The Central American Economic Council, the group’s chief policy-making organ, meets every three months. Composed of economic ministers, it coordinates regional economic integration. The council elects a secretary-general, who serves a three-year term. CACM, an organization formed by the developing countries of Central America for the purpose of gradually uniting the national economies of the member nations into one “common market. ” The Central American countries embarked on economic integration before other developing countries, including those of Latin America.
The General Treaty of Central American Economic Integration was concluded in Managua, Nicaragua, in 1960 and took effect on June 4, 1961. The member countries are Guatemala, Nicaragua, El Salvador, Honduras (prior to January 1971), and Costa Rica (from 1962 to September 1972 and since 1978).
Under the treaty the CACM countries agreed to liberalize reciprocal trade gradually, to introduce a uniform Central American customs nomenclature, and to apply a uniform “common market” tariff to non-participating countries.
The treaty forbids the subsidizing of exports and “disloyal competition,” considers the question of financing economic development on the basis of regional equality, establishes the procedure for transport and transit shipment, provides for uniform tax incentives for industrial development, and authorizes the free movement of workers and capital between the member countries. A uniform tariff was introduced in 1965. By the early 1970’s 98 percent of Central American customs items had been given free-trade status. The remaining 2 percent, however, accounted for one-fifth of the value of the intraregional trade urnover and included such commodities as petroleum products, wheat, sugar, coffee, electrical equipment, and vehicles. In 1977 the trade turnover within the CACM was valued at approximately $600 million, compared with $80 million in 1961. The share of intraregional exports in the overall exports of CACM countries rose from 7 percent to 28 percent during the same period. There was a significant growth of trade in finished industrial goods, especially those produced by industries processing non-agricultural raw materials. Integration is developing slowly in industry, agriculture, electric power generation, transportation, and communications.
The Term Paper on Why countries engage in international trade
This article at explaining why countries engage in international trade. Now days it is not uncommon to find that the main objective of a trade policy of almost all countries is to promote international trade. Countries have gone ahead to engage in trade negotiations all in the interest of enabling international trade. But then, why do countries engage in international trade? Why are there global ...
The first branches of industry to be integrated were those that were self-sufficient within the CACM. Measures have been taken to integrate enterprises for the production of tires, caustic soda, insecticides, fertilizers, plywood, and flour. The production of grain is being coordinated, and four plans have been drawn up for the unification of energy systems. In 1962 a system of accounting was introduced that was based on a common accounting currency, the Central American peso, pegged to the US dollar. MEMBER STATES El SalvadorGuatemala HondurasNicaragua Costa Rica
HISTORICAL BACKGROUND Efforts to achieve Central American economic union, which began in the early 1950’s, constitute a continuation of a regional unification movement which dates back to 1821 when the area gained its independence from Spain. The five nations, had sought on numerous prior occasions, with great difficulty, to form a political alliance. The earliest attempt was the Federal Republic of Central America in 1823. But the federation collapsed in 1838. In 1896, the Republic of Central America was founded but it lasted only for two years i. e. till 1898.
After nine years, Between November 14 and December 20, 1907 following a proposal made by Mexico and the United States of America, five Central American nations – Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua – took part in the Central American Peace Conference in Washington, D. C. , sponsored by United States President Theodore Roosevelt’s Secretary of State, Nobel Prize winner Elihu Root. Nations ended the Conference by signing a peace treaty, one aspect of which created the Central American Court of Justice (Corte de Justicia Centroamericana).
The Essay on Central American Civilization
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The signatories agreed that the convention creating the Court would remain in effect for ten years, beginning at the time of the last ratification. All communications between the signatories were made through the government of Costa Rica. The Court was composed of five judges, one each from each member state. For the period of its functioning the Court heard ten cases, five of which were brought by private individuals and declared inadmissible, and three of which were started by the Court’s own initiative. The court operated for 10 years, until April 1918, from its headquarters in Costa Rica, at which point it dissolved.
Its members had sought without success from March 1917, when Nicaragua gave a notice of termination from the agreement, to continue the arrangement. Several explanations for the treaty’s failure exist: * The court lacked an effective system of judicial procedure. * The judges were not free to act independently of their respective governments. * The court had been given a jurisdiction too broad to satisfy its member states. Organization of Central American States Following the end of World War II, a new interest in integrating the Central American governments began.
On October 14, 1951, 33 years after the dissolution of the CACJ, the governments of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua signed a new treaty creating the Organization of Central American States (Organizacion de Estados Centroamericanos, or ODECA) to promote regional cooperation, integrity and unity in Central America. The following year, December 12, 1952, ODECA’s charter was altered to create a new Central American Court of Justice (this time called the Corte Centroamericana de Justicia, or CCJ), without the time limitation of its previous incarnation.
The Essay on Population and Economic Growth
The debate between positive and negative sides of population growth is ongoing. Population growth enlarges labour force and, therefore, increases economic growth. A large population also provides a large domestic market for the economy. Moreover, population growth encourages competition, which induces technological advancements and innovations. Nevertheless, a large population growth is not only ...
The Charter of San Salvador was ratified by all the governments of Central America, and on August 18, 1955 the foreign ministers held their first meeting in Antigua Guatemala. There ensued the Declaration of Antigua Guatemala, which decreed that subordinate organizations should be formed under ODECA, to help establish systems of organization and procedure so there would be no restrictions to free intercourse, to economic cooperation, to better sanitary conditions for member nations, and to continued progress in the “integral union” of the Central American nations.
The Central American Common Market (CACM), the Central American Bank for Economic Integration (CABEI), and the Secretariat for Central American Economic Integration (SIECA) were established between five nations of Central America on December 13, 1960 in a conference in Managua. These nations ratified the treaties of membership the following year.
As of March 31, 1962, the Central American integration program was being conducted under the provisions of three separate treaties: (1) The Multilateral Treaty of Central American free trade and Economic Integration signed in 1958 by all five countries and ratified by all but Costa Rica; (2) the Treaty of Economic Association, signed by Guatemala, El Salvador, and Honduras in 1960, and in effect among those countries since April 27, 1960; and (3) the General Treaty of Central American Economic Integration, signed by all the countries except Costa Rica in December 1960, and in effect since June 3, 1961.
The Costa Rican regime which assumed power in May 1962 has expressed to the Permanent Secretariat of the General Treaty its intention to adhere to that treaty. Since 1958, work has been progressing on the formulation of a common external tariff for Central America, and many uniform rates of duty already are in effect among Guatemala, El Salvador, and Nicaragua. Completion of a uniform import tariff for the participating countries was expected to be achieved during 1962. Costa Rica joined the CACM in 1963.
Panama is conspicuous by absence. Then organization froze in 1969 with the Football War between Honduras and El Salvador. In 1973, ODECA was suspended and progress in regional integration came to a standstill. ECONOMIC BACKGROUND OF CENTRAL AMERICAN INTEGRATION General Characteristics of the Economy Area and Population The five Central American countries have a combined area of about 170,000 square miles. In 1960, their aggregate population of nearly 11 million approximated that of New England and slightly larger than that of Belgium.
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The rate of population increase during the decade 1950-60 was approximately 3. 4% annually (about the highest rate in the world); during the next decade it is expected to decline to about 3% a year because of increasing urbanization, rising family incomes, and opportunities for students to remain in school for longer periods. Density of population variedly marked among the five countries, ranging from 27 persons per square mile in Nicaragua to 319 in El Salvador; the regional average was 65 in 1960. Within these countries the distribution of population has been very uneven.
