A P R I L 2 0 0 6

A P R I L 2 0 0 6

Po t e n t i a l I m p a c t o f t h eC e n t r a l A m e r i c a f r e e

t r a d e A g r e e m e n t( C A F T A )

w i t h t h e U n i t e dS t a t e s o n C e n t r a l

A m e r i c a n O r g a n i cA g r i c u l t u r e B u s i n e s s

Produced by: And Executed by:

cooperation

inters e c oSecretaría de Estado de economíaSegretariato di Stato dell’economiaSecrétariat d’Etat á l’économieState Secretariat for Economic A�airs

SWITZE

R LAND

+

A Project Commissioned by:

� Enhancing Organic and Fair Trade !

This study has been developed for the project ECOMERCADOS, which is financed by SECO (Swiss State Secretariat for Economic Affairs) and carried out by INTERCOOPERATION (Swiss Foundation for Development and International Cooperation). Ecomercados started its operation in January 2005 in the area of Central America, with emphasis on Costa Rica and Nicaragua.

The main objective of the project is to promote and increase the trade of organic and fairtrade products in the export, regional and local markets, aiming at fostering the markets access for the small and medium producers and thus increasing employment and income for them.This study has been prepared by Lawrence Pratt, CEO; Bernard Kilian, Production and Research manager and Luis Rivera, Associate researcher of CIMS (Sustainable Markets Intelligence Center). Alajuela, Costa Rica.

For more information, please contact:

[email protected]: (506) 437 2200 Website: www.cims-la.com

The authors have compiled all statements, results and materials contained in this publication, to the best of their knowledge. The material has also been verified by CIMS and partners. However, the possibility of errors cannot be ruled out and the authors and/or publisher do not accept any responsibility or liability for any such error that might be contained in the publication.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of ECOMERCADOS.

April 2006

ABOUT THIS STUDY

�Enhancing Organic and Fair Trade !

EXECUTIVE SUMMARY

he United States-Central American Free Trade Agreement (CAFTA) is expected to entry into force in 2006. The main results from CAFTA are the consolidation of CBI trade preferences and the creation of clear market rules for the parties. Regarding agriculture, CAFTA opens the US and Central American markets widely, with the elimination of almost 100 percent of import tariffs. Still, the sensitive agricultural products of Central America obtained additional protection with long tariff phase-out periods. Expected effects of the agreement will depend on the implementation of complementary policies to improve the region’s competitiveness. Within this scenario, organic agriculture in Central America still faces historical traditional sector challenges: low value added, limited access to infrastructure, technology and financial resources, less competitive quality standards, certification problems, and incipient value chain positioning. Still, organic business in the

region has been growing, and US market dynamism offers significant opportunities for further business development. At the same time, stricter US market regulations and more demanding consumer preferences pose additional challenges to Central American organic producers. Therefore, CAFTA´s possible impact would be directly related to the consolidation of national and regional efforts to enhance the agricultural sector conditions in order to compete successfully. The main lesson from NAFTA is that a trade agreement is not enough to modernize an economy and create development opportunities for all. The main challenge for the traditional and organic agriculture of Central America remains the same: develop stronger entrepreneurship, increase private investment, achieve higher competitiveness levels, and promote a closer integration with international high value added chains.

T

� Enhancing Organic and Fair Trade !

ABBREVIATIONS

APHIS Animal and Plant Health Inspection Service

CA Central America

CAFTA Central America Free Trade Agreement with the United States

CBI Caribbean Basin Initiative

CBTPA Caribbean Basin Trade Partnership Act

CGE Computable General Equilibrium

CIMS Sustainable Trade Intelligence Center

EU European Union

FDI Foreign Direct Investment

GDP Gross Domestic Product

GNP Gross National Product

GSP Generalized System of Preferences

GTAP Global Trade Analysis Project

HACCP Hazard Analysis and Critical Control Point

MFN Most Favored Nation

NGO Non-governmental Organization

SPS Sanitary and Phytosanitary Measures

US United States

USITC United States International Trade Commission

5Enhancing Organic and Fair Trade !

TABLE OF CONTENTS

1. INTRODUCTION.........................................................................................................................................................62. AGRICULTURAL TRADE BETWEEN CENTRAL AMERICA AND THE US:

A GOOD TRADITIONAL BUSINESS............................................................................................................................73. CAFTA RESULTS FOR THE CENTRAL AMERICAN AGRICULTURAL SECTOR:

MARKET ACCESS IS THE KEY...................................................................................................................................104. POTENTIAL IMPACTS OF CAFTA FOR THE ECONOMY AND THE

AGRICULTURAL SECTOR IN CENTRAL AMERICA:A GENERAL EQUILIBRIUM ANALYSIS......................................................................................................................14

4.1. ASSESSMENT OF STATIC EFFECTS...............................................................................................................15 4.2. ASSESSMENT OF DYNAMIC EFFECTS.........................................................................................................165. POTENTIAL IMPACTS OF CAFTA FOR ORGANIC AGRICULTURE IN CENTRAL AMERICA:

THE CHALLENGE REMAINS THE SAME....................................................................................................................19 5.1. AGRICULTURE COMPETITIVENESS IN CENTRAL AMERICA: A LONG ROAD AHEAD...............................19 5.2. THE ORGANIC AGRICULTURAL SECTOR IN CENTRAL AMERICA ............................................................20 5.3. THE ORGANIC AGRICULTURE MARKET IN THE UNITED STATES.................................................................23 5.4. POSSIBLE IMPLICATIONS FOR ORGANIC AGRICULTURAL TRADE WITH THE UNITED STATES..................24 5.4.1. Growth Markets............................................................................................................................24 5.4.2. Standards and Technology.........................................................................................................24 5.4.3. Adjustments in the Sector to Meet Demand Trends.................................................................25 5.4.4. Processing and Value Added.....................................................................................................26 5.4.5. Environmental Rules in Conventional Markets..........................................................................27 5.4.6. Promising Products.......................................................................................................................28 5.5. LESSONS LEARNED FROM NAFTA..............................................................................................................296. CONCLUSIONS........................................................................................................................................................337. REFERENCES.............................................................................................................................................................358. ANNEX..................................................................................................................................................................... 37

ANNEX 1. MODEL ESTIMATION RESULTS................................................................................................................ 37ANNEX 2. EVOLUTION OF AGRICULTURAL EXPORTS FROM CENTRAL AMERICAN COUNTRIES TO THE US.......40

6 Enhancing Organic and Fair Trade !

�. INTRODUCTION

he United States and five Central American countries, El Salvador, Guatemala, Honduras, Nicaragua and Costa Rica, concluded negotiations on the US-Central American Free Trade Agreement (CAFTA) in January 2004.1 The agreement was signed on May 2004, and ratified by the US House of Representatives on July 27, 2005. The agreement has also been ratified by El Salvador, Dominican Republic, Guatemala, Honduras and Nicaragua. In Costa Rica the agreement is waiting for discussion in the Parliament.2

Under the US Caribbean Basin Trade Partnership Act (CBTPA),3 and the Generalized System of Preferences (GSP), many exports from Central America already enter the United States duty-free. CAFTA will consolidate these benefits and make them permanent. More than 80 percent of US tariff codes (consumer and industrial products) exported to Central America will be duty-free immediately upon ratification of the agreement, and 85 percent will be duty free within five years. All remaining tariffs will be eliminated within ten years. Close to 98 percent of all goods produced in Central America will enter the US market duty-free immediately. The Central American countries also accorded substantial market access across their entire services regime (i.e. banking, insurance, telecommunications), subject to very few exceptions.

Regarding agriculture, CAFTA opens the market widely, with the elimination of almost 100 percent of import tariffs. The only excluded products are sugar in the US, white corn in all Central American countries, potatoes and onions in Costa Rica. The sensitive agricultural products of Central America (rice, beans, poultry, beef and pork meat, dairy products) obtained protection with long tariff phase-out periods.

Agriculture has been a central issue for CAFTA, mainly because of the asymmetries between the US and Central America in terms of production, protection levels (both subsidies and import tariffs), productivity, degree of sector development and competitiveness. Currently, Central America is a net exporter of agricultural goods to the US. In recent years the agricultural supply has been diversified. Today, although coffee, bananas and sugar remain as leading export products, fruits, vegetables, meat and processed goods have gained market positioning in the US. In addition, the production and exports of organic agricultural goods to the US have increased significantly.

The markets for organic and Fair Trade agricultural products have grown in recent years, with North America, and particularly the US, as one of the leading markets. Sales volumes in the US achieved more than US$10 billion in year 2004.4 At the same time, the organic business in Central America has been developing, with thousands of small farmers transforming their traditional activities to certified organic farms.

Within this scenario, what could be expected from CAFTA for the organic agriculture of Central America? The answer is directly related to the possible implications of the agreement for the agricultural sector, the economy, and the future of agricultural competitiveness. It depends on the impact of CAFTA on poverty and development opportunities as well. Organic production is seen as a promising option for agricultural development in the region, with high expectations from its growth potential and possible impacts on sustainable rural development.

This document offers insights about the potential impacts of CAFTA for the organic agricultural business in Central America. First, it describes the evolution of agricultural trade between Central America and the US. Then, it makes a brief evaluation of agricultural competitiveness in the region. In a fourth section, a general equilibrium analysis is conducted to assess the economic implications of the agreement for the Central American region, with emphasis on agriculture. The fifth section discusses possible impacts and perspectives for the organic agricultural sector. The final section concludes.

1 The Dominican Republic was included into the Agreement on August 2004, named afterwards DR-CAFTA.2. CAFTA is expected to entry into force on January 1, 2006. However, there would be delays be-cause of lack of legal and regulatory framework harmonization between the US and the rest of DR-CAFTA countries. Partner countries must approve a DR-CAFTA implementation law, in order to “level the playing field for everyone.” The political discussion has been intense in all Central American countries with this and other regards. During the negotiation process, ratification pro-cess discussions, and future implementation strategy planning, DR-CAFTA has been and will be controversial. In general, those in favor of the agreement hope that the Agreement can be part of a policy foundation supportive of growing trade and investment, and long-term social, political, and economic development. On the other hand, there are strong concerns over the potential negative effects of DR-CAFTA on certain Central American productive sectors, workers, small farmers, and other groups. Most opposition to the DR-CAFTA before and after its ratification has emerged from well organized civil society groups (unions, agricultural organizations, environmental groups, aca-demic institutions, political parties, religious organizations, among others). At this point in Central America’s economic and political development, DR-CAFTA risks becoming a referendum on the entire trade integration and “globalization” goals pursued by the region in general. This means that much of the risk is political, relating to ideology and perceptions of who are the “winners” and the “losers.” See Condo, Colburn and Rivera (2005) for a broader analysis.3 Enacted in May 2000 as part of the Trade and Development Act. The CBTPA enhanced the 1984 Caribbean Basin Initiative (CBI) benefits.

T

4 CIMS (2005a).


nited States is the main trading partner of the Central American countries. Almost 50 percent of the region’s international trade (exports and imports) is with the US. The US exported nearly US$11 billion in goods to the five Central American countries in 2003. Two-way trade was over US$23 billion in 2003.5 In 2001, the CAFTA countries exported US$11 billion to the US market. Through November 2004, the figure was US$12 billion. Although “traditional” exports like bananas and coffee still represent a very important share of regional exports, in recent years there has been a diversification of exports towards more technologically advanced sectors like electronics and medical instruments, non-traditional agricultural products like fruits and vegetables, beverages and prepared meats, seafood, and chemical products.6

US agricultural imports value from Costa Rica represents more than 22 percent of total imports from this Central American country. In the case of El Salvador, the figure

is less than 4 percent. This country exports relatively less agricultural products than the rest of the region to the US. In the case of Guatemala, the figure is 24 percent. The US imports value from Honduras and Nicaragua account for 12 and 24 percent of total imports respectively. With the exception of Costa Rica, apparel products exports represent the main trading sector of Central America with the US (Table 1).

The general performance of Central America’s agricultural sector, in terms of production and exports, was positive during the 1990s. However, the relative share of agriculture in national exports and production in the Central American economies has fallen significantly during the last two decades, mainly because of the diversification of the economies and the growth of other productive sectors. Additionally, the participation of agricultural exports in the total amount of exported goods has decreased. Still, agricultural products account for a very important share of Central America’s exports.

�. AGRICULTURAL TRADE BETWEEN CENTRAL AMERICA AND THE US: A GOOD TRADITIONAL BUSINESS

U

US Imports Value from Central America by Main Products, 2004

Costa Rica El Salvador Guatemala Honduras Nicaragua

3,332 2,052 3,154 3,640 990.5

Electrical Machinery and EquipmentFruitsArticles of Apparel and ClothingMedical InstrumentsCoffeeSugarFish and CrustaceansMineral Oils and ProductsMeatTobaccoOthers

Source: Own elaboration with data from the US International Trade Commission

TABLA �

7.4%1.4%

60.1%0.0%5.3%1.6%7.4%0.0%5.8%2.8%8.3%

4.7%4.7%

75.3%0.0%1.2%0.4%3.7%0.0%0.0%1.9%8.1%

0.0%13.4%61.7%0.0%6.8%2.4%0.7%6.3%0.0%0.4%8.2%

0.9%0.0%

90.2%0.0%2.4%1.3%0.0%0.4%0.0%0.0%4.9%

21.6%14.7%18.1%14.4%4.5%1.3%1.8%0.0%0.2%0.0%

23.4%

Total Imports US$ Million

5 USTR (2004).6 Condo, Colburn and Rivera (2005).


Agricultural trade with the US has increased significantly during the last decade. Currently, Central American countries are net agricultural exporters to the US markets (Figure 1). On average, in the last decade export value grew by 3 percent annually, while imports increased at an average 5 percent. Net agricultural exports to the US reached almost US1 billion in 2004. The evidence suggests that Central American agricultural companies and foreign firms (mostly US multinationals) operating in the region have been successful entering the US markets.

