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

Central America is not a place most Americans or U.S. policymakers spend a lot of time thinking about, even though the region, time and again, has forced itself onto our radar screen. The past year was one of those times, as we experienced the effects of instability in Central America on our own well-being. The consequences of the pandemic, political chaos, and a lack of economic opportunity have driven a mass exodus from the region. As a result, the U.S. has received a record number of migrants and the highest number of illegal border crossings in history, creating a formidable challenge at our southern border.  

The causes of the current crisis are diverse and longstanding, and there is no simple solution. Better border security, aid to democratic institutions, fighting organized crime throughout the region, and sanctioning corrupt officials are all part of the answer and figure prominently in U.S. government efforts. However, U.S. policy still falls short in one key area: initiatives to foster economic prosperity through regional trade and job growth. 

Among the many factors driving Central American migration to the U.S., economic incentives combine a unique set of push-and-pull elements. People are pushed to migrate by the lack of opportunities at home, and simultaneously are pulled by the promise of a dynamic U.S. economy. 

Reducing these factors requires recognition that Central America is effectively part of a larger North American economic zone that draws people and investment to the places where demand is greatest. Attempting to create barriers to people, capital and trade never has been effective and is unlikely to succeed now.

Reducing incentives to migrate in the long term requires expanding economic opportunities in Central America. This won’t happen principally through official development assistance or a few well-publicized investments by a group of multinationals. Instead, it requires broad trade and investment incentives that encourage the private sector throughout the Western Hemisphere to do more business in Central America.  

When we recognize Central America as part of our larger economic zone, implementing such incentives becomes easy to justify. And they often require only limited changes to current policies. Trade is one such area. The existing U.S. trade agreement with partner countries in the region — the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) — was designed to reduce tariffs and other trade barriers slowing industry growth and job creation. Unfortunately, substantial flaws within CAFTA-DR — including the “rules of origin” requirements — have created an anti-competitive marketplace that stymies investment and limits economic growth across multiple sectors. 

Take, for example, the textiles and apparel industry, which has the potential to drive significant economic growth in Central America, creating prosperous and stable communities for future generations. While the rules of origin requirements grant partner countries preferential access to the U.S. market, goods must be obtained 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 primarily “yarn-forward,” meaning the yarn in fabrics used to produce apparel or other textile articles must originate in a participating partner country. 

This policy drastically decreases the competitiveness of garment exporters in the region. Many of the fabrics that manufacturers need to create their products are simply not produced in Central America, making it difficult to meet this yarn-forward requirement. Because of this, many textile and apparel manufacturers continue manufacturing their garments in Asia, rather than possibly setting up shop and investing in Central America.

The fix could be relatively easy to achieve. Less demanding “cut and sew” rules, where products are considered originating provided the fabric is cut and sewn in a participating country, already apply to a few fabrics not commonly found in CAFTA-DR countries. If these were expanded across more apparel categories, producers could manufacture a wider variety of apparel products at a lower cost, perhaps incentivizing investment in the region.  

Given the value of creating long-term economic stability in Central America, updating provisions such as these should be a priority for U.S. policymakers. By incentivizing trade and investment, President Biden, Vice President Kamala Harris, U.S. Trade Representative Katherine Tai and members of Congress could help reduce the economic factors driving mass migration. This could benefit Americans and encourage manufacturers, investors and retailers to expand their engagement in CAFTA-DR partner countries, creating an engine for lasting prosperity in the region.

Steve Liston is the senior director at the Council of the Americas, where he manages the Trade Advisory Group and trade policy.