Typically, there are a fewer centres of population—usually on the central plateau and at the major ports-and large, relatively uninhabited, areas between. An economic consequence of roach scattered population centres in an area of mountainous terrain has been high costs of marketing and transportation, even of locally produced goods, and misdistribution of available resources among the various zones of particular countries. As a corollary, border trade between neighbouring areas of certain countries has been much more important to those areas than trade with more distant areas within the respective countries.
The Central American market for commercial products is substantially smaller than a population of 11 million would indicate, since only about one-third of the people are in the labour force and, in most of the countries a sizable proportion of the population lives either outside of or on the margin of the monetary economy. Only about 8. 4 million, or some 77% of the area’s population, possess effective purchasing power. Labour Force Within the five countries of Central America, there has been a very marked urbanization trend over the past 15 years.
According to an ECLA study of the relationship of urban population growth to per capita gross national product in Central America during the period 1945-55, the urbanization rate in Central America, as in Latin America as a whole has borne a high direct correlation to the per capita GNP. This interdependence has been partly reflected by the large difference between the average productivity per worker in agriculture and that in other types of economic activity. More important, however, has been the actual reduction in plantation activities which has forced agricultural labourers to seek elsewhere for their livelihoods.
The Essay on Developed Country and American Means
For hundreds of years the United States has been attracting immigrants from a variety of different countries, races, and religions to come live in a land full of freedom and opportunity. These people were looking for more than just rights and privileges. Their real desire was to become something that depicts pride and honor, an American. Being an American means much more than living in the United ...
In as much as the plantation (coffee, banana) workers usually earned substantially more than other agricultural labourers, they could find–or expected to find–equal or better standards of living only in the urban centres. The urbanization trend has reflected largely a movement of agricultural labour into manufacturing and service activities (transportation, distribution, domestic service, etc. ).
ECLA has forecasted a continuation of the urbanization trend through 1980. Thus far, the average annual rates of industrialization of the Central American countries have been less than the rates of growth in population.
Government development policies not only have failed to relieve unemployment originating in other sectors of the economy, but they also have been unsuccessful in providing a sufficient number of jobs to absorb the vegetative growth of the urban labour supply. Increasing unskilled population and growing unemployment have inhibited the development of factory production and to permit the continuation of inefficient household industries. National income and its distribution In 1960, the total value of goods and services produced in Central America amounted to $2. billion. The accompanying level of economic activity provided an income approximating $200 per person–a level roughly one-tenth of the average in the United States. The distribution of total and per capita national product by countries in 1960 was as follows; The distribution of the national product compared with that of the labour force reveals the very low productivity in agriculture (including pastoral and forest activities), the major sector of the Central American economy.
Although 69 percent of the labour force was employed in agriculture, they produced only 46 percent of the gross national product (GNP) in 1950. By contrast, the 14 percent of the labour force engaged chiefly in construction and service activities (other than commerce, transportation, and communications), produced 22 percent of the GNP. Even among the gainfully employed population, the uneven distribution of income–which characterizes all the Central American economies–has restricted the kinds and quantities of commodities that could be sold.
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History of American Home Products American Home Products Corporation (AHP) was founded in 1926 and has a history of continuous acquisitions of smaller companies that made proprietary medicines. In 1931, AHP purchased John Wyeth & Brother, Inc. from Harvard University. Another important acquisition was that of Canada's Ayerst Laboratories in 1943. Ayerst was a large pharmaceutical company that ...
In as much as any significant increase in the aggregate income of any of these countries accrues largely to a minor share of the entire population, and since this small sector of the population tends to spend its incremental income on imports, the growth of national markets for domestic manufactures is limited. In El Salvador, for example, where the disparities in income are probably wider than elsewhere in Central America, in 1950 less than eight percent of the families were the recipients of more than-half of the country’s gross national product.
This unequal distribution of income has been one of several factors that have restricted industrial production in the five countries to a few small scale operations supplying essential consumer goods for the low-income portion of the population (clothing, and other textiles, shoes, beverages, matches, tobacco products, and the like) and has inhibited the development of industries producing manufactured products for export.
The high-income groups have preferred to obtain many of their consumer goods, including most luxuries, by importation, because of the superior quality and wider variety of the imported products or the “status” indicated by possession of such items. Since “economies of scale” (i. e. cost advantages of large-scale production and marketing) are rarely achieved under circumstances governing most manufacturing activities in Central America, and production costs, especially capital costs, are high, there has been a tendency for prices of domestically produced items to approximate the high prices of competitive imports.
Competition from imports has often been restricted by high tariff duties, as well as by cumbersome customs procedures. Despite the existence of a captive market in Central America–consisting of the majority of the population unable to afford imported goods–the entry of new firms to supply this market has been very slow. The small populations of the individual countries, combined with the low average incomes of the people as a whole, have created a situation where in one firm or a few small producers are able to supply the limited demand for their products.
Competition is usually found among sellers of imported goods, since profit margins for these items are so high that some bargaining between merchants and consumers is possible. A further limitation on the development of local manufacturers in Central America is the widespread practice of granting duty free import privileges to concessionaires (companies, institutions, or individuals).
Although the raw materials bases for certain industries exist in the respective countries, the supply of duty-free imports entering by virtue of these concessions is believed to have effectively prevented the establishment of many such industries.
In 1960, duty-free imports entering Honduras under concessions constituted about one-fifth of the total c. i. f. value of imports. Aim of Central American Common Market * The States agree to establish among themselves a common market. They agree to create a customs union in respect of their territories * Aim to bring a Central American free-trade area into full operation within a period of five years and to adopt a standard Central American tariff as provided for in the Central American Agreement on the Equalization of Import Duties and Charges. The Signatory States shall grant each other free-trade treatment in respect of all products originating in their respective territories, * The natural products of the Contracting States and the products manufactured therein shall be exempt from import and export duties, including consular fees, and all other taxes, dues and charges levied on imports and exports or charged in respect thereof, whether they be of a national, municipal or any other nature. Except for such measures as may be legally applicable in the territories of the Contracting States for reasons of health, security or police control. Proposed to expand the “local” market by means of common markets among like groups of countries.
A common external tariff (CET) would allow nascent industries to develop by protecting local manufacturers from extra regional competition. * The Signatory States agree that the Protocol on the Central American Preferential Tariff, appended to the Central American Agreement on the Equalization of Import Duties and Charges, shall not apply to trade in the products referred to in the present article for which special regimes are provided. Aim to provide important incentive to industrial development within the CACM was the implementation of regional infrastructure development projects. Several infrastructure development organizations were established during the 1960s to improve intraregional transport and communications. * No Signatory State shall establish or maintain regulations on the distribution or retailing of goods originating in another Signatory State when such regulations place, or tend to place the said goods in an unfavourable position in relation to similar goods of domestic origin or imported from any other country. Tax exemptions of a general nature granted by a Signatory State with a view to encouraging production shall not to be deemed to constitute export subsidies.
* The Central Banks of the Signatory States shall co-operate closely in order to prevent any currency speculation that might affect the rates of exchange and to maintain the convertibility of the currencies of the respective countries on a basis which, in normal conditions, shall guarantee the freedom, uniformity and stability of exchange. The Contracting States shall grant national treatment to enterprises of other Signatory States engaged in the construction of roads, bridges, dams, irrigation systems, electrification, of the Central American economic infrastructure, housing and other works intended to further the development of the Central American economic infrastructure. * CACM signed the following Treaty; Multilateral Treaty on Free Trade and Central American Economic Integration, signed on 10 June 1958; * Agreement on the Regimen for Central American Integration Industries, signed on 10 July 1958 * Central American Agreement on the Equalization of Import Duties and Charges, Signed on 1 September 1959, and its Protocol signed on the same day as the present Treaty. (United Nations, Treaty series, Vo. 454, NO. 6542).
