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EU trade policy

While many agricultural products from Central America already enter duty-free into the European Union (EU) thanks to the GSP plus initiative, there remain two notable exceptions: bananas, a major Central American export, and sugar which is hardly exported to the EU due to subsidy and tariff restrictions.

Using a GTAP CGE model this paper assesses the potential macroeconomic effects of a future European Union-Central America Association Agreement (EU-CAAA). Three scenarios are applied: full liberalisation, preferential treatment on a par with ACP countries, and liberalisation excluding sensitive agricultural products.

The authors find that liberalising the access to both bananas and sugar products will bring significant gains to Central America. Other major Central American exports already enjoy preferential access to the EU market. Therefore, 75% of the potential Central American welfare gains brought about by the EU-CAAA depend on the removal of barriers on banana and sugar imports.

The EU-CAAA might also be beneficial through dynamic mechanisms such as trade facilitation reducing iceberg costs and endogenous capital formation, i.e. inflow of foreign direct investments.The extension of the GTAP CGE model to those dynamic mechanism points to further welfare gains which are conditional on the level of EU agricultural liberalisation.

However, there are other possible benefits for Central American countries:

• consolidation and formalisation of the benefits accruing from the GSP plus initiative
• enhanced cooperation with the EU, including additional funding and structural funds
  

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