Intraregional Trade and Investment
Economic Situation of the Member Countries
After the setback experienced in the past decade with regard to a common external tariff (CET), in the course of 1990-94 a process of convergence was observed in external tariffs in general, including for the first time the agriculture sector. Indeed, in 1993 the region adopted a CET with a floor rate of 5 percent and a ceiling rate of 20 percent. Honduras, after incorporating the CET in 1993 and acceding to the GATT in 1995, undertook to eliminate the surcharges in effect prior to those two events by means of a program which has been proceeding satisfactorily. Nicaragua, for its part, because of its unfavorable economic circumstances, has applied a temporary extraordinary tariff since 1993 with a reduction schedule that will enable it to reach levels of 20 percent and 5 percent by the year 2000. Panama, which has never been a participant in the subregions's CET, has the highest levels of protection, both nominal and effective, with a floor of 2.5 percent and a ceiling of 40 percent.
Despite there having been a general process of reduction of effective protection and dispersal of rates, certain industrial activities have benefited from significant protection and high rates of dispersion. There are branches of industry with effective protection in excess of 250 percent, while others have less than 20 percent.
Despite the advances made in developing the CACM, the Central American economic integration process has had to contend with a series of obstacles in recent years. These have been basically associated with the harmonization at a regional level of national economic policies, and especially trade and fiscal policies. Tensions arise between the objective of speeding up the region's integration into the world economy and the considerable dependence on customs revenues of certain governments facing fiscal imbalances. Such was the case in Costa Rica and Honduras in 1994.
These tensions have been reflected in the Central American Tariffs and Customs Council's recent decisions, which lowered the minimum rate to 1 percent for capital goods. At present, only El Salvador has implemented this rate. In turn, a reduction of the tariff ceiling to 15 percent is under consideration, depending on the outcome of studies being made by the Permanent Secretariat of the General Treaty on Economic Integration of Central America (SIECA) on the impact of this reduction on manufacturing industries and on the fiscal revenues of the five countries.
It should be noted that Costa Rica has been an exceptional case in the uniform tariff reduction process. Because of its marked fiscal deficit, in March of the current year, Costa Rica invoked the safeguard clause in the Central American Tariff Agreement to temporarily raise its tariff by 8 percentage points for all products imported from outside the CACM until the Legislative Assembly approves a package of taxes that will improve this situation. The Central American Tariff Council took note and approved this measure, recognizing the exceptional causes behind it, and extended its validity to December 31st of this year.
The agricultural product markets have undergone significant deregulation and frameworks have been agreed on for liberalization of regional trade in agricultural products. Nevertheless, the actual progress in regional liberalization of these markets is very limited. In practice, there are still a number of obstacles to this trade, including import licenses, quantitative barriers, tariffs and phytosanitary certifications, together with delays and complications at border posts.
The last two regular presidential summits --Guácimo and San Salvador-- confirmed the commitment of the countries of the region to the Central American integration process. For instance, at the Guácimo Summit, the new Costa Rican administration announced its decision to remain in the regional bloc for its trade negotiations with third countries, after the previous administration had negotiated a trade agreement bilaterally with Mexico. Despite these declarations, ratification of this agreement by the Costa Rican Legislative Assembly at the end of last year had the effect of partially disrupting the Central American common external tariff. Moreover, the agreement with Mexico subjects Costa Rica to stricter disciplines than those contained in the Central American treaty, especially as regards rules of origin, safeguard clauses, anti-dumping measures and dispute settlements.
Since the San Salvador Summit of March 1995 the governments' commitment to regional integration has also been reflected in their desire to accelerate the modernization of the bodies and institutions governing this process. This has led them to request that the IDB and ECLAC assist the region in making an assessment of the institutional apparatus with a view to increasing its operating efficiency and effectiveness. This is most urgent since the growth of the region's institutional system has been pronounced; there are now around 57 regional organizations and bodies making up the Central American Integration System (SICA). Despite the efforts that are being made, there are difficulties in implementing the regional initiatives decided on at the highest political levels. One of the weaknesses in Central American integration has been the gulf between presidential policy declarations and the implementation and response capacity of regional institutions.
In addition, it should be noted that the service markets have been excluded from the integration process, despite the fact that the so-called "northern triangle" (Guatemala, El Salvador and Honduras) has adopted agreements to facilitate the movement of capital and also of labor. The lack of progress in liberalization, harmonization and integration of the overland freight transport markets is of particular significance. It is also a fact that the subregion does not have a transparent dispute settlement system to regulate the use of restrictive practices and application of anti-dumping measures in trade among the Central American countries.
To remedy some of these problems, SIECA has begun studies that will lead to the adaptation of regional trade rules in accordance with the new requirements of the World Trade Organization. In this connection, special attention will be paid to services, particularly professional and financial services, telecommunications, and air and sea transportation.
One of the problems of the integration movement in the years prior to the external payments crisis of the 1980s was that the benefits tended to be concentrated in the relatively more advanced countries of the region, to the detriment of Nicaragua and, especially, Honduras. There were numerous reasons for Honduras' limited participation in the earlier stages of the integration process, including the perception that the distribution of costs and benefits was unequal. In the new initiatives now being taken to reactivate the process, there is an awareness of the seriousness of this problem and of the need to resolve it, as evidenced by the temporary special treatment the region has allowed Nicaragua with regard to tariffs.
