Recession-driven reality may come as a shock


Like millions of people around the world, Central Americans are gleeful with hope that Barack Obama’s victory at the polls in November and his inauguration as the first African-American U.S. president will bring about a new era in politics, trade, international relations and human rights.

Mindful of the Reagan era and the contentious U.S. policies that sought to overthrow leftists in Central America in the 1980s, Panama President Martin Torrijos hailed Obama’s victory as offering “the chance of a new era of cooperation  and understanding.” Honduran President Manuel Zelaya said it was “a triumph for all civilization.”

For Daniel Ortega, the Nicaraguan leader and a Cold War-era enemy of Washington, the victory was “a miracle.” 

But the region, which is heavily dependent on trade with the U.S., may be in for a shock. Under President Bush, Central America was not badly served, winning a wide-ranging trade deal, the Central America Free Trade Agreement, that has become one of the key tenets of the bilateral relationship and is credited with transforming Central America from a group of archetypal banana republics into a trading bloc of 40 million people. CAFTA comprises Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica, as well as the Dominican Republic.

During Obama’s election campaign, however, the president-elect vowed to “stand firm again agreements like the Central American Free Trade Agreement” in a “fight for fair trade,” saying CAFTA failed to live up to labor and environmental standards. Obama has not gone into details about what he does not like about CAFTA and it is not clear if he is a trade protectionist or internationalist, but he has vowed to protect American jobs. Critics of CAFTA claim that labor laws in the region fall short of international standards and that farmers cannot compete with the U.S. government-subsidized agricultural sector. 

Central America is clearly not a priority for the new president-elect, despite the excitement Obama generates in the region. The Illinois senator takes office amid the worst U.S. economic crisis since the Great Depression and faces the challenges of withdrawing from Iraq, tackling Afghanistan and Iran, relaunching the Middle East peace process and helping the industrialized world reduce global warming.

“The array of problems and challenges is so great that I would be very surprised if any president, whether Obama or anybody else, would be able to meet the expectations,” said David Scott Palmer, who specializes in U.S.-Latin American relations at Boston University. “Given the domestic economic crisis and its worldwide implications, the Obama administration is going to be focused much more broadly. I would not see any particular reason for a special focus on Central America,” he added.

“The issue at this moment in Central America is what may happen with free-trade agreements negotiated but not yet ratified in Colombia and Panama. My impression is that the new administration will not ratify them in their present form,” Palmer said.

While most agree that CAFTA (as well as the North American Free Trade Agreement, which Obama has also criticized), will not be opened up for renegotiation, Panama, home to the U.S.-built canal, could be particularly frustrated by Obama.

Panama is not part of CAFTA and the U.S. has negotiated a separate trade deal with the nation. But Congress under Bush has not ratified the accord, blocked by Democrats who were angered by Panama’s brief appointment of Pedro Miguel Gonzalez, who is wanted in the U.S. for murder, to be the head of its National Assembly. Although Gonzalez stepped down in September, the U.S. Congress is set to leave trade pacts with Colombia and Panama (as well as South Korea) unsettled until 2009.

Costa Rican exporters are also concerned about what Obama’s administration may bring. Of all the Central American nations, the country was the most skeptical about CAFTA from the outset, and ordinary Costa Ricans only narrowly approved the accord in a referendum in 2007. Last month, after much haggling over the details of the pact because they were reluctant to open up their telecom and insurance sectors to outside competition, Costa Rica lawmakers voted to implement it. CAFTA first entered into force between the United States and El Salvador on March 1, 2006, followed by Honduras and Nicaragua on April 1, 2006, Guatemala on July 1, 2006, and the Dominican Republic on March 1, 2007.

Now Costa Rica is set to enjoy permanent tariff-free access to the world’s biggest economy from January on — but some are wondering if the agreement might not be anticlimactic, given the late hour in which the country joined the agreement. “We are at the final stages of prepping the food for cooking, but how do we know the client won’t order a different dish at the last minute?” asked Karl McQueen, head of Costa Rica’s Atlantic Port of Limon, which sends three-quarters of its cargo to the United States.

For now, Central American exporters, just like Obama, are focused on the U.S. recession and how likely it is to hurt business, especially amid gloomy news such as the Philadelphia Federal Reserve’s latest Survey of Professional Forecasters, which said that the U.S. economy entered a recession in April and that it will last 14 months, making it one of the longest recessions since the 1930s.

CAFTA is the second-largest U.S. export market in Latin America after Mexico. Bilateral trade in farm goods grew by one-fifth to nearly $4.6 billion in 2007. Two-way trade of agricultural products in 2008 is expected to reach at least $5 billion, according to the U.S. government. Textiles are the other main Central America export product that benefit from the agreement, which reduces tariffs to zero and helps the region compete with Asia, where labor costs are lower.

