The World Economy
The World Economy (2010)
doi: 10.1111/j.1467-9701.2010.01323.x
The Dominican Republic Trade
Policy Review 2008
Amelia U. Santos-Paulino
World Institute for Development Economics Research (WIDER),
United Nations University, Helsinki
1. INTRODUCTION
HE Dominican Republic (DR) is regarded as a successful liberaliser. The
most recent Trade Policy Review conducted in 2008 clearly states the
country’s commitment to continuous trade liberalisation. However, the potential
benefits from a more open trade regime recognised in the trade and development literature depend on minimum economic and institutional conditions for
liberalisation to be successful in enhancing economic performance and welfare
(e.g. Greenaway, 1993; Santos-Paulino and Thirlwall, 2004). As Winters (2004)
argues, trade liberalisation by itself is unlikely to boost economic growth, unless
openness reduces corruption, institutional constraints and is accompanied by
improved macroeconomic policymaking.1
This article assesses the DR’s 2008 Trade Policy Review conducted by the
Review Body of the World Trade Organization (WTO). It summarises and discusses the Trade Policy Review (2008), and evaluates the development challenges
faced by the country in view of continuous liberalisation and economic integration processes. The rest of the article proceeds as follows. Section 2 sets the stage
by overviewing the trade liberalisation efforts and previous trade policy reviews.
Section 3 reviews the 2008 Trade Policy Review. Section 4 discusses some
future challenges for trade policy in the DR and provides concluding remarks.
T
2. STRUCTURAL REFORMS AND TRADE LIBERALISATION
The WTO completed its first Trade Policy Review of the Dominican Republic in 1996, just midway through vital economic reforms and trade policy
1
For reviews of the evidence on trade liberalisation and economic performance, see Greenaway
et al. (1998) and Santos-Paulino (2005).
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DOMINICAN REPUBLIC TRADE POLICY REVIEW 2008
1415
adjustments that started in the early 1990s. Following the ‘lost decade’, an
extensive programme of macroeconomic reforms was launched in 1990 aimed
at improving national policies and hence the country’s economic performance.
The programme focused mostly on fiscal and trade policy reforms, and the
main targets were increasing the efficiency of the existing tariff and tax structure and eliminating price distortions, reducing asymmetries in the incentives
provided to specific industries and sectors (particularly that between the industrial and agricultural sectors competing with imports), and at the same time
maintain a fiscal equilibrium. Crucially, the existing anti-export bias needed
attention, to increase exports’ competitiveness, as well as to achieve a better
allocation of resources and a higher participation of the private sector in
productive activities.
At the onset of structural reforms, the trade regime featured a complex structure and difficult administration, as well as by the discretionary nature of its
application. Specifically, trade policy was typified by the use of import substitution strategy based on a dense tariff code, additional duties applied to specific
products, contingents, licences, prohibitions, exemptions and concessions to
specific industries, and a multiple exchange rate system with various rates
applied to different transactions (see Santos-Paulino, 2006). Before the reform,
imports were ruled by over 27 laws, and 140 taxes and duties, and were subject
to three different types of exchange rates.2
The 1990 tariff reform simplified the tariff structure and reduced tariff dispersion, therefore lowering the effective rate of protection. Also, a new tariff
code based on the ‘Harmonised System of Goods Codification’ was introduced.3 Tariff exemptions granted to specific sectors under special agreements
with the government were eliminated. Import prohibitions were also removed,
with the exception of several products competing with domestic production,
whereby these commodities represented around 40 per cent of agricultural output and 12 per cent of manufacturing production. Domestic taxes applied to
imports were also reformed, particularly the value-added tax.
Importantly, the exchange rate for different imports was unified, and the system of custom administration was improved reducing inefficiencies and corruption. In 1995 Congress approved a new foreign direct investment (FDI) law,
which eliminated restrictions on foreign companies investing in certain economic sectors, and allowed the repatriation of profits and the channelling of
2
Import prohibitions included textiles, food and electronic products, shoes, cars and luxury items.
These prohibitions were justified on the grounds of encouraging national production, and to enable
the country to balance its trade account.
