When the George W. Bush administration signed the Central America Free Trade Agreement in 2004, skeptics were assured the new pact would expand trade and foreign direct investment between the U.S. and six of the least industrialized countries in the Western Hemisphere. Although four of those nations — El Salvador, Guatemala, Honduras and Nicaragua — enacted CAFTA in 2006, and the Dominican Republic followed in 2007, Costa Rica didn’t enact the agreement until 2009 because of widespread political opposition to the pact in that country.
After a steep decline in trade in 2009, U.S. exports to and imports from CAFTA nations are expanding again, in large part because of the preferences laid out in the pact. U.S. imports from CAFTA nations increased from $18.1 billion in 2005 — the year before implementation — to $28.6 billion in 2011. U.S. exports to the trade partners grew from $16.9 billion in 2005 to $30.1 billion in 2011.
Trade growth with and among the CAFTA nations has been resilient and impressive, in part because customs agencies are making it easier for traders to take advantage of the complex preferences written into the pact.
Customs modernization and trade facilitation are vital for Central American growth because they encourage and facilitate the integration of the economies of the region, and make it easier for companies to integrate their supply chains across the borders of the multiple small countries in the region, said Barbara Kotschwar, research associate at the Peterson Institute for International Economics in Washington.
“Modernizing customs lowers transaction costs and increases transparencies,” she said. In some cases, these savings can make a crucial difference that determines whether a smaller or less experienced company enters or remains in the Central American market.
Customs agencies in “all of the countries have improved,” said David Lewis, vice president of Washington-based consultant Manchester Trade, but customs agencies and the private sector still face significant challenges getting maximum benefits from CAFTA.
On the one hand, said Jose Raul Perales, executive director of the Association of American Chambers of Commerce in Latin America, customs agencies and traders struggle to overcome “a tremendous amount of infrastructure problems,” involving inadequate ports and roads, leading to delays that thwart the full impact of CAFTA trade preferences.
On the other hand, the countries suffer from an insufficient number of well-trained officials, and “even if you train them, and they develop expertise, the expertise does not stay in house” because of the high turnover rate among senior officials, Perales added.
Although there is widespread consensus about what’s wrong, “there is not a lot of coordination” among those involved in finding remedies, Perales said. “We have a laundry list of things that need to be done, but there is a problem establishing priorities.”
Some proposals reflect specific initiatives supported by international donors, such as the Inter-American Development Bank, the World Bank and the U.S. and Canadian governments. Other proposals reflect “capabilities that exist” but that should not be prioritized, some people feel. Rather than pursue goals simply because they can be achieved, the public and private sectors need to build a consensus about what kinds of feasible initiatives should be prioritized.
“There is surprisingly little coordination between governments and the private sectors” of the CAFTA countries, Perales said. Governments often assume they know what the private sector wants, but don’t actually know what companies want or need.
In an October survey, AACCLA and the IDB collected views from 325 individuals representing 311 companies and organizations active in six countries of the region. A key finding: Governments often thought companies knew about governmental initiatives, but the companies often did not. “The surprise is the sheer amount of disconnect between governments and the private sector, as if they were speaking past each other,” the report said.
Governments say they have enacted X, Y and Z initiatives, but private companies said these measures are “news to us.” Such ignorance or confusion are damaging in an age when shippers need to move goods across borders in time to meet just-in-time deadlines, Lewis said. In today’s global economy, even a one-day delay because of customs slowdowns can be “something terrible,” he said.
Overall, reactions to customs modernization initiatives were mixed. Forty-six percent of all survey respondents said customs administrations use information to expedite the release of goods “completely” (6 percent of respondents) or “to a great extent” (40 percent). Equally promising, 44 percent said customs administrations provide for electronic submission of processing of information and data before arrival.
But only 16 percent of respondents said customs administrations are effective, fair and uniform in their use of compliance and risk analysis information. Perhaps worse, only 1 percent of respondents said the effective, fair and uniform use of compliance and risk analysis information takes place “completely,” while 12 percent of respondents said it “never” happens.
Only 2 percent said customs administrations did a “very good” job of managing maritime infrastructure and equipment they utilized, compared with 7 percent who gave customs administrations a “very poor” rating in that regard.
Establishing trust between customs and the private sector is vital, Perales said, because “a gap in communications creates a gap in trust, and when you lack trust, you can’t maximize the benefits” of the trade agreements. To that end, AACCLA has been working with the private and public sectors in the region “to build a channel of communication between the governments and the private sector,” he said. The next step is to present a formal report with recommendation for actions.
Enacting the trade preference provisions written into CAFTA “has been a big challenge” for customs agencies of the various countries, said Rafael Cornejo, a veteran international trade consultant. With CAFTA’s enactment, 70 to 80 percent of all trade in the region is now covered by the complex preferences laid out in the pact itself, other free trade agreements between the Central American nations and the European Union or in pacts enacted separately by CAFTA members with various Asian nations such as China and Taiwan.
In Central America, as in other developing regions, customs agencies have long played a significant role in raising revenues for the national treasury, Cornejo said. Customs agents’ traditional mindset is not to facilitate trade by approving preferences on specific shipments, but to focus on collecting revenues.
“These governments sometimes forget that fact, and they increase their control in different aspects because the governments need these revenues,” he said. “But revenues should not be as important now” for these government agencies as they were in the past. “The agencies don’t assume that this (loss of revenue) is a cost of the CAFTA agreement.”
Despite the pact, customs corruption, emblematic of traditional shortcomings in the region, remains a significant issue. In the AACCLA-IDB survey, only 17 percent of respondents said there are “always” mechanisms available for them to report corruption incidents to authorities in those countries. Only 3 percent of respondents said local government “always” follows up on reports of corruption, while 57 percent said the government “rarely” (39 percent of respondents) or “never” (19 percent) follows up.
Only 1 percent of respondents said the government “always” provides protection from retaliation for those who report corruption, while 77 percent report said such protection occurs “rarely” (29 percent) or “never” (48 percent).
“There are some things that are very easy and are not costly for governments to do,” Cornejo said. Importers need to be aware of the latest revisions of the Harmonized Tariff Schedule, for example. “You need to know which rules of origin for preferences are in effect,” or you are working with out-of-date information, and can easily have wrong expectations about how much duty you will have to pay, he said.
Added Kotschwar, “When you expect to go into a market at zero percent (duty), and you find out that you are (really) going into that market at 11 percent, this is something that can keep you out of the market in the future.”
Small companies can address this challenge by hiring experts with specialized knowledge, for a relatively modest price, Cornejo said. Larger companies are more likely to have such expertise in-house.
In theory, the customs agencies of all CAFTA members are required to implement their own “advance ruling” process that enables importers to demonstrate in advance to Customs that their shipments comply with the CAFTA rules of origin. But most CAFTA countries have not established such a procedure for speeding up compliance, Cornejo said.
CAFTA nations are also making uneven progress toward establishing a “single window” where traders can present information to Customs about their imports and exports, and benefit from the fact that this information is electronically shared with other governmental agencies that have jurisdiction in their product sector, such as the local food safety agencies.
Some countries, such as El Salvador, Guatemala, Costa Rica and Nicaragua, have established such a single window for sharing export documentation, but not for import-related documentation. Other countries have established a single window for import documentation, but no country in the region has completed the process for both imports and exports.
Costa Rica and El Salvador expect to have such a single window late this year or in 2013, Cornejo said. During the past few years, Internet access has expanded throughout the region, and even small importers are now connected to the Web. “In the worst case, if they don’t have their own computers, they can rent a computer by the hour,” he said.
Contact Alan M. Field at email@example.com.