LatinFinance - May/June 2017 - 46

ments is good news in a region where
governments have been relucant to spend,
too intent on keeping the public safes
tightly locked. He says that in places like
Costa Rica, austerity has failed to reduce
public debt because more decisive action
on tax reforms has not materialized. Even
in countries where debt is not a worry,
governments have felt compelled to keep
spending as low as possible.
"In Guatemala, the government has
been shrinking, even though there is much
need for improvements in the public
sector and debt levels rank among the
lowest in the world," Medina says. "It is not
necessary to keep implementing austerity measures, but it is an idiosyncrasy of
the country. Guatemala has implemented
strong inflation target policies for three
decades." ECLAC numbers show that
Guatemalan government debt closed 2016

CARMEN AÍDA LAZO,
ESEN

"EL SALVADOR IS
AN OUTLIER IN
CENTRAL AMERICA.
WE HAVE A CHRONIC
ECONOMIC GROWTH
PROBLEM"

at just over 23% of GDP.
With stingy governments keeping a tight
rein on spending, Central American economies will do well to attract private investments to achieve faster growth. Lazo sees
potential for private investment in sectors
that can benefit from El Salvador's proximity to the US, such as logistics, call center
services and medical tourism. Medina
stresses that Costa Rica has carved a niche
in high technology industries, particularly
biomedicine, and offers the skilled labor
force required to attract foreign firms.
To tempt private investors, however, Central American economies need to improve
both the business environment and the rule
of law. The region fares poorly in the World
Bank's Doing Business rankings, with Costa
Rica leading the lot in the dubious 62nd
position. Panama ranks 70th and Guatemala
comes in at 88th.

CAFTA in question
When US President Donald Trump took office in January, he
vowed to shake up US trade policy.
He has called the North American Free Trade Agreement (NAFTA) a "disaster" and on his first day in office pulled the US out of
the Trans-Pacific Partnership (TPP), a trade agreement with Pacific
Rim countries.
Yet, so far, one prominent Latin American trade accord has
avoided Trump's criticism: the Central America Free Trade Agreement, known as CAFTA or CAFTA-DR.
Started more than a decade ago and modeled after NAFTA,
the trade group includes Costa Rica, the Dominican Republic, El
Salvador, Guatemala, Honduras and Nicaragua. The combined
countries represent the US' 16th-largest trading partner, according
to figures from the Office of the US Trade Representative (USTR).
As the Trump administration works through its policies on
trade, CAFTA appears an unlikely target for an overhaul. Central
American leaders say they are preparing for any possibility - and
some are even optimistic, saying the withdrawal from the TPP
could boost regional business.
"It does offer an opportunity for the region," says Juan Pablo
Carrasco, president of the American-Guatemalan Chamber of
Commerce.
In recent years, Central American apparel manufacturers,
particularly in Honduras, the largest source of US apparel imports
from Central America, have struggled to compete with the growth
of exports by Chinese producers.
The prospect of the US' inclusion in the TPP also worried apparel industry executives in El Salvador, where textiles represent
45% of the country's total exports. El Salvador's economy ministry had warned the trade deal threatened some 300,000 jobs in
Central America, arguing the TPP would provide a competitive
advantage to Vietnam, the second-biggest producer of clothes
imported to the US.

46 L ATINFINA NCE.COM - May/June 2017

Now, with Trump bringing attention to trade with China and
Mexico, plus his decision to withdraw from the TPP, Central America could boost apparel exports, some industry leaders say.
"We've been saying for some time that the [US's inclusion in
the TPP] would have hurt the Central American region and El
Salvador, particularly in the textile industry, because it would have
increased our direct competition in the US market with Vietnam
and other south Asian countries," says Jorge Arriaza, director of El
Salvador's Textile Industry Chamber.
Trump, in his criticism of free trade, has blamed trade deals
for the loss of jobs in the US and argued they cost the country
exports. But US government data on CAFTA shows the pact has
proved heavily favorable to the US, a likely indication it will remain
untouched.
The US trade surplus with CAFTA countries in 2016 topped $5
billion, according to the US Department of Commerce. US exports
to the region supported more than 130,000 American jobs in 2014,
according to the USTR.
The US is Central America's main trading partner, sending automobiles, electronics, medical equipment and chemical products
to the region.
Central American countries, in turn, ship textiles, coffee, fruits
and meat, among other products. Under CAFTA, the US exports
tariff-free and Central America wins access to the US market.
Trade has flourished between the US and CAFTA countries
since the trade pact took effect. In 2005, US exports totaled about
$16.9 billion; exports in 2016 reached $28.9 billion.
Still, for some in the CAFTA region, the trade imbalance is worrying. Benny Metz, a political leader in the Dominican Republic, has
said the country not only has a trade deficit with its bigger northern
neighbor, but also with some Central American countries whose
economies are similar in size to the Dominican Republic. LF
By Kevin Gray

http://www.LATINFINANCE.COM

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