3
Although tariff rates were significantly reduced, the government implemented temporary tariff
surcharges to counteract the impact of liberalisation on the protective structure of ‘sensitive’
sectors, and at the same time to allow them to adapt gradually to foreign competition. The
additional tariffs were eliminated by 1995.
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A. U. SANTOS-PAULINO
long-term loans. This signified determinant of future FDI inflows. Following
the restoration of macroeconomic stability in 1991, the DR entered a new
period of remarkable economic growth.
Following several years of confrontation, in December 2000 the Congress
approved a programme of trade and tax policy reforms, which intertwined the
different existing proposals, under a Tariff Reform and Fiscal Compensation
Programme. The application of the programme started in January 2001. The
new programme further reduced tariffs and trade duties, the value-added tax
and the tax on selective consumption. The further liberalisation effort was the
highlight of the second Trade Policy Review in 2002.
Reforms also eliminated most non-tariff barriers and converted them into
explicit taxes, such as import prohibitions, quotas, licences and exemptions, to
comply with the WTO agreements; consequently, the import tax base was
extended. However, tariff contingents for some agricultural products (beans,
corn, chicken, milk, rice, sugar and garlic) regarded as sensitive for Dominican
producers continued to be applied. The protection schedule for these products
was bound at the time of the country’s accession to the WTO.4
Table 1 reports the evolution of the tariff schedules as a result of the trade
liberalisation programmes. The reduction in tariff rates and in their dispersion is
evident, but the government yet uses tariffs and temporary excises as a means
of protection for some industries ⁄ sectors, mainly agricultural products and raw
materials that compete with imports.5 This reduction in trade barriers has stimulated a higher growth of exports and imports, but the net trade balance has
deteriorated progressively (see Figure 1).
3. THE 2008 TRADE POLICY REVIEW
Since the Trade Policy Reviews preceding 2008’s, the DR has continued liberalising its trade policy regime. Important measures include streamlining customs procedures, further reducing tariffs, eliminating import surcharges and
export taxes, and notable improvements in the legal framework by adopting a
new legislation on government procurement, and new laws on competition policy and intellectual property rights. The improvement in the legislation signifies
4
During the Uruguay Round of multilateral trade negotiations (1986–94), a tariff of 40 per cent
was consolidated for these agricultural products. In 1998, the government established the quotas
(approved by the WTO in February 1999), and the tariffs on imports in excess of the quotas. The
government also stated the schedule under which these contingent tariffs will be reduced to between
40 and 99 per cent by 2005.
5
During this period, the selective consumption tax for vehicles and alcoholic beverages was also
increased, with marginal rates between 10 and 95 per cent. This increased the operative costs of sectors such as tourism, affecting the sector’s comparative advantages, and consequently the demand
for that service.
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DOMINICAN REPUBLIC TRADE POLICY REVIEW 2008
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TABLE 1
Tariff Schedule Before and After 2001 Trade Reform
Tariff (%)
Type of Imports
Final consumption
Agricultural goods (final consumption or agro industrial)
Inputs (which are not produced in the country)
Inputs (which are produced in the country)
Capital goods
Inputs for construction (luxurious)
Inputs for construction (not luxurious)
Pharmaceutical products and inputs required for their fabrication
Vehicles for transport
Other vehicles for commercial use
Before
After
20–35
30–35
5
10–20
10–20
15–25
15–25
3–5
30
10–15
20
20
3
8
8
20
14
3
20
8
Memorandum
Average tariff rate (simple)a
18.6
Note:
Includes the selective tax on consumption applied to imports.
a
Source: Santos-Paulino (2006).
2007
2006
2005
2004
2003
2002
0
–1
–2
–4
–5
–6
–7
–8
–10
US dollar thousands
Trade balance
2001
2000
1999
1998
1997
1996
Total imports
1995
1994
1993
1992
Total exports
1991
16
14
12
10
8
6
4
2
0
1990
US dollar thousands
FIGURE 1
Exports, Imports and Trade Balance (1990–2007)
Source: IMF–DOT (2009).
a major step to establishing a comprehensive system and the public sector
transparency. Traditionally, government procurement in the DR has been conducted without reference to any uniform set of regulations, and has mainly
been done by unrestricted administrative purchasing. The problems with this
system are obvious. That is, wasteful use of fiscal funds, no uniform procurement proceedings or efficient supervisory procedures, and lack of transparency
have been a source of corruption in the past.