Tax Incentives to Industrial Development The Contracting States, with a view to establishing uniform tax incentives to industrial development, agree to ensure as soon as possible a reasonable equalization of the relevant laws and regulations in force. To that end they shall, within a period of six months from the date of entry into force of the present Treaty, sign a special protocol specifying the amount and type of exceptions, the time limits thereof, the conditions under which they shall be granted, the systems of industrial classification and the principles and procedures governing their application.
The Executive council shall be responsible for co-ordinating the application of the tax incentives of Industrial development. * For the purpose of applying and administering the present Treaty and of undertaking all the negotiations and work designed to give practical effect to the Central American Economic union, an Executive Council, consisting of one titular official and one alternate appointed by each Contracting Party, is hereby established. The Executive Council of CACM shall propose to the Governments the signing of such additional multilateral agreements as may be required in order to achieve the purpose of Central American economic integration, including a customs union in respect of their territories. * SOME ANNEXURE ASSIGNED BY THE COUNCIL FOR MEMBER COUNTRIES 1. In the case of the goods in the present Annex subject to a preferential tariff, it shall be understood that: a.
The tariffs indicated represent the total amount of taxes applicable to trade between the contracting parties, including custom duties, consular fees and other import duties, charges and surcharges in force in the Signatory States: b. The specific customs duties are applied on the basis of a standard unit of one gross kilogramme (G. K. ) and are expressed in a monetary unit equivalent to the United States dollar; c. The ad valorem customs duties are charged on the c. i. f. alue of the goods, calculated up to the place of entry in the territory of the importing country. 2. In the case of the goods in the present Annex subject to preferential tariffs expressed in percentages of the import duties and charges, it shall be understood that: d. The preferential percentages shall be calculated on the basis of payment of customs duties, consular fees and other import duties, charges and surcharges in force in the Signatory States on the date with the present Treaty is signed; e.
In cases where the equalization of tariffs on goods subject to progressive reductions takes place after the present Treaty enters into force, and the agreed standard tariff level is at any time lower than the preferential tariff established in this treaty, the Contracting States shall apply the preferential percentage on the lowest tariff. The Executive Council shall examine each case and shall recommend to the Parties concerned, in explanatory forms, whatever adjustments they should make in applying the previous provisions. 3.
Goods subject to quotas shall enjoy free-trade treatment in the amount of the quotas, which shall be reciprocal. Such amounts in excess of the basic quotas as may be authorized by Governments shall also enjoy free-trade treatment. Any unauthorized surplus shall remain subject to the import duties and charges in force in the Contracting States on the date of signature of the present Treaty or as specifically indicated in the schedule forming part of this Annex. 4. Application of the export and import controls established in this Annex shall be optional for each of the Governments of the Signatory States.
When the import control is applied, the goods shall enjoy free-trade treatment only if the relevant licence has been issued. If the licence has not been issued, the goods shall remain subject to payment of duties, charges, and quantitative restrictions in force and to the general provisions governing imports. The new integration initiative emphasized insertion of the region’s economy into the global economy based on export-led growth. The industrial base established under the CACM was to be retrofitted and modernized to compete in the international marketplace, and non-traditional exports were to be promoted more vigorously
Goods to which export controls are applied can be exported only if the relevant licence has been issued. CACM FREE TRADE AGREEMENT (FTA) The Governments of the Republics of Guatemala, El Salvador, Honduras and Nicaragua, for the purpose of reaffirming their intention to unify the economies of the four countries and jointly to promote the development of Central America in order to improve the living conditions of their peoples, Mindful of the need to expedite the integration of their economies consolidate the results so far achieved and lay down the principles on which it should be based in the future.
Having regard to the commitments entered into in the following instruments of economic integration: 1. Multilateral Treaty on Free Trade and Central American Economic Integration; 2. Central American Agreement on the Equalization of Import Duties and Charges and its Protocol on the Central American Preferential Tariff; 3. Bilateral treaties on free trade and economic integration signed between Central American Government; 4. Treaty of Economic Association signed between Guatemala, El Salvador and Honduras CHAPTER I: CENTRAL AMERICAN COMMON MARKET Article I
The Contracting States agree to establish among themselves a common market which shall be brought into full operation within a period of not more than five years from the date on which the present Treaty enters into force. They further agree to create a customs union in respect of their territories. Article II For the purposes of the previous article the Contracting Parties undertake to bring a Central American free-trade area into full operation within a period of five years and t o adopt a standard Central American tariff as provided for in the Central American Agreement on the Equalization of Import Duties and Charges.
CHAPTER II: TRADE REGIME Article III The Signatory States shall grant each other free-trade treatment in respect of all products originating in their respective territories, save only for the limitations contained in the special regimes referred to in Annex A of the present Treaty. Consequently, the natural products of the Contracting States and the products manufactured therein shall be exempt from import and export duties, including consular fees, and all other taxes, dues and charges levied on imports and exports or charged in respect thereof, whether they be of a national, municipal or any other nature.
The exemptions provided for in this article shall not include charges or fees for lighter age, warfare, warehousing or handling of goods, or any other charges which may legally be incurred for port, storage or transport services; nor shall they include exchange differentials resulting from the existence of two or more rates of exchange or from other exchange arrangements in any of the Contracting States.
Goods originating in the territory of any of the Signatory States shall be accorded national treatment in all of them and shall be exempt from all quantitative or other restrictions or measures, except for such measures as may be legally applicable in the territories of the Contracting States for reasons of health, security or police control. Article IV The Contracting Parties establish special interim regimes in respect of specific products exempting them from the immediate free-trade treatment referred to in article III hereof.
These products shall be automatically incorporated into the free-trade regime not later than the end of the fifth year in which the present Treaty is in force, except as specifically provided in Annex A. The products to which special regimes apply are listed in Annex A and trade in them shall be carried on in conformity with the measures and conditions therein specified. These measures and conditions shall not be amended except by multilateral negotiation in the Executive Council.
Annex A is an integral part of this Treaty. The Signatory States agree that the Protocol on the Central American Preferential Tariff, appended to the Central American Agreement on the Equalization of Import Duties and Charges, shall not apply to trade in the products referred to in the present article for which special regimes are provided. Article V Goods enjoying the advantages stipulated in this Treaty shall be designated as such on a customs form, signed by the exporter and containing a declaration of origin.
This form shall be produced for checking by the customs officers of the countries of origin and destination, in conformity with Annex B of this Treaty. If there is doubt as to the origin of all article and the matter has not been settled by bilateral negotiation, any of the Parties affected may request the intervention of the Executive Council to verify the origin of the article concerned. The Council shall not consider goods as originating one of the Contracting States if they originate or are manufactured in a third country and are only simply assembled, wrapped, packed, cut or dilute in the exporting country.
In the cases mentioned in the previous paragraph, importation of the goods concerned shall not be prohibited provided that a guaranty is given to the importing country in respect of payment of the import duties and other charges to which the goods may be liable. The guaranty shall be either forfeited or refunded, as the case may be, when the matter is finally settled. The Executive Council shall be laid down regulations governing the procedure to be followed in determining the origin of goods.
Article VI If the goods traded are liable to internal taxes, charges or duties of any kind levied on production, sale, distribution or consumption in any of the signatory countries, the country concerned may levy an equivalent amount on similar goods imported from the other Contracting State, in which case it must also levy at least an equivalent amount for the same respective purposes on similar imports from third countries.
The Contracting Parties agree that the following conditions shall apply to the establishment of internal taxes on consumption: a. Such taxes may be established in the amount deemed necessary when there is domestic production of the article in question, or when the article is not produced in any of the Signatory States; b. When the article is not produced in one Signatory State but is produced in any of the others, the former State may not establish taxes on consumption of the article concerned unless the Executive Council so authorizes; c.
