ezra is anxious for his business to grow. And he thinks that the Dominican Republic and Central American Free Trade Agreement with the United States is the answer.

The DR-CAFTA accord better known simply as CAFTA will open the door to freetrade between the Dominican Republic and the United States. But wait a minute! Flordom’s flowers already enter the U.S. market duty-free and have done so since the mid-1980s thanks to the Caribbean Basin Initiative (CBI). What does Eben Ezra stand to gain from CAFTA? Eben Ezra is betting that CAFTA will help his company reduce costs and increase profits. “All our supplies are imported,” he explains. “I buy them here and they’re expensive.” Whether it’s packaging supplies or plastic pipes, the Flordom general manager is convinced that duty-free imports will lower his costs and make Flordom more competitive.

Hundreds of other exporters on the island are hoping, like Eben Ezra, that the United States and Dominican legislatures will ratify the CAFTA accord soon. The agreement was signed by the governments of the D.R., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the United States in Washington last August. It was ratified by the Salvadorian national assembly in December and is now awaiting ratification in the rest of Central America, the D.R. and the United States.

CAFTA would immediately eliminate tariffs on 80 percent of U.S. goods exported to the Dominican Republic, with the remainder phased out over the following 10 years. While the Dominican Republic currently enjoys duty-free access to the U.S. for most of its exports, the trade pact would provide a long-term guarantee of access. (Under the preferential arrangements of the CBI, Dominican and Central American exporters in 2003 sent 77 percent of their industrial products and 99.5 percent of agricultural products duty-free to the U.S., according to a report from the U.S. Chamber of Commerce.)

“We’ve benefited from CBI, but it’s no guarantee for continuity. CBI has to be renewed and is not guaranteed,” says Hugo Rivera, a former deputy trade minister who helped negotiate the Dominican accession to CAFTA. “CAFTA will provide that guarantee and boost the competitiveness of the export sector.”

And that, everyone is quick to point out, will provide a major boost not only to local export industries, but also to Florida. “The agreement will result in an increase in trade with the United States, especially Florida,” says Kai Schoenhals, executive director of the Dominican Exporters Association (AdoExpo). CAFTA, predicts Hugo Rivera, will lead in a doubling of trade between the D.R. and South Florida “in five to seven years.”

The Dominican Republic is already Miami’s second-largest trade partner after Brazil. In 2003, two-way trade with the Caribbean country was $4.2 billion, a slight increase over 2002.

Industries on the island that are expected to do well as a result of CAFTA include footwear and jewelry. Beer and rum exports could also benefit. Meanwhile, CAFTA will help reinforce already growing sectors such as services and call centers. Thanks to CAFTA, several call centers that were set to move to India will remain, says Jose Manuel Torres, executive director of the Association of Export Processing Zones (Adozona). EPZ’s are special manufacturing and assembly zones that benefit from duty-free imports and tax breaks on exports and corporate earnings. They typically import products such as textiles—that are then assembled here and re-exported as finished garments mainly back to the U.S. market.

CAFTA is not without its detractors in the D.R. who fear that thousands of manufacturing jobs will be lost as cheaper, higher-quality goods come flooding in. “The United States maintains a series of subsidies that protect their local industries, subsidies which we can’t match,” says Schoenhals of Adoexpo. Dominican agricultural groups also decry Florida’s protection of its citrus and sugar industries as unfair competition that they face from U.S. agricultural exporters.

By and large, however, the high hopes and enthusiasm of Dominican exporters are matched by importers and industry. CAFTA “will undoubtedly spur domestic and foreign investment in the imported goods sector,” says Andres Dauhajre, president of the Importers Association of the Dominican Republic.

Dauhajre is also hopeful that freer trade and the higher volumes of trade that will result will spur a much-needed modernization of the country’s 11 ports, as well as the customs administration system, plagued for years by inefficiency and corruption. In the medium term, says Dauhajre, a modern Customs service "will facilitate doing business in the Dominican Republic and will cut costs even further.”

As for local manufacturers, they will also benefit from cheaper raw materials and capital goods, which represent a significant portion of the country’s total imports. “This will definitely increase the competitiveness of the Dominican economy,” Dauhajre says.

With higher competitiveness come the prospects of more foreign investment and more jobs. Some 15.000 additional jobs will be created in the Export Processing Zones as a result of CAFTA, predicts Torres of Adozona. Already several companies, including Canadian apparel producer Gildan Activewear, are planning to set up manufacturing operations. “CAFTA provides legal security and makes the country more attractive for investors from all over the world,” says Torres.

Most important of all is the impact that CAFTA is expected to have on reducing the damage from fierce Chinese competition in the global textile trade. A recent study by Virginia-based consulting firm Nathan Associates predicts that the D.R. is set to lose 48,000 textile-manufacturing jobs to China, now that import quotas on textiles have been eliminated with the end of the Multi-Fiber Arrangement at the beginning of the year. Thanks to CAFTA, it is believed, 40 percent of these jobs could be saved. The Nathan report projects that CAFTA will lead to an increase in exports of cotton trousers by $160 million and synthetic fiber trousers by $58 million.

The benefit will come largely from the fact that CAFTA enables Dominican garment manufacturers to source their raw materials from non-U.S. suppliers, including China, Torres says. Although China is seen as a rival in terms of textile and footwear, Chinese companies are expected to use the Dominican Republic as a base for manufacturing and exporting to the U.S. market.

Polls show strong support for CAFTA. According to a CID-Gallup poll in December, 57 percent of Dominicans believe the accord will benefit the country, while only 20 percent say the opposite. The support for CAFTA comes as business owners are optimistic about the future thanks to market-friendly reforms by president Leonel Fernandez.

After inheriting an unprecedented economic crisis, Fernandez has been able to boosting the economy, while reducing and stabilizing inflation. Despite original forecasts of a recession for 2004, the year ended with an estimated 2.0 percent GDP growth. Inflation, at 28 percent, was also lower than expected. And this year the government hopes to cut it to single digits. By reducing import costs, CAFTA will help hold the line on inflation.

And, if that happens, the Dominican consumer stands to become the biggest CAFTA beneficiary of all. “Our experience, after the major trade liberalization process implemented in the early 1990s,” says Importers’ Association president Dauhajre, “was that consumers benefited greatly from lower prices, a wider range of products and better customer service.”