Caribbean & Central America - September 2024

On 13 August President Xiomara Castro met with China’s vice foreign minister Hua Chunying to discuss the free trade deal (FTA) that the two countries have been negotiating.

The pair met in the Honduran capital Tegucigalpa for talks which also covered Chinese financial support for various projects in Honduras. Honduras’ minister for economic development Fredis Cerrato said that the meeting was “very fruitful,” adding that negotiations over an FTA had “advanced rapidly in a year,” with 22 chapters agreed and one left to discuss. That same day, Honduras’ foreign minister, Eduardo Enrique Reina, and China’s ambassador in Honduras, Yu Bo, signed an agreement for a feasibility study for the construction of 300 educational centres in Honduras.

The two countries forged bilateral relations in March 2023, after Honduras severed ties with its long-time ally Taiwan in search of Chinese trade and investment. Since then there have been six rounds of negotiations over an FTA, as well as a deal over an early harvest agreement (EHA) to allow Honduran shrimp and other seafood products to enter the Chinese market duty-free, which took effect on 1 September.

This agreement, which is a preliminary step towards a full FTA, marks a significant step in strengthening bilateral trade relations. Approved by the Honduran congress in July, the EHA has already facilitated the shipment of two containers of shrimp to China, and Honduras has prepared nine shrimp packing plants certified for export to the Chinese market. The Castro government is hoping that the full FTA will provide a major export channel for Honduran seafood and other key exports such as melon, tobacco, bananas, and cacao.

But others have questioned the impact that an FTA, and relations with Beijing more widely, will have on the economy as a whole. For example, Honduran international trade expert Enrique Mejía Uclés told local daily Tiempo that the FTA will have a “harmful” effect, with cheap Chinese imports replacing locally made products. In an article published 16 August, he predicts that the FTA will allow Honduras to export products worth US$25-40m to China, with US$1bn in imports coming the other way. 

Mejía also claimed that Taiwan used to buy Honduran shrimp at preferential prices, but China is negotiating cut price deals. Graco Pérez, an international law expert, made the same point to business magazine Revista Estrategia y Negocios in an article published 12 August, claiming that China is attempting to pay half of what Taiwan paid before. Alejandro Kaffati, an economic policy adviser with private sector lobby Consejo Hondureño de la Empresa Privada (Cohep), told local digital outlet HonduDiario in an article published on 16 August, that hundreds of jobs in shrimp-producing areas in the south of the country have already been lost due to the decision to end relations with Taiwan. He added that Cohep had warned of the impacts of an FTA on Honduran industry on multiple occasions.

Kaffati questioned the logic of ditching Taiwan in favour of China, predicting that the FTA would increase the country’s trade deficit. He highlighted the fact that promised Chinese investment has not been forthcoming, and that the FTA in its current form would not solve Honduras’ problems with productivity and job creation.

Meanwhile in a piece published 12 August, Cerrato told Revista Estrategia y Negocios that Chinese negotiators are inflexible and “pretty tough,” with Honduran negotiators unable to secure the benefits for which they are pushing.

• Flexibility?

The Honduran government has reportedly asked China to be more flexible during the remaining negotiations, with greater access for Honduran tobacco products a priority. Honduras is also pushing to be allowed to export a greater volume of products to China. 

Cerrato has also said that China wants the FTA to be finalised before it provides financing for other projects, as it wants any potential disputes to be handled by the United Nations (UN) rather than the International Centre for Settlement of Investment Disputes (Icsid), which is part of the World Bank.

So far, the impact of switching allegiances to China has been limited. A L6.8bn (US$276m) cooperation agreement to improve education infrastructure was signed in March while in late August, following a business event held in Tegucigalpa organised by the Honduran and Chinese governments, Cerrato announced that four agreements had been signed by businesses from both countries, with the potential to export US$17m worth of products such as coffee and palm oil. However, Honduras has not secured funding for strategic areas including infrastructure projects, such as a transoceanic railway line that is part of a so-called dry canal linking Pacific and Atlantic coasts. 

In recent years Chinese priorities have shifted away from investment in large-scale infrastructure towards what Beijing calls “new infrastructure,” or innovation-related sectors such as electric vehicles, information and communications technology (ICT), and urban infrastructure, which it wants to use to drive its own economic growth.

While this could bring some benefits to Honduras, with Chinese telecoms firm Huawei increasingly involved in the communications network, Beijing’s changing strategy may leave Honduras wanting. The country is less suited to innovation-related projects than others in Latin America, such as Mexico and Brazil, which have a strong track record in high-end manufacturing, nor does it offer a huge market for digital services. 

On the other hand, a new report from the UN Economic Commission for Latin America and the Caribbean (Eclac) shows that Chinese firms were significant contributors to foreign direct investment (FDI) project announcements in 2023, mostly in natural resource- and labour-intensive industries (see previous page).

While the agreement of the FTA may unlock Chinese investment in some areas, there is a risk that Beijing’s policy shift leaves President Castro struggling to justify the decision to switch allegiances from Taiwan. The Honduran government’s policies and legislation have “created a climate of uncertainty that has driven a decline in private investment and job creation” according to the US State Department’s 2024 Investment Climate Statement on Honduras. Increasing tensions with Washington, which saw Castro end her country’s extradition treaty with the US on 28 August (see our other publications for more discussion of this), could also reduce the chances of investment from the US and its allies, leaving Honduras increasingly reliant on China.

Rejecting US investment report

In mid-July Honduras’ foreign minister, Eduardo Enrique Reina, rejected the US State Department’s latest investment climate report on Honduras which claims that “in recent months increasing numbers of companies report they are experiencing challenges operating in the country”. It says these include difficulties in operations due to the central bank’s “strict and often onerous process governing the sale of dollars”, along with “uncertainty surrounding the implementation of pending legislation…politically motivated threats of criminal prosecution and expropriation of private assets, unreliable and expensive electricity, non-tariff measures against US imports, and increasingly frequent armed land invasions”. The report states that over 200 US companies operate enterprises in Honduras.