On 18th June 2019, senior officials from Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama gathered in an annual meeting in Antigua Guatemala with representatives of the European Union (EU) to discuss issues and best practices related to implementation of their Association Agreement. Signed in 2012, the agreement aimed at scaling up the economic and political cooperation between the EU and Central America (CA) going beyond the simple unilateral preferential access granted to Central America under the EU’s General Scheme of Preferences. A challenging task for the EU that, despite historical links, maintains a low presence in CA; a presence reduced by the omnipresence of the US but also challenged by incumbent China.
The Association Agreement
The EU and Central America have maintained close and comprehensive relations for decades, reaching back to the EU’s support for the region’s successful peace process in the 1980s. Indeed, the European Union, strong in its own successful integration history, promoted economic dialogue in CA and supported creation of the Central American Integration System (SICA) to promote peace and democracy in the region.
During these years, CA leaders, through SICA, implemented an extensive programme of negotiations with the aim of creating a harmonized system concerning the coordination of customs policies and the implementation of common industrial policies. Subsequently, important regional agreements were signed, including: the General Treaty of Economic Integration and the promotion of institutions such as the Central American Bank. The Association Agreement between Europe and Central America provides an important turning point in this process. It relies on three complementary and equally important pillars, namely political dialogue, cooperation, and trade, considered to be the right tools to support economic growth, democracy and political stability in Central America. The agreement aims at consolidating the rule of law, strengthening legislative powers, making electoral processes more efficient, promoting respect for human rights, peace and the strengthening of the UN, as the core of the multilateral system. It also aims at promoting cooperation on environmental matters and above all at negotiating the establishment of a common mechanism open to the interventions of the European Investment Bank and the Latin American Investment Fund, to contribute to development and the reduction of poverty in CA.
The trade pillar of the Association Agreement
The last pillar of the agreement concerns trade, a very broad discipline whose key elements are:
- Tariff elimination. The agreement will largely eliminate tariffs with complete liberalisation at the end of the tariff phase-out period. Upon the agreement’s entry into force, Central America will liberalise 69% of its existing trade with the EU. Once the trade pillar of the agreement is in force, EU exporters will save €87 million annually in customs duties.
- Addressing obstacles to trade in goods. The agreement will ensure more transparency and better cooperation in the areas of "standards" and market surveillance in particular concerning sanitary and phytosanitary (SPS) barriers.
- Improved market access to government procurement, services and investment in telecommunication, environmental, financial and maritime services. The agreement also liberalises current payments and capital movements between the parties.
- Intellectual property rights & Geographical Indications. The Central American countries have adopted new legislation to incorporate so-called 'Geographical Indications' in a manner similar to the EU with over 200 geographical indications in the EU specifically protected.
- A transparent way to settle trade disputes. The agreement includes a dispute settlement system in accordance with the principles of transparency and sequencing. A mediation mechanism for non-tariff barriers is also foreseen.
- Regional Integration. The agreement will facilitate the movement of EU goods within Central America. Regional rather than ‘national’ regulations and using a single administrative document for customs declarations will considerably ease the administrative burden on European exporters.
- Customs procedures are going to be harmonized. Eliminating double duties over time, importers will pay a single duty for the region rather than at each country's borders.
- An agreement for sustainable development. The parties' commit themselves to adopting core labour standards and multilateral agreements addressing environmental issues.
With the entry into force of the Association Agreement in 2013, trade relations between the two regions increased but did not, however, receive the desired boost. According to EUROSTAT, trade between the EU and Central America amounted to 12 billion euro in 2013 and stayed approximately the same in 2018 (see chart below). It is important to remember that the main EU imports from CA are mostly primary products while the main exports to CA regard machineries and products with higher added value.
Several reasons explain this meagre trend. First of all, the Association Agreement entered into force in a period of world economic slowdown, which affected bilateral trade relations. But another main reason can be attributed to a lack of effective communication. Despite the investments the EU made to inform and help small and medium enterprises (SME) especially in both regions to grasp the potential benefits from the agreement, SMEs still largely ignore its main features. In fact, especially from the European viewpoint, CA is still mainly seen as a region destined for cooperation and not so much as an important market. Third, it must also be said that CA countries still maintain their peculiarities, even in the regulatory and organizational field, and have implemented the Association Agreement in different ways, at the expense of the overall coherence of regional cooperation. This means that some countries have proved to be more efficient and effective, as well as more open, in implementing the benefits of a sort of "free trade agreement" between the two regions, while in other circumstances barriers sometimes erected by incorrectly applied duties, or other obstacles, have discouraged the entry of European products into Central America.
Case study: the effect of the Association Agreement on Italian-Guatemalan relations
The prospects for the development of trade relations between Italy and Guatemala are extremely optimistic. The entry into force of the Association Agreement removed the high tariff burden and facilitated customs procedures for Italian exports to Guatemala. Moreover, the consolidation of the operations of the Italian Chamber of Commerce has given excellent results in increasing knowledge of the benefits of the agreement. Like its European peers, Italy exports to Guatemala mostly machinery and equipment, chemicals, basic pharmaceutical products and pharmaceutical preparations. The Italian case demonstrates that, despite increasing global competition, Italy was able to exploit the benefits of the Association Agreement increasing its exports to Guatemala also in more traditional sectors such as textiles, garments and agri-food products.
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