چگونه ممکن است پیمان گاتفا نوسانات اقتصاد کلان در امریکا مرکزی را تغییر دهد؟: درسهایی از پیمان نفتا

This paper examines the potential impact of the Central America Free Trade Agreement (CAFTA) on macroeconomic fluctuations in Central America in light of Mexico's NAFTA experience. CAFTA and NAFTA share a number of common characteristics as both agreements envisage comprehensive tariff reductions, cover a broad spectrum of sectors, and include provisions about settlement of disputes. NAFTA helped spur a dramatic increase in trade and financial flows between the member countries and was associated with significant changes in the Mexican business cycles. The findings in this paper suggest that CAFTA could also result in similar effects. In particular, CAFTA could boost trade and financial flows between the United States and the Central American countries. The agreement also could play a major role in reducing the volatility of business cycle fluctuations in the region and could lead to an increase in the degree of co-movement of business cycles in the Central American economies and the United States.

Signed by five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua), the Dominican Republic, and the United States in 2004, the Central American Free Trade Agreement (CAFTA) could constitute a turning point in the region's integration with the global economy.1 CAFTA is a comprehensive trade agreement changing the framework of trade relations between the United States and the Central American countries (initial five and the Dominican Republic). The agreement provides enhanced access to the Central American countries’ largest export market and could be instrumental in increasing foreign direct investment (FDI) inflows to the region.2 This paper examines the potential implications of CAFTA for macroeconomic fluctuations in Central America in light of the Mexico's experience under the North American Free Trade Area (NAFTA). While similar preferential trade agreements are relatively recent—therefore, providing little empirical evidence—Mexico's experience under NAFTA is quite insightful offering some guidance as to how CAFTA could affect Central America. Signed by the United States, Canada, and Mexico a decade ago, NAFTA was the first major trade agreement including a developing country and highly developed economies.3 CAFTA and NAFTA share a number of common characteristics as both agreements envisage comprehensive tariff reductions, cover a broad spectrum of sectors, and include provisions about settlement of disputes. CAFTA aims at eliminating tariffs and substantially reducing non-tariff barriers between the United States and the Central American countries. CAFTA also includes provisions covering investment flows, financial services, government purchases, protection of intellectual property rights, as well as labor and environmental issues. While the Central American countries already have strong trade and investment relations with the United States and enjoy preferential access in the context of the Caribbean Basin Initiative (CBI), CAFTA is more comprehensive and changes the form of trade relations from the unilateral preferential arrangement defined under the CBI to a negotiated bilateral agreement.4 CAFTA's main objective is to eliminate all tariffs and substantially reduce non-tariff barriers between the United States and the Central American countries.5 During the past 10 years, the Central American countries have already significantly decreased their tariff rates (see Kose, Rebucci, & Schipke, in press). In addition, these countries have undertaken various measures to reduce dispersion of tariffs. Immediately after CAFTA enters into force, tariffs on all non-agricultural and non-textile exports from Central America to the United States and on about 80% of non-agricultural and non-textile exports from the United States to Central America will be reduced. Tariffs on other goods would be phased out incrementally over a 5–20-year period. While a significant fraction of exports from the Central American countries have already had tariff-free access to the US market, CAFTA would further reduce various restrictions and eliminate compliance costs necessary to qualify preferential access (Griswold & Ikenson, 2004). In the case of agriculture and textiles, CAFTA provides some enhanced market access but its extent is much more limited than initially expected.6 A key component of CAFTA is that it includes various provisions about flows of investment and financial services, government purchases, and protection of intellectual property rights.7 In addition, it provides broad market access for several markets, including services. Labor provisions are slightly tighter than under previous agreements, by offering a platform to examine the quality of legislation rather than merely ensuring its implementation (Elliot, 2004). Dispute resolution provisions of CAFTA are modeled on NAFTA, implying that disagreements would be solved through cooperation. The agreement would create a permanent committee on trade capacity building to help the Central American countries in trade negotiations. NAFTA appears to have had a positive impact on the Mexican economy during the past 10 years. It helped spur a dramatic increase in trade and financial flows between Mexico and member countries. NAFTA has also been associated with significant changes in the Mexican business cycles. For example, there has been a moderation in the size of business cycle fluctuations in Mexico. The agreement has also fostered an increased synchronicity of business cycles in Mexico and the United States. Section 2 analyzes how CAFTA could affect the volume of trade and financial flows after reviewing the impact of NAFTA on the flows between Mexico and the United States. The results suggest that CAFTA could lead to a substantial increase in trade flows through its impact on productivity growth and specialization patterns in the CA countries. CAFTA also could accelerate the pace of diversification of the trade base. Moreover, CAFTA could further boost FDI flows to the Central American countries as NAFTA led to a sizeable increase in financial flows to Mexico. Mexico's NAFTA experience suggests that the increased integration with the US economy could have a major impact on business cycles in the Central American countries. Section 3 documents that output variability could decline in the Central American countries after the inception of CAFTA. CAFTA also could play a major role in reducing the volatility of consumption and investment fluctuations in the Central American countries. More importantly, CAFTA could result in large welfare gains in the Central American countries by helping expand the set of available financial instruments for international risk-sharing purposes. CAFTA could lead to an increase in the co-movement of business cycles in the Central American economies and the United States. The degree of synchronization of business cycles in the Central American countries and the United States has risen in recent years. Section 4 examines the importance of external and domestic shocks in explaining business cycles in the Central American countries using various VAR models. The results suggest that there are significant differences in these economies’ exposure to external shocks, and particularly those stemming from North America. External factors appear to drive business cycles only in Costa Rica and Honduras. Domestic shocks are the dominant sources of volatility in Nicaragua and the Dominican Republic, consistent with their history of political and macroeconomic policy instability. Section 5 argues that CAFTA could lead to a further increase in the degree of synchronization as it results in an increase in the importance of external shocks in driving business cycles in the Central American countries. A stochastic dynamic general equilibrium model, which is calibrated to reflect some basic features of the Central American economies, is used to analyze the potential changes in the transmission channels of business cycles after CAFTA. Impulse responses produced by the model indicate that reductions in trade frictions that boost trade flows between the Central American countries and the United States could lead to an increase in business cycle interdependence. There are inherent difficulties associated with analyzing the potential impact of CAFTA on the Central American countries in light of Mexico's NAFTA experience. First, isolating the effects of NAFTA on Mexico is a complicated task given the significant other external and policy shocks that have occurred over the past decade. Second, Mexico differs from the Central American countries in several dimensions (Table 1). Mexico shares a common border with the United States, has a much larger and more a diverse economy, and its per capita GDP is much higher than all of the Central American countries except Costa Rica. Section 6 concludes with a summary of results.

