Central American - European Union Association Agreement: Assessment using General and Partial Equilibrium

Five economies of Central America —Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua— are negotiating an Association Agreement with the European Union (EU). This process is an important part of their trade policy and implies significant changes in the relationship between both regions, not only in trade-related issues and in investment and services arrangements, but also in the existing political dialog and cooperation for development. Using the General Equilibrium (GTAP model and database) and Partial Equilibrium methodology, this paper presents an assessment of the socioeconomic and environmental impacts for Central America and the European Union coming from this Association Agreement. In order to develop this work we have considered the trade sensitivities for Central America and for the European Union. Three scenarios were established: a) full liberalization; b) liberalization with the exclusion of all sensitive products in both sides; and c) liberalization considering only “fruits and vegetables” as sensitive by the European Union. Being impossible to obtain specific results for El Salvador and Honduras with the CGE methodology -they are not single regions in the GTAP database-, the study also incorporates a complementary Partial Equilibrium analysis for all Central American countries using information on their bilateral trade flows with the EU. Results show that, in general terms, a full liberalization for all tariff-lines would promote the expansion of exports of all countries signing the agreement, especially those for agricultural products and light manufactures. Additionally, it would improve welfare for all Central American countries due to the improvement of their terms of trade by raising export prices of agricultural products, in particular fruits and vegetables, other crops and some manufactures. The scenario excluding sensitive products shows the worst results, with a small growth in trade (1.2%) and welfare loses explained by terms of terms worsening and efficiency loses in the use of resources. In the other hand, when the European Union excludes only fruits and vegetables, results for trade and product remain positive, but with smaller figures. Partial Equilibrium simulations give additional information about the kind of products most positive affected trade liberalization, which are basically agricultural and agroindustrial products (for example, in the case of Costa Rica, they include bananas, pineapples, lemons, oranges, nuts and shrimps, among others). The simulations also support the preliminary intuition that the biggest profits come from a general cut of all current protection levels. Regarding welfare, similar as in the general equilibrium, Costa Rica leads the improvements due to its condition of principal partner of the European Union within the Central America group.