A briefing by the Nicaragua Solidarity Coalition, February 2025

Draft legislation from the last session of the United States Congress, likely to be reintroduced in the 119th session, appears to conflict with an important US trade treaty. If approved, the ill-named “Restoring Sovereignty and Human Rights in Nicaragua Act” (formerly numbered S.1881 in the Senate and H.R.6954 in the House) could enable the US administration to impose sweeping new economic sanctions on Nicaragua.

However, the US is a signatory to the treaty known as CAFTA-DR, the Dominican Republic-Central America Free Trade Agreement (called here “CAFTA”, for short). The treaty was signed in 2004 by the United States, Nicaragua and four other Central American countries, and the Dominican Republic. Treaties signed by the US are binding under both international law and US federal law.

If new legislation is enacted and the US attempts to impose further economic sanctions on Nicaragua, could it fall foul of CAFTA? This briefing looks at the implications.

Note: The assessment in this briefing is a lay-person’s reading of the provisions, not a legal interpretation of them. The text of the CAFTA treaty is available online from the Office of the US Trade Representative.

What new sanctions could be imposed if the new legislation becomes law? – A summary

Among other measures, the original bill to impose new US sanctions would have:

• obliged the US administration to report on Nicaragua’s “violations” of CAFTA and limit its benefits from the treaty, which may lead to an attempt to exclude the country from CAFTA or to impose penalties on it
• required the administration to impose personal sanctions on those operating in various sectors of the Nicaraguan economy (gold mining and other sectors)
• stopped any further investment in Nicaragua by ‘US persons’, with very limited exceptions (in the House version of the bill)
• sought to prevent economic assistance to Nicaragua via CABEI (the Central American Bank for Economic Integration), of which Nicaragua is a founding member.

New sanctions would primarily affect the private sector – not, as the bills state, government officials. They would also inevitably affect other Central American countries as Nicaraguan products are often processed elsewhere.

What provisions in the CAFTA treaty might help stop these sanctions? – A summary

• The sanctions conflict with CAFTA. Nicaragua cannot be excluded from CAFTA without the agreement of all its member countries.
• The US could only impose sanctions that conflict with CAFTA by claiming that Nicaragua is a threat to international or US security.
• Reviewing Nicaragua’s compliance with requirements in CAFTA would be lengthy and complicated.  Any penalties would be financial, not exclusion from the treaty.
• Nicaragua cannot plausibly be sanctioned on the basis that it is a “nonmarket economy” (one of the provisions in CAFTA that might be used against it).
• CAFTA prevents general trade sanctions being applied; financial sanctions on non-US nationals operating companies in Nicaragua could be challenged under CAFTA rules.
• Preventing “US persons” from investing in Nicaragua appears to conflict directly with the CAFTA provisions on investment.
• Restricting Nicaragua’s access to finance from CABEI does not conflict with CAFTA but is likely to be difficult to implement since the US is not on CABEI’s governing board.

Who would be affected by the new sanctions

The bill purports to be aimed at the Nicaraguan government and its officials, but in fact practically all of its sanctions would target Nicaragua’s private sector and companies exporting goods to the US. Many of these exports are part of a chain, in which processing is carried out in other Central American countries. The effects could therefore be broader than expected.

The halting of US investment (included in bill H.R. 6954 of the 118th Congress) would affect US companies and individuals directly. Although “investment” is not defined, and there are exceptions such as for the sale of food and medicine, it would appear to cover, for example: (i) investments by major US companies such as Walmart, Intercontinental Hotels, United Airlines, and many more; (ii) property investments by US nationals and realtor businesses; (iii) remittances by US residents sent to Nicaragua, if intended for investment purposes (e.g. helping a family buy a taxi or a small business).

Many of these investments are extensive (e.g. Walmart owns 91 supermarkets in Nicaragua: Subway has 20 branches) and ending them would be very damaging.

