DOMINICAN REPUBLIC:
DR-CAFTA Launches, as Free Zones Founder
Diógenes Pina

SANTO DOMINGO, (IPS) - On Thursday, the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) finally entered into force in this country, after years of tough negotiations and repeated delays, the Trade and Industry Ministry confirmed.

Dominican free zone industrialists have been waiting impatiently for the pact as a life raft for their businesses, which are experiencing a major economic slowdown.

In the third week of February, two companies closed down in the Santiago de los Caballeros free zone, 155 kilometres north of Santo Domingo, leading to the loss of 15,000 jobs.

Other companies will go bankrupt in the short term and fire their employees if the government does not adopt further urgent measures, according to a Feb. 20 communiqué from the Dominican Free Zone Association (ADOZONA).

Maquiladoras -- factories using tariff- and tax-free imported ingredients to make products for export, included in the Dominican Republic's free zone provisions -- have been doing badly in recent years.

Nineteen businesses have closed their doors since 2004 in Santiago, the country's second largest city, leaving 27,000 workers jobless, according to Fernando Capellán, the president of Grupo M, which employs over 11,000 people.

In 1997, according to official statistics, free zones employed 182,174 people, 57 percent of them women and 43 percent men. In 2006, the number of workers was 141,490, of whom 53 percent were women and 47 percent men.

ADOZONA has been calling for the immediate entry into force of DR-CAFTA, which "was delayed for over a year," after having been announced for January 2006, following several previous postponements.

"Companies who were counting on DR-CAFTA as part of their survival strategy are closing down, and others are on the same track as they see their expectations failing," ADOZONA said.

Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua are also part of the regional free trade agreement, although Costa Rica has still not ratified the treaty.

DR-CAFTA has had its share of controversy for what critics say is a lack of adequate labour and environmental protections. In Guatemala and elsewhere, it has been staunchly opposed by campesino, labour and indigenous movements, who feared that the deal would lower living standards even further among the poorest workers.

Now that DR-CAFTA applies in the Dominican Republic, the U.S. market will be open to goods produced by the free zones.

In the textiles sector, instead of having to use only yarn from the United States, it will be possible to use yarn from the Dominican Republic or the other Central American parties to the agreement. Bleaching, dyeing and finishing fabrics for export to the U.S. market, at present prohibited, will also be allowed.

Washington had suspended the start of the agreement because the oil company Chevron wished to increase its market share in Dominican transport fuel, a move that was opposed by local transporters.

The Dominican government and Chevron reached an agreement whereby Chevron's market share will remain unchanged until 2008.

In his Independence Day speech on Feb. 27, President Leonel Fernández said the agreement might be implemented next week.

The fact is that the companies in 57 industrial parks operating under different special regimens are suffering because of other factors, such as the international liberalisation of trade in textiles, which has led to an influx of cheaper Asian products in the U.S. market, and the fall in the value of the dollar.

The free zones, which enjoy certain tax breaks, contain 556 companies, manufacturing mostly textiles, but also tobacco, shoes, electronic equipment, jewellery and agroindustry products. In 2006 their exports were worth 3.9 billion dollars and were the third source of foreign currency, after remittances from residents abroad and tourism.

But these sales, which represented 70 percent of total exports, were 243 million dollars below the corresponding figure for 2005, mainly due to a fall in the value of textile manufactures exported, according to a Central Bank report.

In the legislative term beginning Feb. 27, the Senate will debate a draft law sent by the executive branch, to exempt free zone industries from paying tax on transfers of goods and services, and corporate tax and customs tariffs.

"This measure is intended to favour the levels of competitiveness of these enterprises, since they generate direct and indirect employment," said Fernández's letter to congress attaching his proposal.

"A couple of weeks ago we met with owners of free zone companies, and we promised to reintroduce the project that seeks to release them from taxes in order to make them more competitive," Senate leader Reynaldo Pared Pérez told IPS.

The project would grant wider benefits to the textile sector in free zones, but these would also apply to textile companies operating outside the industrial parks.

ADOZONA claims that the failure of competitiveness is also due to the national currency being overvalued in dollar terms (the exchange rate is 33 Dominican pesos to the dollar) and the flooding of the market with Asian textile goods.

Industrialists acknowledge that devaluing the peso would force the government to find more resources to pay for the external debt and for oil imports, and would have a negative social and economic impact.

In 2006, the oil bill came to 2.8 billion dollars, and payments on foreign debt to 1.8 billion dollars, according to the General Budget of Public Expenditure.

In certain sectors it is like the free zone industrial model is drawing to a close in this country. Others say that the business concept must change in order to face the Asian competition.

Labour Minister José Ramón Fadul said "They must change their view of what a business of this sort is, so that everything can get back to normal."

According to Dominican Federation of Small and Medium Businesses president Issachard Burgos, the future for free zones in this country is a relatively short one. "They will not be able to compete with other regions that are constantly growing," he told IPS.

>From now on the government should put all its efforts into developing small and medium businesses, "because that's where the future of Dominican labour lies," he said.