Main agricultural goods exported to the US include fruits and nuts and coffee and spices (Figure 2). Sugar is important in Guatemala and El Salvador, while fruits account for 60 percent of Costa Rican agricultural goods exported. Fish and crustaceans exports from Honduras and Nicaragua to the US have grown significantly in last years.7

-

0.50

1.00

1.50

2.00

2.50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Billio

n US

$

Exports Imports Trade Balance

Source: Own elaboration with data from FAS Agricultural Database

Agricultural Trade Balance between Central America and the US FIGURE �

7 More detailed information is described in the annex.

Main Agricultural Exports from Central America to United States FIGURE �

-

0,50

1,00

1,50

2,00

2,50

3,00

2000 2001 2002 2003 2004

Billio

n US

$

Fruits Coffee Fish and crustaceans Sugar Vegetables



On the other hand, Central American agricultural imports from the US consist mainly of cereals and grains (rice, wheat, and corn), animal fats and oilseeds. Import value of all these goods has grown steadily in the last five years, especially in El Salvador and Costa Rica (Figure 3).

Central America’s agricultural exports composition has changed in the last decade, from traditional goods like bananas and coffee, to other emerging sectors like seafood

products and higher value-added goods for final consumption, such as food preparations, fruit and vegetable juices, and packed frozen meat. Additionally, many companies in the region are investing in higher value-added market niches, like organic goods, and exporting them to the US market. However, the agricultural sectors of Central American countries face important challenges to modernize and turn into a more industrialized productive activity.

Main Central American AgriculturalImports from United States

FIGURE �


0

100

200

300

400

500

600

700

800

900

2000 2001 2002 2003 2004

Milli

on U

S$

OthersMeatOilseedsAnimal fatsCereals and grains


fter nine rounds of negotiation, plus an additional round between Costa Rica and the US, CAFTA was signed. The long-term benefits of the agreement for Central America appear to outweigh the long-term costs.8 However, how much Central America benefits will depend on how effectively the countries can manage the process of transforming their agriculture productive capacity.

The five Central American countries agreed in 1995 to reduce their common external tariff to a maximum of 15 percent.9 The region has low average tariff rates, as a result of a unilateral process of trade liberalization and a strong commitment to global integration. However, selected agricultural commodities are protected with tariffs that significantly exceed the 15 percent common external tariff ceiling. These specially protected commodities include dairy products, rice, sugar, and poultry. In addition, the use of non-tariff barriers has decreased significantly in recent years; although there are still some of these barriers in place (Table 2).

Almost no agricultural products are excluded from CAFTA. Tariffs will be eliminated for all products, except sugar for the United States, fresh potatoes and fresh onions for Costa Rica, and white corn for the rest of Central America. More than half of current US agricultural exports to Central America will become duty-free immediately. Each Central American country will have a separate schedule of commitments providing access for US products. The United States will provide the same tariff treatment to each of the five countries, but will make country-specific commitments on tariff-rate quotas.

The elimination of the high levels of protection of sensitive agricultural goods as a result of

CAFTA is a major concern for many in Central America. The likely effect on local production of traditional crops as a result of higher import penetration from US products was a key issue during and after the negotiation process. Condo, Colburn and Rivera (2005) argue that most regional groups lobbying against the agreement used an expected “tragedy” for the Central American agricultural producers as a central argument to oppose CAFTA.

Mason (2005) presents estimations of the possible effects of CAFTA on sensitive agricultural products on the poor in Nicaragua, Guatemala, and El Salvador using a “net consumer-net producer” approach. The findings indicate that producers of the sensitive agricultural products could

3. CAFTA RESULTS FOR THE CENTRAL AMERICAN AGRICULTURAL SECTOR: MARKET ACCESS IS THE KEY

A

8 Condo, Colburn and Rivera (2005).9 Through the Central American Common Market (CACM) of which all countries are members. The Central American integration process has been reactivated in the last decade. At present, an average of 30 percent of total trade is intraregional.

General Import Barriers in Central America

Source: Own elaboration with information from SIECA, www.sieca.org.gt, accessed on September 2005

TABLE 2

Average Tariffs (%) Guatemala El Salvador Honduras Nicaragua Costa Rica

7.1

0

0

5 - 10

15

15

5-35

32

20

15

15

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

40

0

40

40

40

20

20

20

35

40

15

50

40

0-30

62

55

15

170

65

1

35

50

48

150

7.1

0

0

5 - 10

15

6.9

0

0

5 - 10

15

7.1

1

1

5 - 10

15

5.1

0

0

5

15

Average Nominal External Tariff

Capital Goods

Inputs

Intermediate Goods

Final Goods

Diary Products (Milk)

Corn (yellow)

Rice

Sugar

Pork Meat

Chicken Meat

Countervailing and Anti-dumping Measures

Safeguards

Non-automatic Licensing

SPS Prohibitions

Tariff Rate Quotas

Price Band Controls

Most Protected Products (% Tariff)

Non-Tariff Barriers

��Enhancing Organic and Fair Trade !

experience welfare losses. Still, the reduction of tariff barriers could lead to welfare gains for a majority of households, as a result of lower prices of agricultural products. The net effect on rural agricultural households would then be positive. However, some households (net producers of sensitive goods) could be negatively impacted. For those households, complementary policies to support the transition to other activities would be necessary.

Arguments against CAFTA dismiss entirely the potential benefits of liberalization in terms of lower prices and product diversity, particularly for the poor. For instance, Umaña and Figueroa (2002) estimated that the burden of tariff protection in traditional agricultural (sensitive) products for the poorer Costa Rican households (lower 20 percent quintile)

represented 18 per cent of their real incomes. Although CAFTA might certainly cause negative effects on some productive sectors, this should be balanced with the positive outcomes for the majority of consumers. Sensitive sectors were granted special treatment (safeguards, protection from imported goods, specific schedules for tariff phase-out) under CAFTA. To address asymmetrical development and transition issues, CAFTA specifies rules for lengthy tariff phase-out schedules as well as transitional safeguards and tariff rate quotas (TRQs) for sensitive goods in Central America. Although almost all goods will attain immediate duty-free treatment, others will have tariffs phased out incrementally so that duty-free treatment is reached in 5, 10, 15, or 20 years. Duty-free treatment would be delayed and in some cases, the tariff reductions would not begin

Tariff Reduction Schedule for Sensitive Agricultural Products under CAFTA

Guatemala Honduras El Salvador Nicaragua Costa Rica

Product

Beef* n.a. 10 0 15 15 6 15 15 0 15 15 3 15 15 4

Pork

Poultry (leg quarters)

Diary products

Yellow maize

Beans

Fresh Potatoes

Rice

Sorghum

15 15 0 15 15 0 40 15 6 15 15 0 47 15 6

164.4 18 10 164.4 18 0 164.4 18 10 164.4 18 10 151 17 10

15 20 10 15 20 10 40 20 10 40 20 10 66 20 10

n.a. 10 0 45 15 6 15 15 6 15 15 0 15 15 0

20 15 6 15 15 0 20 15 15 30 15 0 47 15 0

15 15 0 15 15 0 15 13 0 15 15 0 Excluded

29.2 18 10 45 18 10 40 18 10 63 18 10 36 20 10

0 0 0 15 15 0 15 15 0 20 15 6 15 15 0

*Beef products other than prime and choice cutsIT: initial tariff; PP: phase-out period; GP: grace period; n.a.= not available

Source: CEPAL (2004)

TABLE �

�� Enhancing Organic and Fair Trade !

until 7 or 12 years into the agreement (Table 3).From the US perspective, import tariffs have generally been higher on processed agricultural products than on their primary commodities. Even after the full implementation of the Uruguay Round tariff concessions, high levels of nominal tariff escalation remained in the US markets for a high number of agricultural commodities. The most important areas with the highest frequencies and the highest rates are the major agricultural staple foods, in particular

meat, sugar, milk, butter and cheese, and cereal, as well as tobacco products. In most cases, peak duties for major fruits, vegetables and some fish and crustaceans range from 12 to 30 per cent.10 However, import duties for many fruits and vegetables are substantially lower or zero. The case of Costa Rica exemplifies a general situation common

10 UNCTAD (2000).

Unites States: Current MFN rates, CBI / CBTPA1/ and CAFTA treatment for someCosta Rican Agricultural Products

Note: CAFTA treatment “A” means duty free treatment on the entry into force of the Agreement. 1/Preferential treatment under CBTPA expires on either Sept. 30, 2008, or the date, on which the FTAA or acomparable agreement enters into force, whichever is earlier.

Source: USITC Data Web and US Tariff Schedule for CAFTA. UNCTAD (2000). FASonline

TABLE �

Pineapples 1.1 cents/kg 0% A

Orange juice, frozen 7.85 cents/liter 0% A

Cantaloupes, fresh 29.8% 0% A

Cassava (manioc),frozen, fresh or chilled 7.9% to 11.3% 0% ABanana pulp, otherwiseprepared or preserved 3.4% 0% A

Chayote, fresh or frozen 5.6% to 7.9% 0% A

Tobacco 350% 350% Tariff phase-out in 15 years

Bovine meat WTO quota of 64,800 metric tons, In addition to the existing to be assigned WTO quota, a 10,536 MT among all countries quota for Costa Rica under that don't have a free trade conditions, with specific allocation. 5% of annual growth.

Cane sugar WTO quota forCosta Rica of about15,800 MT for 2004.

In addition to the WTOquota, a 13,000 MT quota(of which 2,000 MT are fororganic sugar) for CostaRica under free tradeconditions, with 2% ofannual growth.

Product CAFTA Treatment CBI / CBTPATreatmentCurrent MFN Rate


to all Central American agricultural exporters (Table 4).Under the US Caribbean Basin Trade Partnership Act (CBTPA) and the Generalized System of Preferences (GSP), many agricultural exports from Central America already enter the United States duty-free. However, Monge et al (2003) document that hundreds of Central American agricultural goods with significant revealed comparative advantages have been excluded from US preferential access schemes. Despite CBI preferences, a long list of Central American agricultural products (over one-half of goods exported to the world but not the US) face important barriers in the US market. In addition, tariff escalation could have blocked the exports of many processed higher added-value agricultural goods.

One of the advantages of CAFTA is that almost 100 per cent of all agricultural goods produced in Central America will enter the US market duty-free. CAFTA will make unilateral CBI preferences permanent. As a result, many agricultural goods from the region would have the opportunity to compete in the US market. Goods like fruits and vegetables, forestry products, and processed food have growth potential, particularly if higher value is added with further processing, product differentiation, and quality improvements.

On the other hand, after CAFTA, the relevance of non-tariff barriers for agricultural trade with the US will increase. Incidence of non-tariff barriers has historically been significant, and will gain more importance parallel to agricultural tariffs elimination. As an example, avocado exports from Central American countries to the US are currently prohibited as a result of the outbreak of Mediterranean fly disease. Other agricultural products have faced difficulties entering US markets because of lack of information, weak health and safety standards, technical limitations, packaging restrictions and certification capacities. This is a key competitiveness issue that must be addressed as a high priority.

Central American organic (and conventional) agricultural producers must understand and apply necessary measures to comply with market entry regulations, particularly those related to Sanitary and Phytosanitary (SPS) standards. In addition to the proper organic certifications, compliance

with Hazard Analysis and Critical Control Point (HACCP) regulations, Animal and Plant Health Inspection Service (APHIS) standards, and bioterrorism related laws, are a must. The agricultural business in Central America has bifurcated in two: those sectors that comply with SPS standards and those that do not. The former group will not enter the market.

One implication of CAFTA is the strengthening of SPS regulations.11 At the same time, more transparency and cooperation opportunities emerge from the agreement. For instance, Jaramillo and Lederman (2005) indicate that the US committed to resolve delays in food inspection procedures for meat and poultry products from Central America. Honduras obtained a schedule for the resolution of sanitary issues that affect export of poultry, dairy products, tomatoes and peppers, as well as technical assistance to strengthen institutions in the sanitary and phytosanitary area. Nicaragua is receiving help in solving SPS problems for exports of cheese, papaya, pitahaya, peppers and tomatoes. Costa Rica obtained guaranteed access of ornamental plants over eighteen inches in height, more flexible sanitary treatment for some of its flower exports, and advanced in the recognition of its poultry inspection system.12

CAFTA makes SPS regulations stricter, but at the same time offers new opportunities for Central American countries to catch up with agricultural market requirements. The final outcome will depend on national and regional efforts, on coordinated actions between companies and public organizations, to invest more on technical capacities, laboratories, certification infrastructure, and create an incentives scheme to promote the required adjustments and restructuring of companies. Technical cooperation and technology transfer from the US is an option to take

11 With CAFTA the parties agreed to apply the science-based disciplines of the WTO Agreement on Sanitary and Phytosanitary (SPS) Measures. An SPS working group was established to expedite resolution of technical issues and to contribute to the dissemination of the regulations and procedures applied in the US for key products of interest.12 These changes are expected to have significant impacts, e.g. in the case of Costa Rica’s ornamental plants, producers have estimated that this may increase their export earnings by 50 percent just by exporting taller rather than shorter plants (Jaramillo, 2005).


uantitative instruments like Computable General Equilibrium (CGE) models have been used to evaluate the likely impact of CAFTA for its member countries (Table 4). For instance, the United States International Trade Commission (USITC, 2004) reports positive but very small economy-wide welfare effects for the United States. US exports to Central America are likely to increase by US$2.7 billion or 15 percent, and US imports are likely to grow 12 percent, by US$2.8 billion after full implementation of the tariff liberalization provisions of CAFTA. The impact on US employment and output is expected to be minimal. The largest sectoral effects for the US are expected in the textiles and apparel, and sugar industries, both highly-protected activities. For Central America as a whole, Hilaire and Yang (2004) report total exports from Central America to the US market are likely to increase by 50 percent from their 2002 values,

4. POTENTIAL IMPACTS OF CAFTA FOR THE ECONOMY AND THE AGRICULTURAL SECTOR IN CENTRAL AMERICA: A GENERAL EQUILIBRIUM ANALYSIS

Q according to their model simulations.13 This represents an important welfare gain of US$3.9 billion (1.5 percent of regional GDP), with the full implementation of CAFTA. A main source of the gain for Central American countries comes from expanded sales of textiles and clothing and processed crops, which more than offsets trade diversion from other countries and regions. Brown et al. (2004) report a total improvement in US economic welfare of US$17.3 billion, which represent 0.2 percent of Gross National Product (GNP). Economic welfare in CA increases by US$5.3 billion, which is 4.4 percent of regional GNP. For Central America, there are sizable percentage increases in the exports of food, beverages and tobacco, textiles, wearing apparel, leather products and footwear, and services. Total export value increases by US$8.3 billion and the likely impact on output in textiles, wearing apparel, and leather products and footwear in CA is also significant.

