Is Free Trade With the US Right for Central America?

Ronald Reagan's death forced many people to confront once again the legacy of Central America's brutal wars in Guatemala, El Salvador, and Nicaragua of two decades ago. That the region's bloody history is truly behind it seems to have been confirmed by the recent signing of the Central American Free Trade Agreement (CAFTA) with the United States.

The symbolism of that treaty promises much, not least the idea that civil wars and US interventions may be things of the past. But the details of the treaty offer little comfort to a region that is still recovering from the economic devastation wrought by those wars.

Paramount to CAFTA is a concern about the extent to which Central American countries will liberalize their economies. But more critical is whether the agreement will make for healthier economies. Although CAFTA represents an important opportunity in the region's quest to expand its access to the US market, it is unclear whether the new rules will strengthen or weaken Central American producers.

Under CAFTA, 80% of US exports will be duty-free as soon as the treaty is ratified, and all tariffs will expire in 15 years. Until recently, the region maintained a trade surplus with the US, but with liberalization, the region will increase imports of more affordable goods, thereby turning the surplus into a deficit. Consider Mexico's trade balance with the US since the North American Free Trade Agreement (NAFTA) came into effect. In the years between 1995 and 2002, Mexico's annual trade deficit with the US increased to $1 billion.