If a Contracting Party has established a domestic tax on consumption, and production of the article so taxed is subsequently begun in any of the other Signatory States, but the article is not produced in the State that established the tax, the Executive Council shall, if the State concerned so requests, deal with the case and decide whether the tax is compatible with free trade.
The States undertake to abolish these taxes on consumption, in accordance with their legal procedures, on receipt of notification to this effect from the Executive Council. Article VII No Signatory State shall establish or maintain regulations on the distribution or retailing of goods originating in another Signatory State when such regulations place, or tend to place the said goods in an unfavourable position in relation to similar goods of domestic origin or imported from any other country. Article VIII
Items which, by virtue of the domestic legislation of the Contracting Parties, constitute State monopolies on the date of entry into force of the present Treaty, shall remain subject to the relevant legislation of each country and, if applicable, to the provisions of Annex A of the present Treaty. Should new monopolies be created or the regime of existing monopolies be changed, the Parties shall enter into consultations for the purpose of placing Central American trade in the items concerned under a special regime.
CHAPTER III: EXPORT SUBSIDIES AND UNFAIR TRADE PRACTICES Article IX The Governments of the Signatory States shall not grant customs exemptions or reductions in respect of imports from outside Central America of articles adequately produced in the Contracting States. If a Signatory State deems itself to be affected by the granting of customs import franchises or by government imports not intended for the use of the Government itself or of its agencies, it may submit the matter to the Executive Council for its consideration and ruling. Article X
The Central Banks of the Signatory States shall co-operate closely in order to prevent any currency speculation that might affect the rates of exchange and to maintain the convertibility of the currencies of the respective countries on a basis which, in normal conditions, shall guarantee the freedom, uniformity and stability of exchange. Any Signatory State which establishes quantitative restrictions on international monetary transfers shall adopt whatever measures are necessary to ensure that such restrictions do not discriminate against the other States.
Should serious balance-or-payments difficulties arise which affect, or are apt to affect, monetary relations in respect of payments between the Signatory States, the Executive Council, acting of its own accord or at the request of one of the Parties, shall immediately study the problem in co-operation with the Central Banks for the purpose of recommending to the Signatory States a satisfactory solution compatible with the maintenance of the multilateral free-trade regime. Article XI
No Signatory State shall grant any direct or indirect subsidy favouring the export of goods intended for the territory of the other States, or establish or maintain any system resulting in the sale of such goods for export to any other Contracting State at a price lower than that established for the sale of similar goods on the domestic market, due allowance being made for differences in the conditions and terms of sale and taxation and for any other factors affecting price comparability.
Any measure involving the fixing of or discrimination in, prices in a signatory State which is reflected in the establishment of sales prices for specific goods in the other Contracting States at levels lower than those that would result from the normal operation of the market in the exporting country shall be deemed to constitute an indirect export subsidy.
If the importation of goods processed in a Contracting State with raw materials purchased under conditions of monopoly at artificially low prices should threaten existing production in another Signatory State, the Party which considers itself affected shall submit the matter to the consideration of the Executive Council for a ruling as to whether unfair business practice is in fact involved.
The Executive Council shall, within five days of the receipt of the request, either give its ruling or authorize a temporary suspension of free trade, while permitting trade to be carried on subject to the award of a guaranty in the amount of the customs duties. This suspension shall be effective for thirty days, within which period the Executive Council shall announce its final decision.
If no ruling is forthcoming within the five days stipulated, the Party concerned may demand a guaranty pending the Executive Council’s final decision. However, tax exemptions of a general nature granted by a Signatory State with a view to encouraging production shall not to be deemed to constitute export subsidies. Similarly, any exemption from internal taxes levied in the exporting State on the production, sale or consumption of goods exported to the territory of another State shall not be deemed to constitute an export subsidy.
The differentials resulting from the sale of foreign currency on the free market at a rate of exchange higher than the official rate shall not normally be deemed to be an export subsidy; if one of the Contracting States is in doubt, however, the matter shall be submitted to the Executive Council for its consideration and opinion. Article XII
As a means of precluding a practice which would be inconsistent with the purposes of this Treaty, each Signatory State shall employ all the legal means at its disposal to prevent the export of goods from its territory to the territories of the other States at a price lower than their normal value, if such export would prejudice or be liable to prejudice the production of the other States or retard the establishment of a national or Central American industry.
Goods shall be deemed to be exported at a price lower than their normal value if their export price is less than: A. the comparable price in normal trade conditions, of similar goods destined for domestic consumption in the exporting country; or B. the highest comparable price of similar goods for export to a third country in normal trade conditions; or C. the cost of production of the goods in the country of origin, plus a reasonable amount for sales expenses and profit.
Due allowance shall be made in every case for existing differences in conditions and terms of sale and taxation and for any other factors affecting price comparability. Article XIII If a Contracting Party deems that unfair trade practices not covered in article XI exist, it cannot impede trade by a unilateral decision but must bring the matter before the Executive Council so that the latter can decide whether in fact such practices are being resorted to. The Council shall announce its decision within not more than 60 days from the date on which it received the relevant communication.
If any Party deems that there is evidence of unfair trade, it shall request the Executive Council to authorize it to demand a guaranty in the amount of the import duties. Should the Executive Council fail to give a ruling within eight days, the Party concerned may demand such guaranty pending the Executive Council’s final decision. Article XIV Once the Executive Council has given its ruling on unfair trade practices, it shall inform the Contracting Parties whether, in conformity with this Treaty, protective measures against such practices should be taken.
CHAPTER IV: TRANSIT AND TRANSPORT Article XV Each of the Contracting States shall ensure full freedom of transit through its territory for goods proceeding to or from the other Signatory States as well as for the vehicles transporting these goods. Such transit shall not be subject to any deduction, discrimination or quantitative restriction. In the event of traffic congestion or other instances of Force majeure, each Signatory State shall treat the mobilization of consignments intended for its own population and those in transit to the other States on an equitable basis.
Transit operations shall be carried out by the routes prescribed by law for that purpose and shall be subject to the customs and transit laws and regulations applicable in the territory of transit. Goods in transit shall be exempt from all duties, taxes and other charges of a fiscal, municipal or ally other character levied on transit, irrespective of their destination, but may be liable to the charges usually applied for services rendered which shall in no case exceed the cost thereof and thus constitute de facto import duties or taxes.
CHAPTER V: CONSTRUCTION ENTERPRISES Article XVI The Contracting States shall grant national treatment to enterprises of other Signatory States engaged in the construction of roads, bridges, dams, irrigation systems, electrification, of the Central American economic infrastructure, housing and other works intended to further the development of the Central American economic infrastructure. CHAPTER VI: INDUSTRIAL INTEGRATION Article XVII
The Contracting Parties hereby endorse all the provisions of the Agreement on the Regime for Central American Integration Industries, and, in order to ensure implementation; among themselves as soon as possible, undertake to sign, within a period of not more than six months from the date of entry into force of the present Treaty, additional protocols specifying the industrial plants initially to be covered by the Agreement, the free-trade regime applicable to their products and the other conditions provided for in article III of the Agreement.
CHAPTER VII: CENTRAL AMERICAN BANK FOR ECONOMIC INTEGRATION Article XVIII The Signatory States agree to establish the Central American Bank for Economic Integration which shall be a juridical person. The Bank shall act as an instrument for the financing and promotion of a regionally balanced, integrated economic growth. To that end they shall sign the agreement constituting the Bank, which shall remain open for the signature or accession of any other Central American State which may wish to become a member of the Bank.
