Intra-regional vs extra-regional liberalization trade in Central America

The countries in the Central American region (henceforth CA: Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Panamá) have signed multiple trade agreements in the recent past. Sometimes the whole CA worked as a unified agent, for instance vis à 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. 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 the current level of tariffs within CA, while reducing with the shock the barriers to the inter-regional trade with the United States. Taking this background into account, we use a perfectly competitive GTAP CGE model based on the GTAP 9 database, to assess the impact of the different scenarios, based on the current trade relationships. Our intention is then advising the CA authorities as to which range of trade negotiations should be prioritized today.