Caribbean Economies and Trade Liberalization: Rethinking Size, Asymmetries, and Coordination

First Published: 2006-07-28

Presentation to the Nassau Institute/Atlas Economic Research Foundation conference, Taking Small Nations to Greatness, Friday, June 9, 2006.

Concerns about the effects of trade liberalization, financial shifts and imbalances, outsourcing, and migration – in other words, globalization – have been the centerpiece for much of Latin American and Caribbean (LAC) discussions about economic policy options since the mid-1990s. Indeed, whether it has been support for free trade and economic regionalism (the FTAA or related efforts); unease about the emergence of China, India and other global competitors; or the effects of national economic crises in the overall shape of LAC trade and investment; these questions appear to have raised a fundamental paradigm shift in LAC's relation to the world economy. As in previous episodes of such seemingly radical change in the region, these questions have also raised important concerns, not just about policymakers' ability to produce timely and effective responses, but also about national economic strategies and long-term goals.

Caribbean countries consider themselves especially vulnerable to these sweeping economic changes. Preferential arrangements whereby Caribbean traditional products have been granted special access to European and American markets have been recently challenged (especially in the case of bananas and sugar in the EU), and their survival altogether questioned (in the case of the CBERA program in the United States.) Areas where Caribbean economies have developed certain competitive advantages, especially services such as tourism and offshore, have run into tight competition from either low cost jurisdictions (such as Mexico and the Dominican Republic for tourism) or global offshore players. Indeed, a common feature of many of the Caribbean's most recent challenges is their "globalized" origin, for instance, in the application of equal market access provisions in global trade rules of the World Trade Organization.

Policy-makers in the region have responded with a varied mix of new initiatives and some old prescriptions. Closer economic coordination among CARICOM countries, especially culmination of the single-market initiative, or CSME, has resurfaced as the most obvious medium-term goal. While its implementation has only been recently launched among some of the more developed members of CARICOM, calls for greater integration of Caribbean economies have been around for decades (especially propositions about free movement of labor.) Similarly, concerns abound regarding the pace of these important reforms, particularly as the region begins implementation of a recently concluded trade agreement with Central American countries, engages in trade talks with Europe, and calls for new commercial arrangements with Canada and the United States.

A common thread running through most analyses of these scenarios and policy responses is the perennial issue of smallness, and the peculiar structural conditions that affect the behavior of Caribbean economies. Familiar concerns about productive capacity, economies of scale, attraction of foreign investment, and transport costs have all resurfaced in recent debates about Caribbean "choices" and "actions". These concerns actually became the basis for special and differential treatment positions espoused by Caribbean officials in FTAA negotiations in the mid-1990s, and more recently in the Doha Round of WTO talks. It shouldn't pass unnoticed that both of these instances are now either stalled or in serious danger of collapsing, which in itself should bring Caribbean countries an important warning about the extent to which a successful trade policy for the region ought not to be reliant upon such an exceptional principle.

As Caribbean countries ponder their "place" in an increasingly dynamic commercial environment, lessons from other small countries facing similar challenges may provide an important point of reference for bringing new insights into some traditional constraints facing Caribbean trade policies. In fact, I would argue that the dynamic transformation of Central America's trade policy agenda in the last ten years provides one such reference.

While mindful of Caribbean idiosyncrasies and special circumstances, Central America's concerted and targeted engagement of world trade forums is a remarkable achievement by a traditionally fragmented group of countries, a precedent that certainly holds lessons for Caribbean efforts in this regard. Indeed, the Central American Common Market (CACM -Guatemala, El Salvador, Honduras, Nicaragua – like the Bahamas in CARICOM, Costa Rica is a member of the group but opted out of the common market) has a long history of divisiveness and failed attempts at policy coordination among its members. Consolidation came only after a protracted period of civil strife, conflict and economic crisis, and ultimately a paradigm shift from protectionism and import substitution to open economies, market reforms, and trade reciprocity. Like the rest of the beneficiaries of the Caribbean Basin Initiative, extreme disparities characterize their relationship with their main trading partner, the United States (the case of post-civil war Nicaragua especially telling of such contrasts.) Central America possesses some of the same characteristics (and challenges) as the small island economies in the Caribbean: dangerous fiscal imbalances and current account deficits, worrisome debt-to-GDP ratios, de facto (and sometimes de jure) dollarization, relative lack of productive diversification and over-reliance on the "external" sector (in Central America's case, the maquila sector); and competitive pressures from larger, more efficient extra-regional producers of traditional manufactures (especially textiles.)