It is, however, established that members of the Bank may not obtain guaranties or loans from the Bank unless they have previously deposited their instruments of ratification of the following international agreements: The present Treaty; Multilateral Treaty on Free Trade and Central American Economic Integration, signed on 10 June 1958; Agreement on the Regimen for Central American Integration Industries, signed on 10 July 1958; and Central American Agreement on the Equalization of Import Duties and Charges, signed on 1 September 1959, and its Protocol signed on the same day as the present Treaty. United Nations, Treaty series, Vo. 454, NO. 6542).
CHAPTER VIII: TAX INCENTIVES TO INDUSTRIAL DEVELOPMENT Article XIX The Contracting States, with a view to establishing uniform tax incentives to industrial development, agree to ensure as soon as possible a reasonable equalization of the relevant laws and regulations in force.
To that end they shall, within a period of six months from the date of entry into force of the present Treaty, sign a special protocol specifying the amount and type of exceptions, the time limits thereof, the conditions under which they shall be granted, the systems of industrial classification and the principles and procedures governing their application. The Executive council shall be responsible for co-ordinating the application of the tax incentives of Industrial development. CHAPTER IX: ORGANS
Article XX The Central American Economic Council, composed of the Ministers of Economic Affairs of the several Contracting Parties, is hereby established for the purpose of integrating the Central American economies and Co-ordinating the economic policy of the Contracting States. The Central American Economic Council shall meet as often as required or at the request of any of the Contracting Parties. It shall examine the work of the Executive Council and adopt such resolutions as it may deem appropriate.
The Central American Economic Council shall be the organ responsible for facilitating implementation of the resolutions on economic integration adopted by the Central American Economic Co-operation Committee. It may seek the advice of Central American and international technical organs. Article XXI For the purpose of applying and administering the present Treaty and of undertaking all the negotiations and work designed to give practical effect to the Central American Economic union, an Executive Council, consisting of one titular official and one alternate appointed by each Contracting Party, is hereby established.
The Executive Council shall meet as often as required, at the request of one of the Contracting Parties or when convened by the Permanent Secretariat, and its resolutions shall be adopted by majority vote. In the event of disagreement, recourse will be hard to the Central American Economic Council in order that the latter may give a final ruling. Before ruling on a matter, the Executive Council shall determine unanimously whether the matter is to be decided by a concurrent vote of all its members or by a simple majority.
Article XXII The Executive Council shall take such measures as it may deem necessary to ensure fulfilment of the commitments entered into under this Treaty and to settle problems arising from the implementation of its provisions. It may likewise propose to the Governments the signing of such additional multilateral agreements as may be required in order to achieve the purpose of Central American economic integration, including a customs union in respect of their territories.
The Executive Council shall assume, on behalf of the Contracting Parties, the functions assigned to the Central American Trade Commission in the Multilateral Treaty on Free Trade and Central American Economic Integration and the Central American Agreement on the Equalization of Import Duties and Charges, as well as those assigned to the Central American Industrial Integration Commission in the Agreement on the Regime for Central American Integration Industries, as well as the powers and duties of the joint commissions set up under bilateral treaties in force between the Contracting Parties.
Article XXIII A Permanent Secretariat is hereby instituted, as a juridical person, and shall act as such both for the Central American Economic Council and the Executive Council established under this Treaty. The Secretariat shall have its seat and headquarters in Guatemala City, capital of the Republic of Guatemala, and shall be headed by a Secretary-General appointed for a period of three years by the Central American Economic Council. The Secretariat shall establish such departments and section as may be necessary for the performance of its functions.
Its expenses shall be governed by a general budget adopted annually by the Central American Economic Council and each Contracting Party shall contribute annually to its support an amount equivalent to not less than fifty thousand United States dollars (US$ 50,000), payable in the respective currencies of the Signatory States. Members of the Secretariat shall enjoy diplomatic immunity. Other diplomatic privileges shall be granted only to the Secretariat and to the Secretary-General. Article XXIV
The Secretariat shall ensure that this Treaty, the Multilateral Treaty on Free Trade and Central American Economic Integration, the Agreement on the Regime for Central American Integration Industries, the Central American Agreement on the Equalization of Import Duties and Charges, bilateral or multilateral treaties on free trade and economic integration in force between any of the Contracting Parties, and all other agreements relating to Central American economic integration already signed or that may be signed ereafter, the interpretation of which has not been specifically entrusted to another organ, are properly executed among the Contracting parties. The Secretariat shall ensure implementation of the resolutions adopted by the Central American Economic Council and the Executive Council established under this Treaty and shall also perform such functions as are assigned to it by the Executive Council. Its regulations shall be approved by the Economic Councils.
The Secretariat shall also undertake such work and studies as may be assigned so it by the Executive Council and the Central American Economic Council. In performing these duties, it shall avail itself of the studies and work carried out by other Central American and international organs and shall, where appropriate, enlist their co-operation. CHAPTER X: GENERAL PROVISIONS Article XXV The Signatory States agree not to sign unilaterally with non-Central American countries any new treaties that may affect the principles of Central American economic integration.
They further agree to maintain the “Central American exception clause” in any trade agreements they may conclude on the basis of most-favoured-nation treatment with any countries other than the Contracting States. Article XXVI The Signatory States agree to settle amicably, in the spirit of this Treaty, and through the Executive Council or the Central American Economic Council, as the case may be, any differences which may arise regarding the interpretation or application of any of its provisions. If agreement cannot be reached, they shall submit the matter to arbitration.
For the purpose of constituting the arbitration tribunal, each Contracting Party shall propose to the General Secretariat of the Organization of Central American States the names of three magistrates from its Supreme Court of Justice. From the complete list of candidates, the Secretary-General of the Organization of Central American States and the Government representatives in the Organization shall select, by drawing lots, one arbitrator for each Contracting party; no two of them may be nationals of the same State. The ward of the arbitration tribunal shall require the concurring votes of not less than three members, and shall have the affect of re judicata for all the Contracting Parties so far as it contains any ruling concerning the interpretation or application of the provisions of this Treaty) Article XXVII The present Treaty shall, with respect to the Contracting Parties, take precedence over the Multilateral Treaty on Free Trade and Central American Economic Integration and any other bilateral or multilateral free-trade instruments signed between the Contracting Parties; it shall not, however, affect the validity of those agreements.
The provisions of the trade and economic integration agreements referred to in the previous paragraph shall be applied between the respective Contracting Parties in so far as they are not covered in the present Treaty. Pending ratification of the present Treaty by any of the Contracting Parties, or in the event of its denunciation by any of them, the trade relations of the Party concerned with the other Signatory States shall be governed by the commitments entered into previously under the existing instruments referred to in the preamble of the present Treaty.
Article XXVIII The Contracting Parties agree to hold consultations in the Executive Council prior to signing any new treaties among themselves which may affect free trade. The Executive Council shall examine each case and determine the effects that the conclusion of such agreements might produce on the free-trade regime established in the present treaty. On the basis of the Executive Council’s examination, the Party which considers itself affected by the conclusion of these new treaties may adopt whatever measures the Council may recommend in order to protect its interests.
Article XXIX For the purposes of customs regulations relating to free trade, the transit of goods and the application of the Central American Standard Import Tariff, the Contracting Parties shall, within a period of one year from the date of entry into force of the present Treaty, sign special protocols providing for the adoption of a Central American Standard Customs Code and the necessary transport regulations. CHAPTER XI: FINAL PROVISIONS Article XXX
This Treaty shall be submitted for ratification in each State in conformity with its respective constitutional or legislative procedures. The instruments of ratification shall be deposited with the General Secretariat of the Organization of Central American States. The Treaty shall enter into force, in the case of the first three States to ratify it eight days following the date of deposit of the third instrument of ratification and, in the case of the States which ratify it subsequently, on the date of deposit of the relevant instrument.