13 This result must be interpreted with caution, since the authors use data for 1997, and some recent preferential agreements are not considered; as well as the recent implementation of the quota reduction for Chinese exports of textiles and apparel products.

CAFTA Estimated Aggregate Economic Effects

TABLE �

USITC (2004)

Not available

Hilaire and Yang(2004) Not available

Welfare grows by 1.5% of GDP(US$3.9 Bn)

Exports grow by 50%

Brown et al. (2004) Welfare grows by 4.4% of GDP(US$5.3 Bn)

Exports grow by US$8.3 Bn

Employment growth in Textiles andApparel sector of 28%

Welfare increase of 0.01% of GDP

Exports grow by 15% (US$2.7 Bn)

Imports grow by 12% (US$2.8 Bn)

Welfare grows by 0.17% of GDP(US$17.3 Bn)

Study Impact on United States Impact on Central America


For this paper, the GTAP database and Computable General Equilibrium (CGE) model14 were used to analyze the potential economic implications of CAFTA for Central America, with emphasis on the agricultural sector.15 The GTAP database 6.0 pre-release 3.10 version uses 2001 as its baseline and provides one of the best available bases to analyze current trade policy (USITC, 2004).16

The data was aggregated in 19 sectors and 3 regions: USA, Central America, and the Rest of the World (ROW). The sector aggregation was done considering 17 agricultural sub-sectors plus manufacturing and services.17

First, a standard GTAP static model with different shocks was used to evaluate alternative scenarios under CAFTA.18 Then, some potential dynamic effects were assessed, taking into consideration possible increases in US foreign direct investment flows to Central America and capital accumulation in response to the incentives provided by the bilateral liberalization, the potential impact of trade facilitation strategies, and the reduction of unemployment by labor market adjustments. It is important to stress that the simulation results include the full adjustment of the Central America economy and the agricultural sector to the policy shock and thus, can represent, ceteris paribus, the long-run effect of CAFTA. Therefore, the short-run adjustment and preliminary implications of the trade agreement are not analyzed here.

�.�. ASSESSMENT OF STATIC EFFECTS19

In the first scenario, a full liberalization of trade between US and Central America is assumed. Thus, all tariffs between both regions and among Central American countries are reduced to zero, keeping the original tariffs with the ROW. However, tariffs for sugar in the US and for corn in CA are not removed, in accordance to the agricultural exclusions made in the agreement.20 In addition, some minor quotas across both regions and countries were also eliminated (Table 6).

The results for this scenario show that welfare gains are likely to be positive for CA. It increases US$993 million or 1.4 percent of previous GDP, which in turn has a 0.22 percent growth rate. Household incomes rise 4 percent, driven by a significant increase in wages and capital returns. Moreover, CA has positive terms-of-trade effects that also contribute to these welfare gains.21 As expected, the equivalent values for the US are close to zero.22

Manufacturing production in CA increases by 2 percent, drawing a higher specialization into this sector, at the expense of all the rest of the economy, and particularly the agricultural sector production, which falls by 3 percent. Agricultural production in all sectors falls, with rice being the most affected sector. This situation is also reflected in the export performance, were manufacturing exports to US grows 45 percent, while agricultural exports are almost unaltered (-1 percent). In terms of imports change, the simulation results are the expected ones. Import penetration from the US is significant, due to tariff asymmetries between both regions that are eliminated with the agreement. The phase out of sensitive agricultural goods tariff barriers strengthens the imports effect. The imports of rice, meat, dairy products and sugar grow enormously. Vegetables and fruits imports increase significantly as well. Central America’s comparative advantage in these sectors appears to be relatively eroded under a free-trade environment with the US.23

When analyzing factor prices, CA experiences significant increases in wages for unskilled and skilled labor, as well as capital returns. This would contribute to welfare and income increases mentioned before and moreover, promises some relief to poor unskilled workers. In addition, consumer prices

Global Effects of CAFTA for Central America:Total Tariff Phase-Out (First Scenario)

TABLE 6

GDPEconomy WelfareHousehold IncomeFactors of Production PriceLandUnskilled LaborSkilled LaborCapitalNatural Resources

0.22%1.42%

4.0%

-8.18%5.37%5.74%5.97%7.59%

Source: own estimations with GTAP model and database (6.0 pre-release 3.10 version)

14 For a detailed description of the GTAP model theoretical setting see Hertel and Tsigas (1997).15 The Global Trade Analysis Project (GTAP) is an international network of institutions and researchers that facilitates and fosters trade analysis. The main aim of the project is to provide updated datasets of bilateral trade, transport, and import protection data in conjunction with individual-country input-output databases. Moreover, it also provides a modelling framework to conduct CGE static analysis of multi-region and economy-wide scenarios. In particular it can simulate the effects of trade policy and resource-related shocks on the medium-term patterns of global production and trade.16 For this specific application, there are two main limitations. First, the regional aggregation available in the database groups the five Central American participants (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) together with Belize and Panama, which are not part of CAFTA (currently, Panama is negotiating an agreement with the US). Secondly, the baseline year is four years apart from the implementation date of the agreement. This implies that the economic environment and data changes that have taken place between 2001 and 2005 are not included in these estimations. Still, the analysis is relevant for regional impact estimations. Further research is necessary to assess the impacts by each country.17 The GTAP database allows for other possible combinations of sectors and regions. 18 In particular, the RunGTAP software version 5 is used.19 Tables A1 and A2 in the annex include the disaggregated results.20 Because of limitations with the aggregation of sectors provided by the GTAP database, the exclusion of white corn is proxied by leaving the tariff of “Cereals” unaltered, even when other products are being included there. For similar reasons, onion and potato tariffs in Costa Rica were not considered, since they were excluded from the negotiated tariff reductions.

21 These positive terms-of-trade effects are present throughout the rest of scenarios, with an average percentage increase between 2 percent and 3 percent.22 US impacts are available by request.23 Manufacturing imports´ growth from the US is also significant, notwithstanding the relatively low import tariffs of this sector.

�6 Enhancing Organic and Fair Trade !

increase less than income. The overall situation of poverty in each country is likely to improve under these conditions. However, land returns are negatively affected because of the negative impact of CAFTA on the agricultural sector. This implies a redistribution of income from rural land-owners to (rural) workers.

Accounting for the negative effects of CAFTA on the agricultural sector in CA reported in the first scenario, it is interesting to simulate an alternative case where agricultural protection in this region is not lifted with the agreement. Given the phase-out schedule for most of the agricultural sensible products of CA,24 this simulation can proxy a medium-term scenario where agricultural imports are not fully liberalized (Table 6).

This second scenario is fairly comparable to the first case, providing a slight increase of welfare by US$1,014 million. In addition, GDP and household income grow by 0.20 percent and 4.2 percent respectively. As expected, agricultural output falls with a lower magnitude, and agricultural imports grow by 12.5 percent, mainly as a result of the tariff barriers in sensitive sectors. Interestingly, agricultural exports fall more than in the previous scenario. This suggests stronger specialization in traditional protected crops, instead of a shift towards other agricultural export oriented goods. One of the main conclusions is that, even with protectionism, and with other things equal, the agriculture in Central America would face significant shocks with CAFTA. On the other hand, manufacturers would keep their dynamism. That is why agricultural sectors in CA continue to face output reductions, driven mainly by the reallocation of resources into the manufacturing sector.25

Therefore, this second “medium-term” scenario roughly replicates previous results, with the full implementation of CAFTA. Still, it would imply an important interval or “adjustment time” for Central American agricultural sectors to adjust for higher and broader competition from the US in the agricultural sectors.26 This highlights the importance of complementary policies in the agricultural sector which can mitigate or reverse the potential negative effects, while the phase-out of import protection is not fully implemented. At the same time, the results stress the need to improve competitiveness.

As stated by Kose et al (2005), complementary policies should be in place to maximize the benefits of CAFTA for the

Global Effects of CAFTA for Central America:Protection of Sensitive Agricultural Goods

(Second Scenario)

TABLA 7

GDPEconomy WelfareHousehold IncomeFactors of Production PriceLandUnskilled LaborSkilled LaborCapitalNatural Resources

0.20%1.45%4.19%

-5.97%5.48%5.76%5.94%7.23%


24 For instance, in the case of rice, all Central American tariffs will be eliminated in 18 years (20 years for Costa Rica). All tariff cuts will be back loaded, with out-of-quota imports subject to a safeguard. Tariff-rate-quotas (TRQs) will be established for rough and milled rice.25 Francois, Rivera and Rojas-Romagosa (2006) argue that this aggregated outcome is driven mainly by the high dependency of Central American countries (with the exception of Costa Rica) on apparel and textiles exports to the US. Taking into account the strong competition of China in the US apparel market before and especially after the Agreement on Textiles and Clothing (ATC), the authors conclude that CAFTA, alone, will roughly compensate for this new source of competition.26 However, as stated by Condo, Colburn and Rivera (2005), the message for the agricultural producers in Central America seems to be clear: Protectionism is not a solid policy for agricultural development. The central problem is the low competitiveness of Central America’s agriculture.

poor. In particular, policies are needed to strengthen social safety nets and help poorer households take advantage of the benefits of the agreement. Since their dependence on agriculture varies, the Central American countries could utilize specific policies to ease the transition process of workers in the agricultural sector to export-oriented manufacturing and services industries.

�.�. ASSESSMENT OF DYNAMIC EFFECTS27

Static gains from trade resulting from general equilibrium models are relatively small with respect to base GDP. However, this is not consistent with cross-country estimates of trade and growth.28 These studies imply that there is a strong link between increased trade, more investment and growth. Thus, in order to assess the wider impact of trade liberalization it is important to include some estimates of the dynamic gains associated with increased investment and capital accumulation.

Besides liberalizing bilateral trade between the United States and the region, CAFTA will also strengthen integration efforts among the countries of Central America, and remove barriers to trade and investment in the region to US companies.29

The agreement will also require CA to undertake reforms to improve its performance in areas critical for agricultural competitiveness, including customs integration and administration, the protection of intellectual property rights, access and protection of investments in utilities (energy, telecommunications, and water), construction, insurance and financial services markets, sanitary and phytosanitary standards, and other certification norms.

To assess for the potential impact of these “agreement-pushed” reforms, a dynamic scenario experiment is

�7Enhancing Organic and Fair Trade !

conducted. In this scenario the effects of Foreign Direct Investment (FDI) and capital accumulation, trade facilitation and the reduction of unskilled labor unemployment are combined. The joint impact of these expected positive outcomes provides an upper-bound or “optimistic scenario” concerning CAFTA.

Foreign direct investment (FDI) inflows to CA have increased significantly in the 1990s. This phenomenon has contributed in a decisive manner to increase export diversity in the region. Moreover, FDI inflows help finance the persistent current account deficits, especially in Costa Rica.30 One of the main issues negotiated in CAFTA was the inclusion of legal and administrative provisions to ease the flow of FDI into the region. Moreover, given that the Caribbean Basin Trade Partnership Act (CBTPA) already grants market access to the US for many Central American products, it is expected that investment will provide the biggest economic impact of the agreement for the region.31

Assuming that CAFTA increases the flow of FDI into the region, the dynamic effects can be estimated by allowing capital to change endogenously.32 The results show an increase in capital stock of 10.4 percent associated with CAFTA. The raise in the capital stock is directly associated with a GDP increase of 4.8 percent. Since terms-of-trade are also improving, then social welfare is further increased by US$ 2,300 million (or 4.7 percent of GDP), with respect to the first scenario (total tariff phase-out).

In addition, trade facilitation mechanisms are modelled as a decrease in the “iceberg” trade costs.33 These efficiency-enhancing trade facilitation mechanisms include customs automatization, improvements in ports and roads infrastructure that reduce transportation costs, and the simplification of custom procedures that serve to reduce the effective import prices.34

A uniform 2 percent decrease in the transportation costs between both regions and within CA, to simulate an improvement in trade facilitation mechanisms, generates significant gains from CAFTA. First, an approximated 10 percent additional increase in trade volumes between both regions is reached. In addition, welfare gains for CA rise by US$726 million with respect to the “static” case, which are motivated by a 3.5 percent increase in terms of trade and additional increases in the price of productive factors in the region.

One of the most anticipated gains from CAFTA for CA is expected to be on increased employment opportunities for the region, which can curb low wages and high under-employment and sub-utilization rates. In turn, these improved labor conditions can help to reduce the high poverty rates of the region. While the previous “static” scenario shows a wage increase of around 5.5 percent for both skilled and unskilled labor, these figures are implicitly assuming full employment.

Despite relatively low unemployment figures, labor sub-utilization is a serious problem in CA. Therefore, a more realistic simulation must take into account these labor market characteristics. To simulate an eventual positive impact of the agreement on employment, the skilled and unskilled workers wages in CA are fixed, to allow for trade shocks to adjust the number of employed workers. As a result, CAFTA increases employment of unskilled workers by 5.1 percent and skilled by 4.7 percent. In addition, GDP presents an increase of 2.6 percent, determined by the use of previously idle productive factors. Thus, even when sub-utilization figures will remain high, CAFTA could be a very positive influence to tackle this problem in the region, while providing a significant increase in production.

With these previous three shocks combined, an upper-bound or optimistic scenario where welfare is improved the most can be assessed (Table 8). In this scenario, capital stock increases by 21 percent and unskilled labor employment is increased by 13.5 percent. This increase in productive factors is directly associated with an improvement in social welfare by US$ 5,700 million and a GDP growth of 15 percent. This is achieved even when terms-of-trade do not improve as much as in the “static” case. These significant welfare gains reflect the potential and economic possibilities associated with free trade in general. Moreover, the overall reduction in agriculture production and exports from the first scenario is not observed. Even though some specific sectors are affected, some others are now expanding and this reflects the increase in the productive capacity of the region. On the other hand, import penetration remains high. Still, the agricultural trade balance with the US remains positive.

