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Potential economic effects of the proposed Dominican Republic-Central America free trade agreement (DR-CAFTA) on the state of Florida
h [electronic resource] /
prepared by the Center for Economic Development Research, College of Business Administration, University of South Florida.
Tampa, Fla. :
b Center for Economic Development Research,
1 online resource (ii, 11 p.)
Title from PDF of title page (viewed Aug. 6, 2009).
Includes bibliographical references.
This report serves to advance effective public policy recommendations regarding the impacts across the state of Florida of globalization.
z Latin America.
x Economic conditions.
University of South Florida.
Center for Economic Development Research.
t Center for Economic Development Research (CEDR) Collection
Potential Economic Effects of the Proposed Dominican Republic Central America Free Trade Agreement (DR-CAFTA) on the State of Florida Prepared by the CENTER FOR ECONOMIC DEVELOPMENT RESEARCH College of Business Administration 1101 Channelside Drive, Second Floor North, Tampa, Florida 33602 Office: (813) 905-5854 or Fax: (813) 905-5856 May 2005
Preface In order to advance effective public policy recommendations regarding the statewide impact of globalizat ion, the University of South Floridas (USF) Globalization Research Center commissioned the Center for Economic Development Research (CEDR) to conduct a study of the poten tial economic effects of pr oposed free trade agreements on the state of Florida. This report is a follow-on to the CEDR report Potential Econom ic Effects of the Proposed Free Trade Area of the Americas (FTAA) on the State of Florida. We follow the same methodology of that report, available upon request from CEDR. CEDR, a unit of the USF College of Business Administration, initiates and conducts innovative research on economic development. The Centers education programs are designed to cultiv ate excellence in regional deve lopment. Our information system serves to enhance development efforts at USF, its College of Business, and throughout the Tampa Bay area and the state of Florida. Robert Anderson, Dean, College of Business Administration (COBA), USF Dennis Colie, Director, CEDR, COBA, USF, Co-pri ncipal Investigator Dave Sobush, Associate Director, CEDR, CO BA, USF, Co-princip al Investigator Michael Bernabe, Graduate Research Assistant, CEDR, COBA, USF i
Executive Summary This report estimates the potential effects of the proposed Dominican Republic Central American Free Trade Agreemen t (DR-CAFTA) on the Florida economy. Economic effects are measured by jobs, output and regional product. These are three descriptions of the same phenomenon, as mass, density, and shape can each be used to describe a solid. The DR-CAFTA, if enacted, would en compass seven Western Hemisphere nations. Modeled after the North American Free Trade Agreement (NAFTA), the DRCAFTA would reduce over a period of time the prevailing tariffs and other trade restrictions. Currently, the prevailing tariffs imposed on U.S. exports to the region can be as high as 25%, ad valorem. Regional e xports to the U.S. typically face fewer and smaller barriers to trade. Using economic software to model elim ination of tariffs on agriculture and manufactures, we estimate that enactment of a DR-CAFTA would have a slight, but positive, effect on Floridas economy. In the first year of enactment, we estimate Florida employment to increase by 5,335 jobs (0.06%), Florida output (sal es) to increase by $885M (96$), or 0.10%, and Gross State Produc t (GSP) to increase by $436M (96$), or 0.08%. The effects of a DR-CAFTA would increase over time, percolating through Floridas economy. ii