This has resulted from sovereign efforts, as well as by binding commitments
from the economic integration agenda, as will become clear later in the article.
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A. U. SANTOS-PAULINO
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The DR’s involvement in the global economy has remained strong, as shown
by the evolution of trade in goods and services, investment flows and family
remittances, which have a significant share in the economy.
Notwithstanding ongoing trade liberalisation, the incentive framework continues to be characterised by significant bias in favour of selective productive
sectors. In this regard, the WTO and government reports (WTO, 1996, 2002,
2008) recognise that most exporters of goods are exempt from the general trade
and fiscal schemes in an attempt to counteract the anti-export bias of these
regimes. This has also been noted in previous trade policy reviews, conveying
that this restricted strategy, alongside persistent market inefficiencies mostly
in infrastructure – notably in electricity supply – are significant obstacles for
sustained improvements in living standards, and hence development.
In the manufacturing sector some firms supply the domestic market, while
the favoured part of the sector consist of firms producing under the free trade
zones (FTZ) regime, and this is apparent in Figure 2. FTZ production account
for most of the DR’s merchandise exports but its main industry, textiles and
clothing, has been recently affected by the pressures of a more competitive global environment (see also Figure 3). In contrast to manufacturing, agriculture
continues to be supported through measures like higher-than-average applied
tariffs, direct payments, quotas, and marketing and price control programmes.
The assistance granted to certain agricultural activities merit revision, to
facilitate its transparency and minimise its impact on consumers and taxpayers.
A more optimal strategy could be to enhance competition in the domestic market and rationalising the fiscal incentive programmes to discourage agency
problems and improve economic efficiency. Despite this incentive bias, manufactures represent above 30 per cent of gross domestic product (GDP), and over
50 per cent of total national exports, compared to the lower value added in
agriculture (Tables 2 and 3). But it is the services industry that dominates the
Dominican economy, mainly via tourism-related activities.
FIGURE 2
Dominican Republic’s National and Free Trade Zone Exports
6,000
US$ MM
5,000
4,000
3,000
2,000
FTZ new Incentive
Laws
Macroeconomic Reform
Programme (trade
liberalisation and fiscal
reform)
New economic programme
(tariff reform and fiscal
compensation)
1,000
0
1980
Source: Santos-Paulino (2006).
1990
1995
2000
National
Free Trade Zones
2004
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DOMINICAN REPUBLIC TRADE POLICY REVIEW 2008
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uf O
ac th
tu er
re
s
ea
tw
m
an
Fo
o
eu
ac
m
ar
Ph
r
l
tic
a
co
ac
To
b
el
s
2007
2000
Je
w
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Te
xt
ap iles
pa &
El
re
ec
l
tro
ni
ce
qu
ip
.
US$ Millions
FIGURE 3
Free Trade Zone Manufactures Exports by Economic Activity
Source: Central Bank of the Dominican Republic, Statistical Reports (various issues).
Recently, in addition to export promotion programmes, the DR has introduced new fiscal incentive schemes to promote the competitiveness of its
domestic industry and to reduce the gap with the incentives given under the
export promotion regimes. Other programmes have been also fostered to aid
small and medium-sized enterprises, technological innovation and regional
development, mainly consisting of tax incentives, financing on preferential
terms, technical assistance and support for research and development. But the
concerns about distortions and allocation of resources remain.
As noted, overall, trade liberalisation has resulted in the reduction of the
average applied most-favoured-nation (MFN) tariff rates, as seen in Figures 4
and 5. Although the share of duty-free tariff lines decreased manifestly, tariffs’
dispersion has increased implying that certain products could be benefiting
from higher effective protection. The DR has bound its entire tariff schedule,
mostly at 40 per cent; and the WTO Secretariat Report (1996, 2002, 2008)
suggests that reducing the average gap of around 28 percentage points between
bound and applied rates would further enhance the predictability of the DR’s
trade regime.