27 Table A3 in the annex includes the disaggregated results.28 See Helpman (2004) for a critical assessment of the literature on the links between trade openness and growth. 29 Pratt and Rivera (2003).30 Francois, Rojas-Romagosa and Rivera (2006).31 The Economist (2005). Many of the economy-wide effects of increased trade openness are dynamic in nature. While an improvement in the allocation of resources is the main static effect of liberalization, most of the expected gains from increased trade are dynamic. These include more and cheaper inputs and final products, pro-competitive effects associated with increasing returns to scale and the erosion of market power. However, the increase in investment flows is generally regarded as the main dynamic effect associated with trade liberalization.32 Following Francois et al. (1996), the impact of increased capital accumulation can de assessed by changing the closure rule of the standard GTAP model. To do this, it is assumed that the savings rate and the initial level of capital are endogenously determined and thus, the increase in capital associated with trade liberalization affects the results of the simulation. In practical terms, GTAP uses the end-of-period capital level, which is associated with the new savings rate and the flow of FDI from regions with lower capital returns, as the initial capital level. Hence, the trade shocks are implicitly considering the capital accumulation associated with the shock itself. In this way, although a dynamic model is not explicitly used, a good proxy of the dynamic effects of FDI and capital accumulation with CAFTA can be estimated. Therefore, FDI flows into the region can be linked with an increase in the amount of capital. With the GTAP model, this effect is assessed by including an additional scenario with a shock in the total tariff phase-out case by changing the closure rule to include capital accumulation and endogenous saving rates.33 In the GTAP setting trade costs are modelled using the “iceberg cost” approach. This implies that no specific international transportation sector is modelled, but instead, there is a mark-up between the effective price of goods and services between importers and exporters. This mark-up is lost (“melted”) and cannot by explained by tariffs or non-tariff barriers (NTBs), nor is it assigned to any region or institution.34 Hertel et al. (2001).


The high specialization in the manufacturing sector is a constant throughout all simulations, which in turn results in a reduction of agricultural output driven by the movement of productive factors to the production and exports of manufactures. If, in addition, sugar tariffs to the US were liberalized,35 then the welfare gains for CA could be higher and could balance the use of endowments between manufactures and agriculture.

In this dynamic simulation, of the total increase in welfare, capital accumulation associated with FDI growth represents two thirds of the gains from CAFTA. This significant addition to social welfare confirms the prior hypothesis that FDI could generate the most important global gains from the agreement. How to channel this investment to the agricultural sector remains a challenge.

The general conclusion from the CGE simulations is that CAFTA would create further competition from the US agricultural products in Central America, and a stronger reallocation of resources from the agricultural to the industrial sector. Traditional crops production would be significantly impacted, while non-traditional products exports would help to keep the agricultural trade balance with the US positive. A shown above, most of final outcomes would depend on the impact of complementary policies to help the potential “losers” to face higher competition and support a transition to new productive activities. In addition, improving the level of competitiveness of agriculture in the region is a necessary task to take advantage of new trade opportunities.

But a question that arises is if even with the implementation of modernization policies for the agricultural sector in Central America, the role of agriculture would still be determinant in the near future, with or without CAFTA, to improve the living conditions of the rural sector. The debate should focus not only on agriculture, but on the possibilities for the rural economy as a whole. Agriculture is an important activity in Central America, but has not been effective, for several political, historical and productive reasons, to reduce poverty in the region.

As stated by Pratt and Rivera (2003), rural poverty has increased in the region, but not as much as rural agricultural poverty. In the future, many resources and workers would necessarily be reallocated from agriculture to other productive sectors, a situation that seems to be unavoidable. One important issue is that agricultural producers will face the challenge of shifting to alternative rural activities, like ecotourism, environmental payments services, or sustainable forestry, to mention some. With or without CAFTA, the development of the rural economy and the creation of new opportunities to reduce poverty in Central America should not be expected mainly from agriculture modernization. Still, there are opportunities to improve the agricultural sector and create more wealth through production and trade. Organic production is a promising option within this scenario.

35 These results are not included. Available by request.

CAFTA Impact on Central America:Dynamic Effects with Total Tariff Phase-Out

TABLE 8


Model Scenarios

-9.6%

7.7%

TradeFacilitation

UnemploymentReduction

FDI andCapitalGrowth

CumulativeScenario

GDPEconomic WelfareHousehold Income

0.79%2.44%6.18%

2.15%1.00%2.39%

4.77%4.70%7.12%

15.15%8.16%8.83%

-1.9%

0.00

-1.94%

8.3%

19.9%

0.00

8.3%

8.3%9.8%

4.9%

6.2%10.2%

8.2%

0.5%11.9%

11.5%

-1.3%25.4%

Factors ofProduction PriceLand

Unskilled Labor

Skilled Labor

CapitalNatural Resources


�.� AGRICULTURE COMPETITIVENESS IN CENTRAL AMERICA: A LONG ROAD AHEAD

istorically, the competitiveness of agriculture in Central America has been based on its comparative

advantages in geographical location, climatic variety, and endowments of water, soil, and abundant labor. According to Pratt and Rivera (2003) the experiences of successful companies and countries indicate that a greater agricultural competitiveness depends on at least four basic aspects: i) a more-efficient market functioning; ii) an active support policy for the sector in the short, medium and long terms that promotes product quality and greater value-added for its transformation and exports; iii) large-scale public and private investments in research and development, specialized infrastructure, education, market intelligence and international commercialization; and iv) the creation of world-class agribusiness clusters that allow the development of new and specialized products and services to support competitiveness.

Modern agriculture is an international business. The Central American countries are price- and rules-takers, since their influence on world markets is marginal. The region does not hold market power to be able to change neither global policies nor international agricultural business, both of which are becoming more concentrated among a small group of countries and multinational companies. In addition, there are important barriers in agricultural trade, and high interventionism in the most-developed nations of the world.

The central problem remains at the local level, because of the low levels of competitiveness of Central America’s agriculture. The real, long-term exit to agricultural problems depends on the reorientation of public policies, business strategies, and interrelations between the private, public, civil and multilateral sectors, given that the region has been left behind by the great advances experienced in modern agro-industrial systems worldwide.

Contrary to global tendencies to implement policies and national strategies to create value and develop more-competitive agricultural chains, governmental support for the agricultural sector in Central America stagnated in the

5. POTENTIAL IMPACTS OF CAFTA FOR ORGANIC AGRICULTURE IN CENTRAL AMERICA: THE CHALLENGE REMAINS THE SAME

last decade. The Central American countries have paid little attention to agriculture precisely during the years in which developed countries have intensified their investments in infrastructure, technological development, human capital creation, quality certification systems, environmental technologies, agricultural extension and, in general, clearly-established sector competitiveness policies.

Since agricultural activities are the basis of well-being and development for a large quantity of Central Americans, the impediments and problems that act as obstacles to the sector’s growth should be corrected, and there should be further efforts to contribute to a productive transition towards a greater diversification of the rural economy. Rural and agricultural policy formulation should consider the heterogeneity of the actors who form the sector, and be linked to the great challenges of competitiveness, sustainability and the fight against poverty.

What type of agricultural sector should be promoted? One that is efficient and competitive at international prices, based on companies´ capabilities, with their technical, social and environmental attributes, and in the conditions created by a competitive business climate. Additionally, the use of support instruments that have been successful on a world level, based on the provision of knowledge, infrastructure, the transfer of technology and trade intelligence, should be promoted.

After CAFTA, the Central American countries should redouble their efforts to continue promoting agricultural competitiveness policies that take advantage of existing comparative advantages, and further advance the creation of competitive advantages based on productivity, product differentiations and high value-added, to create more and better jobs, and new opportunities for Central America’s development. Within this scenario, organic agriculture would have a better environment to develop and position competitively in the US and other international markets. Or seen from another perspective, it is not likely that Central America will experience great success in organic exports in a region that is not competitive in agriculture in general – the changes that make conventional agriculture successful are a necessary (but not sufficient) condition for organic agriculture to be successful.

H


�.� THE ORGANIC AGRICULTURAL SECTOR IN CENTRAL AMERICA

The Organic agricultural production in Central America is driven by thousands of small farmers, organized in cooperatives and associations. Many producers sell their products through intermediaries and foreign buyers that process and export the agricultural organic goods. It is estimated that, on average, organic farms have an extension of 5 hectares. Currently, more than 79,000 hectares of land in the region are organic certified. The main characteristics of Central American organic markets, from the supply perspective, are:,36

● Most production is export oriented, although local and regional markets are increasing.

● Coffee is the most important product, followed by fruits and seeds.

● There is a high concentration on fresh products, with low levels of value added through processing.

● Produced volumes are low, with the exception of coffee and bananas.

● Organic animal and diary products market are not well developed, although organic meat has gained relevance in Nicaragua.

● Some personal care and processed food products are sold as “organic” without proper certifications.

Organic farms in Central America can be categorized in five groups: i) highly diversified farms with almost no use of synthetic inputs (i.e. coffee farms), ii) farms historically managed with indigenous sustainable practices, currently certified (i.e. raspberries), iii) organic transformed farms, iv) very small farms (less than one hectare) operated without chemicals due to budgetary restrictions, and v) conventional farms in transition to organic certification. Currently, the main incentive to transform conventional practices into organic agriculture practices has been the emerging market opportunities. On the other hand, many producers have seen organic production as an alternative to traditional sectors crisis, like the decreasing international prices of coffee.

Although definitive information is not available, the distribution of organic farms in Central America appears uneven. Data from different sources reported by CIMS (2005a) indicate that most farms locate in Nicaragua and Costa Rica. Honduras and El Salvador are next on farm distribution. In terms of average size, Nicaraguan farms are larger, while Honduran producers have the smallest average pieces of land dedicated to organic agriculture in the region (Table 9).

TABLE 9

Country % of TotalArea

Number of Farms

Costa Rica

El Salvador

Honduras

Nicaragua

Organic CertifiedArea (Ha)

13,967

7,500

5,897

54,271

3,987

1,000

3,000

5,977

3.11

0.47

0.16

0.90

Organic Production Area and Number of Firms by Country

Source: CIMS (2005a)

Large amounts of small organic farmers suggest a more fairly distribution of business gains among producers. However, it is also worth to notice the important presence foreign owners, many of them successful businessmen, well positioned in export markets. In addition, retailing companies, supermarkets and other intermediaries obtain a significant share of the organic market returns in Central America. A study of value creation through the distribution and trading chains of organic products is not available at the moment. But it is fair to say that potential gains for small farmers from growing markets would depend on land ownership, business capabilities, and financial resources availability.

If the organic business is expected to become an important source of income for small farmers, which could lead to a more equitable distribution of gains generated from agricultural business in Central America, then a stronger integration with the value chain is necessary. Support policies should focus the small farmer needs from a business growth perspective, and not only from a development aid approach. Technical support, infrastructure building, financial resources, and certification are major intervention areas.

In terms of area harvested, coffee is the most important organic crop in Central America, followed by fresh fruits and nuts. Recently, Nicaraguan producers have allocated a very

36 CIMS (2005b).


Distribution of Certified OrganicArea in Central America by Product

FIGURE �

Source: CIMS (2005a)

25%

8%

5%4% 1%

57%

Meat

Coffee

Fresh Fruits

Oilseeds, nutsderivativesCocoa and CocoaProductsSugar and SugarProducts

significant area to sustainable managed cattle and organic meat production. Taken into account the average small area dedicated to agricultural crops, meat appears as the most important product in the region from a certified area perspective (Figure 4).

Studies conducted by the Sustainable Markets Intelligence Center (CIMS) indicate that these particular features characterize Central American production of organic agricultural goods:,37

● Main products have been produced in the region historically. Organic production is based on traditional knowledge, commercialization channels and technologies.

● Processing of agricultural goods is limited. Besides toasted and milled coffee, oils and some processed fruits and vegetables, the value added of the regional supply is relatively low.

● Organic farms are small. In addition, they are geographically dispersed and located in rural areas with limited infrastructure and logistics problems. This reduces the ability to organize, cooperate and share learning.

● Most small farmers lack financial resources and entrepreneurship skills. Market knowledge is limited. Local producers have been less competitive and business oriented than foreign farmers.

● Technical, financial, and market limitations are general obstacles for business development.

● Organic production is not highly technified or planned. Productivity levels are lower than international standards.

It can be noted that these characteristics are present in traditional agriculture as well. Pratt and Rivera (2003) describe the same features for the Central American agricultural production as a whole. In this sense, it is important to consider that organic production and certification, notwithstanding its relevance and positive impact for market positioning and higher returns, are not substitutes for good agricultural practices, high productivity, quality market standards, significant volumes, and business development through primary products processing and value adding. The potential of organic agriculture in the region can be overstated if this reality is not acknowledged.

Data on organic agriculture exports is not available. Still, rough estimates suggest that 70 percent of total production from Central America is exported. About 50 percent of exports are sold in the US markets. Interestingly, these estimated figures are consistent with traditional and non-traditional agricultural production export dynamics. Central America exports more than 50 percent of its total exports to the US, and more than 60 percent of its agricultural products to the US. In this sense, the US market could gain more presence for organic agriculture with CAFTA, considering recent export tendencies.

On the other hand, organic agricultural imports are important in Central American markets. In all countries there is a wide variety of products, especially processed goods with higher added value, good quality, and clear certification standards. Contrary to Central American products, imports appear to be more competitive in terms of quality attributes and product diversification, especially through the growing supermarket chains. Still, Central American exports have been increasing and gaining a better positioning in the US and European markets.

There is no statistical hard data for organic food sales in Central America. Available information is based on rough estimates. Still, CIMS has elaborated the first directory of organic producers in the region and a study of market and distribution channels. The sample of companies and organizations analyzed, involved in the organic business of Central America, is highly representative, and offers valuable insights on the current situation of organic agricultural markets (Table 10).

The highest number of surveyed organic farms is located in Costa Rica. The country’s supply is the largest of Central America, in terms of product variety and certified hectares. The volume of production is the highest in the region, with an even distribution of fresh and processed goods. Relevant products include coffee, essential oils, oranges, grains, pineapple, marmalade, onions, carrots and bananas (particularly puree).

37 More information can be found in www.cims-la.com/EN/ecomercados


El Salvador produces and exports a wide variety of agricultural goods, plus an important volume of textiles and cosmetics. Honduras exports organic coffee, sugar, fresh and processed fruits, oil seeds, nuts, cocoa, and wine. Nicaraguan companies have the highest share of processed organic goods, with higher added value. Besides agricultural goods, organic textiles have gained importance for Nicaragua’s trade.

Currently, the US market is the main destination of Nicaraguan and Honduran organic agricultural exports. On the other hand, Europe is the main destination of Costa Rican products. Surprisingly, El Salvador’s local market is

the most important for organic production. Other international markets for Central American products are still incipient.

