Why can’t Central America trade more?

February 15, 2013

Logistical costs can add up to 50 percent to the final consumer price of products sold in Central America, a recent study by the World Bank noted. 

Factors that make goods more expensive in the region include high costs to transport products by land, poor road conditions and slow customs processing at borders. That makes it more difficult for companies – especially small ones – to remain competitive.

The drawbacks to trade were highlighted on Feb. 8 during a Central American conference on trade and logistics, held in Costa Rica and attended by the World Bank vice president for Latin America and the Caribbean, Hasan Tuluy, INCAE Business School President Arturo Condo and Costa Rican Foreign Trade Minister Anabel González.

“Logistical costs currently represent 40 percent of the final value of a product. That’s an excessive figure when compared internationally,” Tuluy said.

In Chile, for example, logistical costs represent only 18 percent of a product’s final cost, and the average of countries belonging to the Organization for Economic Cooperation and Development is 8 percent, he added. 

“Logistical costs mostly affect small producers, who pay three times more than big producers per unit to transport products from their farms to the border,” Tuluy said. 

The study noted that it’s cheaper and easier to ship tomatoes from San José, Costa Rica, to the U.S. state of California than it is to send them to Managua, Nicaragua. The Nicaraguan capital is one-tenth the distance from the Costa Rican capital when compared to California, but transportation costs can run companies up to four times as much. 

Border bureaucracy is another infamous barrier to cheap and efficient trade. Transport companies often must wait up to 20 hours for processing goods in order to cross Central American borders. Bad roads and lack of coordination between border officials also hamper the process. 

“Central America needs to address these logistical barriers, particularly at the borders, through a joint effort by governments and through low-cost measures that help facilitate trade and improve competition in the region,” said Felipe Jaramillo, the World Bank’s director for Central America. 

The study also analyzed recent free-trade agreements between Central American countries, concluding that although the agreements create more trade and investment opportunities, results aren’t guaranteed unless government agencies become more agile and efficient, which includes hiring better-trained employees, upgrading technology and improving infrastructure. 

“For a region that has advanced in terms of free-trade agreements, there is still a need to improve internally,” Tuluy said. 

González said implementing the study’s recommendations should be a priority for regional officials. “As government officials, we need to give this issue political priority and work together with regional governments and the private sector,” she said. 

“We need to use international cooperation and achieve not only an increase in regional trade, but also the participation of our countries in global value chains,” she added. 

In January, González announced the Inter-American Development Bank would loan Costa Rica $80 million to finance the renovation of border facilities at Peñas Blancas, Paso Canoas, Sixaola and Las Tablillas.

The minister cited “intense inter-agency cooperation” to upgrade Peñas Blancas border facilities, recent improvements at Paso Canoas and a decision to continue projects at Sixaola and Las Tablillas as a sign of commitment by the administration of President Laura Chinchilla to help businesses compete. She said the projects had been delayed by 20 years before the current administration decided to move forward. 

“Our goal is have world-class border facilities, and we’ve made great strides to open new markets through trade agreements. We’re also improving the business climate by making bureaucracy more efficient and easy for exporters,” Foreign Trade Vice Minister Fernando Ocampo said.

The study concluded that it is vital for countries to work together, not only on improving individual shortcomings, but also on bilateral issues, including customs offices. 

“The World Bank will continue working to help develop these efforts to make trade more efficient, and transform growth opportunities into real benefits for all Central Americans,” Tuluy said.

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