Trade policy measures continue to be used as short-term instruments for
counteracting macroeconomic crises and business cycle fluctuations, and this
affects the reliability of the regime. That was the case as the Dominican economy’s 1990s boom ended abruptly, due to a major banking crisis in 2003 costing over 20 per cent of GDP along with adverse international conditions such
as the slowdown in tourism after the 11 September attacks on the USA, the
reduced growth rate of the US economy, and higher petroleum import prices.
The latter, exacerbated by the considerable degree of informal dollarisation of
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TABLE 2
Selected Macroeconomic Indicators
(1990–2007, averages)
GDP per capita (2000 US$)
GDP growth (annual %)
Agriculture, value added (% of GDP)
Industry, value added (% of GDP)
Services, etc., value added (% of GDP)
Foreign direct investment, net inflows (% of GDP)
Gross fixed capital formation (% of GDP)
External debt stocks (% of GNI)
Total debt service (% of GNI)
2010 Blackwell Publishing Ltd.
Source: World Bank–WDI (2009).
Dominican Republic
Latin America and Caribbean
1990–99
Average
1990–99
Std. Dev.
2000–07
Average
2000–07
Std. Dev.
1990–99
Average
1990–99
Std. Dev.
2000–07
Average
2000–07
Std. Dev.
3,809
4.6
12.8
32.5
54.9
2.9
22.1
43.6
3.4
460.1
4.1
0.9
1.1
0.3
2.0
2.4
14.2
0.8
5,363
5.5
11.6
29.9
58.5
4.7
22.1
33.0
4.5
501.12
4.3
0.5
3.3
2.7
0.5
1.5
8.8
1.0
7,540
3.0
7.7
31.7
60.7
2.2
18.8
37.8
5.3
359.2
2.1
1.1
2.8
3.8
1.4
0.8
3.3
1.7
8,459
3.6
6.4
32.0
61.8
3.0
18.5
35.8
7.3
531.9
2.6
0.5
2.1
2.3
0.8
1.2
8.6
1.6
A. U. SANTOS-PAULINO
Indicators
DOMINICAN REPUBLIC TRADE POLICY REVIEW 2008
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TABLE 3
Domestic Trade Structure
(By sectors)
Description
Total (US$ million)
Total primary products
Agriculture
Food
Agricultural raw materials
Mining
Ores and other minerals
Non-ferrous metals
Fuels
Manufactures
Iron and steel
Chemicals
Other semi-manufactures
Machinery and transport equipment
Textiles
Articles of apparel and clothing accessories
Other consumer goods
Other
Gold
2002
2006
Exports
Imports
971
6,001
1,982
(% of total)
37.9
47.3
15.3
27.3
13.3
26.7
2.0
0.7
22.6
19.9
0.3
1.6
0.6
0.3
21.6
18.0
61.9
50.4
2.6
40.3
9.7
3.3
10.0
3.0
32.1
0.6
1.2
0.1
1.3
0.3
5.0
2.9
0.1
2.2
0.0
0.0
56.0
43.9
42.5
1.5
12.0
0.9
0.5
10.6
35.0
18.6
5.3
2.7
1.3
0.1
1.3
5.6
8.8
0.1
Exports
Imports
9,401
44.2
13.1
11.6
1.4
31.1
0.3
0.8
30.0
55.6
3.9
9.6
8.7
24.5
1.0
1.9
6.0
0.2
0.0
Source: WTO Secretariat (1996, 2002, 2008) estimates based on data provided by the Government of the
Dominican Republic.
the Dominican economy, generated exchange rate instability, high inflation,
and weakened the effectiveness of macroeconomic (stabilisation) policies during 2003. Critically, as a result of the economic crisis the DR signed a standby agreement with the International Monetary Fund (IMF). It also introduced
temporary trade protective measures – which were eliminated afterwards, notably surcharges on import duties of 10 and 13 per cent, and a transitional import
tax rate of 2 per cent.
