Ring: Central America's Integration Status
down by decades of civil war, then lashed by natural disasters from hurricanes
to earthquakes, Central America’s seven nations are emerging to the rough, new
realities of global trade. Crushing world price pressure on traditional exports
of coffee and bananas—as well as growing competition on textiles from
China—threaten to make life even harder. So a new generation of post-war
leaders is pounding on the door for a shot at joining the North American Free
Trade Agreement (Nafta). It’s a tough bargain to strike but one
regional leaders know they can’t flub.
Peace accords across the region following the
civil wars of the 1970s and ’80s paved the way for stronger democratic
institutions. Peace also ushered in a decade of unprecedented economic growth. The
region’s total trade in the last decade has almost doubled to US$36 billion.
And even as the trade deficit has widened, the region’s surging exports have
produced a trade surplus with the United States for the first time in
Central American leaders say fewer barriers to
trade are essential for continued growth. “We need what industrialized
countries have, access to markets,” says Salvadoran President Francisco
Flores. “It is not fair that some countries have unlimited access to markets
while others, like mine, can only trade in the periphery of development.”
Central America depends heavily on the United States, the destination of some
60% of its exports. With the world economy in a slump and the U.S. battling back
from terrorism, the region is facing tough times.
Drought has demolished crops in many parts of
the region while dirt cheap commodity prices have siphoned off financial
gain from this year’s meager harvests. Coffee, the region’s top export, has
hit historically low prices as worldwide production continues to outpace demand.
The coffee crisis has forced many growers in Central America out of business.
Worldwide production cutbacks sponsored by the
Association of Coffee Producing Countries in 2001 failed to curb the
situation. Next year’s outlook for the sector does not look promising: demand
from importing countries is expected to increase by a dismal 1%.
Competition is also getting tougher as the world’s top producer, Brazil,
churns out more coffee at the same time its weakened currency gives Brazilian
growers a competitive advantage compared to Central America.
$3 billion tourism business has been hit hard, too. After the Sept. 11 attacks,
travel agents in Honduras reported 60% of hotel reservations canceled, while
Guatemala posted a 25% drop. El Salvador will lose an estimated $54 million this
year due to a tourism slump following the two major earthquakes in early 2001.
Costa Rica, where tourism represents 7% of GDP, expects a decline in visitors
this year. After the terrorist attacks, Costa Rica’s Tourism Ministry actively
lobbied European airlines to add service to the country, which is popular with
eco- and adventure-minded travelers.
Banana production problems mirror those of
coffee. Oversupply is putting the squeeze on multinational growers, such as
Chiquita Brands International, which have heavy presence in Central America. The
company is scrambling to cut costs in order to pay down $800 million in debt it
claims resulted in part from European import restrictions. Industry
belt-tightening and Ecuadorian competition have meant fewer contracts with
All this, however, pales in comparison to the
oncoming tide of Asian imports, especially textiles. “The Chinese juggernaut,
like a typhoon, is going to roll over the industries among our trade partners in Central
America,” says Latin American researcher Jerry Haar at the University
of Miami. China’s entry into the World Trade Organization means the
abolishment of quotas and tariffs on many of its products entering the U.S.
market. The thought of competing with Chinese imports has textile makers in the
Western Hemisphere scared red.
Relief effort. Alfredo Milián, head of
the Central American and Caribbean Textiles and Apparel Council, is lobbying in
Washington for continued support of the Central American textile industry
through the Caribbean Basin Trade Partnership Act passed in May 2000. The act
extends trade benefits similar to those enjoyed by Mexico with Nafta. The United
States lifted import duties on a variety of textile and apparel products, in
part to speed reconstruction in Central America and the Caribbean in the wake of
Hurricane Mitch. The 1998 storm left 5,000 dead and billions of dollars in
Now as the U.S. economy hits recession,
struggling U.S. textile makers are stepping up their efforts to convince
Congress to revoke duty exemptions granted last year to Central American and
Caribbean countries. Milián says “protectionist forces” from
cotton-producing states should be resisted.
“We can’t let free trade initiatives
approved by the U.S. Congress to arbitrarily be changed,” Milián says.
“That would set a very negative precedent for free trade. … If we haven’t
consolidated our alliances with the U.S. by 2005, we are going to be in serious
trouble.” That means even more serious trouble than it’s already in now as a
result of decreased demand for clothing in the United States. In Mexico, where a
flourishing textile industry is hailed as a Nafta success story, temporary
shutdowns of factory lines have affected 70,000 workers and some factories could
close permanently. In Central America, a prolonged U.S. recession could cripple
the promising industry.
D.C.-based trade consultant David Lewis argues that there’s too much
invested in the region for the United States to turn back now. “Out of
every dollar spent in Central America, 70 cents goes back to the U.S., buying
goods and services. With Asia it’s only 30 cents,” he says. “If Central
America slows down because of a U.S. slowdown, it makes the U.S. slow down even
more, creating a vicious cycle.”
Mexico’s solution. As Central America
continues to plea for access to the U.S. market, Mexico is boldly presenting
itself as an alternative. The Puebla-Panama initiative launched this year is a
Mexico-sponsored strategy aimed at developing southern Mexico and Central
America. The idea is to tackle the region’s chronic poverty and
unemployment by improving infrastructure, promoting investment and boosting
trade between Mexico and Central America. The project, with strong backing from
the Inter-American Development Bank, promises to transform the region. Central
America imports $8.3 billion, or seven times as much from the United States as
it does from Mexico. But Mexico’s government is trying to tilt the scales. And
imports from Mexico have almost tripled over the last decade, suggesting an
increasing effort on the part of Mexico to grab away a piece of the Central
American–U.S. trade pie.
The goal focuses on taking advantage of
Mexico’s free trade agreements to get companies to use Mexico as a stepping
stone to access markets. “If you are a U.S. company exporting to Central
America, you’re paying a duty that you might not pay if you move to Mexico,”
says José Antonio Rivas, trade commissioner for Mexican import-export bank
Bancomext. It works the other way around, too, with Central American
companies gaining access to the U.S. market through Mexico.
The strategy is also designed to insulate
Mexico from the Chinese invasion of cheap, high-volume products by transferring
its maquila industries to Central America. “Eventually, we can take advantage
of Central America’s infrastructure and expertise and transfer our maquila
industries there,” Rivas says. “We need to concentrate on more value-added
That may insulate Mexico from a Chinese
invasion, but what happens to Central America? Unless it solidifies its trade
relationships in the United States, things could get worse. A Free Trade Area of
the Americas would ultimately give Central American countries access to the U.S.
market, but the region needs to do some hard work beforehand.
“Central America must pursue a more regional
approach that will strengthen its bargaining position as trade agreements are
negotiated,” says Douglas Kincaid, a Central American expert at Florida
El Salvador’s Flores offers a more poetic
spin: “We do not want the gift of a fish, neither do we expect a lesson on
fishing. What we direly need is a chance to fish,” he says. Whether that comes
to pass will depend on him and the region’s new trade-oriented
economies—and a lot of good will from its bigger, richer northern neighbors.
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