To stabilize Central America, the US must craft better incentives for trade

Central America is not a place most Americans or American policymakers spend a lot of time thinking about, even though the region has, time and time again, imposed itself on our radar screen. Last year was one of those times, when we witnessed the effects of instability in Central America on our well-being. The consequences of the pandemic, political chaos and lack of economic opportunities have led to a mass exodus from the region. As a result, the United States has taken in a record number of immigrants and the largest number of illegal border crossings in history, creating a formidable challenge on our southern border.

The causes of the current crisis are varied and long-standing, and there is no simple solution to them. Improving border security, aiding democratic institutions, fighting organized crime across the region, and punishing corrupt officials are all part of the answer and feature prominently in the US government’s efforts. However, US policy remains falling short in one key area: initiatives to promote economic prosperity through regional trade and job growth.

Among the many factors driving Central American immigration to the United States, economic incentives combine a unique set of push and pull elements. People are being pushed to emigrate by the lack of opportunity back home, and at the same time they are being pushed by the promise of a dynamic American economy.

Reducing these factors requires recognizing that Central America is an effective part of a larger economic region in North America that attracts people and investment to places where demand is greatest. Trying to put up barriers to people, capital and trade has never been effective and is now unlikely to succeed.

Reducing long-term incentives to migrate requires expanding economic opportunities in Central America. This will not happen mainly through official development assistance or some well-advertised investment by a group of multinational companies. Instead, it requires broad trade and investment incentives that encourage private sector throughout the Western Hemisphere to do more business in Central America.

When we recognize Central America as part of our larger economic region, it becomes easy to justify implementing such incentives. They often require only limited changes to existing policies. Commerce is one of these areas. The current US trade agreement with partner countries in the region – the Central American and Dominican Republic Free Trade Agreement (CAFTA-DR) – is designed to reduce tariffs and other trade barriers that slow industry growth and job creation. Unfortunately, significant flaws within CAFTA-DR – including “rules of origin” requirements – have created an uncompetitive market that hinders investment and limits economic growth across multiple sectors.

Take for example the textile and apparel industry, which has the potential to drive significant economic growth in Central America, creating prosperous and stable societies for future generations. While the requirements of rules of origin give partner countries preferential access to the US market, goods must be acquired or produced entirely in a partner country to qualify for the benefits of this agreement. For the textile and apparel industry, the rules of origin are essentially “spin forward”, which means that the yarns of fabrics used in the production of clothing or other textiles must originate in a participating partner country.

This policy significantly reduces the competitiveness of apparel exporters in the region. Many of the fabrics that manufacturers need to produce their products are simply not produced in Central America, making it difficult to meet these yarn requirements. For this reason, many textile and apparel manufacturers continue to manufacture their clothing in Asia, rather than setting up shop and investing in Central America.

The fix can be relatively easy to implement. Less demanding “cut and sew” rules, where products are considered to be originated on the condition that the fabric is cut and sewn in a participating country, do indeed apply to a few fabrics not common in CAFTA-DR countries. If expanded to include more categories of apparel, producers could manufacture a variety of apparel products at a lower cost, possibly stimulating investment in the region.

Given the value of creating long-term economic stability in Central America, updating such provisions should be a priority for US policymakers. By stimulating trade and investment, President BidenJoe Biden’s Student Debt: It’s a Foolish Interest U.S. Continues to Pressure Russia Amid Concerns Over Possible Ukraine Invasion To stabilize Central America, the U.S. should craft better incentives to trade More, vice president Kamala HarrisKamala Harris To Stabilize Central America, US Should Craft Better Trade Majority Incentives In new poll saying US is heading in the wrong direction, Biden says Roe v. Wade is under attack like ‘never before’ MoreUS Trade Representative Catherine TaiCatherine Tate To stabilize Central America, US must craft better incentives for trade, Vilsack accuses China of failing to meet its Trump-era trade deal commitments, US and UK start formal talks on Trump steel and aluminum tariffs More Members of Congress can help reduce the economic factors driving mass immigration. This could benefit Americans and encourage manufacturers, investors and retailers to expand their participation in CAFTA-DR partner countries, creating an engine for lasting prosperity in the region.

Steve Liston is a senior director at the Council of the Americas, where he directs the Business Advisory and Trade Policy Group.


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