17 de febrero 2025
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Nicaragua would face severe economic consequences if US President Donald Trump restricts or eliminates the benefits of the free trade agreement known as CAFTA-DR. There could also be consequences for the rest of the Central American countries, according to Jhon Fonseca Ordoñez, a researcher at the University of Costa Rica, who warns that “the consequences would be severe.”
At the end of January this year, President Trump’s special envoy for Latin America, Mauricio Claver-Carone, declared that the United States is not interested in having Nicaragua as a trading partner. As a result, they are exploring “options” with their allies in the region to have the country excluded from CAFTA.
Any measure Washington could implement would have consequences for Nicaragua, as the country would lose—or see limited—preferential access to the US market.
Companies Could Leave Nicaragua
“Without CAFTA, Nicaraguan products would face high tariffs, reducing their competitiveness,” said the professor. In his opinion, the exports most affected would be those from the textile and apparel sector; coffee, tobacco, and seafood, as well as agricultural and manufactured products.
Affecting products from the textile and apparel sector, as well as some made in companies under the free zone regime, would lead to almost immediate job losses. The professor reminds that “Nicaragua has a strong maquiladora industry that depends on exports to the United States,” so “if exports fall, thousands of workers could lose their jobs.”
Additionally, he predicts that some multinational companies (whether under the free zone regime or not) could relocate to other CAFTA signatory countries, such as Honduras or El Salvador. While most workers in the Free Trade maquiladora industries in Nicaragua earn around $250 USD per month, agricultural workers for products exported under CAFTA earn less.
Other areas where consequences are also likely include foreign direct investment, because “without preferential access to the United States, Nicaragua would lose its appeal as an investment destination.” This could push businesses to leave for countries with better access to markets.
Although the topic has not been discussed, Fonseca Ordoñez, who is also an expert in Management, Foreign Trade, and Development, warns that Trump could also impose restrictions on remittance transfers (which amounted to 5.2 billion dollars in 2024), which would reduce the flow of money to Nicaragua. If that happens, “the economic crisis could force increased migration to Costa Rica and the United States,” he predicts.
Exclusion of Nicaragua Would Affect Central America
While both Claver-Carone and Secretary of State Marco Rubio have made strong statements about excluding Nicaragua, one of the reasons no measures have been implemented yet is that it seems impossible to do so without affecting the rest of Central America. Fonseca Ordóñez agrees that “if the United States imposes trade sanctions on Nicaragua, this could have collateral effects on other countries in Central America.”
As the country is part of Central America’s value chains, applying trade restrictions to Nicaragua could affect the export of raw materials to neighboring countries. It could also harm regional textile and manufacturing production, and hinder regional logistics, “as Nicaragua is a key corridor for intra-regional trade.”
The academic warns that smuggling and trade diversion across the borders with Honduras and Costa Rica should not be ruled out. Just as companies and entities from other sanctioned countries (such as Russia) do, Nicaraguan companies could try to export their products to the United States “using intermediaries in other CAFTA countries.”
Finally, he recalls that, as seen in the past, sanctions against Nicaragua could lead to greater migration pressure and economic destabilization in the region. “An economic crisis in Nicaragua could generate increased migration flows to Costa Rica and the United States,” as well as “economic instability impacting foreign investment across the region, affecting the risk perception of Central America,” he concluded.
Options for Excluding Without Violating the Agreement
Researcher Fonseca Ordóñez notes that in addition to the suspension of tariff preferences, another retaliation could be financial and investment restrictions. He notes that “the United States could restrict Nicaragua’s access to international financing, affecting currency flow and the operations of Nicaraguan companies.”
Some possible measures include blocking financing from multilateral organizations such as the World Bank, the IMF, and the IDB. Besides blocking, it could delay loans and technical assistance to Nicaragua.
Another front that has not yet been implemented is imposing financial sanctions on Nicaraguan banks or excluding them from the international financial system (SWIFT), “making commercial and investment transactions more difficult.”
Washington could also continue sanctioning individuals and Nicaraguan companies, indirectly affecting trade and the economy. Thus, sanctions against high-ranking officials could be complemented with asset freezes and travel restrictions for government figures.
If sanctions are imposed on key companies, Fonseca Ordóñez identifies that it could restrict the export of strategic Nicaraguan products to the United States. It could also limit imports into Nicaragua and impose administrative barriers making it harder for Nicaraguan products to enter the United States, forcing them to meet stricter certifications.
Additionally, he finds that the United States could influence other countries to not sign trade or investment agreements with Nicaragua, weakening its foreign trade. It could also restrict cooperation with Nicaragua’s key partners, such as the European Union or Mexico, and pressure international companies to avoid doing business with the country.
Mechanisms for Excluding a Country
Since it is not hard to imagine these consequences, experts are focusing on the “how,” since the Treaty “does not contain an explicit clause allowing the unilateral or automatic exclusion or expulsion of a signatory country. However, there are several mechanisms that could, in practice, lead to a country’s exit from the agreement, depending on the circumstances,” warns Fonseca Ordóñez.
One of these is for Nicaragua to voluntarily withdraw from the agreement. This is unlikely but not impossible. While CAFTA “does not establish a direct mechanism for expelling a country, a signatory country can withdraw voluntarily from the treaty through formal notification,” he points out. In any case, the procedure is governed by international law and the Vienna Convention on the Law of Treaties.
Given the difficulty of Daniel Ortega and Rosario Murillo renouncing the Treaty, the researcher notes that political or economic pressure could be applied to force them to exit. This could happen by having other CAFTA countries impose trade restrictions on Nicaragua or deny it access to key markets.
One more option is for the dictatorship to stop trusting the dispute resolution mechanisms. “In this case, the affected country might decide that its best option is to voluntarily exit,” he detailed.
Several Countries Would Need to Agree
Another way would be through sanctions and the suspension of commercial benefits. Regarding this, Professor Fonseca Ordóñez explains that “if a country seriously violates its commitments under the Treaty, there are mechanisms to suspend trade benefits, though not to expel the country from the agreement.”
These mechanisms could be activated if it is proven that Nicaragua is violating labor or environmental provisions. “The treaty has dispute resolution mechanisms that allow for imposing trade sanctions on a country if it fails to meet commitments in these areas,” specifies the expert.
A similar situation occurs if trade or investment rules are violated. If a country takes actions contrary to CAFTA rules, other members may initiate dispute resolution procedures that could result in sanctions. It could also happen that a country adopts protectionist or discriminatory measures, and other countries respond with reprisals that are already within the Treaty.
There is also the option to modify the Treaty to exclude a country, or alternatively, create a new treaty without Nicaragua. “The remaining members could amend the Treaty through a new agreement that excludes one of the parties. For this, all remaining countries would have to renegotiate the Treaty and sign a new version without the excluded country,” he concludes.
This article was originally published in Spanish by Confidencial and translated by Havana Times. To get the most relevant news from our English coverage delivered straight to your inbox, subscribe to The Dispatch.
