The Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) is a political and economic treaty between the United States and developing Central American states. These include Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The agreement results in a combined flow of goods worth $53 billion. The U.S. trade surplus with countries in the free trade agreement is approximately $5 billion. It is meant to promote interregional trade and investment by providing stable conditions for businesses to function and supporting 134 thousand jobs (Office of the United States Trade Representative, n.d.).
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Strategic decision-making is significantly impacted by free trade agreements since it touches a variety of economy-related aspects of business function. CAFTA-DR impacts regional manufacturing by eliminating tariffs that allow for the flow of resources, components, and finished products across borders. Furthermore, the workforce is affected since it allows for a free movement of human labor capital and guarantees certain protections under the law (Office of the United States Trade Representative, n.d.). A business focused on moving its manufacturing to one of the Central American countries can take these aspects into account since it no longer has to worry about legal, bureaucratic, or financial barriers to cross-border operations. CAFTA-DR promotes economic growth by allowing businesses to create economies of scale and increase their efficiency by outsourcing. A business can become more competitive by reducing costs of production and export since there are no tariffs that may accrue additional expenses. Overall, considering the extensive outreach of the CAFTA-DR treaty over economic aspects, it plays a critical role in the strategic decision-making of a business.
Offshore outsourcing is the process of contract that allows hiring an external foreign organization to manage a part of a company’s functions (i.e., information technology) for efficiency or cost-saving. CAFTA-DR is meant to promote free trade operations, including that of labor and intellectual property. However, some of its aspects may present certain threats to offshore outsourcing. According to CAFTA, all involved countries had to implement and enforce labor provisions by the standards of the International Labor Organization. That includes guaranteeing human rights but also allowing for collective bargaining and other labor union prerogatives (Office of the United States Trade Representative, 2005). Essentially, that begins to eliminate the various economic benefits of outsourcing. Furthermore, there are several political threats. Many of the Central American nations are reluctant to allow privatization of key industries and have shown political instability. CAFTA is not necessarily beneficial regarding outsourcing because of the issue of scalability where the countries in the agreement are unable to sustain large workforces (Laughlin, 2010).
The move to the Dominican Republic or one of the other Central American nations in the agreement depends on a range of business and economic factors. However, CAFTA-DR has created a wide variety of benefits for investing in such business moves. The agreement strongly simplifies logistics and bureaucratic elements by allowing U.S. citizens to travel and conduct business in member countries as well as ship products without complex paperwork. Furthermore, close geographic proximity has created a tightly-knit economic network amongst Central American countries and the United States. Member state governments are actively seeking U.S. businesses and are creating attractive investment conditions. Finally, the CAFTA market serves as a good testing run opportunity before international expansion while providing enough commercial viability for successful financial growth (Delaney, n.d.).
Delaney, L. (n.d.). Going global: Doing business in Central America and the Dominican Republic. Web.
Laughlin, K. (2010). Five years later, CAFTA influence on pro services outsourcing is hotly debated. Web.
Office of the United States Trade Representative. (2005). CAFTA facts. Web.
Office of the United States Trade Representative. (n.d.). CAFTA-DR (Dominican Republic-Central America FTA). Web.