CAFTA Opens Trade Doors but Increases Risk Potential

Trade Credit Insurance Can Help Protect Companies Exploring New Free Trade Zones

When the U.S. Congress passed the Central American Free Trade Agreement (CAFTA), it opened the door for more U.S. companies to export their goods to Latin America. However, the expected trade increase includes the potential for more financial risk, according to Euler Hermes ACI -- the leading provider of accounts receivable insurance in the U.S.

CAFTA will eliminate tariffs on 80 percent of U.S. exports to the countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. Experts expect an increase in trade to these areas, as companies will now save nearly $15 billion per year through the tariff elimination. But exporters looking to begin shipping their goods to Central America should be wary of their increased risk exposure.

"The door swings both ways," said Arjan van de Wall, Euler Hermes ACI Senior Vice President and Director of International Development. "Without the tariffs, more U.S. goods can be shipped to Latin America, which will be beneficial to American businesses. But the increased amount of exposure combined with the less stable economies in certain parts of Central America mean a bigger financial risk in entering these new markets."

An expert in Latin American affairs, van de Wall believes that CAFTA will have similar implications to the North American Free Trade Agreement (NAFTA), specifically expanding sales into new markets and leveling the playing field in trade due to the fact that most imports from the six Central American countries now enter the U.S. duty-free. However, van de Wall explained that expanding sales into new markets always comes with an increased loss risk. Export receivables can affect bank financing, collections and legal recourse are more difficult, and buyer information is less readily available.

Businesses looking to expand their sales into the new free trade zone may find trade credit insurance to be most beneficial in protecting their cash flow. "As with NAFTA, the Central American free trade zone will facilitate sales expansion into significantly riskier countries, and trade agreements do not equalize all commercial regulations nor the means to dispute them," van de Wall said. "Through the utilization of trade credit insurance, a company looking to export its goods to Latin America can have the benefit of better loss protection and better risk management intelligence."

Meanwhile, CAFTA has also opened the door to additional free trade zone discussions with countries like India and China. "As the current administration pursues more free trade zones around the globe, U.S. companies should seriously consider the benefits that a trade credit insurance policy with Euler Hermes ACI can offer," concluded van de Wall. "Expanding sales is important, as is protecting cash flow."

For more information about Euler Hermes ACI products and services, visit http://www.eulerhermes.com/usa.

Euler Hermes is the worldwide leader in trade credit insurance and one of the leaders in bonding and guarantees. With 5,400 employees in 40 countries, Euler Hermes offers a complete range of services for the management of customer receivables and posted a consolidated turnover of 1.9 billion euros in 2004. The North American headquarters (Euler Hermes ACI) is in Owings Mills, Md. For more information visit www.eulerhermes.com.

Euler Hermes, a subsidiary of AGF and a member of Allianz, is listed on Euronext Paris. Standard & Poor's rates the group and its principal trade credit insurance subsidiaries AA-.

These assessments are, as always, subject to the disclaimer provided below.

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