Introduction This report estimates the potential economic effects of the proposed Dominican Republic Central America Free Trade Agreement (DR-CAFT A) on the state of Florida. We measure economic effects by jobs, regional product, and out put (sales adjusted fo r inventory). We hope that this report will aid th e development of economically sound policy and investment both nationally and regionally. We follow the methodology of our May 2005 report Potential Economic Effects of the Proposed Free Trade Area of the Americas (FTAA) on the State of Florida. U.S.Dominican Republic Central Am erica Free Trade Agreement (DR-CAFTA) The Dominican Republic Central America Free Trade Agreement (DR-CAFTA) is a proposed free trade zone spanni ng seven countries in North and Central America, along with the Caribbean. Table 1 lists the countries particip ating in FTAA negotiations. Table 1 DR-CAFTA Country Participants Costa Rica Guatemala Dominican Republic Honduras El Salvador Nicaragua United States of America Negotiations of a Free Trade Agreement (F TA) between the U.S. and five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) began early 2003. An agreement was reached in early 2004 and signed by all participants in May 2004. Meanwhile the U.S. was having separate negotia tions with the Dominican Republic hoping to include them into the grand scheme of CAFTA. In August of 2004 the Dominican Republic was officially added to the CAFTA agreemen t, which was thus renamed DR-CAFTA. 1 The House Ways and Means Committee held hearings on th e DR-CAFTA April 21, 20 05. U.S. Congress is slated to vote on the DR-CAFTA in the late summer or fall of 2005. Presently only three participating countries (Honduras, Guatemala, a nd El Salvador) have ratified the agreement. 2 If passed by Congress and ratified by all part icipating countries, DR-CAFTA will be the largest Free Trade Agreement (FTA) put into force in the last decade. In 2003, U.S. exports to Central America and the Dominican Republic totaled more than $15B, maki ng it the second largest market for U.S. exports in all of Latin America. 3 In 2004, two-way trade between U.S. and the region exceeded $33B. 4 DR-CAFTA is a wide-ranging agreement regulating many issues: agriculture, telecommunications, investment, trad e in services (from water distribution to 1 US-DR-CAFTA. (n.d.) Retrieved May 2005, from http://www.bilaterals.org/rubrique.php3?id_rubrique=13 2 Florida FTAA, Inc. Leads DR-CAFTA Lobbying Mission to Washington, D.C. (March 15, 2005). Retrieved May 2005, from http://news.findlaw.com/prnewswire/20050315/15mar2005161522.html 3 CAFTA Facts. (February 2005) Retrieved May 2005, from Office of the United States Trade Representative Web site: http://www.ustr.gov/assets/Trade_Agreements/Bilate ral/CAFTA/Briefing_Book/asset_upload_file248_7179.pdf 4 U.S.-Dominican Republic-Central Amer ica Free Trade Agreement (DR-CAFTA). (n.d.) Retrieved May 2005, from U.S. Chamber of Commerce Web site: http://www.usc hamber.com/issues/index/international/drcafta.htm 1
gambling), intellectual property, the e nvironment, etc. It essentially serves US business interests by giving them a concrete and high-level set of rights to operate in Central America. 5 The main focus of the agreement is to eliminate barriers, especi ally to trade, within agriculture, manufacturing, services and investment. U.S. Highlights Presently, the U.S has eliminated tariffs on 75% of all imports from Central America and the Caribbean, including 99% of agricultural imports from the region. Meanwhile, U.S. merchandise exports to the region still face tari ffs averaging between 30% to 100% higher than remaining U.S. tariffs. Implementation of DR -CAFTA would immediately eliminate tariffs on 80% of U.S. exports of consumer and industrial goods into the region. 6 Key sectors to benefit include: information technology prod ucts, agricultural and construc tion equipment, paper products, pharmaceuticals, and medical and scientific equipm ent. Remaining tariffs will be phased out in ten years. 7 In addition to eliminating tariffs, DR-C AFTA will open service markets, provide new legal protections for copyrights, patents, and trad emarks; and foster transparency in government procurement. 