Article XXXI This Treaty shall remain effective for a period of twenty years from the date of its entry into force and shall be indefinitely. Upon expiry of the twenty-year period mentioned in the previous paragraph, the Treaty may be denounced by any of the Contracting Parties. Denunciation shall take effect, for the denouncing State, five years after notification, and the Treaty shall remain in force among the other Contracting States so long as at least two of them remain parties thereto. Article XXXII
The General Secretariat of the Organization of Central American States shall act as depository of this Treaty and shall send a certified copy thereof to the Ministry of Foreign Affairs of each of the Contracting States and shall also notify them immediately of the deposit of each instrument of ratification as well as of any denunciation which may be made. When the Treaty enters into force, it shall also transmit a certified copy thereof to the Secretary-General of the United Nations for the purposes of registration as set forth in Article 102 of the United Nations Charter.
Article XXXIII The present Treaty shall remain open for the accession of any Central American State not originally a party thereto. Provisional article As soon as the Government of the Republic of Costa Rica formally accedes to the provisions of this Treaty, the organs hereby established shall form part of the Organization of Central American States (OCAS) by an incorporation agreement and the OCAS shall be reorganized in such a way that the organs established by this Treaty retain all their structural and functional attributes. SUCCESS AND FAILURE OF THE CACM
The first decade of the CACM was hailed as a remarkable achievement both inside and outside the region. By 1970 intraregional exports had reached almost $300 million – a nine-fold increase in one decade – with El Salvador and Guatemala selling more than 30% of their total exports in the regional market. Intraregional trade was almost entirely concentrated in manufactured goods, as the architects of CACM hoped, and the region had begun to develop for the first time a modem industrial sector with multi-national companies (MNCs) strongly represented in the most dynamic branches.
Regional institutions were established to oversee the process of regional development and the Banco Centroamericano de Integracion Econimica (BCIE) gave special attention to the needs of the weaker countries (Honduras and Nicaragua).
Yet many problems had begun to surface and these deprived CACM of much of its dynamism in its second decade (1970-80).
The first problem was the scale of net trade diversion. With a very small manufacturing base in 1960, the scope for trade creation was strictly limited unless intraregional trade liberalization covered all activities.
Agricultural products, however, were largely excluded from the terms of reference of CACM. Meanwhile, trade diversion occurred on a large scale as the newly established industries replaced cheaper imports from the rest of the world. That the CACM was net trade diverting was demonstrated in numerous empirical studies. Under certain circumstances net trade diversion can be welfare improving and these conditions may have applied in Central America: economies of scale, a shadow price of foreign exchange different rom the official rate, less than full employment, etc. But net trade diversion placed a particular burden on those countries subject to a structural deficit in intraregional trade. Such countries were expected to pay each year an additional foreign exchange cost equivalent to the difference between the dollar price of intra and extra-regional imports without necessarily being able to increase dollar earnings through intraregional exports. The country most seriously affected by net trade diversion was Honduras.
Unable to expand her sales of agricultural products to Central America as a result of continuing trade restrictions, Honduras also failed to attract much new investment into the small manufacturing sector. The result was a widening deficit in intra-zonal trade that had to be settled in hard currency twice a year. Furthermore, the deterioration in the net barter terms of trade in the 1960s made it difficult for Honduras to generate an extra-regional trade surplus to finance the intraregional trade deficit.
As a result, following its failure to negotiate special treatment from its CACM partners, Honduras withdrew from the regional integration scheme at the end of 1970. The second problem was fiscal. Since the tariff had traditionally had a revenue function, the rapid growth of duty-free intraregional imports had serious fiscal consequences. Furthermore, in order to attract new investment into the manufacturing sector, the government of each country offered attractive tax holidays for up to 10 years.
Finally, in order to increase the profitability of consumer goods production, the CET was restructured with low tariffs on intermediate and capital goods. The result was a sharp drop in the relative importance of the tariff as a source of government revenue that led in 1968 to the San Jo & Protocol raising the CET by 30%. The third problem was the size of the market.
With a population in 1960 of less than 11 million, and many of these effectively excluded from the market economy by their poverty, the Central American region could not provide the level of demand needed to support the optimal scale of production needed in most industries. As a result, the market was quickly saturated and it became increasingly difficult to attract new investment into the manufacturing sector. Furthermore, all attempts to encourage regional producers to export anufactured goods were undermined by the high levels of anti-export bias and this was made worse by the San Jose Protocol. As a consequence of these problems, the CACM lost dynamism in its second decade. Honduras signed bilateral trade agreements with all republics other than El Salvador and intraregional trade for Central America as a whole continued to expand, but its share of total trade fell with traditional primary product exports to the rest of the world now providing the engine of growth.
Intraregional trade in agricultural products continued to be subject to restrictions and non-tariff barriers remained a formidable obstacle for the expansion of manufactured exports. Indeed, non-tariff barriers go a long way to explain an observed inverse relationship between the importance of a manufacturing sector in gross production and its importance in intraregional trade. Many efforts were made in the 1970s to revive the CACM, but these efforts never commanded the highest priority among the political elites.
Furthermore, regional suspicions were accentuated toward the end of the 1970s as the Somoza regime in Nicaragua began to crumble and as the left made gains in El Salvador. Ironically, however, the Sandinista victory in Nicaragua in 1979 provided the conditions for a boom in intraregional trade the following year with Nicaraguan imports soaring on the back of economic reconstruction. The Nicaraguan 1980 level of CACM imports could not be sustained and the value of trade fell back in 1981, although still exceeding 1979 levels.
The real crisis of the CACM began in 1982, however, with a series of adverse shocks all combining to produce a sharp drop in intraregional trade. The most important of these shocks was the decline in the value of extra-regional exports, which began in 1981 as the world economy went into recession; this had a predictable effect on the external terms of trade for Central America (which had in any case been falling since 1977 when the coffee price peaked) and on the volume of demand. Since intra- and extra-regional trade are complementary in Central America, the value of CACM rade was dragged down by the drop in extra-regional exports. The second shock was the adjustment and stabilization programs, which all Central American countries were running in 1982 in response to the debt crisis. The initial response to the first shock had been to increase domestic demand through an increase in public expenditure; this had produced unsustainable levels of budget deficits, inflation and public external indebtedness, forcing all republics to adopt adjustment programs. In 1982, real GDP fell in all five republics – the first such occurrence since 1932.
The drop in real GDP was accompanied by an even sharper decline in real consumption per head with a predictable impact on the value of CACM trade. The third shock was a series of unilateral and ad hoc measures designed to aid each country’s balance of payments problems by restricting CACM imports; these included exchange rate devaluation. Exchange control and non payment of intraregional debt arrears. The last problem was particularly severe with “surplus” countries (Costa Rica and Guatemala) eventually restricting exports to the rest of Central America in order to avoid any further increase in unpaid debts.
The final shock was civil war and political unrest; while the first two shocks involved a reduction in the demand for regional exports, civil war and political unrest restricted. Thus, part of the decline in CACM exports from El Salvador and Nicaragua in the 1980s was due to war-related supply constraints, although in the Nicaraguan case the problem was compounded by the unrealistic exchange rate paid to exporters. The combination of all these factors on the CACM was devastating. By 1985 the dollar value of intraregional exports had fallen by more than half, its importance had declined to 15. % of total trade and the Central American political crisis ruled out any attempts to revive the integration process. The CACM was identified by many inside and outside the region as part of the problem rather than as part of the solution and it was widely linked to the increasingly discredited policy of regional import-substituting industrialization (ISI).