Importantly, the DR has modernised its legal and institutional framework for
the elaboration and application of technical regulations, similar to international
standards. Since 2002, the DR has adopted new laws to improve the protection
and enforcement of intellectual property rights, mostly reflecting the entry into
force of the free trade agreement among the DR, Central America and the
United States (DR–CAFTA). And, in some cases, the domestic regulations go
beyond the standards established by the Trade Related Intellectual Property
Rights (TRIPS) Agreement.
The DR does not subscribe to the WTO’s Agreement on Government
Procurement. But in 2006 new legislation was adopted to regulate most public
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FIGURE 4
Distributions of Average Applied Most-favoured-nation (MFN) Tariffs by
Main Trading Partner (2006)
20
15
10
Agricultural products
World (average)
Korea, Republic of
China
Mexico
European Communities
United States
World (average)
Switzerland
Jamaica
United States
0
Canada
5
European Communities
MFN AVG of
traded TL
25
Non-agricultural products
Source: WTO World Tariff Profiles (2008).
Agricultural products
> 100
50 ≤ 100
25 ≤ 50
15 ≤ 25
10 ≤ 15
5 ≤ 10
0≤5
MFN applied
Duty-free
> 100
50 ≤ 100
25 ≤ 50
15 ≤ 25
10 ≤ 15
5 ≤ 10
Final bound
0≤5
100
90
80
70
60
50
40
30
20
10
0
Duty-free
Tariff lines
FIGURE 5
Tariff Lines and Duty Ranges for Agricultural and Non-agricultural Imports (2006)
Non-agricultural products
Source: Based on Figure 4.
procurement of goods, services, works and State concessions (in line with the
DR–CAFTA requirements). But revisions need to be completed, and the country’s capacity should be strengthened, in areas such as the legislation ruling
sanitary and phytosanitary measures, as well as other technical barriers to trade.
This would benefit producers and consumers. New legislations have also been
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DOMINICAN REPUBLIC TRADE POLICY REVIEW 2008
1423
approved in the areas of air and maritime transports, which further enhance the
country’s ability to internationally trade goods and services.
At the national level, following over a decade of debate in Congress, a
General Law on Competition was adopted in 2007 and it is expected to enter
into force in 2009. This represents an important development in promoting the
efficiency of the Dominican economy.6 Finally, lack of basic infrastructure and
the provision of key services remain a critical issue affecting the DR. The telecommunications sector is one of the most dynamic in the Dominican economy
and receives large flows of foreign investment. But the electricity sector is still
in a profound crisis, and this lingers as one of the country’s main economic
challenges.7
The financial sector has recovered from the 2003–04 crisis, and prudential
indicators have improved markedly, largely because of measures to strengthen
the supervisory framework. However, according to financial market indicators,
the sector suffers from high operation costs and limited competition – and it is
expected that this would be improved under DR–CAFTA.
The contribution of tourism to the Dominican economy is crucial, and the
sector has recovered from its depression in the early 2000s. There are no
restrictions to foreign investment in this sector, and investors in certain tourism
projects are granted incentives, including import and income tax exemptions;
such incentives are conditioned on employing Dominican professionals.
a. International Trade and Economic Integration
Over and above trade openness, mostly through tariff and tax reductions and
eliminations of quantitative barriers, one of the most noticeable features of the
DR’s trade policy in recent years has been its embracing of international trade
relationships, both bilaterally and multilaterally. Until recently, Dominican
exports benefited from an extensive preferential access to US market under the
Generalised System of Preferences, which encompassed 26 different schemes
under which developed countries granted market access to developing
countries; and the Multi-Fibre Agreements, both dating back to 1974. It has
also been a beneficiary of the Caribbean Basin Initiative since 1983, providing
preferential access to the USA. The DR was also a signatory of the ‘Lomé
6
For instance, the DR applies price controls on electricity and certain agricultural products; the
price of hydrocarbons is set on the basis of a formula and varies according to fluctuations on the
international market.