8 Effect on the State of Florida The state of Florida serves as the gateway for two-thirds of U.S. merchandise trade with the DR-CAFTA region. About $4.5B worth of U.S. goods and services headed to the DR-CAFTA region passes through Floridas air and sea ports annually. The overall effects of implementing the DR-C AFTA will spill into Florida by providing increased access into the DR-CAFTA markets regarding the major sectors: agriculture, manufacturing, and services. Key agricultural indus tries to benefit include processed foods, meats, poultry, nuts, vegetables, and cotton. DR-CAF TA will also benef it Floridas leading manufacturing export sectors incl uding textiles, apparel, and co mputers and electronics. Also, substantial reductions in trade barriers will be seen in Florida service industries including telecommunications, insurance, health care, information tec hnology, and banking and securities. 9 In contrast to the Free Trade Area of the Americas (FTAA), negotiations and support of DR-CAFTA from leaders of the participating co untries has been much more animate. Recent events included a two-day trip through 11 U.S. cities by the leaders of the six participating countries culminating with a meeting with the President of the U.S. Notable support of the benefits of the agreement, specifically how CAFTA will help Central America get out of 5 US-DR-CAFTA. 6 Fifteen Reasons to Support DR-CAFTA. (n.d.) Retrieved May 2005, from U.S. Chamber of Commerce Web site: http://www.uschamber.com/issues/index/in ternational/0504_cafta_15reasons.htm 7 CAFTA Facts. (February 2005) 8 U.S.-Dominican Republic-Central Amer ica Free Trade Agreement (DR-CAFTA). 9 DR-CAFTA: MEANS JOBS AND OPPORTUNITY FOR FLORIDA. (n.d.) Retrieved May 2005, from United States Chamber of Commerce Web site: http://www.uschamber.com/NR/rdonlyres/ezymqy43axsb7knbj6xvdcgj5vuoo57yqq3xt7hdloj4a75kuxxlskmqdw6dhsy kl5hgrj5a7yz3fd37xhiqe2ha5af/0505_fl_drcafta.pdf 2
poverty, was made by the President of Nicaragua. 10 Although still aw aiting U.S. congress approval and ratification of the agreement by three other pa rticipating countries (Dominican Republic, Costa Rica, and El Salv ador) negotiations re garding DR-CAFTA are definitely much more viable than those of the FTAA. 10 Harrington, Jeff. (200 5). Central American Free Trade Agr eement// A presidents plea for trade. St. Petersburg Times. Retrieved May 19, 2005, from http://pqasb.pqarchiver.com/sptimes/836598731.html?MAC=2a85109c958563d4bbf9150a7031f56e&did=836598731 &FMT=FT&FMTS=FT&date=May+11%2C+2005&author= JEFF+HARRINGTON&printformat=&desc=CENTRAL +AMERICAN+FREE+TRADE+AGREEMENT+%2F%2F +A+president%27s+plea+for+free+trade 3
Potential Impacts: Economic Modeling In this section, we use two computer mode ls, IMPLAN and REMI, to estimate the potential effects of a DR-CAFTA on the st ate of Florida. We report economic effects in terms of employment, output and gross state product. Employment refers to j obs (not workers as a worker may hold more than one job), outpu t is defined as sales adjusted for inventory, and gross state product is output minus inputs and can also be thought of as compen sation and profit. These three variables are interrelated descriptors of the same economy, much as mass, volume and density each can describe a solid. Economic Impact of a DR-CAFTA The first step in our economic modeling is to es timate the net direct employment effect of a DR-CAFTA on the Crop Producti on (NAICS 111) and Animal Pr oduction (NAICS 112) subsectors of Floridas economy. Using the IMPLAN model, we estimated these sectors would experience a net decrease of 30 jobs in our analysis of the FTAA. We scaled this result by agricultural trade volume between Florida and th e DR-CAFTA nations, vis--vis the Florida and the FTAA nations. As agricultural trade between Florida and the DR-CAFTA nations is one-third of agricultural trade between Florida and the FTAA nations, we estimate that a DR-CAFTA, upon implementation, would result in a net direct loss of 10 crop and animal production jobs. Next we utilize the REMI model to estimat e the total economic effects of a DR-CAFTA on Floridas economy. We introduce to the model the direct employment effects generated in the previous step and concomitantly adjust the F oreign Export Costs (Share) and Foreign Import Costs (Share) on other industries to simulate the economic effects of an DR-CAFTA. Because the Foreign Export Costs (Share) and Foreign Import Costs (Share ) represent global trade and not just trade with the DR-CAFTA nations, we must scale the variab les by Floridas trade with the DR-CAFTA nations as a sh are of global trade. Table 2 reports, for year 2004, the share by NAICS sub-sector of Floridas global exports to the six other DR-CAFTA nations, the average applied tariff, and in the right-most column, the product of the share and the tariff. This is the amount by which we will reduce Foreign Export Costs (Share) in the REMI model. 4