The regional institutions suffered severe cuts in their budget and even the BCIE recorded losses after two decades of profits. REVIVAL OF THE CACM
Efforts to revive the CACM started in the mid- 1980s but they were overwhelmed by several factors. First, the tension between the Sandinista government in Nicaragua and other governments in Central America made any major restructuring of the CACM impossible. Second, the International Financial Institutions (IFIs), such as the World Bank, had become strongly opposed to regional integration as at best a distraction from the need to promote non traditional exports to the rest of the world and at worst a return to regional ISI.
Third, the Reagan administration (1981-89) in the United States, whose support was essential for a revival of regional integration, resisted any move in Central America that could be interpreted as throwing a life-line to the Sandinistas. Finally, the non payment of debts through the multilateral clearing house provided a strong disincentive for an increase in intraregional exports. With the defeat of the Sandinistas in free elections in February 1990, the path was cleared for a new attempt to revive the integration scheme building on the success of the Arias Plan in ending the civil war in Nicaragua. The summit of Central American Presidents held in Antigua, Guatemala, in June 1990 outlined a new integration scheme in which Honduras would return as a full member, the common external tariff would be re-established (at much lower levels), intra-zonal non-tariff barriers would be swept away and trade liberalisation within the region would embrace agricultural products for the first time. The next step toward the reconstruction of the CACM was taken in 1991 with the signing of the Protocol of Tegucigalpa.
This treaty created the Sistema de Intepzcibn Centroamericana (SICA), establishing a new legal and institutional framework for the integration process, SICA began operations in 1993 in San Salvador, the capital of El Salvador, but rivalry from long-established traditional institutions and an inadequate budget prevented it from playing a hegemonic role in the integration process. SICA’s work was also hampered by the diffusion of regional institutions across the five countries – a problem that was finally tackled in 1997.
Two years after the creation of SICA, at the 14th presidential summit in 1993, the Protocol of Guatemala was signed. This was a serious attempt to update the 1960 General Treaty that had launched the CACM in the first place. Among its most important features was a calendar for the reestablishment of a CET with a ceiling of 20%. Although all countries subscribed to this goal, it has been very difficult to achieve as a result of unilateral tariff adjustments upward and downward in the light of short-term macroeconomic conditions.
In 1996 the governments of the region once again committed themselves to the objective of a CET by the year 2000, but this time with a floor of zero (for capital goods) and a ceiling of 15% (for consumer goods).
Intraregional exports, which had begun to recover slowly after 1985, responded positively to the new climate. From a modest $664. 2 million in 1990 (15. 2% of total exports), they had reached $1171. 3 million by 1993 (22. 8% of total exports).
For some countries, exports to CACM were of major importance reaching (in 1993) over 40% of exports in the case of El Salvador and over 30% in the case of Guatemala. The rapid growth of intraregional trade at the beginning of the 1990s completely reversed the pessimism that had surrounded the integration process in the 1980s. Indeed, optimism became so strong that the governments of the region embarked on a series of commitments that went far beyond what could realistically be expected.
In 1994 the Central American Presidents adopted the Alianza para el Desarrollo Sostenible (ALIDES), a program to promote regional sustainable development, but environmental protection remained a national responsibility without adequate funding in most countries. The following year, at the 16th presidential summit, the Treaty of Central American Social Integration was signed without any attempt to explain how the CACM could alleviate, yet alone resolve, the region’s accumulated social problems. Intraregional exports did continue to grow after 1993, but their share of total exports had fallen below 20% again by 1995.
The importance of intraregional trade appeared even more modest when expressed as a proportion of total imports since Central America’s imports have far outstripped its exports in the 1990s as a consequence of capital inflows and remittances. By 1996, intraregional imports were less than 15% of total imports. Recognition of the difficulties faced in reviving the CACM helped to create a new sense of realism toward regional integration. At their meeting in July 1997, the Central American Presidents adopted a series of proposals to streamline the institutional arrangements following a series of critical reports from international agencies.
SICA was given the leading role and, as a consequence, a bold decision was taken to transfer most regional organisations to San Salvador. Although the Central American Parliament and the Central American Court of Justice were allowed to remain in Guatemala and Nicaragua respectively, their budgets were sharply reduced as part of the streamlining process. The new realism was also translated into the adoption of a series of measures designed to meet the concerns of the business community.
Under pressure from the World Trade Organisation (WTO), to which all Central American countries belong, the governments of the region adopted in 1996 rules of origin defining which goods qualify for duty-free status in the CACM and safeguard clauses to deal with dumping and other similar problems. The settlement of disputes, however, is still far from satisfactory with the Central American Court of Justice unable to play a leading role as its authority is not recognized by all countries in the region. Intraregional trade since 1990 still dominated by manufactured products as in the 1960s and 1970s shows some changes from the earlier period.
There has been some intra-industry trade, as Rodas shows in his paper in this issue, although trade creation and agricultural trade have both been very modest. The most encouraging change has been a greater correlation between intraregional and extra regional exports. T his demonstrated that at least some of the products traded within the region were now competitive outside, although the numbers of such products were still quite small. Rubber and plastic products exhibited a particularly strong performance. It would be wrong to dismiss the efforts to revive the CACM as ineffective.
There have been important changes in the approach to integration and some evidence that these are beginning to create the conditions for firms that are competitive within the region to become competitive outside. But the process of transforming an inward-looking scheme into an outward-orientated one is still far from complete and much remains to be done before Central America can be said to apply open regionalism successfully. A particular source of concern is the reluctance of Costa Rica, the region’s most successful economy, to enter fully into the new scheme.
Having lowered its tariffs unilaterally, in the 1980s, Costa Rica felt under no obligation to join in creating a CET in the 1990s. Unwilling to contemplate free movement of labour, Costa Rica also stayed outside the Triang & de1 Norfe (formed by El Salvador, Guatemala and Honduras) whose stated aim was the creation of a (true) common market. Furthermore, Costa Rica made no secret of its desire to enter into bilateral agreements with countries outside the region and signed in 1994 a free trade agreement with Mexico. This complicated even further the prospects for a customs union in Central America.
Another problem is the unequal distribution of trade between the member countries. Trade within CACM has grown, but remains highly concentrated with bilateral exchanges between El Salvador and Guatemala responsible for almost 30% of the total. The two weakest economies, Honduras and Nicaragua, have remained on the margin of trade expansion and both have large deficits with the rest of region; indeed, the trade deficit of Honduras in 1996 with the rest of Central America ($194. 9 million) was more than three times greater than the value of its CACM exports.
This imbalance was one of the reasons for the demise of regional integration in the 1970s so that the concern remains that the CACM -despite some novel features – is largely reproducing the pattern of the 1960s and 1970s. ECONOMIC RELATIONS WITH OTHER ECONOMIC BLOCS ASSOCIATION WITH THE EUROPEAN UNION A 1985 economic agreement with the European Community (now called the European Union) failed to spark an anticipated economic revitalization of CACM countries, but it did provide the impetus for the formation of the Central American Parliament in 1986.
This body is modelled after the European Parliament which serves as a consultative body to the European Union. The two parliaments have formed cooperative economic ties between the European Union and CACM. ASSOCIATION WITH NAFTA The North American Free Trade Agreement (NAFTA), embracing Canada, Mexico and the United States, was established on January 1, 1994. The richest market in the world, NAFTA offers an immense attraction for small countries in Central America. Indeed, it is impossible to understand the dynamics of regional integration in Central America in the 1990s without some appreciation of NAFTA and the trade policy of its members.
