The idea of a united Central America can be traced as back as the early XIXth Century. Following independence from Spain and Mexico, five Central American nations, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua formed the Central American Federation 1824. Though the Federation collapsed in 1838, the aspiration of unity in the Isthmus endured giving rise to a number partial projects for regional association. One of these projects was the Organization for Central American States (ODECA) which was established in 1951 as a political forum to promote cooperation and integration among members. Since the early 1950s, ECLAC became involved in the project of integration contributing with an economic rational, deeply influenced by the paradigm of import substitution industrialization. Lacking a formal structure for achieving these goals, the initial efforts towards integration proceeded slowly and through a number of bilateral agreements.

The Multilateral Agreement on Free Trade and Central American Economic Integration, signed in 1958, provided a common Central American approach to integration and mandated the establishment of a free trade area within ten years. Two years later, in December of 1960, El Salvador, Guatemala, Honduras, and Nicaragua, signed the General Treaty on Central American Integration creating the basic framework for economic integration and giving birth to the Central American Common Market - CACM. The General Treaty provided for the establishment of a common market and a customs union within a period of five years. Costa Rica acceded to the treaty in 1962.

During the first two decades of CACM’s existence, intraregional trade and FDI increased (see figure 1) contributing to the industrialization of the region. However, in the late 1960s, political problems prompted Honduras to pull out from the CACM. Moreover, signs of exhaustion of the ISI model and unilateral currency devaluation in response to oil shocks led to the re-imposition of trade restrictions among members. By the 1980s, civil war and foreign debt problems caused major payment difficulties among countries and, consequently, intraregional trade contracted more than 50% between 1980 and 1986.

Figure 1

In late 1980s, democratization brought about reform-oriented governments which on the occasion of the 1990 presidential Summit of Antigua, Guatemala, decided to reactivate the integration process under the guiding principles of open regionalism. This new vision entailed that intraregional barriers to trade would be eliminated while at the same time the region as whole would become progressively more open to the rest of the world (in fact the average tariff for the region dropped from nearly 45% in 1985 to almost 6% in 2002).   

In 1991, the five Central American republics and Panama signed the Protocol of Tegucigalpa to the 1962 Charter of the ODECA establishing the current institutional framework, the Central American Integration System (SICA). The SICA Secretariat coordinates and executes the mandates from Central American Summits and the decisions from the Council of Foreign Ministers. Institutionally, SICA encompasses all existing entities including those in charge of executive functions (summit meetings, ministerial commissions, and other technical judicial (Central American Court of Justice), and legislative functions (Central American Parliament). In terms of scope, SICA comprises the political, economic, social, cultural, and environmental subsystems. Despite being full members of SICA, Panamá and Belize – which joined in SICA in 2000 - do not participate in SICA’s subsystem of economic integration.

In 1993, the six Central American presidents reconvened to sign the Central American Economic Integration Protocol to the General Treaty on Central American Integration (Protocol of Guatemala) whereby they reiterated their commitment to the objective of creating a customs and a monetary union without establishing a specific deadline. Through the Protocol of Guatemala they also laid down the institutional framework of the economic subsystem of SICA. The Council of Ministers for Economic Integration, which is made up by ministers of economy and presidents of the central banks, assumed the responsibility for coordination of economic policies, aided by both the Sectoral and Intersectoral Councils of Ministers. The economic subsystem is completed by three technical administrative bodies (the Secretariat for Economic integration, the Secretariat of the Agricultural Council, and the Secretariat of the Monetary Council) as well as three technical institutions, the Bank for Economic Integration, the Institute for Public Administration, and the Institute for Industrial Technology and Research.

The CACM has been successful in establishing a free trade area in Central America. The General Treaty established that all products with certified local origin enjoyed free trade except for a list of products listed in Annex A. The list of exceptions has decreased overtime and currently applies only to coffee, sugar, alcoholic beverages and petroleum products. As a result intraregional trade has increased in volume and importance, particularly during the 1990s (figure 2). In fact, in 2002 intraregional exports reached close to 2.8 billon US dollars, which is roughly 28 percent of total exports of central America.

Figure 2

After 40 years of integration, the CACM is presently somewhere between an almost perfect free trade area and an imperfect customs union. Since the beginning of the 1980s there has been significant progress in harmonizing external tariffs. The common external tariff applies four tariff levels, 0, 5, 10, and 15 percent to capital good and raw materials, raw materials produced in the region, intermediate goods, and consumption goods respectively. The average tariff of the CET is 7.5 percent. As of 2002, more than 79 percent of tariff lines were harmonized, and only 1305 tariff lines remained unharmonized. However, during the 1990’s, member countries have moved at different speeds in their negotiation of bilateral free trade agreements with third parties, and this has raised the issue of whether those different commitments that have eroded the common external tariff.

During the 1990s, the process of integration was deepened by the development of new rules and regulations in a number of areas such as rules of origin, safeguard measures, unfair trade practices, standards and technical barriers to trade, dispute settlement, and trade and investment in services. Also, the Código Aduanero Uniforme Centroamericano (CAUCA) and the rules and regulations to the CAUCA were expanded as the countries tackled the modernization and integration of custom administration.

External Trade Relations

The Central American countries have been pursuing new trading arrangements with other Countries in the Americas, both individually and as part of the Central American Common Market.

To date, the region has concluded free trade agreements with Chile, the Dominican Republic, Mexico, Panama and the United States, and are currently negotiating with Canada, the Andean Community, the European Union, and participating in the Free Trade Area of the Americas.

Nevertheless, CACM members have had some difficulties in articulating external positions as a block. Costa Rica has negotiated individually with Mexico, Canada, and CARICOM. The other CACM members are currently negotiating with Canada. Moreover, even in those negotiating theatres that have seen CACM members negotiating as a block ( FTA negotiations with Chile, the Dominican Republic, and Panama) significant parts of the negotiation were completed through bilateral negotiations between the external party and each CACM member. Since not all countries have concluded their respective ratification processes some of these agreements have been entered into force bilaterally.
 

Relevant Bibliography 

Central American Report. SIECA / IADB-INTAL

Centroamérica, evolución de las políticas comerciales, 1999-2000. ECLAC, Mexico

Customs Unions. Salazar-Xirinachs, J.M.; Wetter,T.; Steinfatt, K.,and Ivascan, D.  in Towards Free Trade in the Americas.

El Proceso de Integración Centroamericana en Perspectiva.

Pasado, presente y futuro del proceso de integración centroamericano. Zapata, R. and Pérez, E. (2001)

Progress in Central American integration. SIECA. October 2003

SICA at the Dawn of a  Century: Will the Central American Isthmus Finally Be Able to Achieve Economic and Political Unity? O'Keefe, T. (2001)

The Central American common market: From closed to open regionalism. Victor Bulmer-Thomas (1998)