Caribbean & Central America - May 2018 (ISSN 1741-4458)

A Guatemalan-Honduran customs union that came into effect in June 2017 has led to a modest increase in bilateral trade. According to figures published by the Guatemalan and Honduran central banks, Guatemalan exports to Honduras in 2017 totalled US$914.9m, a 4.5% year-on-year increase, and Honduran exports to Guatemala totalled US$236.7m, a 0.2% year-on-year increase. The Honduras-Guatemala customs union is the first step towards achieving a Central American customs union loosely based on the European Union (EU) model, a project that has been discussed for decades but has made little progress due to instability and governance issues in the region.

Initially agreed in 2015 to facilitate the movement of goods and people between the two states, the Guatemala-Honduras customs union came into effect on 26 June 2017 at an event held in the border post of Corinto and attended by Guatemala’s President Jimmy Morales and his Honduran counterpart, Juan Orlando Hernández.

Three border crossings between Guatemala and Honduras – Agua Caliente, El Florido, and Corinto – were designated for the free flow of merchandise. Each of these border crossings has a counter for the 70% of goods exchanged between Guatemala and Honduras that are now tariff free. These products are traded using the Central American Invoice and Single Declaration (FYDUCA), an electronic document that records transfer (formerly known as exports) and acquisitions (formerly known as imports) of goods with free movement traded between Guatemala and Honduras. A second counter is used for the remaining 30% of goods that are still subject to tariffs.

The statistics department of the Central American Economic Integration System (SIECA) told LatinNews that coordination between the different government bureaus responsible for managing the border posts, including customs and excise, immigration, the taxation superintendency, phytosanitary and animal health institutions, has been the greatest challenge. “Developing regulations was one of the most time-consuming items on the agenda and required the greatest effort,” the SIECA statistics department told LatinNews in a written statement.

Despite such ‘teething problems’, in February this year, the World Bank, which has provided SIECA with technical assistance to launch the customs union, said that prior to the implementation of the customs union in June 2017, it took up to 10 hours to cross the Honduras-Guatemala border, but since the new system came into effect, the use of FYDUCA and the two separate counters for tariff-free and non-tariff free products has reduced this to 15 minutes.

More efficient customs proceedings and the free flow of goods between the two countries have led to a modest increase in bilateral trade. According to figures published by the Guatemalan and Honduran central banks, in 2017, Guatemalan exports to Honduras totalled US$914.9m, a 4.5% year-on-year increase, and Honduran exports to Guatemala totalled 236.7m, a 0.2 % year-on-year increase.

SIECA’s statistics department told LatinNews that a more significant increase in trade between the two countries is expected in the long term. “Central America’s intra-regional trade is recovering after falling over two consecutive years. Intra-regional exports between Guatemala and Honduras are not the exception; they have also started to recover (Guatemala’s Central American exports increased from 0.5% to 2.6% and Honduras’ increased from -2.5% to -0.4%), and the positive impact of regional integration will be seen in the long term,” says SIECA.

Added to this, the United Nations (UN) Economic Commission on Latin America and the Caribbean (ECLAC) predicts that in the long term, the customs union could boost Guatemala’s GDP between 0.2% and 0.4% and Honduras’ GDP between 0.3% and 0.7%.

“The Guatemalan economy is almost three times the size of the Honduran economy, so what we’re seeing are Honduran producers flocking to Guatemala to sell their products. They’re going to have a hard time though, because they’re competing for the same niches where Guatemalan producers are strongest. The Honduran market, on the other hand, is not the best option for Guatemalan producers, and most commercial opportunities have already been exploited,” says Guatemalan economist Hugo Maúl, of the National Centre for Economic Research (CIEN). He adds: “The customs union is useful in terms of facilitating the transit of finished products from Guatemala to Honduras’ industrial base, or facilitating the transit of raw materials from Puerto Cortés, in Honduras, to Guatemala. Rather than facilitating the exchange of manufactured goods, it will allow the integration of the textile sector, and other industries, in both countries.”

Regional integration remains a distant goal

On 20 October, El Salvador’s president Salvador Sánchez Cerén said El Salvador would join the customs union during a meeting with his Honduran and Guatemalan counterparts in the border post of El Amatillo, located on the border between Honduras and El Salvador. “Our border posts, far from representing an obstacle for trade and human mobility, should become tools to lead us to a deep integration,” Sánchez Cerén told the press. He added that a three-month deadline had been established to create the necessary infrastructure for El Salvador to join the customs union.

Javier Gutiérrez, SIECA’s secretary general, predicts that if El Salvador goes ahead with plans to join the Guatemala-Honduras customs union, it could increase its trade volume by 76.9%. “El Salvador has a domestic market of 7.1m inhabitants. If it joins the customs union, it would have access to a market of 31.2m people,” he told the press in October 2017.

“Things are a lot easier with El Salvador and a de facto integration is already taking place. The problem with El Salvador is political because the customs union isn’t a priority for the current administration in El Salvador. Added to this, VAT is significantly higher in El Salvador than in Guatemala, which could lead to product triangulation for tax reasons, and many Salvadoran products compete directly with Guatemalan products,” says Maúl. However, Maúl believes the region lacks the necessary infrastructure to contemplate the inclusion of other countries, such as Nicaragua and Costa Rica, in the customs union.

“A customs union between Honduras and Nicaragua would be complicated for logistical reasons. Firstly, Honduras would have to invest far more in its roads to bring them up to the same standard as Nicaragua’s road network. And secondly, both countries have a very strong agricultural sector and there would be fierce competition between them,” Maúl told LatinNews.

So far, Costa Rica remains sceptical about the customs union and says it is working on its own trade liberalisation model based on the models implemented in Singapore, Holland and South Korea. In September 2017, Costa Rica’s deputy minister for foreign trade, Jhon Fonseca, told Nicaraguan newspaper La Prensa: “What Guatemala and Honduras have done has been labelled a customs union but it isn’t. They have facilitated the transit of products they consider to be low risk. These countries have similar tax regimes so they don’t face the same problems as other countries.” Edgar Balsells, former president of the Central American Bank for Economic Integration (CABEI), told LatinNews that “Costa Rica’s position has always been the same” and that successive governments have been less than enthusiastic about regional integration.

• Obstacles

Former president of the Central American Bank for Economic Integration (CABEI) Edgar Balsells believes that rather than the inevitable technical issues that have arisen during the months after the Guatemala-Honduras customs union was implemented, the greatest obstacle to Central American integration is the political instability and governance issues faced by each of these countries’ governments, such as soaring crime rates in El Salvador as a result of gang violence, electoral fraud allegations in Honduras, and a string of corruption cases in Guatemala. “There’s a lot of conflict right now. Central American governments are looking inwards, rather than outwards,” says Balsells.