Central American Common Market (CACM)
The Central American Common Market (CACM) was established by the General Treaty of Central American Economic Integration signed on December 13, 1960, by Guatemala, Honduras, El Salvador, and Nicaragua. Costa Rica joined on July 23, 1962. The treatywas the principal economic component of a series of measures adopted during the 1950s and early 1960s that were designed to facilitate the political and economic integration of the five nations of the Central American isthmus. The General Treaty also created two regional institutions: the Secretariat for Regional Economic Integration and the Central American Bank for Economic Integration. The political component of this integration process was to be carried out through the Organization of Central American States (ODECA), which was formed on October 14, 1951.
Integration Efforts in the 1950s and 1960s
The notion of a unified isthmus has a long history in Central America. It dates back at least to 1821 and the formation of the Federation of Central American States shortly after the region’s independence from Spain. The federation lasted only 15 years, but the ideal of unification continued to prevail throughout the next century and finally led to concrete unification measures in the 1950s. During this period, regional integration was driven in part by the example of the European Community and by the views of economists at the UN Economic Commission for Latin America (ECLA). According to their importsubstitution industrialization (ISI) strategy, poor nations should eschew international trade and turn inward by closing their internal market to foreign products. The resulting boost to their domestic industry would lead to higher living standards. Since the ISI strategy does depend on the size of internal markets, however, ECLA economists believed that the strategy would be more effective in the region if the five nations formed a free trade area that expanded the market size for local firms but still protected them from international competition. Prompted by these ideas, the five nations signed theMultilateralTreaty on FreeTrade and Economic Integration in Central America on June 10, 1958. That same day, they also signed the Regime for Central American Integration Industries (RII), which permitted member countries to identify firms that due to economies of scale would be granted monopoly right to supply the entire region. To ensure balanced development, each nation would be allocated an equal number of these industries.
The ECLA approach led to opposition from the United States and other groups concerned with its protectionist bent. Responding to this pressure, the five nations reached a new agreement the General Treaty that altered the direction of the proposed common market from one focused on protection to one intended to be more encouraging of trade. For instance, whereas the Multilateral Treaty required that products eligible for free trade intraregionally be listed within the treaty, the General Treaty freed all products unless specifically exempted and identified by the treaty.
By most criteria, the CACM was considered a dramatic success, especially during its first decade of operation. According to Bulmer-Thomas (1998, 314 16), the elimination of duties on intraregional trade and the creation of a common external tariff (CET) was done rapidly and efficiently: 74 percent of goods listed on the tariff schedule traded freely immediately on the General Treaty’s entry into force and, by the end of 1966, 94 percent of all listed products were assessed no duty when trading intraregionally. In addition, by 1967, 90 percent of traded goods were covered by the CET. As a consequence, intraregional trade expanded by a factor of nine, from $31.3 million in 1960 to $285.2 million in 1970, and the share of intraregional trade as a percentage of total exports rose from 7.0 percent in 1960 to 26 percent in 1970. For more details see Bulmer-Thomas (1998, table 1).
Despite these successes, deficiencies in the integration model soon became evident. The General Treaty was biased toward freeing up intraregional trade in consumer goods manufactured regionally and left in place barriers to intraregional agricultural trade. This contributed to sizable intraregional trade imbalances among the less-developed members such as Honduras and Nicaragua, which had small or nonexistent manufacturing sectors. It also led to sizable trade diversion as third-country manufactured consumer goods, which faced high protectionist CETs, were replaced by more expensive, lower-quality regional goods. Yet the mechanisms established to address imbalances were either incapable of reaching a consensus or nonexistent. For instance, the RII was suspended when Costa Rica permitted the establishment of a tire factory to compete with an integration industry already operating inGuatemala. Finally, since the structure of the regional agreement still maintained elements of the ISI model, tariff revenues fell sharply as a percentage of total government revenues. Not only did consumer goods trade duty-free, since they were manufactured regionally, but also imports of intermediate and capital goods from outside the region entered duty-free to avoid harming these regional manufactures. To address this problem, the five nations agreed to a 30 percent increase in the CET under the San Jose Protocol of 1968.
