The global economic and trade system is at a crossroads. The rise of emerging economies, the disaggregation of production across multiple geographical locations and the fragile state of the global financial system all point to the need for countries to reassess their place in the global marketplace. For developing countries, the urge is even greater. In Central America, for example, growth of around 3.9 percent in 2016—notable given Latin America’s 0.6 percent contraction in the same period–is largely fueled by the region’s trade links with external partners, including the United States and the European Union. So as economic nationalism and the new protectionism, gains support in developed economies, policymakers of emerging and smaller economies need to discover innovative ways, not only to guard themselves from downside risks, but to secure their places in the new economic context.
Global uncertainty: is there a way forward?
While global trade in goods and services rose at around twice the rate of global GDP in the last few decades, in recent years it’s barely kept pace. In 2015 global trade was even below the growth of the general economy, due in part to subdued growth in developing economies and reduced demand for commodities (stemming mainly from China’s transition to an economy based more on internal consumption and less on raw, imported goods). The rise of economic populism in the developed north risks derailing trade relationships between advanced economies and some of the key players in the emerging world even more. Added to that is the threat of a trade war between the US and China.
But the overall picture should not undermine new opportunities available for smaller partners in the global economy.
Smaller economies have the opportunity to jump to the foreground and become more active players in the international scene. Central America, for example, could prove just the right hinge to boost trade between Asia and the Americas. This possibility gains more importance as the future of the Trans Pacific Partnership (TPP) remains uncertain. If Mr. Trump’s coup de grace proves effective and plans for TPP do come to an end, the remaining 11 countries will need to find an alternative way to participate in and benefit from the U.S. market. Thus, other trade partners or blocs should be considered: alongside its strategic geographic position and low labor costs, Central America has preferential access to the U.S. market through the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR). Asian manufacturers that had been planning for TPP could now relocate part of their production to the region, in order to ensure preferential access for their products and designs to the U.S. market. This, in turn, could provide Central America with fresh foreign investment and upend its industries, raising productivity and opening jobs for its swelling, young population.
Turning to Asia: Central America’s strategic bet?
In 2016, Central America concluded negotiations for a free trade agreement (FTA) with the Republic of South Korea (though Guatemala is still negotiating), building on a solid, decades-long presence of the Asian giant in the region–South Korean firms have an especially strong presence in the textile sector in El Salvador, Guatemala and Honduras. The FTA, which will come into force on January 1st 2018, eliminates tariffs for over 95 percent of South Korean exports and will open the Korean market to some of the Central America’s products, notably coffee, sugarcane and fruits. This expansion to new trade partners comes at a perfect time, as South Korea exports to the United States, its second biggest trading partner, contracted by -0.7 percent in 2015.
In the current economic context, even before the Korean FTA goes into effect, Central America can leverage its relationship with some of the leading Asian economies and attract their investment to the region. Taiwan has an FTA with five countries in Central America, and Japan has shown interest in starting negotiations in the near future. Thus, Asian firms could channel capital to manufacturing and other sectors of production, including pneumatics, petroleum-based oil and even help to start the production of electronic devices, through technology transfer to the region.
All economic crises and predicaments also offer opportunities. And with the current uncertainties surrounding the global trading system, Central America can strengthen its position as a more competitive international player. To do so, it must act as a united region and look beyond its traditional exports–agriculture and other commodities–to seek new, more sustainable engines of growth.
As Asia is left adrift by the U.S.’s likely shelving of the TPP–an ambitious trade agreement that once promised to unite economies accounting for 40 percent of the global economy policymakers must now seek to bolster region-to-region relationships. It could just prove the right strategic bet Central America needs to transform its economy and gain a more active role in the 21st century.