Many certification schemes are present in the region’s organic business. The US NOP and Europe’s EC 2092/91 are the leading organic certifications. BCS Oko-Garantie, Eco-Lógica and Biolatina are the major certification bodies. A positive signal is the evolution of certification practices in the region. Currently, there are products being marketed as organic without a proper certification, a weakness that could create a bad image for the sector as a whole. This situation must be corrected.

TABLE �0

Surveyed Organic Agriculture Producers in Central America

COUNTRYCOVERAGE OF

PRODUCTCERTIFICATIONS**

Coffee, sugar,fresh andprocessed fruit,fresh andprocessedvegetables, oils,roots and tubers,grains, cocoa,spices, healthplants, flowers

US NOP 56%

EC 2092/91 35%

JAS 6%

OTHER ORGANIC 31%

Fair Trade (FLO) 12%

OTHER 16%

US NOP 94%

EC 2092/91 73%

JAS 53%

OTHER ORGANIC 12%

Fair Trade (FLO) 6%

US NOP 71%

EC 2092/91 65%

JAS 27% OTHERORGANIC 20%


OTHER 4%

US NOP 97%

EC 2092/91 90%

JAS 68%


34,134

13,799

10,376

14,511

28%

66%

4%

19%

18%

16%

56%

40%

50%

9%

40%

34%

3%

9%

n.a.

7%

149

Fresh 46%

Processed54%

18.5

Fresh 64%

Processed36%

Textiles12,000 units

Cosmetics72,000 units

27.8

Fresh 53%

Processed47%

Wine 7000L

17.4

Fresh 6%

Processed 94%

Textiles122,000 units

NUMBER OFFIRMS/

ASSOCIATIONS*

NUMBER OFPRODUCTS

MAIN PRODUCTCATEGORIES CERTIFIED

HECTARES

TOTALPRODUCTION

´000MT

MAIN MARKETS (Volume MT)

COSTA RICA 119 84

EL SALVADOR 32 28

HONDURAS 35 23

NICARAGUA 57 25

Coffee, textiles,cocoa, fresh andprocessed fruit, oilseeds, spices,health plants,nuts, cosmetics

Coffee, sugar,fresh andprocessed fruit, oilseeds, nuts,cocoa

Coffee, fresh andprocessed fruit,fresh vegetables,meat, vegetableoils, oil seeds andnuts, grains,cocoa, spices,health plants,flowers, textiles,honey

*Many companies and producers are grouped in associations or cooperatives. This figure is the result of a field work that identified a significant sample of companies, associationsand cooperatives in Central America.

**Frequency by product. Some companies have more than one certification.

Source: Own elaboration with information from "Directorio Centroamericano de Productores y Exportadores de Productos Certificados Orgánicos y Fair Trade." CIMS, ProyectoEcomercados, 2005

LOCAL US EUROPE ROW


5.3 THE ORGANIC AGRICULTURE MARKET IN THE UNITED STATES

According to CIMS (2005a), the markets for organic and Fairtrade products have increased significantly worldwide in recent years, with North America as one of the leading markets internationally. Although most of the demand and production is found in the industrialized countries, an increasing demand for products from developing countries can also be observed. Market analysts estimate that this demand growth presents an opportunity for poor farmers in developing countries and bears potential for a more equitable and sustainable development. Markets for organic products have been growing with annual rates above 10 percent.

Hartman and Wright (1999) indicate that the demand for organic food is driven by factors like an increased interest in healthy eating, indulging in food experimentation, an increased interest in food traceability, an aversion to pesticides, antibiotics and other chemicals, and an overall desire to “return to basics.” In the US market, an important factor has been the standardization of organic food regulations under the National Organic Program (NOP), which has led to more transparency, increased consumer confidence and a nation-wide recognized seal for organic products. Currently, the United States is the most important market for organic products in the world, with estimated total sales value between US$11 and US$13 billion (CIMS, 2005a)

The organic food market in the US was growing more than 20 percent per year until 2001, slowed down to around 16 percent in 2002 and 2003, and to 12.5 percent in 2004. Still, organic food sales are growing much faster than the rest of food sectors (CIMS, 2005a). In the case of organic tropical fruits, the US is the world-leading importer. According to NBJ (2004), US demand for certified fruit will continue to grow at annual rates of 11 percent during the next five years.

The largest and most important market segment for organic goods in the US market corresponds to fruit and vegetables, since consumers have been especially concerned about chemical residues resulting from pesticide application and by freshness and health issues. The market share of fruits and vegetables accounts for nearly half of the organic food market, with around 42 percent. In addition, dairy products, bread and cereals, prepared food, and beverages account for 13, 9, 13 and 15 percent of US organic market respectively (CIMS, 2005a).

Notwithstanding its relative small market participation, meat and fish products are the fastest growing product category in the US organic market. Other categories with high growth rates are fruits and vegetables, snack foods, and dairy products. Currently, average market penetration of all product categories is below 2 percent. Still, organic fruits and vegetables reached nearly 5 percent in year 2003 (Table 11).

TABLE 11

Current and Estimated Organic Food Sales in the US Market

2001 2003 2010 2001 - 2003 2003 - 2010 Market

Penetration(2003)

Category Thousand US$ Annual Growth in %Dairy Products

Bread and grains

Beverages (incl. non-dairy)

Fruits and vegetables

Snack Food

Packaged/prepared foods

Sauces/condiments

Meat/fish/poultry

Total organic food sales

952

683

1,148

2,502

318

1,006

166

33

5,797

1,385

966

1,581

4,336

484

1,326

229

75

10,381

3,481

2,314

3,878

8,469

1,398

2,989

554

762

23,845

21%

19%

17%

32%

23%

15%

17%

51%

21%

14%

13%

14%

10%

16%

12%

13%

39%

13%

2.3%

1.4%

1.6%

4.5%

1.5%

2.2%

1.2%

0.1%

1.9%

Source: NBJ (2004)


Market growth estimations indicate that total organic food sales will more than double by year 2010. Above-average growth is expected for snack foods, beverages and dairy products, while organic fruits and vegetables sales will grow significantly. With CAFTA, all these product categories will have better access conditions, with no tariffs and clearer market rules and regulations.

�.� POSSIBLE IMPLICATIONS FOR ORGANIC AGRICULTURAL TRADE WITH THE UNITED STATES

Notwithstanding the strong presence of organic production support organizations in the region, organic agricultural products trade was not an issue within the process of CAFTA negotiations. Indeed, there is no evidence of any effort from lobbying groups, organic associations, or producer chambers, to include the topic in the agreement. The agricultural sector market access rules and the division between “general” and “sensitive” highly protected Central American products was the focus of CAFTA agricultural trade negotiators. The only exception is sugar. The United States established a quota for specialty (organic) sugar goods from Costa Rica in the amount of 2,000 metric tons annually.

The analysis developed so far offers general insights on possible effects from CAFTA for the agricultural sector of Central America as a whole, many of which are relevant for the organic agriculture of the region. There are however some special issues related to organic production that deserve further attention and analysis.

�.�.� Growth Markets

Organic agriculture production in Central America has increased in recent years. Organic exports to the US market have grown as well, and many companies are taking necessary measures to compete successfully and take advantage of CAFTA.38 Main organic exports currently enter the US market without tariffs (coffee, bananas, pineapple, among others). Still, CAFTA eliminates tariff barriers for processed food products with higher value-added. Tariff escalation will be reduced with the agreement, something that could benefit the production and export of processed agricultural organic goods.

CIMS (2005a) reports particular opportunities for tropical fruits like bananas, mango, and pineapple, and some margin for papaya. The US is the leading importer of these products. A mayor reason can be attributed to legislation. The National Organic Program (NOP) differs in several points from the

legislation of other countries. For instance, US legislation regarding tropical fruits production has permitted the use of ethylene for flowering purposes in organic pineapple production, while the EU has only recently decided to permit it. Another factor is the participation of Hispanic consumers, in particular their purchase of tropical and exotic fruits. According to NBJ (2004) the demand for organic fruits in the US will grow at annual rates of 11 percent in the next five years.

With CAFTA, agricultural import penetration into the region will increase, and the organic sector will certainly face more competition from abroad. The level of readiness and competitive strengths of regional producers is not clear, and deserves further research. Still, many companies are clear on the relevance of the agreement, and are planning to make adjustments in their business strategy.

For instance, a Salvadorian company that produces oilseeds and nuts and exported US$500,000 in 2004, is developing a new strategy to take advantage of the potential benefits of the agreement, including technology upgrading, new certifications, market intelligence, and joint ventures with other exporters. In words of the owner, “every change creates expectations and fears. Our challenge is to break paradigms and look for joint ventures to face this new scenario and move forward. Those not ready, will suffer from higher competition and lower prices.”39

Market growth tendencies in organic agricultural markets, particularly in the US, offer broader opportunities for Central American producers. However, significant efforts are needed in order to count with accurate information, market intelligence services, new niche and business developments, volume demands, logistics and trade channels, and in general, a “real” dimension of the organic market. There is a need to inform with more detail on the several implications for the organic business resulting from CAFTA, which are the same for the agricultural sector as a whole.

�.�.� Standards and Technology

Besides stronger competition and lower prices from US exporters, the need of more certifications and higher investments to comply with enhanced sanitary and phytosanitary standards are among the main concerns of Central American producers. Many expect very negative impacts for regional companies that could not compete due to higher costs. The president of a Nicaraguan association of producers with a relatively diversified supply (coffee, honey, roots) expressed his concern with this regard, but at the same time argued that “in order to face this new competition, there is a need to use new technologies and

39 Interview, August 2005.

38 This section presents primary information obtained through interviews with company managers and directors of organic associations in Central American countries. For confidentiality reasons, personal references are omitted.


make more market studies, to understand customer needs effectively.”40

However, it is also acknowledged that the agreement could be favourable, since it will make market rules clearer, eliminate US import tariffs and non-tariff barriers, and reduce the cost of doing business. Some companies believe they are not affected by the agreement at all, but they acknowledge the relevance of CAFTA for the region. In words of a Honduran exporter of fresh fruits, “CAFTA will have no impact on our business, but the consequences of not having such an agreement could be negative.”41 Others are evaluating the possibility of returning to the organic agriculture business, expecting new market opportunities after CAFTA. The manager of a Salvadorian company exporting traditional agricultural products to the US expressed that “CAFTA will create opportunities for new products. We hope to benefit from the positive side of the agreement. It moves us to improve our marketing and trading. We expect more support from financial organizations in order to improve our business and produce and export organic goods again.”42

The lack of clear information on the details and scope of CAFTA results, and the potential impacts for the organic agriculture business in Central America is generalized. Interestingly, many companies indicate that the agreement will have no impact at all, but at the same time ignore what CAFTA is all about (this inconsistency should be further studied). On the other hand, some others are concerned about their limited knowledge. The director of a Salvadorian cooperative of organic producers was straight: “We have no clear information; we just hear that the agreement will be very good for us, but so far, the Ministry of Agriculture and other responsible organizations have not called a meeting to see what is next. Still, we know that more investment will be needed, and probably more certifications.”43

Other companies are clear on their need to improve competitiveness, notwithstanding their potential advantages with the agreement. In words of the president of a Nicaraguan association with 2,500 beneficiaries, “CAFTA will force us to improve our standards and our quality. We are more concerned with non-tariff barriers like sanitary and phytosanitary standards in the US market. We need more capacity building activities and investments to comply with market regulations. The agreement is about tariffs phase-out, which is good, but the real issue is how to be more competitive, with higher standards and a better knowledge of what US consumers want.”44

Market information is necessary to export to the US, but more important is to invest on standards improvement and certification. The region lacks proper laboratories, infrastructure, technical skills, and financing. Organic certification has advanced significantly, but sanitary, phytosanitary, product contents, input tracking, nutrition details, and other market requirement information are far from international standards in Central America. This limitation is faced both by traditional and organic agriculture. This is a priority area for investment.

�.�.� Adjustments in the Sector to Meet Demand Trends

Although CAFTA would create new possibilities for organic agricultural business growth in Central America, it is important to take into account the relevance of other market forces that move and shape the US organic market. Consumer tastes, the awareness of environmental protection, health and fitness perceptions and needs, and even conspicuous tendencies towards “exclusive” organic goods, might be stronger determinants of market potential, rather than import tariffs.

A Costa Rican exporter was clear when arguing that “CAFTA, by itself, does not change things significantly. We will face more competition, yes, but so far we have been successful. Actually, we export more to the US, and will work harder to improve our business. The US organic market is huge and growing, so we have to pay more attention to product volumes and quality standards. If organic producers do not work together, things will be more difficult.

Certainly, consumer tastes are the main driver, and non-tariff barriers the main obstacle in the US market. With or without the agreement, we need to understand what makes difference in the market, and produce better goods. That is our challenge.”45

Adjustment and productive restructuring initiatives for the agricultural sector in Central America are scarce. Lack of financial, technological and infrastructure resources impose an important obstacle to the modernization and competitiveness improvement of agriculture. Innovative and effective mechanisms to enhance and project the Region’s natural comparative advantages are urgent. New market tendencies towards social and environmentally sound commodities like organic certified products represent an opportunity for Central American countries.

Regarding the organic markets development potential, an important question arises: Would price premiums, market niche positioning and market share growth in new organic

45 Interview, September 2005.

39 Interview, August 2005. 40 Interview, July 2005.41 Interview, August 2005.42 Interview, July 2005.43 Interview, September 2005.44 Interview, September 2005.


certified agricultural products markets compensate for the additional investments and restructuring costs associated to the shift from traditional to organic production? This is a key point, since business success and a competitive trade performance are requirements to build a sound background for organic agricultural activities and a growing market.

Many companies in the region have started and kept their business as a result of non- governmental organizations’ support and development cooperation. Without the related subsidies and technical cooperation grants, it is not clear whether many Central American organic producers would be capable of facing stronger competition and new market challenges. Still, organic agriculture has developed significantly in recent years. More entrepreneurship initiatives and competitive strategies should emerge from CAFTA.

