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Brass Ring: Central America's Integration Status

Matthew Estévez 

Ground 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 decades.

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.

The $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 farmers.

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 destruction.

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.

Washington, 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 products.”

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 International University.

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.

January 28, 2001

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