Heterogeneous Effects of Trade Agreements in Central America

Investment Rating - The report does not explicitly provide an investment rating for the industry under study. Core Insights - The Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) increased intraregional trade among Central American countries by 27 percent, while the impact on Central American exports to the United States was positive but not statistically significant [3][10]. - The average trade-enhancing effect of CAFTA-DR among Central American countries is estimated at 31 percent, contrasting with the insignificant effect on exports to the U.S. [10][41]. - The report emphasizes the importance of controlling for member-specific globalization dynamics and using domestic trade flows to accurately capture the effects of trade agreements [3][10]. Summary by Sections Introduction - Regional trade agreements (RTAs) have become a primary channel for trade liberalization, especially in developing countries, due to stagnation in multilateral negotiations [7]. - CAFTA-DR, one of the first RTAs between the U.S. and developing countries, aimed to promote both intra-regional trade and trade with the U.S. [8][9]. Trade Integration in Central America - CAFTA-DR represents a significant step in the region's trade integration efforts, providing greater market access and reducing trade barriers [18][20]. - The agreement was part of a long-term trend of trade liberalization in Central America, following earlier initiatives like the Central American Common Market [17][20]. Data - The report utilizes the Eora Multi-Region Input-Output (MRIO) database, which includes comprehensive trade flow data across sectors for 189 countries from 1990 to 2015 [21][22]. - The dataset allows for the analysis of both international and domestic trade flows, which is critical for accurate estimations of trade agreement effects [21][22]. Methodology - The study employs a structural gravity model to estimate the effects of CAFTA-DR, focusing on the heterogeneous impacts across different countries and sectors [23][29]. - The empirical strategy includes controlling for globalization dynamics and using a robust specification to capture the specific effects of CAFTA-DR [28][32]. Results - The report finds that while the average RTA effect is positive, CAFTA-DR had a negative impact on bilateral trade among member countries, decreasing trade by an average of 12 percent [38][39]. - Intra-regional trade among Central American countries increased by 31 percent as a result of CAFTA-DR, indicating a positive effect on regional integration [41][42]. - The negative impact on U.S. exports to Central America is attributed to unaccounted U.S.-specific globalization effects and a shift in trade dynamics among CAFTA-DR members [46][47].