A central point is the need for improvement of the standards of production. This is a necessary condition for entering the US agricultural market successfully. Organic producers must be aware of the consequences of not complying with health, safety, quality, bioterrorism and other standards. There might be significant adjustment costs for organic agricultural exporters to improve their standards, besides the investments and costs associated to organic production and certification. The potential impact on market access restrictions could be even permanent and very costly.46 With CAFTA, many organic producers will face stronger standard demands when exporting to the US. In words of a Salvadorian loroco (traditional spice) exporter “when I started exporting loroco to the US everything was going well, but then something happened with a regulation related to the new bioterrorism law. It took me some months to comply with that regulation. Only after doing it could I continue exporting.”47 Some years ago, the “Organic Lifestyle Shopper Study 2000,” conducted by the Hartman Group market research firm, reported that the top five motivators for organic food and beverage purchases were: health/nutrition, 66 percent (most organic users consider that organic products are contributors to their overall health, rather than associating organic products with any specific health benefit); taste, 38 percent; food safety, 30 percent (organic consumers are concerned about food safety); environment concerns,

26 percent; and availability, 16 percent.48 CIMS (2005a) documents similar demand factors relevance today.

But the real driving factors for consumption of organic food products are health reasons and concerns over what people are eating, rather than for traditional philosophical approaches. In addition, beyond the specific organic drivers, mainstream influences are of importance to achieve higher market shares. Convenience, for example, is such a significant driver in consumer products that its impact on food, organic or traditional, should not be overlooked. In fact, some convenience stores, such as 7-Eleven, are now offering organic snacks and plan to increase the number of items. Healthy eating, low-carbonates diets, among others, have all shifted trends in the overall food industry; the organic market will also feel some effect (CIMS, 2005a). Adding value with the production of processed consumer-oriented organic goods with better positioning in value chains is a necessary step to follow.

Traditional low value added agricultural products have composed the Central American export supply for decades. This has been the case even with the development of non traditional exports in the last decade. There has been a shift from raw non-processed coffee, bananas and meat exports, to fresh non-processed pineapples, melons, palm kernels and other vegetables. This market “restructuring” has been positive. Today the agricultural export supply of Central America is more diverse and less vulnerable. However, traditional and non-traditional agricultural commodity markets react fundamentally to international price trends. For example, Mexico’s melons and Ecuador’s palm kernels are today more competitive than these Central American former “star” products. Colombia’s stronger competition in the world flowers and foliage market with Costa Rica is today also widely acknowledged.

CAFTA will increase competition and demand higher standards. A record of organic certification promotion and sustainable agricultural production development in Central America has advantages within this scenario. However, market tendencies will not accept sustainable and organic practices as a substitute of quality, consumer convenience and reliability. The main issue is then productivity improvement and competitive positioning.

�.�.� Processing and Value Added

With CAFTA, organic agriculture competition will depend more on processing and value adding, and value chain positioning. The organic food industry is today more complex and integrated. Similar to traditional agricultural markets, the probability of sustained business growth and successful market penetration will be based on a sound integration with

48 The Hartman Group (2000).

46 For example, in July 1996, the US Center for Disease Control and Prevention declared Guatemalan raspberries as the likely source of some illnesses. In 1997, Guatemalan raspberry exporters temporarily suspended exports to the United States, resulting in an estimated income loss of US$10 million to Guatemalan producers and workers. The US Government issued an import alert for Guatemalan raspberries for the spring 1998 season, but opened its doors in 1999 to Guatemalan raspberries from approved farms using a new food safety program. Prior to 1996, Guatemala was a major player in raspberry exports to the United States. Although the problem was resolved in 1999 to the satisfaction of the US Food and Drug Administration (FDA), the demand for Guatemalan raspberries was only restored to about one-third of the pre-outbreak levels. The trade restrictions coupled with the time needed to implement the complex system of production controls gave other countries, particularly Mexico, the opportunity to take over much of Guatemala’s role as a raspberry supplier. In 1999, only six Guatemalan raspberry farms remained in business, down from the 1996 estimate of 85 farms (Buzby, 2001). Today, stricter controls are imposed on Guatemalan raspberries exports to the US, although the originating situation was a decade ago.47 Interview, September 2005.


the value chain. If Central American producers and exporters compete based only on the comparative advantages of the region, and with prices for organic commodities, the future growth of the regional organic market could be limited, and CAFTA opportunities mishandled.

US imported organic food products pass a series of steps through the value chain until reaching the final consumer. Importers, wholesalers, processors, specialized distributors, retailers, and many actors participate. There is strong market concentration of a few companies, while brokers help small and medium producers to overcome this bottleneck and to gain regional or even national distribution.

CIMS (2005a) estimates that in year 2002 the US organic value chain created a value of US$8.5 billion. Farmers obtained 25 percent of this amount. This information is only about the US market. Estimations about the participation of different actors of the international value chain, from Central American farmers to final US consumers are not available.

However, the figure in case of Central American farmers might be significantly lower than in the US. For example, Figueroa and Umaña (2002) made an exercise to estimate the coffee export value chain from Costa Rica to the US final consumer. The authors estimated that a US$100 green coffee bag, at farm gate, generates a US$10,000 value in a coffee shop like Starbuck’s, through the international value chain. This illustrates how Central American agricultural exporters, with some exceptions, are part of the weakest link of the chain. In the case of organic exporters, the situation might be similar. CIMS´ research presents relevant evidence on this issue (CIMS, 2005a, 2005b, 2005c).

These figures result from important changes in trade channels, supply structure, demand characteristics, product quality standards. For a long time in previous decades, organic commodities were sold mainly in natural food stores, in farmers markets or even directly on the farm. This has changed over the last years. With processing and value adding, the organic markets has turned into a higher value activity, with stricter demands in terms of market knowledge, consumer taste analysis, and demand satisfaction.

Today, Central American organic agriculture producers must be capable to meet the same quality requirements as traditional agricultural goods, in order to compete in bigger markets. In addition, large volumes of organic goods demand are the norm in the US. These market characteristics pose great challenges for small and medium producers. To fulfill market demands, new strategies and cooperation mechanisms among producers, cooperatives and other organizations are necessary.

Taking advantage of processed products exports with lower tariff escalation in the US markets is an important action to

pursue, not only because of new market access conditions, but to create more growth through value adding, and enhance income generation and distribution for Central American organic producers. Without further processing, organic products from Central America would face the “commodity syndrome” experienced by traditional agriculture, with lower prices and income generation.

�.�.� Environmental Rules in Conventional Markets

Another issue related to organic business development is the potential impact of CAFTA for the environment. The main expectations are linked to the agreement’s Chapter XVII and the recently created CAFTA Environmental Committee. So far, the details and scope of environmental cooperation between the US and Central America under the agreement’s umbrella, are not well established. In addition, many Central American companies are still not well informed on the scope and possible impact of environmental regulations under CAFTA.

One of the main features of the environmental negotiations is that the “Parties must ensure that their national laws provide high levels of environmental protection and strive not to weaken or reduce its environmental laws to encourage trade with or investment from another Party.” Chapter XVII recognizes the right of each Party to: (1) establish its own environmental laws; (2) exercise discretion in regulatory, prosecutorial, and compliance matters; and (3) allocate enforcement resources in a bona fide manner.49

The effects of agriculture on the environment have become an important consideration in designing new agricultural and environmental measures, modifying existing agricultural support programs and evaluating projects in the agricultural sector of industrialized countries.

Agriculture is being increasingly influenced by regulations governing water quality, pesticides, waste disposal, food quality and safety, and animal welfare. These regulations, together with rapid developments in technology, structural changes in the sector and farming practices, as well as the evolution of consumer demands for organically produced food, are increasingly influencing a better environmental performance in agriculture.50

In contrast, the situation with respect to the improvement of agriculture activities in Central America seems to be a slower process, particularly because of technological, scientific and institutional obstacles. How this situation could change will depend significantly on forces that are reshaping the agricultural goods markets, and on the incentives created

49 USTR (2005).50 CIMS (2004).


by environmental considerations in trade agreements like CAFTA.

Chapter XVII includes commitments to enhance cooperation between the Parties in environmental matters and encourages the Parties to develop voluntary, market-based mechanisms as one means for achieving and sustaining high levels of environmental protection. In this sense, the agreement offers new opportunities to enhance organic markets through cooperation projects, market intelligence support, technical support and capacity building activities.

Moreover, as stated by Pratt and Rivera (2005), CAFTA represents an important challenge to the traditional attitude from many companies and public organizations in Central America, to ignore the linkages between trade and environmental performance. The environmental provisions of the agreement would help to enhance the enforcement of the law, and at the same time create new mechanisms to drive sound environmental management practices in Central American firms. Organic production would benefit from this result, as far as the necessary policies and strategies are implemented to support the sector development.

�.�.6 Promising Products

At this moment, it is not possible to make robust estimations of possible impacts of CAFTA on specific organic products from Central America. The general equilibrium analysis offers aggregated and sectoral insights, while the previous discussion sets the scope for further discussion and micro studies. All this information is valuable and should be used as basis for future studies. In addition, the geographical identification of “winners” and “losers” is a difficult task that goes beyond the scope of the present study. A microeconomic evaluation of organic agriculture firms is required, with a profile of organization capabilities, strategy development and productivity, quality standards, production volumes and value, employment, company ownership and other variables, and more importantly, historical information, all of which is not available presently. Organic associations and regional support agencies should redouble efforts to build a census of companies, with detailed information about production value and volume, employment, productivity, input use, technology profile, market knowledge, competitive strengths, exports value and volume, and general planning. With this information, a more detailed and reliable analysis of products could be developed.

Still, CIMS has identified some products with high potential in the US market.51 All of them are produced in Central America, and many are currently exported to the US and European markets. In this sense, there are opportunities for Central American producers to consolidate their positioning

in the US market through CAFTA. A sample of promising products is described next.

Pineapple. The US is the main importer of pineapple of the world. Organic pineapples have entered the US market since the end of 90s. The market has developed slowly, mainly because of an inconsistent supply. Still, in 2004 more than 3,000 tons were imported from Hawai (33 percent), Dominican Republic (36 percent) and Costa Rica (31 percent). Price premiums are important, notwithstanding recent increases in production. Certification is the main driver of higher prices. Pineapple exports from Central America enter the US market duty free under the CBTPA. CAFTA will make this preferential treatment permanent.

Currently, there is an increasing and not fully satisfied demand for organic pineapple in the US market. In addition, US production has decreased in recent years. This reality offers new opportunities for Central American producers. Geographical closeness, relative high products quality and competitive prices, plus excellent climate and soil conditions, are key advantages that should be exploited. Another positive feature is the level of technology. Multinational companies have made significant investments to improve technology and labor skills, especially in Costa Rica and Honduras. Taking advantage of these improvements and absorbing the knowledge and productive techniques for smaller local producers would create stronger capabilities in the sector.

Cacao. The US market for cacao and cacao products is one of the most important in the world. Data for organic cocoa trade are scarce. Still, some estimations indicate that the US market grew up by 10 percent to 15 percent between years 2000 and 2003. Other signals suggest a promising future for cacao. World inventories are still small, prices are relatively high and the production of organic goods containing cacao is increasing significantly. Conventional cacao prices have recovered from the year 2000 slowdown. Still, price premiums for organic cacao remain attractive, between US$150 and US$200 per ton. Cacao grains and most cacao products enter the US market duty free under the CBTPA. CAFTA will make this preferential treatment permanent and eliminate tariffs on processed products.

Within these tendencies, there are opportunities for Central American cacao producers. However, a main obstacle that must be overcome is the lack of certified processors in the region. Practically all regional cacao production is sent to Europe for processing and then re-exported to the US. In addition, the quality demanded by consumers is very high. Cacao grains exports to the US also face significant sanitary requirements that must be fulfilled. More information and clear market possibilities should be evaluated in order to make assess the real potential and the necessary investments to enter the processing and exporting business.51 See CIMS product QuickScans developed for Ecomercados.


Mango. The US market for mango is growing. Mexico is the most important supplier (63 percent of US imports), followed by Peru (11%), Brazil (10%) and Ecuador (9%). There are no definitive figures on the organic mango market in the US. CIMS’ research and producer surveys indicate that Latin American countries exported 2,500 tons in year 2003. Main suppliers were Mexico (90%) and Ecuador (10%). The organic mango niche represents 1 percent of total mango market in the US. Mangos enter the US market duty free under the CBTPA. CAFTA will make this preferential treatment permanent.

Buyers’ trust is fundamental for organic mango business. Central American producers have an opportunity to export and obtain good prices out of the Mexican season, as far as high quality and buyers’ demands and timing are satisfied. To export during the Mexican season, superb quality standards and world-class logistics are a must. In general, mango exports to the US face significant sanitary, packaging, and pest control requirements that must be fulfilled. Mango is a promising product, but demands important efforts to achieve higher competitiveness.

Avocado. CIMS estimates that the US market for organic avocado reached 23,000 tons in year 2004, with more than 13,000 tons imported mainly from Mexico. Latin American production is estimated in 40,000 tons, from which 50 percent is exported. Avocado exports from Central America enter the US market duty free. However, Central American fresh avocado can not enter the US market due to phytosanitary prohibitions, mainly related to pest control requirements. Under CAFTA, this situation should be reviewed by regional authorities. The agreement could open new options to negotiate the elimination of this non-tariff barrier. In addition, regional producers could process the fruit and produce avocado preparations. The significant import penetration from Mexico suggests, however, that productivity standards are not competitive.

Nuts. The consumption of nuts in the US has increased significantly in recent years. The US market for organic nuts grew by 12 percent in year 2003 (230 tons), and 10 percent in 2004. However, the niche is still small, compared to other organic products (about US$10 million in 2002). Central American countries export traditional and organic nuts to the US (coconuts, macadamia, maranon seed). The main competitors are Brazil, India and Vietnam. The regional producers would have more potential to increase production and exports after CAFTA. There are opportunities to produce a wider variety of nuts and export them mixed. Nuts from Central America will enter the US market duty free under CAFTA.

The potential offered by these products is positive, but not granted. Other products should be evaluated as well, with more detailed information from sectors and firms profiles.

The evidence so far indicates that CAFTA demands more research and evaluations, and a deeper understanding of its possible impacts. The task, however, is not additional to the necessary understanding of US markets for organic agricultural products, and the real Central American productive capabilities.

�.� LESSONS LEARNED FROM NAFTA

Assessing Mexico’s experience with the North American Free Trade Agreement (NAFTA) is an illustrative exercise to estimate possible outcomes for Central America with CAFTA. Indeed, many studies have focused on NAFTA to evaluate CAFTA´s expected impacts on the region.52 Both agreements share a number of common characteristics, like comprehensive tariff reductions, a broad spectrum of sectors, provisions for dispute settlement mechanisms, and investment protection regulations.