Table 2 Foreign Export Cost Reduction Calculation REMI Sectors Item Share of FL Exports Tariff Tariff x Share 1 113 & 114 Forestry and Fishing, et al 4.06% 1.99% 0.081% 3 211 Oil & Gas Extraction 0.76% 1.99% 0.015% 4 212 Mining 6.64% 1.99% 0.132% 19 311 Processed Foods 9.24% 17.13% 1.583% 20 312 Beverage & Tobacco Products 7.06% 17.13% 1.210% 21 313 Fabric Mill Products 86.21% 18.03% 15.543% 22 314 Non-Apparel Textile Products 31.46% 18.03% 5.672% 23 315 Apparel Manufactures 53.77% 19.36% 10.410% 24 316 Leather & Related Products 12.50% 19.08% 2.385% 8 321 Wood Products 10.04% 12.11% 1.216% 25 322 Paper Products 15.11% 12.11% 1.830% 26 323 Printing & Related Products 9.42% 12.11% 1.141% 27 324 Petroleum & Coal Products 15.18% 9.06% 1.375% 28 325 Chemical Manufactures 6.07% 9.06% 0.550% 29 326 Plastic & Rubber Products 17.29% 9.06% 1.566% 9 327 Non-Metallic Mineral Manufactures 16.37% 12.11% 1.982% 10 331 Primary Metal Manufactures 12.75% 10.79% 1.376% 11 332 Fabricated Metal Products 13.47% 12.11% 1.632% 12 333 Machinery Manufactures 10.41% 10.37% 1.080% 13 334 Computers & Electronic Prod. 9.24% 10.52% 0.972% 14 335 Elec. Eq.; Appliances & Parts 15.10% 10.52% 1.588% 15 & 16 336 Transportation Equipment 5.68% see below 17 337 Furniture & Related Products 15.24% 12.11% 1.845% 18 339 Misc. Manufactures 8.39% 12.11% 1.016% 40 511 Publishing Industries 2.13% 12.11% 0.258% 30 910 Waste & Scrap 5.54% see below 30 920 Used Merchandise 5.84% see below 30 990 Special Classification Provisions 6.78% see below Note: REMI variable 15 is motor vehicles only. In 2004 15.5% FL exports of Trans. Equip. were motor vehicles Items 910, 920, and 990 were weighted by trade and assigned to the Wholesale Trade sector. 15 Motor Vehicles 0.88% 21.78% 0.192% 16 Transportation Equipment ex. Motor Vehicles 4.80% 12.11% 0.581% 30 Wholesale Trade 6.22% 12.11% 0.753% To reduce import costs in the model, we use estimates published by the National Association of Manufacturers (NAM ). The NAM, in a 2005 publicati on, states that the average applied industrial tariff imposed by the U.S. on goods from Latin American countries is 3.7%. 11 We scaled this figure by the share of DR-CAFTA imports relative to world imports to the U.S. 11 To the Point: Talking Points for Manufacturers. (2005, April). Retrieved April 1, 2005, from http://nam.org/s_nam/doc1.asp?CID=14&DID=233610 5
Inherent to this methodology is the assumption th at Floridas appetite for imports mirrors the nations. Table 3 reports, for year 2004, the share by NAICS sub-sector of Floridas imports from the six other DR-CAFTA nations, the average app lied tariff, and in the right-most column, the product of the share and the tariff. This is the amount by which we will reduce Foreign Import Costs (Share) in the REMI model. Table 3 Foreign Import Cost Reduction Calculation REMI Sectors Item Share of US Exports Tariff Tariff x Share 1 11 Agriculture, Forestry, Fishing, and Hunting 7.52% 3.70% 0.278% 3, 4 21 Mining 0.11% 3.70% 0.004% 19, 20, 21, 22, 23, 24 31 Manufacturing; Part 1 7.05% 3.70% 0.261% 8, 9, 25, 26 27, 28, 29 32 Manufacturing; Part 2 0.21% 3.70% 0.008% 10, 11, 12, 13 14, 15, 16, 17 18 33 Manufacturing; Part 3 0.41% 3.70% 0.015% 40 51 Information 0.03% 3.70% 0.001% 30 910 Waste & Scrap 6.01% see below 30 920 Used Merchandise 0.04% see below 30 990 Special Classification Provisions 0.53% see below Note: Items 910, 920, and 990 were weighted by trade and assigned to the Wholesale Trade sector. 