Finally, regional integration collapsed when a dispute over the attempted expulsion by Honduras of Salvadoran immigrants during the summer of 1969 led to a four-day war between the twoneighbors and the eventual withdrawal of Honduras from the Central American Common Market in December 1970. Relations between the two nations would remain suspended for a decade.
A Revival of Integration Efforts in the 1990s
As a by-product of efforts to restore peace to Central America, the Central American presidents’ meeting in Antigua, Guatemala, in 1990 called for reviving the integration process. In response, the five nations, including Panama as a new member, signed the Tegucigalpa Protocol to the ODECA Charter on September 13, 1991. The protocol amended the existing integration framework and established a new institution, the System of Central American Integration (SICA), which was to oversee the integration process. As an umbrella institution, SICA oversaw 4 thematic areas (economic, political, social, and environmental) and incorporated 27 other regional institutions, more than 200 treaties or protocols existing among the member nations, and 3 regional bodies: the Central American Court of Justice, the Central American Parliaments, and the Secretary General of SICA.
It is worth underscoring that the protocol called for the creation of an economic union and the positioning of the region within the global economy. This was one of a number of important indicators that views within the region regarding the appropriate development model had shifted dramatically. The integration efforts were now to be guided by an export-led development model whose orientation was outward, as opposed to the inward-oriented, import-substitution framework that dominated the views of the early architects of the Central American Common Market. Regionalism was now to be open, not closed. Moreover, several of the member countries had adopted a neoliberal trade strategy that focused on lowering tariffs, eliminating quantitative trade barriers, and employing more market-friendly measures.
The next important step in the revival of economic integration was taken on October 29, 1993, when the six member nations of SICA signed the Guatemala Protocol to the General Treaty. This protocol focused on economic integration and committed the six nations to the formation of a customs union.
Since these steps were taken, the momentum toward integration has ebbed and flowed, buffeted by a host of factors internal (such as the election of presidential candidates opposed to further integration) and external to the region. For instance, Hurricane Mitch in 1998 dampened enthusiasm for integration, the prices of the region’s commodity exports deteriorated sharply, and SICA was confronted with a severe funding crisis.
Nonetheless some progress has occurred and the enthusiasmfor integration appeared to be on the rise by about 2005. By early 2007, all but a handful of regional goods traded freely within the region and, according to data provided by SICA, 94 percent (5,846 out of 6,198) of the products in the tariff schedule had been harmonized into a CET. Additionally, the CET was far less protectionist than during the earlier integration period and was applied as follows: 0 percent to capital goods and raw materials produced outside the region, 5 percent to raw materials produced regionally, 10 percent to intermediate goods produced regionally, and 15 percent to final goods.Moreover, the recent implementation of the Central American Dominican Republic Free Trade Agreement (CAFTA-DR),which establishes a free trade area (FTA) that includes theUnited States, the five Central American countries, and the Dominican Republic, has great potential for deepening the region’s integration.
Following a comprehensive comparison of the FTA with existing integration instruments, Gonzalez (2005) concludes that among the most important features of the new FTA is that the Central American countries opted to make its requirements apply in a plurilateral fashion, as opposed to only bilaterally between the United States and each country. This contrasts with the FTA agreements signed earlier by the region with Chile and with Mexico, which were huband- spoke in nature. A second important feature identified by Gonzalez is that the FTA agreement sets a ‘‘floor’’ on disciplines in a host of existing areas (e.g., trade in goods) and new areas (e.g., services, investment, intellectual property, dispute settlement, etc.). As a result, the newFTA essentially deepens and updates the regional integration instruments. See also Central American Dominican Republic Free Trade Area (CAFTA-DR); common market; free trade area; Free Trade Area of the Americas (FTAA); import substitution industrialization; regionalism; tariff rate quotas