# **5. The relationship between tariff reductions and exporters’ behavior: Preliminary evidence**

In this section, we describe the tariff and the tariff reductions that followed the introduction of DRCAFTA. We then examine the relationship between extensive margin and tariff cuts.

## **5.1. Tariffs and tariff cuts**

The data on tariffs come from the tariff schedules that were negotiated in 2004 by each CAFTA member. Each country has its own tariff schedule in which goods are classified in eight to twelve different categories<sup>14</sup> according to the timeframe over which tariffs will be eliminated. While most of Dominican products could enter the U.S. market duty-free immediately after the agreement, between 15% (Guatemala) to 40% (El Salvador) of the total number of products in the other CAFTA markets were subject to a duty. Products whose tariffs were not zero immediately are being phased out progressively over a 5- to 20-year period.<sup>15</sup> Appendix 5 reports the number of product lines (HS 8-digit)<sup>16</sup> that received duty free treatment before and immediately after the implementation of the DR-CAFTA.

For the Dominican Republic-U.S. trade, the agreement consolidates the existing preferences and grants a duty free treatment to almost all products entering the US market<sup>17</sup> , except for some agricultural products that are subject to quotas.<sup>18</sup> In the case of textile and apparel exports, the DR-CAFTA provisions are more flexible than the ones in the CBTPA, as they allow for cumulative rules of origin.<sup>19</sup> This allows apparel exporters in Central America and the Dominican Republic to use inputs from any country member, without losing their duty-free access to the US market (Hornbeck, 2008). For the Dominican-Central American trade<sup>20</sup> , the DR-CAFTA extends the duty-free treatment to goods produced in export zones.

As for the tariff levels, the median tariff faced by Dominican exporters in the U.S. before the agreement was 3.2% and 5% in the other CAFTA members (see Appendix 6).<sup>21</sup> The tariffs before and after the agreement are shown in Appendix 7. In order to assess the size of the tariff preferences granted by the

> 14 U.S. has 8 categories. El Salvador, Nicaragua and Honduras have 12 categories and Guatemala has 11 categories. 15 There are also cases in which duty-free treatment is delayed and will not begin until 7 or 12 years after the agreement enters into force. But all tariffs will be eliminated in 20 years.

> 16 All tariff schedules are at the HS8-digit product, except in the case of Nicaragua (i.e. HS10-digit).

> 17 According to USITC, before the agreement around 80% of exports from the Dominican Republic had preferential access in the U.S. market.

> 18 Sugar in the case of the Dominican Republic.

> 19 The provision was retroactive to January 1, 2004.

> 20 The Central American (i.e. Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) countries and the Dominican Republic sign a free trade agreement in 1998, that entry into force in all countries between 2001 and 2002. The agreement guaranteed duty free to almost all goods that complied with the rules of origins and transformation criteria, excluding goods from export zones.

> 21 To compute the median tariff in the case of the Central American members, we first compute the median tariff by product across the five countries, and then we calculate the overall median tariff. The median tariff cut by product and overall median tariff cut are computed in the same way. These computations are possible using 8-digit data since countries in Central America share the same product classification at this level of disaggregation, namely the SAC (Sistema Arancelario Centroamericano).

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