However, it must be noted that Mexico and Central American countries differ in many respects. Kose et al (2005) indicate that isolating the effects of NAFTA on Mexico is complicated given other significant external and policy shocks that have occurred over the past decade. Mexico differs from the Central American countries in that it shares a common border with the United States, has a larger and more diverse economy, and higher per capita GDP than all Central American countries except Costa Rica. Moreover, there have been some differences in the evolution of US trade relations with Mexico and with the Central American countries.53 Still, Mexico’s experience with NAFTA provides some insights to evaluate potential implications of CAFTA for the agricultural sector of Central America.

In 1994 the North American Free Trade Agreement (NAFTA) between Canada, the United States and Mexico came into force. Since then, trade of agricultural products between the US and Mexico has shown a growing trend. An interesting aspect is that the growth rate of US exports to Mexico and US imports from Mexico has been similar (Figure 5).

With respect to the major categories of exported products from Mexico to the US, vegetables are by far the leading product group, with a share of nearly 30 percent of all exported products. The second leading group is beverages, with an export share of 22 percent, followed by the product category fruits and nuts, with an export share of 14 percent. Live animals, fish and crustaceans, and processed fruits and vegetables gained an export market participation of around 5 percent. All these leading product groups experienced

52 See Lederman, Maloney and Serven (2004), World Bank (2005), Todd, Winters and Arias (2004).53 For example, the Central American countries have developed strong trade relations with the United States through their preferential access to the US market under the CBI since 1983. Before the advent of NAFTA, roughly 50 percent of Mexico’s exports to the United States were duty free, whereas 80 percent of exports from Central America had duty-free access to the US market in 2003 (Kose et al, 2005).


a continuous growth, not only in export values, but also in production volumes (Figure 6).

On the other hand, major export product categories from the US to Mexico have been cereals (staple crops) with

FIGURE 5

Agricultural Trade between Mexico and the United States

US Imports from Mexico US Imports to Mexico


Billio

n US

$

FIGURE 6

Main Agricultural Exports from Mexico to the United States

Billio

n US

$


Vegetable and Fruit Preparation

Fish, Crustaceans

Live Animals

Fruits & Nuts

Beverages

Fresh Vegetables


an export share of 23 percent in 2004, followed by meat and oil seeds with 16 and 13 percent respectively. It is also significant that the export of cereals did not experience a strong growth as expected. Mexico has a steady production of this sector. Additionally, Todd et al. (2004) show that there is no evidence that domestic production of agricultural goods, which compete with US imports, has declined after NAFTA, with the exception of soybeans and wheat.

Regarding organic and sustainable agricultural production, there are many areas that have been successfully producing crops, which can be marketed as organic, sustainable, or capable to meet other niche market demands (Todd et al, 2004). Gómez and Gómez (2004) indicate that organic agriculture in Mexico has been a very dynamic sector in the last years. Area harvested grew on average 45 percent between 1996 and 2002. Currently, the country is ranked #18 in terms of organic area harvest and as #1 organic coffee producer worldwide. Among the most important products are corn, papaya, mango, herbs and fresh vegetables. In 2004, 45.26 percent of farms produced coffee, 29.56 percent fruits, 12.77 percent avocado, 6.57 percent vegetables, and 5.66 percent grains. More than 98 percent of total supply is produced by small farmers. Mexico exports more than 85 percent of its organic production, accounting for US$281 million in 2002 (Table 12).

FIRA (2003) indicates that organic agriculture in Mexico has been a successful answer to natural resources degradation and a profitable alternative to traditional crops producers. On average, Mexican organic products receive between 20 and 40 percent price premiums in international markets. The organic agriculture business started to grow in Oaxaca and Chiapas, as a result of development organizations initiatives and NGOs projects. The crisis of traditional crops in the 90s made farmers more willing to shift to organic production. Recently, the productive activities have gained more dynamism, and self-sustainability.

The United States are the main destination of Mexican organic agricultural products. Mexico exports coffee, bananas, seeds, vegetables, avocado, pineapples, and spices to the US market. There is no evidence on a direct causality between NAFTA and the growth of organic trade from Mexico. However, Gómez and Gómez (2004) argue that organic production in Northern Mexico was heavily influenced and supported by US trading companies and wholesalers. These companies provided capital and financing for organic farms, to improve quality, increase volumes and shorten delivery times.

In general, small organic farmers in Mexico have taken advantage of these opportunities and other new market tendencies to position themselves competitively. Gómez and Gómez (2004) indicate that organic producer organizations have developed a strategy to compete successfully in export markets, based on: i) high quality and important production volumes to satisfy increasing demands; ii) an internal control system for certification (with groups of farmers); iii) total quality management; iv) strategic planning and social commitment; v) technical groups for business development.

In summary, it can be argued that NAFTA led to a significant increase in the trade of agricultural products between the US and Mexico. Mexico has increased its exports to the US more than its imports from that country. The organic production has been growing steadily, as well as Mexican exports to the US. The main lesson from Mexican organic agriculture development for Central America is that there is no other way to produce and compete successfully than working to improve competitiveness and promote business growth.

Repeatedly, the “negative effects” of NAFTA on Mexican agriculture and poverty rates are often cited as a clear “example” of how CAFTA would impoverish the Central

Organic Agriculture in Mexico, 1996-2002

Area harvested (Ha)

Number of producers

Production Value(Thousand US$)

Source: Gómez and Gómez (2004)

TABLE ��


American countries. But contrary to this position, several studies have shown that NAFTA was actually positive for the Mexican farmers. Taylor et al (1999) conclude that although aggregate models predicted that Mexico’s agricultural price liberalization would sharply reduce rural employment and incomes and stimulate migration, these outcomes do not appear to have materialized. The decline in staple production has been relatively small, and it has been concentrated on large commercial farms rather than in the small-farm sector in which more producers are found and from which most migrants to the US originate.

On the other hand, Burfisher et al (2002) found that Mexico gained from NAFTA when domestic distortions in agriculture were removed, because of allocative efficiency gains large enough to offset the terms of trade losses that arised because of Mexico’s higher initial tariffs than its NAFTA partners. Nicita (2004) found that trade liberalization that occurred between 1989 and 2000 in Mexico had the direct

effect of reducing extreme poverty by about 3 percent, therefore lifting approximately 3 million individuals out of poverty. However, NAFTA tended to increase inequality within the country, between Southern and Northern states, urban and rural, and skilled and unskilled workers.

One of the main reasons why people in the southern part of Mexico could not participate in the creation of wealth has been the lack of adequate infrastructure, education, and institutions necessary to capitalize potential gains from NAFTA.54 The evidence suggests that NAFTA was “not enough” to develop the Mexican rural sector and enhance agricultural competitiveness. Therefore, one of the main lessons for Central America is that complementary policies are necessary to take full advantage of CAFTA opportunities, and at the same time create the conditions for a more sustained growth of the rural economy.

54 Lederman, Maloney and Serven (2004)


6. CONCLUSIONS

rom the point of view of the US, CAFTA represents insignificant overall changes. On the other hand, for the five Central American economies, CAFTA represents a series of opportunities that can be exploited, but also a series of critical challenges. Model estimations and regional data analysis indicate that given the importance of US trade and investments for Central America, in addition to the huge size differences between both regions, the agreement could generate significant sector and economy-wide effects. Without complementary policies (i.e. improved infrastructure, competitiveness support programs, and technological development) this trade agreement could not have positive impacts on agricultural production and trade.

Still, CAFTA will bring about some changes favourable to the Central American agricultural sector in general. Since CAFTA makes permanent existing market access rules, there are not likely to be any significant changes via the opening of new product sectors. The most important effect of the agreement is likely to be “stability.” The rules for trade between Central America and the US will be known and permanent. This makes long-term planning possible, and improves the prospects for investment in both conventional and organic sectors.

The US’ reduction of tariff escalation for processed goods means that Central American processed food should be able to compete more effectively in the US market. This creates much-needed opportunities for selling of higher-value products. However, few existing organic producers are in a position to take advantage of this opportunity, and supplies of most organic products (with the exception of bananas for puree) are too small to justify investment in organic manufacturing operations in the short to medium term.

In addition, Central America’s agricultural sector has significant competitive weaknesses that affect conventional and organic agriculture. Limited technology, poor infrastructure, a relatively un-educated workforce, weak sanitary systems, limited certification capacity (organic, sanitary, origin, bioterrorism), weak regulatory systems, among others, severely restrict the ability of the region to compete in agricultural products, and keep the wages received by Central American agricultural workers in low levels. It is extremely unlikely that Central America’s organic sector could be very successful based in a weak overall agricultural structure. Consequently, the success

of the organic sector is closely linked to Central America strengthening its overall agricultural competitiveness.

Evidence from NAFTA corroborates the economic models estimations suggesting that CAFTA should permit increased agricultural trade between Central America and the US, with organic trade probably benefiting from this growth, but not necessarily more than conventional production. However, opportunities for new agricultural business may arise as a result of complementary competitiveness promotion policies, and the consolidation of existing promising products like pineapples, mango, nuts and cacao.

In spite of its importance, industry groups and government agencies in the United States and Central America did not specifically address organic issues in the CAFTA negotiations. This can be classified as a “missed opportunity” to advance important goals for the United States: healthier food, improved environmental protection in Central America, and access to critical raw materials for US business. Central America missed an opportunity to promote a promising sector where it could have some significant comparative advantages.

Market demand conditions in the United States have been, and will continue to be, the principal determinant of the growth of Central American organic exports. While there has been an important increase in production and trade of organic food products in recent years, this sector still represents a relatively small niche in the US market. The niche is large relative to the size of Central America’s agricultural sector, and it has significant growth potential in the coming years.

Central American organic producers face significant challenges to achieving increased success in the US market. The most significant ones are:

• Lack of detailed information on markets, requirements, expectations of intermediate clients and final consumers.

• Weak national systems to support sanitary, bioterrorism and other technical requirements, particularly certification-related systems.

• Weak national systems to provide information, technical assistance, and other support to small businesses.

• The small size of producers and their organizations creates numerous difficulties, including reduced

F


economies of scale in production and management, and the inability to satisfy orders for the relatively large quantities of product required by US customers.

• Limited entrepreneurial skills and training to permit improved management and sales in a globally competitive environment.

Many organizations supporting the development of organic production in Central America claim that is possible to expand and diversify the current supply of certified products from the region for a number of reasons including the sub-utilization of certified areas, the existing potential for production of new products, and the possibility to certify more organic products. What is necessary to achieve successful results?

CIMS research has identified key elements that should be components of a national market development policy and strategy. These include, among others, necessary controls and regulations, institutional support, market strategies design, compliance with standards through certifications, better infrastructure and broader access to new technologies, a clear understanding and capacity building for market access requirements compliance, laboratories and research facilities and business intelligence services.

In conclusion, CAFTA provides additional opportunities for Central American organic agricultural exports to the US. CAFTA provides a permanent platform for Central American producers and exporters to build business based on very

favorable demand trends in the US. The level of success will depend on national and regional efforts to take advantage of the platform and emerging opportunities in the market. The implementation of CAFTA demands further actions to modernize Central America’s agricultural competitive structure, without which neither conventional nor organic producers are likely to realize much additional benefit from this opportunity.

Within this scenario, there is a new role for organic agriculture supportive organizations. So far, NGOs, international organizations, development agencies, and other groups, have used their resources mainly on non-market-driven development-oriented support programs. This aid has been very important to correct market distortions and surpass initial business barriers.

However, organic producers require more business development instruments and support. Subsidies and development aid should be replaced by marketing, financing and strategic planning programs, to make organic business profitable and self-sustainable. Organic agriculture is a growing business, driven by market forces and mores stringent standards. Support from national and regional organizations should focus on private initiatives strengthening and entrepreneurship building for Central American producers, to improve the region’s competitive advantages and develop a strong and profitable organic market.


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Buzby, J. (2001): “Effects of Food-Safety Perceptions on Food Demand and Global Trade.” In Changing Structure of Global Food Consumption and Trade. Anita Regmi, editor. Market and Trade Economics Division, Economic Research Service, US Department of Agriculture, Agriculture and Trade Report. WRS-01-1.

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CIMS (2005a): The North American Market for Organic and Fairtrade Products. Overview with Emphasis on the US Market. EcoMercados Project, May 2005.

CIMS (2005b): Oferta de Productos Orgánicos y de Comercio Equitativo en Centroamérica. Proyecto EcoMercados, July 2005.

CIMS (2005c): Venta y Distribución de Alimentos en Centroamérica: énfasis en productos orgánicos en Nicaragua y Costa Rica.” Available from http://www.cims-la.com/ES/ecomercados/.

Condo, A., F. Colburn and L. Rivera (2005): The United States Central America Free Trade Agreement (CAFTA): Negotiations and Expected Outcomes. Paper prepared for for the ESRI International Collaboration Project of FTA 2004. Tokyo, Japan.

Figueroa, L. and V. Umaña (2002): Los Retos de la Política Comercial y de la Agricultura en Centroamérica. Elementos para la Discusión. Working Paper CEN 560, CLACDS-INCAE.

FIRA (2003): Agricultura Orgánica. Una oportunidad sustentable de negocios para el sector agroalimentario mexicano. Boletín Informativo #322, vol. XXXV, December 2003

Francois, J., B. McDonald and H. Nordström (1996): “Liberalization and Capital Accumulation in the GTAP model.” GTAP Technical Paper Nº 7.

7. REFERENCES

Francois, J., L. Rivera and R. Rojas-Romagosa (2006): Economic Perspectives for Central America after CAFTA: A GTAP-based Analysis. Tinbergen Institute Working Papers. Forthcoming.

Gómez, L., and M. A. Gómez (2004): La Agricultura Orgánica en México: Un Ejemplo de Incorporación y Resistencia a la Globalización. CIESTAAM, Universidad Autónoma Chapingo. Mexico D.F.

Hartman, H. and D. Wright (1999): Marketing to the New Natural Consumer: Understanding Trends in Wellness. The Harman Group: Bellevue, Washington, USA.

Helpman, E. (2004): The Mystery of Economic Growth. Harvard University Press.

Hertel, T.W. and M. Tsigas (1997): “Structure of GTAP”. In Global Trade Analysis: Modelling and Applications, edited by T.W. Hertel. Cambridge University Press.