In December 2024, the US Trade Representative began an investigation on trading practices in Nicaragua that might affect US businesses. Among those that submitted evidence were textile and apparel businesses, for which Nicaragua was the sixth most important US export market in textiles in 2021. There is $1.1 billion in two-way textile and apparel trade primarily between the other Central American countries and Nicaragua to make apparel for the U.S. market. One trade association warned that “Destabilizing the U.S.-CAFTA-DR production platform would have serious implications for U.S. and regional workers, migration, economic development, and pending and future investment.”

None of these trade organizations offered any examples of issues affecting their business in Nicaragua, and they warn against the possible risks to US interests if the investigation were to result in action against Nicaragua via CAFTA, because of its ties to the US apparel industry.

Measures to exclude or otherwise affect Nicaragua’s membership in CAFTA

Secretary of State Rubio and Special Envoy to Latin America Claver-Carone have expressed support for expelling Nicaragua from CAFTA.  Implementing such a measure, however, would be difficult, and it could cause serious damage if approved by Congress.

CAFTA is a multilateral treaty; it has no mechanism for excluding member states, so Nicaragua could not be expelled from it without a renegotiation of the treaty by all its members.

That the treaty (the “Agreement”) cannot be altered unilaterally is stated in Article 22.4:

“No Party may enter a reservation in respect of any provision of this Agreement without the written consent of the other Parties.”

Amendments to the Agreement have to be accepted by all parties to it. Experts on the treaty have commented that an attempt to exclude Nicaragua could have serious consequences for US relations with the other Central American countries within CAFTA.

Measures argued to be in US security interests

The Chapter on exemptions from the treaty, Chapter 21, Article 21.2, does have a provision which says:

“Nothing in this Agreement shall be construed: …(b) to preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.”

This provision is similar to the slightly longer provision in Article 21 of the GATT (General Agreement on Tariffs and Trade).

Because the US has designated Nicaragua as “an unusual and extraordinary threat to the national security and foreign policy of the United States”, it might argue that this provision could be applied. As Stephen Sefton points out, the US has used the security argument in other contexts.

However, any action under Article 21.2 would be certain to affect US relations with other countries who are CAFTA members. Also, it is difficult to see how a claim that Nicaragua must be excluded from benefits under CAFTA because the country threatens US security would be compatible with, at the same time, reviewing Nicaragua’s compliance with the treaty (see next section).

A recent article in a law journal concludes that “the national security exception cannot be used to justify all types of unilateral economic sanctions, even if these measures are introduced to address national security concerns.” Of course, unilateral coercive measures or “sanctions” are themselves incompatible with international law, as former UN Independent Expert Alfred de Zayas told the UN Security Council on March 25 2024.

Requirement to review compliance with the treaty

The bill imposes a requirement on the US administration to provide an annual report on issues such as Nicaragua’s “violations of commitments made” under CAFTA and whether Nicaragua has become a “nonmarket economy” under the 1974 Trade Act.

On the question of “violations of commitments made”, Manuel Orozco has argued that Nicaragua fails to comply with a number of requirements within the CAFTA treaty, on issues such as labor law and environmental protection. Even if this were to be the case, however, it is likely that other CAFTA members are deficient in these or other aspects of the treaty. It is difficult to see how unilateral action against Nicaragua on these grounds could proceed without similar action being taken against non-compliance by all signatories to the treaty, including the US.

The treaty’s dispute mechanisms (set out in Chapter 20) apply in all cases of alleged non-compliance with the treaty, made by one party against another. Furthermore, there are specific dispute mechanisms relating to labor law, the environment, etc. (Article 20.17), which are lengthy and complicated, and any sanctions that finally result from them are monetary, not involving expulsion from CAFTA.

With respect to the possibility of Nicaragua being designated a “nonmarket economy”, as referred to in the bill, this would require a finding that “it does not operate on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise.” Given the nature of Nicaragua’s economy, it would be difficult or impossible to argue this case.

Sanctions on trade sectors

Nicaraguan exports to the US are very significant, totaling US$3.71 billion in 2023, approximately half of the country’s total exports. They are very significant economically in a country with a total GDP of only $20 billion.