NAFTA presented Central America with a series of challenges. The first was the fear of trade diversion. The trade privileges extended to the three members of NAFTA could lead to some Central American exports being lost to a less efficient source. Textile producers, whose sales had benefited from the tariff concessions under the Caribbean Basin Initiative, were particularly concerned as the rules of origin for clothing in NAFTA are very demanding: the fear is that NAFTA firms will replace textile imports from outside NAFTA with NAFTA inputs in order to qualify for duty-free status for their own NAFTA exports.
Studies by the World Bank and other organizations suggested that trade diversion was unlikely to be a very serious threat. The main NAFTA importer, the United States, had low average tariffs so that trade diversion to Mexico from the cheapest source elsewhere was likely to be small. Attention therefore shifted to investment diversion – seen by many as much more serious. Thus, Central American countries feared both that existing investment in their countries might be relocated to take advantage of Mexico’s unique access to the United States and that future investment ight be diverted for the same reason. The third challenge was related to the second. All Latin American countries, including Mexico, had seen it as one of their highest international trade policy priorities to gain preferential access to the US market. Like the European Union, therefore, The United States had constructed a pyramid of privilege with Puerto Rico at the top and Cuba at the bottom. The launch of NAFTA effectively eroded the margin of preference enjoyed by Central America under the pyramid of privilege.
The inclusion of sugar in NAFTA raised a question over the ability of the United States to maintain its import quotas from the region, while the trade privileges enjoyed by CBI countries in the US market were undermined by Mexican membership of NAFTA. The situation was rendered even more complex by the US proposal for a Western Hemisphere free trade zone. Launched by President Bush in 1990 as the Enterprise for the Americas Initiative (EAI), it was long on rhetoric and short on detail.
Yet it re-emerged at the Summit of the Americas held in Miami in December 1994 as a proposal for a Free Trade Area of the Americas (FTAA) and trade ministers of all 34 countries (only Cuba was excluded) have held meetings annually in pursuit of the objective. Thus, each Central American country had to evaluate the prospects for a free trade agreement with the United States, Mexico and Canada through NAFTA membership, bilateral free trade agreements with each of the NAFTA countries as well as the FTAA.
For the small countries of Central America the prospect of NAFTA membership began to recede following the Mexican devaluation in the last days of 1994. NAFTA became increasingly unpopular with large sections of the US electorate and even Chile was unable to join. With the possible exception of Costa Rica, Central American countries in any case fell far short of the rigorous conditions for entry likely to be imposed by the United States and no US administration relished the possibility of small countries joining one by one. ” Thus, the strategy of these countries became defensive rather than offensive – reforming the CBI to provide parity of treatment with Mexico in order to minimize trade and investment diversion. Both NAFTA and the talk of NAFTA parity, not to mention the mAA, have proved to be an obstacle in the path of strengthening regional integration in Central America. The potential gains from unrestricted access to the US market far outweigh the net benefits to be derived from the CACM.
The difficult task of deepening the process of regional integration in Central America has therefore not received the priority it deserves or resources it requires; unrestricted access to the US market, however implausible, has been seen as more desirable than the less exciting, but more realistic, goal of regional integration, Central America. The potential gains from unrestricted access to the US market far outweigh the net benefits to be derived from the CACM.
The difficult task of deepening the process of regional integration in Central America has therefore not received the priority it deserves or resources it requires; unrestricted access to the US market, however implausible, has been seen as more desirable than the less exciting, but more realistic, goal of regional integration. CONCLUSIONS The integration scheme adopted in Central America in the 1990s has been correctly perceived as different from its predecessor in the 1960s and 1970s in both scope and design.
The goal has shifted from industrialization to export-led growth. As part of this shift, trade liberalization has been implemented by all countries with a huge reduction in external tariffs. This has altered the context in which the regional integration scheme develops. Domestic prices are no longer so far out of line with foreign prices and the margin of preference available to be extended to partner countries is now much smaller. The new regional integration scheme has brought some success.
Since the mid- 1980s intraregional trade grew faster than total trade upto 1993 so that its importance increased in relative terms. This encouraging trend has not continued, however, and in 1996 – after a decade of recovery in intraregional trade – the ratio of intraregional exports to total exports was still close to 20%. Since the goal of regional integration is now the promotion of export-led growth, the share of intraregional exports in total trade may no longer be so significant. What matters is the ability of the ntegration scheme to contribute to the international competitiveness of firms through cost reductions, increased marketing skills, enhanced bargaining power etc. Integration may also be able to promote investment through the increased attraction of regional infrastructure projects in sectors such as transport and energy. Regional integration in Central America is still subject to numerous limitations. The first decade after 1985 amounted to little more than a recovery of the levels of intraregional trade lost as a result of the debt crisis and the Central American political turmoil.
The 1980 level of intra-zonal trade, for example, was only surpassed in 1993. Intraregional trade remains dominated by a small number of bilateral exchanges, while exports by Honduras and Nicaragua to the rest of the region are of negligible importance. The second problem is that cxtra-regional trade continues to dominate the total in all five countries so that economic policy cannot realistically give priority to infra-regional trade. This means that, where conflicts arise, policy cannot be assumed to favour regional integration.
Thus, inflation stabilization – with or without an agreement with the International Monetary Fund – may require the adoption of measures that are inconsistent with the promotion of a customs union. An example was provided in 1994 by the decision of the Figures administration in Costa Rica to raise tariffs on third countries in order to reduce the budget deficit. A third problem arises from the virtual impossibility of reconciling all possible integration schemes open to each country. Costa Rica, for example, is a member of the CACM whose stated goal is a customs union.
Costa Rica, however, wishes to join NAFTA (a free trade area) and as a first step entered into a free trade agreement with Mexico in 1994. This agreement makes it virtually impossible for the CACM to achieve a genuine CET. A fourth problem arises from the weakness of the institutional framework. The idea of a regional secretariat staffed by civil servants not representing their own countries is still not accepted in Central America. The funding of regional institutions is far from adequate and such institutions as do exist lack the powers to remove the obstacles in the path of further integration.
Numerous studies have shown, for example, that the principle obstacle to regional integration in Central America is non-tariff barriers, yet no regional mechanism exists for removing such barriers. There is no redress against national measures that blatantly conflict with the obligations of regional integration treaties since there is no system of community law. These limitations raise doubts over whether the new integration scheme in Central America will be able to achieve the high hopes vested in it. There is little chance.
For example, of intraregional trade in Central America coming to play the role it does in the European Union, where it accounts for nearly 70% of total trade. The new integration scheme however, is more solidly based than its predecessor with much less risk of price distortions and misallocation of resources. It is therefore quite possible that the new scheme will eventually come to play its part in the promotion of export-led growth in Central America provided that other necessary steps are also taken. These additional measures are not unduly difficult to implement.
The main priority is the deepening of the integration process to create a single economic space for goods and services. This is essential for the reduction of costs of production at firm level. It is also important if foreign investors are to increase their commitments to the region, since a series of small national markets will never be of much interest to multinational enterprises. The deepening of the integration process also requires that domestic macroeconomic policies should be stable and consistent.
The complete harmonization of exchange rate, monetary and fiscal policies is not essential, as the first three decades of European integration demonstrated, but sharp changes in currency levels are very dangerous as they tend to provoke measures in partner countries to restrain import growth. Fortunately, as the region returns to moderate price inflation, the risk of competitive devaluations is receding. There are grounds for cautious optimism therefore with regard to the future of regional integration in Central America.
The conflict between intra- and extra regional exports, so apparent in the 1960s and 19705, as a result of import-substituting industrialization, is no longer so acute. Lower tariff and nontariff barriers on extra regional imports have increased the prospects for trade creation and changes in legislation have encouraged foreign investment. Regional integration will never be a panacea. But it can play a supportive role in the transformation of Central American countries from inward- to outward- looking growth and in the consolidation of an export-led growth model based on non-traditional exports.