are subject to 10 and 12-15 year schedules (World Bank, 2006). On the reciprocal side, close to 100 percent of exports by the Dominican Republic and CACM countries are afforded immediate zero-tariff treatment in the US (Francois et al., 2005).<sup>2</sup> The liberalization of trade in services under DR-CAFTA represents a major expansion of the disciplines of CBI and GSP, which largely ignore this subject. For most Central American countries and the Dominican Republic, the main tenets of DR-CAFTA in services—opening of markets for competition, national treatment, and most-favored-nation treatment—were already written into the legislative and regulatory frameworks prior to DR-CAFTA. Therefore, the agreement mainly involves the lock-in of these reforms and continued efforts at their implementation and enforcement. However, the phase-in of many commitments is not immediate. For example, Latin American countries have pledged to allow US-owned insurance branches in four years and are working toward removing local residency requirements for the provision of professional services (World Bank, 2006). For other areas, such as the supply of banking services, trade between CACM countries and the Dominican Republic will not be liberalized for the first two years of the agreement.

DR-CAFTA also covers a range of “deep integration” issues. The investment provisions provide comprehensive protections that go beyond WTO commitments and cover all investment areas: enterprise, debt, concessions, contracts, investor-state dispute settlement, transparency (including anti-corruption), and intellectual property (Francois et al., 2005). Together, these measures effectively give US investors in the CACM countries and the Dominican Republic the same protections as under the US law. Other beyond-the-border issues include government procurement, customs cooperation, trade facilitation, trade capacity building, and labor and environment standards.

# **3 Previous Empirical Evaluations of DR-CAFTA**

The uncertainty surrounding the potential costs and benefits of DR-CAFTA for the US and Central America has led to a fair amount of empirical research on the agreement even before its entry into force. An early study by Hilaire and Yang (2003) used the GTAP5 database and model to estimate large welfare gains of US$964 million for the United States and US$3,859 million for Central America, with the bulk of the gains coming from a large expansion of exports of textiles and clothing from Central America.<sup>3</sup> Another study by Brown et al. (2004), using GTAP5 data but applying it to a model with monopolistic competition under increasing returns to scale, estimated much larger effects with welfare rising by US$17.3 billion (0.2 percent of GNP) in the US and US$5.3 billion (4.4 percent of GNP) in Central America. Most of the welfare gains in these simulations come from the elimination of service barriers, but the results from merchandise trade alone are also significantly above those of Hilaire and Yang (2003).

A more comprehensive study of DR-CAFTA has been put together by the United States International Trade Commission (USITC), which relied on the GTAP6 database for finer regional disaggregation, significantly improved protection data, and a 2001 base year.<sup>4</sup> USITC (2004) made

> 2Only 19 products will continue to be subject to tariff duties, and these barriers will be phased out over a 10 year period (World Bank, 2006).

> 3The authors used equivalent variation as the welfare metric. The GTAP5 database has a base year of 1997; the five CACM members are grouped together with Belize, Panama, and 19 Caribbean nations to form a Central America and Caribbean aggregate.

> 4GTAP6 draws its protection data from the MAcMaps database developed by Centre d’Etudes Prospectives et d’Informations Internationales (CEPII). In contrast to GTAP5, the new data explicitly take into account preferential tariffs and tariff rate quotas (TRQs). Thus, estimates of gains from trade with GTAP6 tend to be significantly below those with the earlier database, since the initial level of protection is much lower. See World Bank (2004, chapter 1)

2