- The U.S.- Central American Free Trade Agreement (CAFTA) is a free trade agreement with five Central American Countries: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. - Because of differences in resource endowments, size, and income between the United States and the Central American countries, trade between the two regions has generally been complementary, inter-industry trade. The United States exports wheat, corn, soybeans, and rice, and imports coffee, bananas, and fruits and vegetables. CAFTA will enhance the U.S. trade volume with Central America through trade creation and diversion effects. - One of the largest exports by the Central American countries is sugar. The region exports about 1.5 million tons of sugar annually, and currently exports less than 10% of its sugar exports to the United States. - If the United States imports more than 500 thousand tons of additional sugar, a limited number of sugar producing regions in the United States would be able to remain viable. Wholesale price of sugar would be about 20 cents in the United States with an additional import of 500 thousand tons, and would decrease further as additional imports increase. For a sugar price less than 20 cents/pound, U.S. domestic sugar supply would become much more elastic. This implies that the U.S. domestic sugar supply would decrease much faster if the price of sugar was lower than 20 cents/pound: domestic supply would decrease 25% for sugar beets and 15% for sugar cane for every 10% decrease in price. Sugar beet processors could lose their economies of scale as a result of reduced supply of sugar beets and would be less competitive. However, this may not be a major problem for cane sugar refiners since the United States imports raw cane sugar for domestic processing. - The current U.S. proposal on sugar under CAFTA could permit the Central American countries to export more than one million tons of sugar to the United States within a few years. Even if the second tier tariff is not included in the final agreement, incremental access, as requested by the CAFTA countries, could be in the range of 300,000 tons per year. In addition, with expected additional imports of sugar under various FTAs, such as NAFTA and FTAA, total additional U.S. imports of sugar could exceed one million tons, which would hurt the U.S. sugar industry significantly. - If the United States imports more than 2 million tons of additional sugar from the CAFTA countries, the world price of sugar would increase from 8 cents/pound to 10 cents/pound and the U.S. domestic wholesale price would decrease to 13 cents/pound. At this price level, the United States would import more than 80% of its domestic consumption. - CAFTA may be good for both the United States and the Central American countries. However, the U.S. sugar industry may become a victim of the agreement. U.S. sugar imports from the Central American countries should be limited to protect sugar beet and cane growers in the United States until worldwide, multilateral free trade for sugar is established.