The United States Congress approved the Central American and Dominican Republic Free Trade Agreement (CAFTA-DR) last summer. It has since been welcomed by Honduras, Nicaragua, and El Salvador, with others expected to follow in the months and years ahead.
Much like the North American Free Trade Agreement (NAFTA), CAFTA-DR aims to bring down trade barriers with Central American countries. CAFTA-DR will reduce or eliminate duties on goods shipped between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic.
The White House has said the agreement will further open a market of 44 million consumers of U.S. products and "strengthen our security at home by promoting democracy and prosperity in our hemisphere." It's not just Florida, California, New Mexico, and Texas that are leveraging CAFTA-DR benefits. North Carolina exports $1.7 billion in goods annually to CAFTA-DR countries, making it third in the nation behind Florida and Texas.
As this heavily debated free-trade agreement makes inroads in Central American nations, some companies are making aggressive moves into these territories with shared service centers and light manufacturing in hopes of gaining a competitive advantage. Others are waiting and watching. But the Office of the United States Trade Representative (USTR) is encouraging companies to pursue relations with these foreign lands. "The Central American countries with which we are negotiating trade events are ready to deepen their trade relationships in a dramatic way," says Nina Moorjani a USTR spokesperson. "These countries are getting our seal of approval and using the free-trade agreement to transform their economies."
The Costa Rica Connection
Costa Rica offers an educated, highly productive, English-speaking work force. It has a renowned history of political, social and economic stability, foreign investment incentive regimes, international standard business infrastructure, and a high quality of life. The government has long placed a high priority on investing in public education, including the university system and technical and vocational training. The country is strategically located in the center of the Americas.
For all these reasons, Costa Rica has been an attractive location for U.S. companies since 1980. What many outside the United States do not know is that Costa Rica is actively engaged in research and development activities. There are more than 130 software companies producing products for banks, communication, healthcare and other sectors, according to American University, and hardware development opened up when Intel entered the country in 1997. Medical devices, electronics, services, and tourism are also key sectors. Companies doing business in Costa Rica include Photocircuits, Boston Scientific, Hewlett Packard, and Hospira.
"Since Intel went to Central America, we've seen a tremendous amount of investment going on there, particularly in shared services on the call-center front," says Matt Jackson, a senior manager at Deloitte Consulting LLP and a member of the firm's Global Expansion Optimization team that advises corporations on site selection.
Gearing Up in Guatemala and Honduras
Costa Rica's success and its reputation among Fortune 500 companies has led to the emergence of some additional locations in Central America. Two countries that have benefited the most are Guatemala and Honduras. Transaction processing and call-center activity are picking up steam in these nations.
On-time delivery and proximity to the largest markets of the world are characteristics that help position Guatemala as an attractive location for investment in Latin America. A rail line operating between Guatemala City and the Atlantic provides an ideal shipping option for bulk and container cargoes. Guatemala also offers seaports on both the Atlantic and Pacific coastlines, as well as major highways to Mexico and other Central American countries. Guatemala has one of the largest pools of young human resources in the Central American region, making it a strong candidate for manufacturing and other labor-intensive industries. More than 72 percent of the population is under the age of 30, guaranteeing a quality labor force both now and in the future.
"Early adopters have found the Guatemalan market to be quite fruitful. We have good reports about the quality of workers. English language capabilities are good," says Jackson. Perhaps the most notable investments in Guatemala are Exxon and Shell. Both companies have shared services operations in the Central American country. Other companies taking advantage of Guatemala's opportunities include Procter & Gamble, Colgate-Palmolive, and Hino.
Nearby Honduras also boasts a large labor pool of industrious, productive workers and unrestricted capital repatriation. The country has carved out a niche in textiles; companies like Fruit of the Loom, Oshkosh B'Gosh, and Hanes operate there. The National Port Authority owns and operates six ports in Honduras. The nautical trip from Miami to Puerto Cortes takes only 48 hours.
Pursuing Opportunities in Panama
No discussion of economic development in Panama would be complete without a focus on the Panama Canal. The international market drives Panama's economy, with large contributions from container transport and cruiser tourism through the canal. The chairman of the Panama Canal Authority's board of directors in April recommended a new lane along the canal that will double capacity and allow more traffic. Potential construction is slated for completion by 2014.
Panama's main manufactured exports are food products; beverages; tobacco; textiles; chemicals and petroleum; carbon rubber and plastics byproducts; and metallic products, machinery, and equipment. The United States is by far Panama's largest export market, accounting for some 43 percent of total exports, according to the Consulate of Panama.
Entering El Salvador
After years of tumult, El Salvador is now known as a Central American location that offers a favorable business environment with highly competitive operating costs. El Salvador is attracting call centers, thanks to its state-of-the-art telecommunications infrastructure, stable dollar-based economy, and growing bilingual work force with its neutral Spanish accent. Sykes Enterprises and Teleperformance have both made investments in excess of $5 million in the country.
"A lot of textile companies that were in Costa Rica are moving to their operations to El Salvador," says Sergio Garcia, KPMG Tax Practice Director in Costa Rica. Indeed, El Salvador is developing clusters for the manufacture of apparel and footwear, along with agroindustry, call centers, tourism, light manufacturing and electronics, and logistics and distribution centers. El Salvador's Agency of Investment Promotion in March toured Miami in attempts to bring awareness of its logistical and distribution advantages.
