A vicious cycle of poverty, crime, and institutional weakness in Central America is at the root of much of recent illegal immigration to the United States. Meanwhile, the US government is working to address both the immediate challenge at the border and the longer-term “push factors”.
The people leading this effort in the White House know the region well and know how the United States has attempted – and failed – to address this problem in the past. This knowledge should open them to trying new approaches.
In particular, trade policy can and should be used to harness the power and creativity of the private sector to produce the kind of economic growth and job creation that will encourage and enable Central Americans to stay in Central America.
Two specific trade policy tools are at hand, none of which has ever been tested in Central America. Either or both would send a strong signal to private markets that investment in the region is welcomed by the governments of the United States and Central America.
First, the United States should link the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) to the United States-Mexico-Canada Agreement (USMCA).
Technically known as cumulation, this would allow a company manufacturing in Mexico to source components from Central America that would count towards the minimum content threshold for duty-free access to the United States under the United States. ‘AEUMC.
This would encourage North American supply chains, which currently source many components from Asia, to return to Central America. The result would be to reduce the cost of manufacturing in North America – which would make us more competitive – and stimulate job creation in Central America.
A trade policy based on CAFTA-DR and USMCA would give strong coherence to the American strategy. This would fully involve the region’s private sector and create hundreds of thousands of jobs in Central America.
In fact, the CAFTA-DR experience highlights the latent market opportunity in the region and suggests that allowing cumulation would promote greater trade and investment. Since CAFTA-DR came into effect in 2005, it has spurred a 20% increase in merchandise trade between the United States and the other six countries in the agreement: Costa Rica, Dominican Republic, El Salvador, Guatemala , Honduras and Nicaragua. .
However, trade between the other six countries (known as CA-5 + DR) has grown at a much faster rate. Merchandise trade between CA-5 + DR countries, which stood at $ 6.5 billion per year when the agreement entered into force in 2006, increased 62% in real terms to 10.6 billion dollars per year by 2019. In addition, nearly 100 billion dollars of foreign direct investment passed through the CA-5 + DR during the same period.
Second, the United States should invite the Northern Triangle countries of Guatemala, Honduras and El Salvador to conclude a stand-alone digital trade agreement.
The power of digital technologies to reduce corruption, strengthen governance, reduce the informality of work, improve the investment environment and promote job creation is widely recognized. Digital technologies are a crucial gateway to global value chains that open up investment opportunities and narrow the social welfare gap, which in turn reduces the pressure to emigrate.
A digital trade deal in line with US practices would accelerate the digital transformation of the Northern Triangle while locking in much needed reforms. It would also encourage the interoperability of regulations and physical infrastructure in the region, which would build resilience and attract more investment.
Although relatively underdeveloped, the Central American region is well placed to seize this opportunity. Cell phones are ubiquitous, including many with data plans, so most consumers are familiar with digital technologies for accessing services and making purchases. The private sector in Central America has started to develop the market potential, and application-based banking services are widely available. All governments in the region are increasingly putting more and more information and services online; many common bureaucratic procedures such as paying taxes or registering a business can be done electronically. Big American brands like Walmart Inc., AES Corp. and Citigroup Inc. are present in the region and use various digital systems to serve their customers.
As a result, Central America is well positioned to benefit from trade policy initiatives like these, and the private sector has proven its willingness to respond to market openings.
The Northern Triangle needs a boost towards a strong regional economy after COVID-19. An agreement on digital commerce and the accumulation of content would provide an immediate major boost with positive long-term effects for the Northern Triangle and the United States.
Matthew Rooney is the Executive Director of the George W. Bush Institute-SMU Economic Growth Initiative.