Central America, Expanding Trade Horizons In Order to Diversify

The 1980s and 90s were not easy for Central America. However, the new millennium has brought a new beginning led by trade activities, especially intra-regional trade.

Central America is a small market: with almost 43 million inhabitants (0.6% of the global population), it only accounts for 0.25% of global GDP. Nevertheless, in the past ten years Central American countries have been more open to trade than other countries with the same level of income.

Historically, the United States has been the main recipient of Central American agricultural products, textiles and manufactures, accounting for some 32% of its exports. This position was solidified after the CAFTA-RD free trade agreement was signed in 2005. It will expand further once the Association Agreement with the European Union — the third largest market for the region, accounting for 9% of its exports — comes into effect.

Still, one of the most important markets for Central America, is the region itself. The Central American Common Market represents the second largest trade partner for most countries in the region, accounting for 26.2% of all exports, despite logistical bottlenecks and problems related to overland transportation. The strength of this regional integration means that Central America occupies the fourth place among trade blocks — above Mercosur and the Andean Community of Nations (CAN) — in terms of intra-regional export share.

According to the Central American Economic Integration Secretariat (SIECA), despite a negative trade balance, exports as a whole have grown more than 11% in the last decade, even after the 2008-2009 setbacks caused by a crisis that particularly affected the US economy are taken into account. The recovery was immediate and in 2011 exports grew by 16% on average compared to 2009.

A World Bank analysis suggests that Central America presents a level of openness to trade that is close to what is expected given its economic development, however it also warns that imports continue to be the main element of exchange with other countries.

“In this context, analyzing the competitiveness of the export sector is important to better understand its performance and constraints and to suggest policy options aimed at ensuring that international trade is an engine of economic growth and that the benefits of international trade translate into welfare gains for the people of Central America, including those living in poverty,” says the report Unlocking Central America´s Export Potential.

This is made all the more relevant by the fact that there are other markets waiting to be tapped in South America, Mexico and particularly among the BRICs (Brazil, Russia, India and China), which have become the growth engine for the global economy.

In this sense, the report suggests policy options aimed at establishing “stable and preferential rules of market access via comprehensive trade agreements with key partners to help export diversification.”

A Quick Look

According to the study, Central American exports are concentrated in relatively low value-added products such as textiles, coffee, sugar, car parts and shrimp. Below, the main export characteristics of these countries:

Costa Rica

In the last two decades, Costa Rica’s trade balance has not changed significantly. Compared to its neighbors, its trade deficit in the last five years has been low — 5% of GDP. It went from being an exporter of fruit, vegetables and textiles to a current portfolio that includes high tech products such as integrated circuits, computer parts and medical equipment. Its main export partner is the EU, which accounted for a third of this country’s exports between 2006 and 2008.

El Salvador

Its annual export growth rate is the lowest in the region. Despite an influx of remittances from abroad compensating these numbers, it still exhibits a substantial trade deficit: approximately 20% of GDP. The country’s big break has been in diversifying the product portfolio it sells abroad. Although it continues to depend on textile exports (around 40%), the country is now third after Costa Rica and Panama in terms of sophisticated product sales.

Guatemala

In the last ten years the country’s openness to trade has been moderate, its trade deficit is one of the lowest in the region (around 10% of GDP). Textiles and vegetables are still an important export pillar, now joined by gold exports. It is the largest intra-regional trade player, which has served to diversify its dependence on US and EU markets.

Honduras

This country shows the lowest level of market diversification. Practically two thirds of its exports have been absorbed by the United States in the last decade. Another notable point is that it runs one of the largest trade deficits, 20% of GDP. Textile and clothing are still its main exports, although it is now venturing into mid-tech products such as car ignition cable assemblies.

Nicaragua

In recent years encouraging signs have be seen regarding this country’s exports, which  also runs the highest trade deficit in the region (30% of GDP). Exports are still dominated by the textile sector and animal and vegetable products, although it is now making inroads into the mid-tech sector. The country has reduced the diversification of its markets, which are now concentrated in the United States (62%) and its neighbors (17%). Nevertheless, it’s worth highlighting the trade relationship it has established with Venezuela in the last five years.

Panama

The country’s openness to trade is driven by the Colon Free Trade Zone, the second largest in the world, which accounted for 92% of exports and 65% of imports in 2010. Its main exports include animal and vegetable products, especially to the United States and the EU.