Caribbean & Central America - October 2023

On 31 August, Nicaragua and China announced the signing of a new free trade agreement (FTA), but there are doubts over how much the deal will benefit the Nicaraguan economy.

The agreement covers customs, tariffs, financial services, and multilateral environment deals, as well as an electronic transaction framework, digital economy cooperation, and online personal data protection. China’s commerce ministry said the two nations “can enhance mutual openness in trade in goods, trade in services and investment market access” in a statement published on 1 September. “It will help to release the dividends of the resumption of diplomatic relations between the two countries, unlock the potential in bilateral trade and investment cooperation, and elevate bilateral economic and trade cooperation to a new level, benefiting people of the two countries,” it reads, referring to Nicaragua’s decision to ditch Taiwan for China in December 2021 [EB-22-01].

Concluded following negotiations which began in July 2022, the agreement will come into force in January 2024. A report from China’s state news agency Xinhua published on 31 August notes that about 60% of goods traded bilaterally will be exempted from tariffs upon the FTA taking effect, and the tariffs on over 95% will be gradually reduced to zero.

• Tariff-free list

Major products from both countries, such as Nicaraguan beef, shrimp, and coffee, and Chinese vehicles and motorcycles, will be on the tariff-free list according to the 31 August Xinhua report.

Nicaraguan presidential adviser Laureano Ortega Murillo, the son of President Daniel Ortega and Vice President Rosario Murillo, said the deal “opens the doors to a huge market” and will generate investment, jobs, and technology transfers to Nicaragua. Ortega Murillo also claimed that Nicaragua will act as a “commercial platform” for China in the rest of Central America. Finance minister Iván Acosta has previously been cited by the international media as saying that the FTA could increase GDP growth by two percentage points, projecting growth of 3.4%-3.5% for the period 2023-2026, and the minister of development, industry, and trade (Mific) Jesús Bermúdez called the deal “a strategic step in the correct direction,” hinting at the wider significance of the deal.

Although Acosta may be optimistic about the economic impact of the deal, experts are sceptical. Trade between the two nations has remained highly asymmetric even since the reestablishment of diplomatic relations former ambassador to the Organization of American States (OAS), Arturo McFields, wrote in an op-ed for Mexican daily El Economista in December 2022. He cites central bank figures showing that in the first nine months of 2022 exports to China were barely US$11.3m, while imports exceeded US$798m. McFields describes Nicaragua’s exports as “pyrrhic” compared with US$1.4bn worth of exports to the US, a relationship likely to come under strain as Beijing and Managua become closer allies.

While some argue that the FTA will boost Nicaraguan exports, others disagree. The kinds of products that Nicaragua could sell to China, such as fruit or agricultural inputs, are cheaper for Beijing to buy from nations such as the Philippines or Malaysia, Evan Ellis, a professor at the US Army War College Strategic Studies Institute, told Nicaraguan media outlet El Confidencial in an article published December 2022. And Hernán Alberro of China Index, a global civil society organisation, believes that FTAs between Latin American countries and China are generally favourable to Beijing, “which sells cheap, low-quality products that it can’t sell to Europe or the US due to quality controls in those markets,” he told Spanish newspaper El País in an article published 9 August.

Then again, even if trade doesn’t get a boost, another attraction of relations with China is the promise of investment and humanitarian assistance. For example, countries such as Costa Rica and El Salvador received a raft of investments as part of negotiations over ending relations with Taiwan in favour of China. In a piece posted on the website of Peru’s army centre for strategic studies (CEEEP), Ellis highlights China’s agreement to purchase US$300m in Costa Rican bonds and construct a new US$100m stadium among other things. Beijing is also funding a new national library for El Salvador. However, thus far Nicaragua has received relatively little in return for its decision to make the diplomatic switch, with the launch of phase one of the “Nuevas Victorias” housing project in April the first major project linked to the new friendship.

It may be the case that Nicaragua simply left it too late to reap the rewards, as economic uncertainties in China have led to “some indications of a tapering of Chinese investment and finance” in the region, according to Margaret Myers, director of the Asia & Latin America Programme at the Inter-American Dialogue, a Washington DC-based think tank. Nonetheless Managua may have had its hand forced due to deteriorating relations with the US and its allies in recent years. This stems from the country’s authoritarian shift, which deepened with the brutal repression of mass protests in 2018 and with the November 2021 general election, which produced a re-election victory for Ortega in a contest widely slammed as fraudulent.

Since then, Nicaragua has sought closer ties with China, as well as Russia. For Beijing, re-establishing relations with Managua meant that it wrested another ally away from Taiwan, and also gained its support in international fora such as the United Nations. Myers believes that Beijing’s relations with Nicaragua are motivated more by these diplomatic considerations than by trade, as Nicaragua represents such a tiny market, she told El País in the 9 August article.

Despite scepticism over the economic impact of the FTA, there are signs that there could be some limited impact. For example, the signing of a new agreement for the export of Nicaraguan beef to China in August could lead to an uptick of trade in the sector. It is also possible that Nicaraguan officials extract more investment from China if they are adept at leveraging their position.

Another point of interest is the potential impact on Nicaraguan domestic politics. The fact that Laureano Ortega Murillo has taken such a prominent role in relations with China, as well as with Russia and Iran, has added to speculation that he is likely to take over from his parents at the head of the government at some point. If he does, it is likely that he will try to take advantage of the relationships he has built up with Chinese officials. However, he, or any other successor, could face more complicated relations with the US as a result of pulling closer to Beijing. Washington has already voiced its concerns over developments in Nicaragua by imposing various rounds of sanctions, but officials have so far refrained from unleashing the full arsenal of economic measures on Managua, perhaps out of fear of sparking a greater wave of migration to its southern border due to the impact on the Nicaraguan economy.