The Central American Customs Union aims to create a single customs zone that will serve to increase the region’s prosperity.
Consult with the Central American Group about your plans to do business in the region.
Central American administrative and economic integration continues to be pursued as a means of maximizing the economic potential of each of the countries of the Isthmus.
In an effort to move the process along, the countries of the Northern Triangle (Guatemala, Honduras, and El Salvador) have entered into a Central American Customs Union in order to facilitate trade and the free movements of goods among each of the participating nations for the purpose of promoting the prosperity of each.
Article XXIV of the General Agreement on Trade and Tariffs (World Trade Organization, 1994) defines a customs union as the replacement of two or more customs territories with a single commercial zone. As such the Central American Customs Union eliminates trade barriers and duties that were once enforced in intraregional trade between Guatemala, Honduras, and El Salvador.
Removing barriers to trade, tariffs, and quotas between the three countries has set into motion the change from the use of different national trade practices to the implementation of supranational mechanisms for the governance of commerce. This transformation has been made with the aim of consolidating economic integration and promoting the collective prosperity of the region.
The establishment of the Central American Customs Union has opened up the possibility of enhanced economic standing for the three participating parties.
Because such an arrangement makes it easier for the member countries to trade freely with each other, there are several improvements that each is able to benefit from. Among them are:
- An increase in trade flows and integration – One of the principal effects of a customs union is that it increases commercial exchange between member countries.
As a result of creating a larger market for goods and services, the Central American Customs Union will provide incentive for the influx of capital in the form of foreign direct investment (FDI). This FDI will help to boost regional employment and to increase the overall economic health of the region;
- Trade creation and trade diversion – The positive effects of a customs union are measured in terms of trade creation and diversion.
A better allocation of resources results from trade creation, when more efficient members of the union sell to the less efficient members of the grouping. Trade diversion results in less trade within the union with non-member countries due to the levying of external tariffs. This gives less efficient countries the opportunity to sell more goods to the countries that are party to the agreement. Additionally, trade diversion provides a great stimulus for strengthening and forming new regional value chains;
- Ease of engaging in trade negotiations – This is especially relevant for small economies such as those of Guatemala, Honduras, and El Salvador.
If not members of a regional bloc, these countries will be less empowered to negotiate successful trade deals when they act unilaterally. Acting together increases their ability to strike favorable accords with other nations and trading blocs.
- The creation of economies of scale – The expansion of an economic area through the implementation of a regional customs union enables the generation of economies of scale through specialization and the creation of economic complementarity among the member countries.
Guatemala, Honduras, and El Salvador form a Central American Customs Union
Guatemala and Honduras officially launched the customs union between their two countries in June 2017. This initial step towards the administrative pairing of these Northern Triangle nations was technically and administratively supported by the Secretariat of Central American Economic Integration (SIECA). It has brought with it substantive changes in the trade and migration processes of both countries, including the free transit of goods and people. Also, the concept of imports and exports was replaced by a system of transfers and acquisitions. This represented a change in the business model that existed historically between the two countries.
In July 2018, the Legislative Assembly of El Salvador approved the ascension of the country to the Central American Customs Union. The addition of a third member to the agreement enabled El Salvador to participate by opening nine integrated border posts at which all commerce would be expedited 100% electronically.
In addition to the free transit of goods that it now enjoys with its regional partners, migration procedures for citizens within the Northern Triangle region will be simplified. Additionally, and very importantly, the wait time at customs cargo checkpoints has been reduced from up to 10 hours to just 15 minutes. According to SIECA, this has led to an increase in trade of 7 percent between the countries thus far.
The Northern Triangle grouping represents a first step in the building of a complete Central American Customs Union that includes all of the nations of the Isthmus.
The eventual establishment of a union that encompasses Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, and Panamá will be beneficial to each country in the long term by creating more economic opportunities for their peoples.
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