Central American port operators, shippers and trade experts say they have yet to see a big slowdown in business, but the outlook for 2009 is bleak. “In practical terms, no one can put up barriers again to U.S.-Central American trade. The big problem is the U.S. recession, which is going to be the fundamental issue for trade. We see Central American trade volumes to the United States falling up to 10 percent next year,” said Rafael Amiel, Global Insight’s Latin American economist.

Others say weaker local currencies against the strengthening U.S. dollar could help Central American exporters. “I believe that Central American exports to the United States will remain at the same level in 2009 compared to 2008 or slightly decrease. The strengthening dollar will be outweighed by the slowing consumption in the United States,” said Henrik Pedersen, regional manager of terminal investments and projects at APM Terminals Central and South America.

Even within Central America, however, there will be a varied impact. “Honduras, Guatemala and Nicaragua are the most vulnerable because they depend heavily on U.S. trade. Panama and Costa Rica are a little more diversified, plus they have niche areas like tourism,” Amiel said. Textile manufacturers in Honduras, Central America’s top clothing and textile exporter to the United States, are reporting plant closures as U.S. retail sales fall. Producers such as Hanesbrands Inc., which makes Playtex, Just My Size and Wonderbra, are moving to Asia to seek lower labor costs.

In 2002, a quarter of all U.S. textile imports came from Mexico and Central America, and 13 percent from China. Last year, China provided 31 percent of all U.S. clothing imports and only around 15 percent came from south of the U.S. border, according to U.S. government data. In August and September, Honduras lost almost 3,500 manufacturing jobs and the Honduran textile industry association says it sees another 2,000 disappearing by the end of this year.

Like other trading blocs, Central America also faces the fallout from the global financial crisis. Trade financing costs are rising as banks ask higher premiums to lend in a tight credit environment. The head of the World Trade Organization, Director-General Pascal Lamy, said in early November that the cost of some deals was now more than six times higher than a few months ago. Some borrowers are paying 500 basis points, or five percentage points, above bank refinancing rates, up from the 80-point spread required in August. The World Bank estimates that global trade flows will fall next year for the first time since 1982 as the credit crisis takes its toll.

But Central America, like the wider region, has suffered many crises over the past five decades. Companies, ports and governments are determined to make the most of hard-won fiscal discipline, political stability and steady credit ratings to pull through. The region is also diversifying its exports to China. “Central America’s U.S. exports count for a smaller share than just a few years ago and their exports to China in the same period have doubled. That is encouraging for Central America even amid a Chinese economic slowdown because Chinese growth is still very healthy compared to the United States and in Europe,” APM’s Pedersen said.

Building on CAFTA, Central America wants to integrate its road and port networks and create a single energy market, as well as eliminate border bureaucracy to grease the wheels of trade.

Despite delays, El Salvador and Honduras aim to link the region’s two biggest ports, the Port of La Union on El Salvador’s Pacific Coast and Honduras’s Port of Cortes on the Gulf, to create a so-called dry canal. The project, scheduled to be up and running in two years, would link 2,400 miles of road to the two ports, would also join Guatemalan and Nicaraguan ports, and create an alternative to the Panama Canal for shipping goods to the U.S. East Coast.

“This is a project that is still 18 to 24 months away, but it is not postponed by the U.S. recession and the international credit crisis,” said Albino Roman, president of El Salvador’s ports commission.

Five companies are vying for the operating concession to run the Port of La Union, but the project has faced delays over the concession contract rules, with the government and lawmakers at odds over how much control the new private operator should have.

Ramon said there was still potential in Central America’s capacity to export to the United States. Exporters are diversifying away from tropical fruits and coffee to everything from toilet paper to furniture. In addition, Central Americans living in the United States create demand for Central American goods. “We have 2 million Salvadoreans in the United States who miss local food, who want local goods. If we can meet that demand, you will see trade volumes surge from El Salvador,” he said.

To do that, Central America will need to meet its pledges to modernize its port network, the most inefficient in Latin America, and to follow Panama’s example and bring in more private operators. Costa Rica’s Caribbean ports, particularly the Port of Limon, are woefully outdated and congested. Guatemala has yet to mobilize the kind of investment being injected into Honduran ports and Nicaragua still lacks a proper port. More modern ports would also be good news for U.S. shippers. Automotive parts, building products, hotel, restaurant and medical equipment and food processing machinery are all important U.S. exports to Central America’s growing economies, which make up the U.S.’s 16th-largest market worldwide.