Hilaire, A. and Y. Yang (2004): “The United States and the New Regionalism/Bilateralism”. Journal of World Trade 38(4): 603-625, 2004.

Hinojosa, R. (2003): Regional Integration Among the Unequal: A CGE Model of US-CAFTA, NAFTA and the Central American Common Market. Background paper for the ECLAC-SICA project “La Integración Centroamericana: Beneficios y Costos.”

Jaramillo, F. and D. Lederman (2005): The Content of DR-CAFTA: Implications for Market Access and Domestic Reforms. The World Bank. Mimeographed.

Kose, M. A., A. Rebucci and A. Schipke (2005): ¨Macroeconomic Implications of CAFTA-DR.¨ In M. Rodlauer and A. Schipke eds., Central America: Global Integration and Regional Cooperation. IMF Ocasional Paper 243. Washington, D.C.

Lederman, D., W. Maloney and L. Serven (2004): Lessons from NAFTA for Latin America and the Caribbean Countries. A Summary of Research Findings. The World Bank. Washington, D.C.

Mason, A. (2005): “Ensuring that the Poor Can Benefit from DR-CAFTA: Policy Approaches for Managing the Economic


Transition.” Mimeographed. Central America Country Management Unit, The World Bank. Washington, DC.

Monge, R., M. Loría, and C. González-Vega (2003): “Retos y Oportunidades para los Sectores Agropecuario y Agroindustrial de Centro América ante un Tratado de Libre Comercio con los Estados Unidos.” Report prepared for the World Bank DR-CAFTA Studies Program.

NBJ (Nutrition Business Journal) 2004: NBJ’s Organic Foods Report 2004. San Diego, California, USA.

Nicita, A. (2004): “Who Benefited from Trade Liberalization in Mexico? Measuring the Effects on Household Welfare.” World Bank Policy Research Working Paper 3265, April 2004.

Pratt, L. and L. Rivera (2003): Tendencias en el Desarrollo de la Agricultura en Centroamérica: Nuevos Retos para el Sector Privado y el Diseño de Políticas Públicas. Workin Paper CEN 563, CLACDS-INCAE.

Pratt, L. and L. Rivera (2005): “El DR-CAFTA y el medio ambiente: perspectivas para el desarrollo empresarial y la sostenibilidad en Centroamérica.” In Revista de Empresa, Nº15, April-June. Madrid: Instituto de Empresa.

Sloan, E. (2004): Top 10 Global Food Trends. Food Technology, vol. 59, Nª 4, April 2004. Published by the Institute of Food Technologists. Chicago, US.

The Economist (2005): “CAFTA’s impact on Central America.” August 6th.

Todd, J., P. Winters and D. Arias (2004): CAFTA and the rural economies of Central America: A conceptual framework for policy and program recommendations. Inter-American Development Bank, RE2-04-016. Washington, D.C.

UNCTAD (2000): The Post-Uruguay Round Tariff Environment for Developing Country Exports: Tariff Peaks and Tariff Escalation. TD/B/COM.1/14/Rev.1, 28 January 2000. UNCTAD/WTO joint study

United States International Trade Commission (USITC) (2004): US-Central America-Dominican Republic Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects. Investigation N° TA-2104-13, USITC Publication 3717, August 2004.

Unites States Trade Representative (USTR) (2004): “Free Trade With Central America. Highlights of the US-Central America Free Trade Agreement.” Trade Facts, May 2004.

Unites States Trade Representative (USTR) (2005): The Dominican Republic-Central America-United States Free Trade Agreement. Summary of the Agreement.

World Bank (2005): DR-CAFTA: Challenges and Opportunities for Central America. Central America Department and Office of the Chief Economist. Latin America and Caribbean Region. Washington D.C.


8. ANNEX

Annex 1. Model Estimation Results

TABLE A1

Impact of CAFTA on Agricultural Production and Trade with United States:Total Tariff Phase-Out

(First Scenario)


Change ChangeAfter

CAFTA Change BeforeCAFTA

AfterCAFTA ChangeSECTOR

% - - - - - Million US$ - - - - - % - - - - - Million US$ - - - - - %Million

US$

AGRICULTUREPaddy-riceWheat ProductsCerealsVegetables and FruitsOilseedsSugarcanePlant-based FibersOther CropsCattleAnimal ProductsWoolCattle MeatOther MeatVegetable OilsDairy ProductsProcessed RiceSugarMANUFACTURESSERVICES

-2.99-21.59

-2.53-0.83-1.92-3.47-2.37-1.68-2.49-1.73-2.66-1.91-1.23-6.82-3.52-1.63-7.43-5.591.95

-0.15

-559.8-60.5-10.1

-3.9-80.8-11.1

-7.6-1.6

-73.0-18.5-32.1

-1.0-20.2-90.4-24.7-34.0-26.4-71.6913.5-92.5

1,7320.30

10

96815

00

508160

602

1261

1509,388

784

1,7160.40.90.4

945.415.7

0.10.4

509.90.85.80.1

67.61.6

11.116.6

0.5138.2

13,587.1699.5

-0.9%33.3%

-10.0%0.0%

-2.3%1.9%0.0%

33.3%0.3%0.0%

-1.7%0.0%

12.5%-20.0%

-9.0%167.7%

0.0%-7.9%44.7%

-10.8%

32.0%37.3%

5.6%1.2%

32.8%2.7%0.0%1.6%

20.2%11.1%

5.2%0.0%

57.0%123.2%

36.5%134.0%129.6%156.9%

47.2%8.4%

32536.3

8.63.1

21.71.7

00.86.70.11.4

035.9

104.218.7

5224.110.2

4,481.751.6

-16.00.1

-0.10.0

-22.40.30.00.11.60.0

-0.10.07.5

-0.4-1.110.4

0.0-11.9

4,198.9-84.6

1,018.097.4

154.6264.1

66.263.3

0.048.933.1

0.926.7

0.063.084.651.338.818.6

6.59.505.0

617.4

1,343.5133.7163.2267.2

87.965

049.739.8

128.1

098.9

188.870

90.842.716.7

13,986.7669

BeforeCAFTA

PRODUCTION EXPORTS IMPORTS

Change Change


TABLE A�

Impact of CAFTA on Agricultural Production and Trade with United States:With Tariff Protection for Sensitive Agricultural Goods

(Second Scenario)


% % %

AGRICULTUREPaddy-riceWheatCerealsVegetables and FruitsOilseedsSugarcanePlant-based FibersOther CropsCattleAnimal ProductsWoolCattle MeatOther MeatVegetable OilsDairy ProductsProcessed RiceSugarMANUFACTURESSERVICES

-1.84-2.52-3.07-0.81-2.47-3.93-2.27-1.91-3.51-0.41-0.31-0.53-1.52-0.02-3.790.670.67

-5.561.54

-0.15

-366.52-7.06

-12.21-3.76

-103.95-12.52

-7.30-1.85

-102.87-4.38-3.74-0.29

-24.93-0.27

-26.5613.97

2.38-71.21721.41-92.54

1,731.50.3

10.4

967.815.4

0.10.3

508.30.85.90.1

60.12

12.26.20.5

150.19,388.2

784.1

1,695.30.30.90.4

938.615.5

0.10.3

5010.85.70.1

65.91.6

10.916

0.5136.7

13,505.3698.5

-2.1%0.0%

-10.0%0.0%

-3.0%0.6%0.0%0.0%

-1.4%0.0%

-3.4%0.0%9.7%

-20.0%-10.7%158.1%

0.0%-8.9%43.9%

-10.9%

12.5%6.4%7.0%1.9%

34.1%3.8%0.0%

2.79%22.4%11.1%

7.9%0.0%

59.8%13.8%38.0%-3.1%7.0%9.2%

47.3%8.4%

127.56.2

10.85.0

22.62.40.01.37.40.12.10.0

37.711.719.5-1.21.30.6

4,491.752.1

-36.20

-0.10

-29.20.1

00

-7.30

-0.20

5.8-0.4-1.39.8

0-13.4

4,117.1-85.6

1,018.097.4

154.6264.1

66.263.3

0.048.933.1

0.926.7

0.063.084.651.338.818.6

6.59.505.0

617.4

1,145.5103.6165.4269.1

88.865.7

050.240.5

128.8

0100.7

96.370.837.619.9

7.113,996.7

669.5

Change

AfterCAFTA Change

BeforeCAFTA

AfterCAFTA Change SECTOR

- - - - - Million US$ - - - - - - - - - - Million US$ - - - - -

BeforeCAFTA


Change Change Million

US$


TABLE A�

Impact of CAFTA on Agricultural Production and Trade with United States:Total Tariff Phase-Out, FDI Growth,

Trade Facilitation and Unemployment Reduction (Dynamic Scenario)


% % %

AGRICULTUREPaddy-riceWheatCerealsVegetables and FruitsOilseedsSugarcanePlant-based FibersOther CropsCattleAnimal ProductsWoolCattle MeatOther MeatVegetable OilsDairy ProductsProcessed RiceSugarMANUFACTURESSERVICES

4.0%-13.5%

7.4%11.2%

1.6%4.5%

14.6%11.8%

0.9%8.9%5.9%9.9%6.6%

-1.0%7.8%6.8%

-2.2%6.2%

29.5%11.4%

742.0-37.929.351.866.914.446.811.527.394.770.9

5.4107.4-13.754.3

141.3-7.979.4

13,833.37,027.2

1,581.40.31.00.4

967.815.4

0.10.3

508.30.85.90.1

60.12.0

12.26.20.5

150.19,388.2

784.1

1,627.70.40.90.4

963.015.7

0.10.3

522.10.85.80.1

81.82.0

13.720.0

0.6158.2

18,721.8812.2

2.9%33.3%

-10.0%0.0%

-0.5%1.9%0.0%0.0%2.7%0.0%

-1.7%0.0%

36.1%0.0%

12.3%222.6%

20.0%5.4%

99.4%3.6%

57.2%78.2%41.5%19.5%53.3%27.6%

0.0%25.2%61.0%33.3%21.7%

0.0%72.2%

149.5%47.0%

162.1%141.9%204.6%

72.1%20.0%

582.076.264.251.535.317.5

0.012.320.2

0.35.80.0

45.5126.5

24.162.926.413.3

6,852.8123.4

46.30.1

-0.1-

-4.80.3

--

13.8-

-0.1-

21.7-

1.513.8

0.18.1

9,333.628.1

1,018.097.4

154.6264.1

66.263.3

0.048.933.1

0.926.7

0.063.084.651.338.818.6

6.59.505.0

617.4

1,600.0173.6218.8315.6101.5

80.80

61.253.3

1.232.5

0108.5211.1

75.4101.7

4519.8

16,357.8740.8

Change

AfterCAFTA Change

BeforeCAFTA

AfterCAFTA Change SECTOR

- - - - - Million US$ - - - - - - - - - - Million US$ - - - - -Million

US$

BeforeCAFTA


Change Change


ANNEX 2. EVOLUTION OF AGRICULTURAL EXPORTS FROM CENTRAL AMERICAN COUNTRIES TO THE US

Costa Rica: Main Agricutural Exports to US

0

100

200

300

400

500

600

Millo

n US

$

Fruits & Nuts 381,06 395,6 417,35 418,9 512,8 486,9 513,7 483,73 522,6 486,21

Coffee and Spices 84,8 85,9 138,1 158,1 135,6 123,7 102,5 121,9 126,2 149,8

Vegetables 42 45,5 50,7 56,2 45,17 45,9 51,66 49,5 46,4 60,5

Fish and Crustaceans 41,3 57,1 73,8 57 69,2 78,18 77,6 80,89 69 59,7

Processed Vegetables and Fruits 26,5 33 41,8 50 42,5 62,5 57,3 60,7 59,8 54,7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: FAS Database

020406080

100120140160

51.19 53.15 101.24 88.25 67 135.5 36.6 31.77 45 49.104

Sugar 25.5 35.8 39.3 32.3 23.8 18.1 33.17 24.23 37.4 27.3

Beverages 14.77 15.5 7.5 4.9 7 11 8.8 9.78 13.6 11.88

Vegetables 3 3.86 5.1 3.7 3.2 3.4 5 5.7 6.9 7.8

Fish and Crustaceans 28.1 39.2 30.5 33.8 26.35 18.5 18.11 8.45 8.5 5.5

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

El Salvador: Main Agricutural Exports to US

Millo

n US

$

Coffee and Spices



Guatemala: Main Agricutural Exports to US

0

100

200

300

400

500

Fruits & Nuts 163.94 181.1 170.8 214.8 194.5 251.7 293.4 337.86 337.8 358.5

Coffee and Spices 320.747 261.8 408.6 301.8 304.5 306.8 180.5 172.7 216 216.4

Sugar 45.139 121.5 87 58.7 82.3 44.5 40.21 53.15 88.96 75.5

Vegetables 39.33 31.26 29.7 37 41.9 38.8 22.86 39.9 48.5 56.88

Fish and Crustaceans 19.34 31.1 22.14 20.5 17.9 18.5 21.5 18.5 20.8 21.5

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004


Millo

n US

$

Honduras: Main Agricutural Exports to US

0

50

100

150

200

250

Fruits & Nuts 183.5 195.6 179.3 139.3 51.1 110.15 147.16 154.235 150.6 171.6Fish and Crustaceans 99.3 101.3 99.4 100 108.6 128.5 120.9 132.9 124.5 132.3Coffee and Spices 58.9 38.7 69.4 124 50.5 98.6 36.5 29 25.7 44.5Processed Food and Vegetables 6.6 13.2 10.5 10.7 7.8 11.8 13.9 16.5 13.9 14.9Vegetables 3.4 2.6 4 4.5 6.4 5.8 3.9 5.2 5.5 10.8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004


Millo

n US

$


Nicaragua: Main Agricutural Exports to US

020406080

100120

Fish and Seafood 67 64 71.4 68 84 104.7 81.6 83 70.2 74Meat 40 22.5 26 13.6 14.4 22 29.4 33 36.36 57.2Coffee and Spices 3.6 6.4 17.8 28.1 24.9 59.1 35.4 30.8 39.5 52.2Sugar 19.1 31.9 32.3 23.2 14.1 14.3 2.3 9.1 11.4 15.2Fruits and Nuts 2.9 7.6 9.3 16.8 9.8 3.7 11 10 14.7 13.7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004


Millo

n US

$

Documents

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