The CAFTA treaty (Chapter 3) appears to prevent the US from imposing general trade sanctions in the form of trade barriers on certain goods (gold, etc.). There are some detailed provisions for particular commodities (e.g. sugar) which may already have been used.

Therefore, new sanctions on trade sectors would have to be directed instead against non-US individuals engaged in operating companies in the targeted sectors (gold, and possibly others originally mentioned in the bill, such as cattle and coffee[1]). It would be up to the US administration to choose which sectors and whom to target. Sanctions against coffee and meat, for example, could potentially hit around 20% of Nicaragua’s current exports to the US and do major damage to its economy.

However, the personal sanctions required by the legislation also appear to clash with CAFTA rules. The CAFTA treaty requires a “party” (i.e. a government) to give the same treatment in financial matters to an investor from another “party” as it gives to its own investors:

“Each Party shall accord to financial institutions of another Party and to investments of investors of another Party in financial institutions treatment no less favorable than that it accords to its own financial institutions, and to investments of its own investors in financial institutions, in like circumstances, with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of financial institutions and investments.” (Chapter 12, Article 12.2)

Thus, US financial sanctions against non-US individual investors (e.g. freezing bank accounts) appear to be incompatible with CAFTA.

If sanctions were to be imposed on sectors such as coffee and meat which involve exports to the US, the Nica Act states that the authority to do so “shall not include the authority to impose sanctions on the importation of goods”. Personal sanctions on those running businesses that export to the US would appear to be incompatible with this exemption.

Halt US investment in Nicaragua

Version H.R.6954 of the bill from the 118th Congress says that, after its enactment, “…a United States person, wherever located, may not make any investment in any sector of the economy of Nicaragua.” A similar provision was in the Senate version of the bill but was later deleted.

The CAFTA treaty (Chapter 10, Article 10.8) is very clear that investment must be permitted from one member country in another: “Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory.” “Transfers” are capital investments, payments, etc. sent between territories. A “covered investment” is one that took place before CAFTA was signed or which was made or expanded afterwards.

This provision therefore appears to be incompatible with US obligations under CAFTA.

Prevent further economic assistance to Nicaragua via CABEI

The bill calls for the US administration to pursue a diplomatic strategy to convince members of the governing board of CABEI to curtail financial assistance towards Nicaragua. The US is not a member of the board, but allied countries such as Taiwan, Argentina and Spain are. However, Nicaragua and its neighbors, the founding members of CABEI, are also on the board, so this diplomatic task seems unlikely to succeed. Recent US attempts to stop CABEI from funding projects in Nicaragua, and why they have so far failed, are discussed in this article.

This part of the bill does not however appear to be limited specifically by CAFTA, although of course it would be contrary to the broad intentions of the treaty and to wider measures to integrate the economies of the Central American region.

Precedents in US law and administration

The Restoring Sovereignty and Human Rights in Nicaragua Act, if passed, is not of course the first measure imposing sanctions on Nicaragua. The main precedents are:

• The “NICA Act” (Nicaragua Investment Conditionality Act of 2018)
• The “RENACER Act” (Reinforcing Nicaragua’s Adherence to Conditions for Electoral Reform Act of 2021)
• An Executive Order EO 14088 – Taking Additional Steps to Address the National Emergency With Respect to the Situation in Nicaragua (October 24, 2022)

The latter contains many of the measures in the current bill, in shortened form. For example:

• It prohibits imports from and exports to Nicaragua of products determined by the administration.
• It bans investment by a “United States person” in any sector of Nicaragua’s economy, as determined by the administration.

The executive order carries the proviso that it “shall be implemented consistent with applicable law”, which presumably requires compliance with the CAFTA treaty.

Published by the Nicaragua Solidarity Coalition.

[1] Cattle and coffee were included (as well as gold) in S.1881 but were then removed; H.R.6954 refers to gold and “any other sector of the economy”.