30 Wholesale Trade 3.58% 3.70% 0.13% Comparison of the export and import cost re ductions shows that the U.S. faces higher tariffs on its exported goods than it imposes on DR-CAFTA goods entering the country. This is consistent with the practice of protective tariffs. Smaller economies generally will have larger tariffs than large economies to protect their industri es from foreign competition. We also note here that we do not adjust import or exports costs for se rvices or investment, as no tariffs exist for these types of trade, per se. Economic Impact of a DR-CAFTA Employment We report estimated employment changes due to enactment of a DR-CAFTA in Table 4 Predictive results are presented by NAICS s ub-sector for years 2006 and 2015. The values reported are differences from Flor idas baseline economic forecast. 6
Table 4 Estimated Employment Effects Reduction of Export and Import Tariffs Full Implementation NAICS Sector Name 2006 2015 11 Agriculture, Forestry, and Fishing 4.24 5.72 21 Mining 2.35 4.24 22 Utilities 18.95 24.29 23 Construction 347.90 605.10 31-33 Manufacturing 1,918.78 2,100.65 42 Wholesale Trade 345.00 426.10 44-45 Retail Trade 571.30 715.30 48-49 Transportation and Warehousing 119.82 156.69 51 Information 107.97 149.96 52 Finance and Insurance 188.03 214.26 53 Real Estate and Rental and Leasing 99.61 173.71 54 Professional, Scientific, and Technical Services 352.50 543.50 55 Management of Companies, Enterprises 86.32 101.60 56 Administrative and Support and Waste Management and Remediation Services 290.32 400.35 61 Educational Services 57.98 70.33 62 Health Care and Social Assistance 97.11 197.33 71 Arts, Entertainment, and Recreation 74.34 89.87 72 Accommodation and Food Services 317.29 397.57 81 Other Services (Except Public Administration) 269.26 334.11 92 Public Administration 66.89 462.30 Total Employment 5,335.95 7,172.98 We predict that in the first year of DR-C AFTA implementation, almost 5,336 new jobs will be created in Florida. In term s of absolute jobs created by fu ll enactment of a DR-CAFTA, the Manufacturing sectors (NAICS 31-33) are projected to receive the prepon derance of new jobs, approximately 1/3 of the total. Even with a direct loss of animal and crop production jobs, the Agriculture Sector, which also includes forestry, fishing, and agricultural support services receives a small net benefit of jobs from DR-CAFTA implementation. Economic Impact of an DR-CAFTA Output We report estimated changes in output due to enactment of a DR-CAFTA in Table 5 Predictive results are presented by NAICS sector for years 2006 and 2015. The values reported are differences from Floridas baseline economic for ecast. We report output changes for the private, non-farm sectors of the economy. 7
Table 5 Estimated Output Effects (Bil. 96$) Reduction of Export and Import Tariffs Full Implementation NAICS Sector Name 2006 2015 11 Agriculture, Forestry, and Fishing $ 0.001 $ 0.002 21 Mining $ 0.000 $ 0.001 22 Utilities $ 0.008 $ 0.012 23 Construction $ 0.026 $ 0.050 31-33 Manufacturing $ 0.534 $ 0.977 42 Wholesale Trade $ 0.067 $ 0.120 44-45 Retail Trade $ 0.039 $ 0.063 48-49 Transportation and Warehousing $ 0.013 $ 0.021 51 Information $ 0.025 $ 0.048 52 Finance and Insurance $ 0.036 $ 0.054 53 Real Estate and Rental and Leasing $ 0.025 $ 0.053 54 Professional, Scientific, and Technical Services $ 0.032 $ 0.061 55 Management of Companies, Enterprises $ 0.024 $ 0.039 56 Administrative and Support and Waste Management and Remediation Services $ 0.016 $ 0.026 61 Educational Services $ 0.002 $ 0.003 62 Health Care and Social Assistance $ 0.005 $ 0.013 71 Arts, Entertainment, and Recreation $ 0.005 $ 0.006 72 Accommodation and Food Services $ 0.015 $ 0.021 81 Other Services (Except Public Administration) $ 0.013 $ 0.019 Total Output (Private Non-farm) $ 0.885 $ 1.589 We predict that in the first year of DR -CAFTA implementation, more than $880M (1996$) of new output will be created in Florida. The li ons share of this output $534M (1996$) will emanate from the Manufacturing sectors. The Fi nance and Insurance, along with the Professional, Scientific, and Technical Services sectors will enjoy the next largest increases in output. By the 10 th year, we predict the DR-CAFTA will create $1.58B in extra output for Floridas economy. Economic Impact of a DR-CAFTA Gross State Product We report estimated changes in gross stat e product (GSP) due to enactment of a DRCAFTA in Table 6 Predictive results are presented by NAICS sector for years 2006 and 2015. The values reported are differences from Floridas baseline economic forecast. 8