7
The consumption of selected types of energy is highly subsidised, undermining public finances
and rational energy use. Some incentives granted under a 2007 law aimed at increasing domestic
energy production from alternative sources are contingent on the use of domestic inputs. The law
also prohibits biofuel imports when domestic production meets demand.
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Convention’ between the European Union, and the African, Caribbean and
Pacific countries (ACP), and later the Cotonou agreement.
These preferential agreements have faced out and evolved into free trade
and economic integration treaties. But most of the market access facilities
under the preferential trade schemes have been extended, to minimise the transaction costs of the elimination of such preferences. The rights of preferential
access to developed markets – notably the USA – have been a key factor in
attracting foreign investment, particularly in the export processing zones, which
benefit from a competitive package of fiscal incentives, and access to industrial
space and infrastructure, as discussed earlier.
Treaties pursued by the DR proliferate from bilateral to regional schemes,
and from partial to full trade and economic integration (see Table 4), and the
country has further liberalised its trade regime selectively through preferential
agreements. In addition to agreements in force, the DR completed negotiations
on the Partial Scope Agreement with Panama, the DR–CAFTA and the Economic Partnership Agreement (EPA) between the European Union and Caribbean States Forum (CARIFORUM).8 The DR grants at least MFN treatment to
all its trading allies, compliant with the WTO rules.
The DR also participates in the Doha Development Round negotiations,
where it has submitted numerous proposals, either individually or in conjunction with other Members, particularly in Agriculture and Services (tourism,
financial services and basic telecommunications) and on export subsidies. Conscious of its innate vulnerabilities, the country also subscribes to the issue of
‘small economies’ and supports a variety of proposals on the definition and
measures that could be taken to implement special and differential treatment
for those economies in the various negotiating areas of the Doha Development
Round. The DR has made specific commitments to the General Agreement on
Trade in Services (GATS), i.e. a fraction of the sectors covered by the GATS
Agreement, and signed the GATS Agreement, Protocols on financial services
and telecommunications.9
b. Free Trade and Economic Integration Arrangements
As already noted, the DR participates in various bilateral and regional trade
agreements as part of its international integration strategy. The free trade
8
The DR bas embarked upon negotiations to establish free trade agreements with Canada (2007)
and with Chinese Taipei (2006); and is exploring the possibility of negotiating preferential agreements with Mexico, Mercosur and Cuba.
9
Despite the significant modernisation of the regulatory framework, there is a sizeable difference
between the DR’s multilateral commitments and its applied regime. And it is expected that the
country would continue enhancing its service regime by expanding its multilateral obligations. This
would also be affected by the commitments bound under the DR–CAFTA.
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TABLE 4
Trade Agreements Subscribed by the Dominican Republic (DR)
Agreements
Countries
Free Trade Agreements
and Economic Integration Agreement
CARICOM–DR
Central America
Costa Rica, El Salvador,
Common Market
Guatemala, Honduras,
Nicaragua, Dominican
Republic
DR–Central
Costa Rica, Dominican
America–United
Republic, El Salvador,
States Free Trade
Guatemala, Honduras,
Agreement
Nicaragua and the United
(CAFTA–DR)a
States
European
Antigua and Barbuda, Austria,
Community
Belgium, Bulgaria, Cyprus,
CARIFORUM
Czech Republic, Denmark,
States EPAa
Estonia, Finland, France,
Germany, Greece, Hungary,
Ireland, Italy, Latvia,
Lithuania, Luxembourg,
Malta, Netherlands, Poland,
Portugal, Romania, Slovak
Republic, Slovenia, Spain,
Sweden, United Kingdom,
Bahamas, Barbados, Belize,
Dominica, Dominican
Republic, Grenada, Guyana,
Jamaica, Saint Kitts and
Nevis, Saint Lucia, Saint
Vincent and the Grenadines,
Suriname, Trinidad and
Tobago
Date of Signature
22 August 1998
16 April 1998
Entry into Force
01 March 2001
(05 February
2002 for the DR)
05 August 2004
01 March 2006
(1 March 2007
for the DR)
15 October 2008
01 November 2008
Partial Preferential Agreements
Panama
17 July 1985
July 1985
Bilateral Investment Agreements
Argentina
Chile
China (Taiwan)
Ecuador
France
Panama
Spain
16
28
05
26
14
06
16
Notes:
a
Agreement has been notified to the WTO.