There are inherent difficulties associated with analyzing the potential impact of CAFTA on the Central American countries in light of Mexico's NAFTA experience. First, isolating the effects of NAFTA on Mexico is a complicated task given the significant other external and policy shocks that have occurred over the past decade. Second, Mexico differs from the Central American countries in several dimensions. Mexico shares a common border with the United States, has a much larger and more a diverse economy, and its per capita GDP is much higher than all of the Central American countries except Costa Rica. Hence, the analysis in this paper and its findings are only tentative. The Central American countries are already becoming more integrated with the United States, in terms of both trade and financial flows. The United States is their most important commercial partner. There are some important differences among the Central American countries, however, and not all of them are integrating with the United States at the same pace. Mexico's NAFTA experience suggests that CAFTA could significantly accelerate the pace of the integration process. However, the Central American countries’ relatively less favorable location, lower level of income, less diversified trade base, and smaller size might be detracting factors to the process of economic integration. Both Mexico's experience and ongoing specialization trends in the Central American economies suggest CAFTA could lead to lower consumption volatility and hence higher welfare in the region. CAFTA could also decrease output and investment volatility as the role of the shocks originating in the United States becomes more important in driving fluctuations in the Central American economies. The increased trade and financial flows could result in a higher degree of business cycle interdependence through stronger demand and supply channels. Moreover, CAFTA could amplify the spillover of sector specific shocks through its impact on the nature of trade flows.