It has been 20 years since the Central America-United States Free Trade Agreement (CAFTA) negotiations began. It has also been 17 years since Costa Rica held a referendum for its approval and 15 years since its implementation. Although all these dates sound far off, and it was until January 1, 2025 that the agreement came into full effect.
Why is this?
In simple terms, the reason is that tariff reduction, an essential part of CAFTA, was gradual. In some products the change was faster and in others the deadlines were extended. On December 31st, the last deadlines associated with rice and dairy products expired.
Little by little, the tariffs for these items have been decreasing and now they will be at zero. A key fact is that there is talk of tariff relief for products arriving from the United States. In the case of national production going to North America, tariffs have not applied for a decade.
CAFTA at the pace of El Salvador
CAFTA is a multilateral treaty and, therefore, there are common provisions that marked all its members. A key point was that the deadlines would run when the agreement first came into force. That happened in 2006 when El Salvador became the first member of the bloc to implement CAFTA.
Francisco Monge, chief economist of the Ministry of Foreign Trade (Comex), explains that from March 1 of that year the tariff cuts began. From then on, every December 31, a quota was due until the 20 years of global grace period was completed in 2024.
This is a key detail for Costa Rica. As the country politically prolonged the CAFTA discussion, it was not until January 2009 that it joined the agreement. By that time the metaphor that the train was already in motion applies
“Costa Rica entered the treaty at a time when the fourth cut in tariff reduction deadlines was already running,” explains Monge. While each country was able to push for some product-specific protections, the deadlines are common.
Not all at the same time, not all in the same way
In CAFTA there were products with variable tariff reductions. Some were for 5 years and others had longer periods of 10, 12, 15, 17 and 20 years. At the latter levels were the so-called “most sensitive” products. These products were subject to grace periods in which the conditions did not change at the beginning and then the tariff reductions began to advance in a much more staggered manner.
Monge gives the example of chicken thighs. These initially had a decade of protection and then lost their tariff in parts for 7 years, and will be liberalized, according to Cafta, in January 2022.
With respect to rice and dairy products, the last ones covered by the treaty, the process has not been different. Both started with a decade of grace, but in year 11 began the gradual reduction that will now close at 0%.
Francisco Monge, economist at Comex, stresses that reaching this figure is not an untimely change. “In reality, the tariff has been gradually decreasing for the last nine years. Today the tariff is already at a relatively low level,” he says. “What is missing is the last little step, the cherry on the cake. But the process is almost concluded, it is simply that this cycle is closed”, explains Monge.
He also emphasizes that, from a legal point of view, everything was agreed from the beginning, even by the time of the referendum there was already an established schedule. “Looking at it from a legal security point of view, we are all warned. Even since in the Costa Rican case the Cafta was voted in referendum”, he added.
Regional trade has both the option of CAFTA and the local treaty
Currently the countries of the region can choose which system to trade with: on the one hand there is CAFTA and on the other the Central American Integration System and its economic chapter (SICA).
Why were dairy products and rice protected under CAFTA?
When negotiating an agreement, and Cafta was no exception, prior internal rounds are held between authorities and productive sectors. From there, the segments that would need special terms are defined.
These terms are then brought to the table by Comex and the Ministries of Agriculture and Economy. In each negotiation the debate will be different, not only in terms of the capacities of Costa Rican production, but also those of the competition.
To give an example: with the Middle East FTAs, there are no protections for the agricultural segment, since they are not producers. For CAFTA, on the other hand, provisions were necessary.
This is how the extension of protections for rice and dairy products came about. The latter category includes liquid milk, powdered milk, ice cream, butter, fresh cheese, mature cheese and yogurt.
In addition, the cases of fresh potatoes and onions were left out of the tariff reduction, with only the restriction of a pre-negotiated quota. Other countries, on the other hand, opted to give these degrees of protection to crops such as corn. There were also examples in textiles and sugar.
Everything ready to fully implement CAFTA
With CAFTA fully in force, the other question is how the latest reforms will be implemented, which will happen automatically. There are no formalities to be done and the discharges are already programmed in the TICA Customs System. “As of January 1, 2025, ÿ it begins to register zero tariffs for products coming from the U.S. and with the proper certificate of origin”, emphasizes the expert.
Ready for CAFTA
As mentioned before, the terms of the FTA with the United States and the region were known from the beginning and have advanced gradually. In that line, authorities and producers point out that the preparation for years has been key to face now the new commercial stage that arrives.
“It has been two decades that the productive sector has been preparing and we know that they have been able to diversify their productive offer,” said Comex Minister Manuel Tovar, in an interview.
“I think that in two decades is enough time for them to have prepared for this challenge, but there are important opportunities also in those two decades”, he added.
Victor Pérez, president of the Costa Rican Chamber of Exporters (Cadexco), highlighted the weight that the United States continues to have for national trade. Faced with possible tariff increases as part of the policies of the new government of Donald Trump (takes office on January 20), he insists that Costa Rica’s position as a ‘pull’ for nearshoring could still be taken advantage of. “We are confident that global trade agreements will continue to work,” he concluded.
The example of Dos Pinos
As a practical example of the implementation of Cafta, Dos Pinos is mentioned, one of the most traditional dairy brands that will now receive competition. They advocate a growth strategy that took into account the upcoming scenarios. “It includes the diversification of its productive activities, always keeping dairy production as its main activity”; explained its spokesman, Francisco Arias.
“From the acquisition of the Gallito Plant in 2017, we started with the process of elaboration and commercialization of confectionery and chocolates under an iconic and centennial brand such as Gallito; it was followed by the acquisition of the beverage plant that allowed us to strengthen the participation in the segment of teas, energy and carbonated drinks and water bottling, among other products. In recent years, we have also ventured into ice cream parlors, as well as into the meat and sausage market, in addition to cookies”, he pointed out.
To this, they added their international presence. They already have plants in Panama, Guatemala, the Dominican Republic and Nicaragua. In addition, the export portfolio has been expanded to 11 different countries.