Table 6 Estimated GSP Effects (Bil. 96$) Reduction of Export and Import Tariffs Full Implementation NAICS Sector Name 2006 2015 11 Agriculture, Forestry, and Fishing* $ 0.001 $ 0.001 21 Mining $ 0.000 $ 0.000 22 Utilities $ 0.004 $ 0.007 23 Construction $ 0.012 $ 0.024 31-33 Manufacturing $ 0.216 $ 0.497 42 Wholesale Trade $ 0.043 $ 0.077 44-45 Retail Trade $ 0.022 $ 0.037 48-49 Transportation and Warehousing $ 0.006 $ 0.011 51 Information $ 0.014 $ 0.028 52 Finance and Insurance $ 0.022 $ 0.034 53 Real Estate and Rental and Leasing $ 0.019 $ 0.040 54 Professional, Scientific, and Technical Services $ 0.022 $ 0.042 55 Management of Companies, Enterprises $ 0.017 $ 0.027 56 Administrative and Support and Waste Management and Remediation Services $ 0.011 $ 0.018 61 Educational Services $ 0.001 $ 0.002 62 Health Care and Social Assistance $ 0.003 $ 0.008 71 Arts, Entertainment, and Recreation $ 0.003 $ 0.004 72 Accommodation and Food Services $ 0.008 $ 0.011 81 Other Services (Except Public Administration) $ 0.008 $ 0.012 92 Public Administration $ 0.004 $ 0.029 Total Gross State Product $ 0.436 $ 0.909 Includes imputed Farm Product We estimate that the enactment of a DR -CAFTA will generate $436M (1996$) of new GSP. Again, the Manufacturing sector is pred icted to provide the gr eatest gain $216M (1996$). The Agriculture sector gains due to the enactment DR-CAFTA, but the animal and crop production sub-sectors experience a decline. By the 10 th year, we predict the DR-CAFTA will a total of $909M (1996$) in extra produc t for Floridas economy. Economic Impact of an DR-CAFTA Summary Using estimates of output change from the U. S. Department of Agriculture (USDA), we estimate a very minor direct loss of jobs 10 in the animal and crop production sub-sectors of Floridas economy. Of these, the bulk of job loss will be borne by animal production workers. The USDA estimates predict no change in output for citrus growers. 9
Table 7 presents a summary of estimated economic effects due to the enactment of a DRCAFTA. We present the absolute differences, as well as the percentage differences, from Floridas forecasted economic baseline. Table 7 Summary of Economic Effects Reduction of Export and Import Tariffs Full Implementation 2006 2015 Employment 5,335.95 0.06% 7,172.98 0.07% Output (Bil. 96$) $ 0.885 0.10% $ 1.589 0.13% GSP (Bil. 96$) $ 0.436 0.08% $ 0.909 0.11% By modeling the elimination of tariffs on manufactured goods and output losses borne by the Agriculture sector, we predic t that enactment of a DR-CAFTA would add in the first year almost 5,400 new jobs to Floridas economy, $885M (1996$) in output (sal es), and $436M (also 1996$) to GSP. These effects represent 0.06%, 0 .10%, and 0.08% increases, respectively, over the baseline economic forecast. By the tenth year of enactment, these percentages increase, indicating that the economic effects of fr ee trade gain steam over time. 10
Conclusions Given its proximity, it is logical that th e Central American nations and Dominican Republic are large trading partners of Florida. Common time zone s also foster trade between the two regions, vis--vis the rest of the world. Based on the U. S. experience post-NAFTA, the enactment of a DR-CAFTA would further increase trade between the U.S. and its hemispheric neighbors. The DR-CAFTA, if enacted, would have a posi tive effect on Floridas employment, output, and GSP. Although thousands of new jobs and hundreds of millions of dollars of output and product are large effects, in relative terms thes e indicators would increase by no more than 13/100 of one percent in the event of a full enactment of the DR-CAFTA. Our estimates are in the same direction, but generally more subdued than, other reports. We believe our inclusion of import effects accounts for this. 11