In 1994 subregional trade (US$1.36 billion) exceeded in nominal terms the historic high achieved in 1980 (US$1.13 billion), after a severe contraction in which it slumped to its lowest point in 1986. Intraregional exports were up 14 percent from the preceding year and represented 24 percent of the region's total exports in 1994. While this level is relatively high compared with other subregions in the hemisphere, it pales in comparison with North America or the European Union. However, it remains the second market for the subregion's producers, with the advantage that the products sold are manufactures with a significant impact on the value added generated in each country.
Central America's main trading partner is the United States, whose importance in this respect has increased since the Caribbean Basin Initiative (CBI), with exports to the United States rising from 36 percent of all Central America's exports in 1980 to 43 percent in 1990. With the advent of the NAFTA, the subregion, together with the Caribbean countries, has expressed the fear that investment and trade will be diverted to Mexico, to the CBI countries' detriment.
While full accession to the NAFTA is a goal, there is a need for an interim system of access to the U.S. market to lessen diversion of investment to Mexico. In response to this need, in April 1994 the United States Government submitted to the Central American presidents the Interim Trade Program (ITP), which is roughly equivalent to the conditions of access for textile products under the CBI. However, in September the ITP was excluded from the addendum to the GATT then under consideration by the US Congress, at the same time as the fast-track mechanism for approval of trade treaties was withdrawn. More recently, other initiatives have been put forward for establishing temporary parity between CBI countries and Mexico regarding their access to the U.S. market.
Central American clothing exports to the United States are for the most part effected under the generalized system of preferences (GSP). There is concern on this score in Central America, because the GSP has only been extended to July 1995, when it is to be replaced by a legal provision compatible with the new GATT treaty.
The Central American integration process is exposed to external pressures owing to the opportunities in the subregion for conclusion of free trade agreements not only with Mexico, but also with Colombia and Venezuela, with which some degree of progress has already been made in negotiations. Contacts have also been made with the Caribbean countries. In any event, it is clear that Central America could move forward in a convergence process with respect to the GATT and NAFTA, adopting appropriate disciplines in areas such as the liberalization and "tariffication" of trade in agricultural products, liberalization of service markets, rules of origin, intellectual property rights and conflict-resolution mechanisms, and safeguard and anti-dumping clauses.
An important factor in the relationship between Central America and the Bank is the existence of the Regional Consultative Group on Central America (GCR-CA) established by the 1990 Puntarenas Presidential Summit. Chairmanship of the group was assigned to the Bank and its membership consists of the seven countries of the Central American isthmus and representatives of international organizations and countries interested in supporting programs to strengthen the Central American integration process and other inititatives of a regional nature.
The GCR-CA is a programming and consultation mechanism of the countries of Central America and Panama for external cooperation. It embodies Central America's priorities and aspirations as to regional integration and development, which are fed into the portfolio of external cooperation and regional investment projects that the Bank can then consider for financing, or serve as a catalyst, for securing funding from other donors. Its main value is that through the dialogue with the donors in a single forum it is able to promote and refine new initiatives for external cooperation while at the same time helping to coordinate financing from various external sources.
In accordance with the mandates received from the recent Presidential Summits, certain areas have been tentatively targeted for consideration by the GCR-CA in 1995-1996. These include continued support for sectors currently receiving consideration (energy, human resources, industrial competitiveness and environment); the strengthening of regional institutions; stage II of the macroeconomic policies convergence program, and the trade support program, including access to the NAFTA and hemispheric convergence. These program approaches will be considered at the next meeting of the Multilateral Steering Committee, scheduled for September 1995.
With a view to developing a well-structured position on the requirements of the GCR-CA, in the next few weeks the Bank will consider a new programming paper that proposes adopting a three-year regional cooperation plan of action for Central America.
The increasing convergence of macro-economic policies in the region is more the outcome of a shift in the direction of economic policy in virtually all of Latin America, rather than a result of a deliberate process. The integration of the region's capital markets is still in its early stages and intraregional trade could be far greater. It cannot therefore be expected that changes in macroeconomic policy will be based solely on considerations of intraregional trade. Indeed, a country such as Costa Rica, which ships just 10 percent of its exports to the subregion, will naturally pay more attention to its major trading partners (the United States and the European Union) regarding commercial policy such as that relating to the exchange rate.
In 1992 and 1993, for the first time in a decade, inflation rates were below 20 percent. In all the countries significant fiscal efforts have been made; however, the structural causes of their fiscal deficits still persist, which is why significant internal imbalances surfaced again in 1994 in Honduras, Guatemala and Costa Rica. Moreover, the liberalization of the exchange markets and high domestic interest rates have increased the overvaluation of local currencies and expanded current account deficits. In addition, Honduras and Nicaragua are saddled with an onerous external debt. In short, while some progress has been made in economic management and performance, macroeconomic fragility continues to jeopardize the feasibility of achieving economic integration free of protectionism and other major distortions.
This article is online: http://www.iadb.org
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