Intra-regional versus Inter-regional Trade Liberalization for Central America

The countries in the Central American region (henceforth CA: Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Panama) have signed multiple trade agreements in the recent past. Sometimes the whole CA worked as a unified agent, for instance vis a vis the United States or the European Union. In other cases, some individual countries took the initiative to extend their list of freely tradeable goods and services. CA exports and imports very extensively with the United States (39% of the aggregate exports). However, the recent growth of the intra-regional trade has been especially remarkable: the experts emphasize that such trade generates more internal added value than the inter-regional one, which may allow for higher local welfare and a more favorable external balance for CA. That happens because most of the CA world exports are agricultural goods or products intensive in the use of natural resources. On the other hand, in the intra-regional markets these countries exchange more elaborate preparations (organic agents, medicines, electrical devices, specialized clothing,,...). Our simulations try to evaluate which alternative is locally preferable, taking into account that any intra-regional trade liberalization would stimulate sectors that compete for productive resources with the world exports. To that purpose, our first shock will be an elimination of existing tariffs at the intra-regional level while keeping the protection against imports from the rest of the world. In our second simulation, we will keep in the benchmark model the current level of tariffs within CA, while reducing with the shock the barriers to the inter-regional transactions with the United States. Our intention is then advising the CA authorities as to which range of trade negotiations should be prioritized today. We will adopt as a modelling tool a perfectly competitive, CGE model, in combination with the GTAP sectoral database, which also contemplates the degree of protection in every productive sector. We expect our results will allow the CA authorities to prioritize the removal of intra-regional trade distortions, as opposed to the inter-regional ones, given their different capacity to insert these countries into the international value chains.