Taking Notice of Nicaragua
The United States is Nicaragua's largest trading partner by far, accounting for roughly 25 percent of the country's imports and about 35 percent of its exports, according to the U.S. State Department. Nicaragua began free market reforms in 1991 after 12 years of economic free-fall under the Sandinista regime. Despite some setbacks, it has made dramatic progress, privatizing more than 350 state enterprises and reducing inflation. The G-8 last year cancelled $700 million of what Nicaragua owes the World Bank. Still, Nicaragua remains the second-poorest nation in the hemisphere with high unemployment and wages of $1 to $2 per day.
An antiquated energy infrastructure and poorly enforced property rights are among the most serious barriers to investment in Nicaragua. Under CAFTA-DR, however, all forms of investment will be protected, including enterprises, debt, concessions, contracts, and intellectual property. U.S. investors will enjoy in almost all circumstances the right to establish, acquire, and operate investments in Nicaragua on an equal footing with local investors. The Nicaraguan government is actively soliciting foreign investment to repair and improve existing facilities.
Betting on Belize
Promoting itself as "60 seconds to NAFTA" - the time it takes to cross the International Bridge of Friendship into the neighboring NAFTA country of Mexico - Belize is poised for extraordinary investments opportunities. Situated on the northeastern tip of Central America with more than 300 miles of Caribbean coastline, this former British colony is a trade crossroads between the Caribbean and Latin America. English is the official language in the business environment. Land is reasonably priced and workers average $10 per day.
Indeed, Belize offers a favorable business environment, with few regulatory restrictions and minimum of red tape. The Commercial Free Zone Act of 1994 established a commercial free zone at Corozal to attract foreign investment. The zone provides facilities for various activities including manufacturing, processing, packaging, warehousing, and distribution of goods and services. Three locations have been designated as EPZs under the Export Processing Zone Act: San Andres, which is eight miles away from the Mexican border, and two others located about nine miles from Belize City, the country's commercial capital.
CAFTA-DR: Not a Panacea
Of course, just because a free-trade agreement is in place in Central America does not mean there are no barriers to doing business in the region. Companies seeking to establish relationships in Central America must be familiar with the culture, language, and laws of the land. All Central American cultures are not the same; dialects differ, and laws are unique to each nation.
"When companies look to invest in Central America they see it as a single region, but you have to bear in mind that this is a group of jurisdictions with different legislation and tax systems," says KPMG's Garcia. "Companies want to standardize their operating structures throughout the region, but you have to make adjustments for each particular jurisdiction." Even though Central America is a relatively small region, it also has different political influences, different levels of education, different economies, and different target industries. Garcia notes that there are good opportunities in Nicaragua for companies that want to set up manufacturing plants, as Nicaragua has perhaps the lowest labor costs in the region. Costa Rica, by contrast, orients itself toward the service sector.
Analyzing the Markets
Whether interested in Costa Rica, El Salvador, Guatemala, or another country in the region, a business team should analyze three dimensions of doing business in Central America: economic, noneconomic, and risk.
On the economic front, the team should examine base wages and benefits; discretionary, mandatory and real estate costs; tax laws; and infrastructure limitations and support. In essence, the goal is to determine the total cost of ownership of operating in the target countries. "There are hidden costs that people don't factor in when they move into a country," says John Vande Vate, Ph.D., executive director of Georgia Tech's executive master's degree program in international logistics. "You may think you can transport goods on a ship at one cost and then find out that you have to fly the merchandise in during peak periods because you can't get the capacity. Those scenarios can cause all the expected savings to disappear."
Noneconomic considerations relate to the ability to sustain and scale operations, such as the availability of a bilingual financial analyst who has a finance or accounting degree, or of technology workers. Availability of space, permitting issues, incorporation requirements, utility approvals, and exit strategies are also key noneconomic considerations.
Then there's risk. The company has to decide if it wants to be a pioneer in a market or if it is looking for a market with a demonstrated presence of comparable investments. The key is to prioritize each of these criteria in the site selection process as it relates to your industry. Labor may be more important than telecommunications infrastructure, for example. "Determine what would represent a set of fatal flaws," says Deloitte's Jackson. "If you need a thousand people and your investigation shows there are only 500, that's a fatal flaw. You simply cannot meet your objectives. If you need five megawatts of electricity and there is only one available, that could be a fatal flaw."
CAFTA-DR will instantly eliminate tariffs on 80 percent of U.S. manufactured goods, and the remainder of tariffs will be phased out within a few years. As a result, manufacturers and workers will benefit from increased sales of information technology, farm, construction, medical, and scientific equipment, paper products, and pharmaceuticals.
Tax and legal issues aside, understanding cultural issues is vital to successful business operations in Central America. Even if your Central American counterparts speak English, they prefer to do business in their native tongue, according to Francisco J. Aparicio, international corporate transactions attorney and of counsel in the Los Angeles office of Ropers Majeski Kohn & Bentley.
"You need to put together a team that understands the differences in law, language, and culture if you want a successful transaction," says Aparicio. "Language, culture, and law are nuts-and-bolts business issues in any country in which you plan to invest and must not be underestimated as a factor in successful deals."