CARICOM, Carribbean Community.
Source: Author’s elaboration.
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March 2001
November 2000
November 1998
June 1998
January 1999
February 2003
March 1995
27 November 2001
30 October 2002
November 2003
07 October 1996
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A. U. SANTOS-PAULINO
agreements establish cross-border free trade for most products, but excluding
those in the sensitive list agreed with the WTO. Despite the variety of agreements, the DR–CAFTA and the EPA with the European Community and the
CARIFORUM states are the most relevant, representing significant challenges
to the country’s economic structure and trading patterns. What follows overviews each of these agreements’ key features.
c. DR–CAFTA
The DR–CAFTA is particularly important inasmuch as the majority of the
DR’s overall trade in goods is carried out with the parties to this agreement,
mostly the USA.10 The DR–CAFTA, which has been notified to the WTO, created an FTZ by eliminating most tariffs and other trade barriers in the margin
between the United States (the DR’s main trade partner) and Central America.
This agreement has driven the DR’s trade policy strategies since the negotiation
started.11
The treaty contains 22 chapters and their respective annexes. These chapters
itemise the elements of the agreement: that is, national treatment and market
access for goods (with special provisions on agricultural products, textiles and
clothing);12 rules of origin and related procedures; customs administration; sanitary and phyosanitary measures; technical barriers to trade; trade protection;
government procurement; investment; cross-border trade in services; financial
services; telecommunications; electronic commerce; intellectual property; transparency; labour and environmental issues; and other administration and final
provisions issues.
The DR–CAFTA is applicable multilaterally, which implies that most of the
mutual obligations are identical for all parties. There are certain obligations,
however, such as tariff quotas, which are applied bilaterally between the United
States and each of the partner countries (World Bank, 2005). The most significant component of the agreement is tariff elimination and the perpetuation of
preferences under the US–Caribbean Basin Trade Partnership. The agreement
10
The DR–CAFTA entered into force for the United States and El Salvador on 1 March 2006, for
Honduras and Nicaragua on 1 April 2006, for Guatemala on 1 July 2006 and for the DR on 1 March
2007. The agreement had not entered into force in Costa Rica.
11
However, the impacts on welfare (i.e. poverty, employment, productivity, etc.) are still to be
assessed. But is evident that certain groups might require assistance to adapt to the more competitive environment.
12
The market access conditions established in the agreement between the DR and Central America
were incorporated as a special regime in an annex to the DR–CAFTA. Furthermore, importers can
choose between two preferential regimes granted by the USA, provided that the corresponding rule
of origin is fulfilled, either the multilateral tariff reduction programme, or the programme contained
in the FTA between the DR and Central America. Also, certain provisions on financial services and
government procurement apply only between the DR and its Central American counterparts.
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DOMINICAN REPUBLIC TRADE POLICY REVIEW 2008
1427
would also immediately remove tariffs from 80 per cent of US consumer and
industrial goods and more than half of US agricultural products exported to the
FTA countries. Sensitive products – mostly agricultural – that are protected by
subsidies and import quotas – tariffs would be phased out over a 15- to 20-year
implementation period.
The DR–CAFTA also entails the removal of barriers to investments, including on several sectors governed by Central American countries and the DR,
notably energy, transport and telecommunications. The agreement also guarantees the protection of patents, trademarks and other forms of intellectual property. Importantly, the enforcement of labour regulation in the developing
country parties of the agreement is a tour de force, particularly in industries
directly linked to FDI-related activities. But, the conditionalities, mostly not
related to trade, were attached to the agreement to facilitate its approval by the
US Congress. Labour and environmental standards are the most notorious
examples.
The agreement has served as a discipline device and has determined significant reforms of the DR’s legal and institutional systems. It has also contributed
to solidifying ongoing economic reforms and prompting further reform efforts.
