During the 1960s, the countries of Latin America and the Caribbean opted for an economic development strategy based on trade protection. At its core, import substitution sought to protect local industries from foreign competition.
Although the region’s economies grew significantly, this growth laid the foundations for the 1980 debt crisis, which was compounded by a series of sociopolitical conflicts in Central America and brought major social and economic repercussions.
This marked a turning point for Central America, which set out to follow the example of the East Asian countries and pursue a development model based on greater trade and financial openness, export promotion, a change in the economic structure, new destination markets, and foreign direct investment attraction.
In this way, Central America began to expand its supply of export products and destination markets.
In 1970, most of the countries in the region mainly exported unsophisticated agricultural goods to 109 destinations in the world, focusing on coffee, bananas and cocoa.
In 2017, the last year for which data is available, Central America exported goods to more than 220 countries. The share of manufactured goods that this region exports has increased significantly and now accounts for 35% of total exports, compared to just under 6% in 1970. Meanwhile, agricultural goods accounted for 25.5% of total exports in 2017 compared to 68% in 1970. And coffee is no longer Central America’s star export—it now accounts for less than 5% of the total.
However, despite the region’s efforts to achieve greater international trade and financial integration, some of its major trading partners have shifted toward more protectionist policies. For example, the United States has been seeking to reactivate its domestic market by increasing tariffs and renegotiating its trade agreements, both of which have tended to increase the price of goods from abroad, especially China and Mexico.
The key: expanding the network of intraregional trade treaties
In the recent publication The Future of Central America: Challenges for Sustainable Development (link in Spanish), we set out to identify the best strategy for mitigating the effects of possible changes to trade policies that could make it more expensive for Central America to access major markets.
One of the steps is diversifying exports geographically. The study estimates that, for instance, if Central America were to expand its network of intraregional trade agreements, it could increase real regional GDP by 1.2% before 2030, which would bring almost 400,000 new jobs.
In this sense, increasing trade with the Pacific Alliance is a window of opportunity for more significant economic growth, job creation and attracting foreign investments. Therefore, it is critical to minimize non-tariff barriers related to logistics costs (such as border posts, paperwork, or infrastructure) and administrative barriers. This could be achieved through border integration programs, which have already been implemented in some countries.
Central America must expand its intraregional trade integration
The Central American region, including the Dominican Republic, has a chance to broaden its trade integration agenda in an uncertain international context. Greater intraregional trade integration with less traditional emerging markets could bring opportunities for growth, employment, and foreign investment attraction.
However, redirecting trade toward new destination markets poses fundamental challenges. It implies coordinating dominant political and diplomatic wills while addressing the demands of sectors that would be negatively affected by greater openness.
It would also require that countries fast-track their trade facilitation strategies, including models such as Single Windows for Foreign Trade and coordinated border management while improving regional connectivity. They would also need to take advantage of network economies at the regional level and to attract innovative infrastructure financing mechanisms that seek to enhance private-sector involvement and more inclusive growth.
Central America thus needs to focus its efforts on liberalizing trade and diversifying its export products and destination markets to better integrate into global value chains by making the most of free trade agreement and reducing nontariff barriers.