The Central American region has a long history in the quest for economic, social and political integration. From the mid-twentieth century to the present, Central American countries – like many other open economies – have gone through two waves of regionalism that marked the emergence of new efforts to form homogeneous and integrated economic blocs capable of expanding markets at the regional level.
In the case of Central America, the first wave of regionalism began at end of the 1950s, but its most important starting point was the adoption of the General Treaty on Central American Economic Integration which set the foundation for the creation of the Central American Common Market (CACM). During the first decades of the new common market, intra-regional trade grew significantly and opened room for the emergence of new Central American industries with regional operations that took advantage of scale economies. Political crises and armed conflict in the region during late 1970s and the 1980s – known as the lost decade – deeply affected regional economies and fragmented the CACM with the collapse of intra-regional trade. From this moment onwards, a second wave of regionalism in Central America arose. Peace negotiation processes and the progressive affirmation of the democratic institutions in the Central American republics (Esquipulas Agreements I and II) were also complemented by an institutional reform process initiated with the Tegucigalpa Protocol and by the review of the scope and institutional framework of the Central American economic integration process embodied in the Guatemala Protocol.
What is most important about the second wave of regionalism in Central America is that it was built at a time when globalization and trade liberalization were fundamental ingredients in the new development model underway in the region, which placed a strong emphasis on promoting exports and opening markets. Since then, Central American economic integration has been accompanied by the natural progress of economic globalization becoming equally vulnerable to current waves of new protectionism.
For the Central American countries, the creation of linkages with the international economy is a key element to deliver new employment and social opportunities to the population: indeed, the commercial exchange of goods accounts for 39.5% of regional GDP, the exchange of services 18.6%, tourism revenues 4.5% and foreign direct investment (FDI) 4.2%. This highlights that, although the Central American economies do not have large shares in the main international markets, the region has developed a flexible vocation of openness not only in trade in goods but also in investment and service transactions. Today, Central America is the sixth-largest economy in Latin America and the Caribbean.
International integration has not been an impediment for the intra-regional market to reconvert and take on a growing trajectory as in the last two decades. Currently, exports to the intra-regional market account for 31.3% of the region's exports to the world. Most notably, trade among Central American countries is marked by the absence of primary agricultural goods and a high presence of semi-industrialized goods.
Beyond figures and data, economic integration in Central America has a core social value through the building of solid institutional frameworks that fostered the dismantling of non-tariff barriers to trade through a gradual process of regulatory harmonization and the development of regional instruments such as a Dispute Settlement Mechanism (DSM). The economic integration agenda is shaped by the Council of Ministers of Central American Economic Integration (COMIECO), which serves as the highest decision-making body within the framework of the Economic Integration Subsystem. To lead this process, COMIECO hosts the Secretariat for Central American Economic Integration (SIECA), which is the technical and administrative body that provides support to the Central American states in this matter.
The regional economic integration agenda has developed alongside the strengthening of trade relations with strategic partners for the region such as the United States, Dominican Republic, Mexico, the European Union, Chile and South Korea. Further steps are underway to improve the existing free trade zone for goods originating in Central America.
As part of these efforts, it is important to underline what has been achieved with the adoption of the “Estrategia Centroamericana de Facilitación del Comercio y la Competitividad” (Central American Strategy to Facilitate Commerce and Competitiveness - ECFCC), which seeks to implement international practices and standards to improve the collection, control, border security and facilitation procedures for the transit of goods and people. The ECFCC is complemented by the initiatives carried out by Guatemala and Honduras to establish a single customs territory that allows the free movement of goods regardless of origin. El Salvador has recently joined and some positive outcomes have already been observed in the short term, such as the reduction in border crossing time for goods.
However, trade facilitation and customs unions by themselves are unable to overcome all the challenges that Central America faces in developing a broader and more efficient regional market. That is why in 2017 the region established the Regional Framework Policy on Mobility and Logistics of Central America. The framework aims to turn Central America into a global hub in terms of mobility and logistics through the creation of a Regional Master Plan that will prioritize the investments for required infrastructure. Additionally, SIECA has become a pioneer in research applied to the development of regional value chains, which has led to a publication entitled “Articulación productiva y cadenas regionales de valor: Una propuesta metodológica para la región SICA” (Productive articulation and regional value chains: A methodological proposal for the SICA region). The project is being carried out with the support and cooperation of the Spain-SICA Fund that was created to help the Central American states strengthen a regional value chain in the agribusiness and tourism sectors.
In Central America, the current context of globalization has been matched with a dynamic and proactive agenda in the area of economic integration and in the management of better trade and investment relations with other markets. These efforts have led to improvements in trade integration between the Central American countries. Notwithstanding, the scenario in international markets is deteriorating: uncertainty due to commercial tensions creates new risks for Central American economies. In this context, Central American economic integration is one of the main tools available to governments and the private sector in order to counteract the possible effects of escalating trade tensions. To face the headwinds, the Central American region must focus not only on short-term policies but also on the construction of a new integration paradigm consistent with the new challenges arising from globalization.