Therefore, it is expected that investors should respond positively to the modernisation of key regulations in such areas as trade in services, government
procurement and intellectual property rights – mostly provisions for greater
transparency in government regulations.
Preliminary studies suggest that the gains from trade, as has been found with
other free trade agreements, will depend on the ability of the Central American
economies to adjust successfully to the changes that the agreement will bring
(including changes in relative prices) and to manage effectively the ensuing
restructuring of the economy (e.g. World Bank, 2005). The welfare gains might
be further conditioned by losses in sensitive sectors such as agriculture and
other commodities and goods highly protected by the largest trading partner.
d. Economic Partnership Agreement with the EU and Caribbean and ACP
Countries
As a member of the CARIFORUM, the DR is part of the EPA between the
European Union and the group of ACP. The EPA replaces the former Cotonou
Agreement between these parties. The agreement evolves from non-reciprocal
relationships, reflecting WTO rules regarding tariff exemptions and preferences
granted under the previous regime, which expired in December 2007. This is
the most significant challenge for the developing partners, particularly the least
developed ones.
That is, the EPA will progressively establish an FTZ based on reciprocity among the members. In addition to eliminating cross-border tariffs, the
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agreement introduces disciplines in several areas, including safeguards and
trade disputes; technical barriers to trade; services; investment; intellectual
property; government procurement; and stipulations on technical and financial
assistance.
The EPA raise challenges to ACP countries. These mostly relate to the
potential competition resulting from the preferential access to EU products
under reciprocal terms, which would affect developing countries’ producers in
numerous sectors. The second challenge is the ensuing loss of tariff revenues
due to the reduction of tariffs for EU products. And, the scope and time
of liberalisation has, and how intra-integration will be linked to ACP–EU
liberalisation.
However, reciprocity is not the only objective of the EU–ACP EPA, and the
parties have been vigilant in securing other elements, including support for
‘deep integration’, which entails establishing or expanding the institutional
environment in order to facilitate trade and location of production regardless
of national borders. Development assistance is also a key element, therefore,
encompassing development objectives in the agreement. Overall, it is expected
that EPA will have very different outcomes, depending on countries and their
specific initial conditions, economic structures and regional context.
4. POLICY CHALLENGES AND CONCLUDING REMARKS
Globalisation has brought about benefits for the Dominican economy, but
these benefits entail unavoidable challenges. The DR has made significant
progress towards a more open trade regime, particularly through the elimination
of non-tariff barriers, by simplifying its tariff structure and by reducing the
rates of duties. The DR’s membership in the WTO has been influential over
trade reforms. In this sense, the structure of the trade policy required important
unilateral adjustments in response to the multilateral agenda, particularly with
reference to the instruments that affect the productive sectors and the export
strategies of the country. The 2008 Trade Policy Review clearly pictures that
trade and payments liberalisation has been a continuous process, but economic
efficiency ought to be improved.
The subscription to a variety of free trade and EPA has driven the DR’s
recent trade policy efforts. For instance, the DR–CAFTA contributed to furthering necessary institutional reforms, complementing the enforcement of multilateral rules. The improvements in the legal frameworks are important for
institutional capabilities and the country’s competitiveness. However, the integration strategy has been very much focused on perpetuating the preceding
preferential regimes and market access schemes, leaving too little to nurturing
the country’s comparative advantages, and ⁄ or promoting trade diversification.
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This is particularly relevant to reduce the country’s exposure and vulnerability
to a limited number of income sources. This affects not only the DR, but
also other middle-income countries, which need to diversify their productive
and trade structures, and evolve from labour intensive–low skill production (e.g.
the FTZ model) to higher value added, and more skill–technology-intensive
activities.
Eliminating the sources of distortions created by incentives to specific industries is a major challenge for the DR. It is well known that Agriculture is
supported by measures like higher-than-average applied tariffs, direct payments,
and marketing and price control programmes, creating distortions that impact
mostly the consumers. The duality in the manufacturing sector merits also revision. But what is more critical is overcoming basic infrastructural constraints,
such as high cost and poor quality of energy supply and some services, which
affect the producers’ cost structures and detriment the country’s comparative
advantages.
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