Of course, there are plenty of contrasts between the two pairings. While there are relative size differences among its economies, Central America does not exhibit the same degree of regional asymmetries as CARICOM (for example, nothing like the economic disparity between Trinidad and neighboring Grenada). Central American production costs are lower than in the Caribbean, and their comparatively larger size affords them some possibility of economies of scale. Policy coordination among 14 or 15 countries is certainly more complicated than among 5 countries, although the European Union proves that the number of veto players in a common market need not be an insurmountable obstacle. Central American countries endured severe macroeconomic crises and emergencies, which some analysts regard as an almost necessary turning point for effecting profound reforms. But the fact that these reforms led to concerted regional activity in international trade is a remarkable outcome that by no means has been automatic or spontaneous. It is this outcome that holds important lessons for the Caribbean:

Lesson #1: Overall, "offensive" international trade policies yield better returns than "defensive" policies.

Since the mid-1990s, Central American countries have maintained a strong commitment to open economies and to securing access not only to their most important markets (like the United States), but also to new markets (Canada, Chile, the Caribbean, Europe) and even non-traditional ones (like Taiwan.) To achieve this end they have embarked upon an ambitious bilateral trade diplomacy agenda, in partnership with the private sector and civil society. Their success in engaging such different negotiating scenarios is not the result of improvised decision-making or a reactive agenda, but rather the product of long-term agenda setting and the crafting of a regional consensus on both the goals of trade liberalization, and the best mechanisms and strategies to achieve these goals. Indeed, in spite of limited resources, they have successfully linked different levels of negotiations (regional, bilateral) in order to reap greater rewards from preferential market access talks. Most importantly, throughout this intensive trade agenda they have avoided some of the "passing-the-buck" tendencies that members of regional groupings often show in these types of negotiations, especially when their focus is on defensive strategies.

Lesson #2: Asymmetries are not an obstacle to liberalization: they should be engaged, not enshrined.

Numerous scholars have demonstrated how trade liberalization between advanced and developing economies usually results in larger relative benefits for the developing economies. While economically logical, this is a politically difficult proposition, especially for vulnerable countries such as those in Central America and the Caribbean. Disparities (economic, social) between Central American countries and their largest trading partners (NAFTA, Europe), and in some cases political legacies from a confrontational past (U.S.), would seem like an insurmountable obstacle to the achievement of mutually advantageous trade liberalization between the region and larger, more advanced economies. While invoking certain principles of preferential and differential treatment, especially in multilateral talks, Central American countries have engaged these asymmetries through a skillful combination of legal and technical instruments (quotas, TPLs, and contingencies, among others). In addition, these countries have used trade liberalization to target certain developmental goals such as strengthening SMEs, improving infrastructure, and streamlining government procedures and public administration.

Lesson #3: External "forces" may be an opportunity, not just a challenge.

As noted above, the successful negotiation of a free trade agreement with the United States required a substantial amount of policy coordination and concerted action among Central American governments, a process that began several years before actual negotiations commenced. Their joint effort extended well beyond the negotiations, and actually became stronger as a result of their combined lobbying activities to secure US Congress approval of the agreement. In this regard, the common goal and challenge of securing market access to the United States provided the context for strengthening regional bodies and institutionalizing policy coordination. These positive externalities of the FTA process have laid the ground for concerted regional action to tackle new economic obstacles, such as energy costs and infrastructure development. Policy coordination may even evolve into a public good, as Central America (as well as the Caribbean) faces problems for which greater international cooperation and coordination is required, such as crime and migration.

Lesson #4: "Less" is sometimes "more".

Contrary to historical precedent, Central American governments have reduced the extent of supranational bureaucratic engagement while strengthening existing regional bodies and entities. Indeed, these countries practically re-invented the CACM in the 1990s, and have slowly transformed it into a better tool to advance the goals of regional integration and commercial liberalization. They have also worked towards linking different instances of intergovernmental cooperation in order to generate synergies and maximize limited technical and financial resources. While much remains to be done towards streamlining regional institutions in Central America (or even generating a true supranational entity altogether), a reduction of the "bureaucratic burden" that intergovernmental cooperation often entails in the region is certainly observable. Moreover, achievements in areas such as customs management and statistical coordination at the CACM are also noticeable, and constitute important steps that lay the groundwork for increasing the institutional and operational capacity of the organization.

Conclusion.

Central America is distant from being the rosy regional grouping that may seem to emerge from this discussion. Indeed, these small countries still face formidable domestic and international challenges (textile competition from Asia, increasing energy costs, poverty and inequality, to name a few) for which there are no readily available answers. Yet in spite of obvious constraints, and contrary to their own historical examples and political traditions, they have increasingly come to realize that their success relies upon a common proactive economic agenda that engages global markets, not shields from them. Size certainly matters, but as Central America has proven, there is very little intrinsic or inherent in that regard. Caribbean countries would certainly be doing themselves quite a lot of good by learning lessons from other small economies, especially in the context of a possible Free Trade Area of the Americas that Caribbean nations have so warmly supported, which would also include their continental neighbors.

Jos? Ra?l Perales, Manchester Trade, LTD.

The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.

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