New Trade Deal Between 5 Central American Countries and South Korea
After three years of negotiations, South Korea has finally signed free trade agreements (FTA) with Nicaragua, Panamá, Honduras, Costa Rica and El Salvador.
According to Spanish news outlet, EFE, the deal will “eliminate duties on more than 95 percent of traded goods and open up the service and investment market.” This “will allow the five Central American nations to have preferential access to South Korea for their agricultural, marine, and textile products,” in addition to cars and steel.
Prior to the agreement, the relatively small Asian nation exported $1.08 billion worth of goods (mainly cars, steel and cosmetic products) to Central America. In return, Central America exported a mere $143 million to South Korea.
According to an article, “ Do Free Trade Agreements Increase Economic Growth of the Member Countries?”, Jung Hur and Cheolbeom Park, contend that “the effect of a [free trade agreement] can be examined by investigating whether both countries will be better/worse off once they have removed all their trade barriers[...]”
The new deal allows South Korea to increase their number of exports. The rise in exports is expected to bolster their economy by an overall 0.02 percent in the next ten years. The sale of automobiles and auto parts exported to Central America are also predicted to boost without the previous tariff rates of over 20 percent.
Historically, South Korea’s economy has been heavily dependent on international trade. As the U.S. has begun to promote protectionist policies under the Trump administration, South Korea will now have “a third route” to trade with the Americas under the FTA.
South Korea is the first Asian country to enter into a free trade agreement with Central America. By signing the trade deal, South Korea has strategically put itself ahead of its bigger economic rivals, namely China and Japan.
While the economic ramifications of the deal are largely positive for South Korea, the economic benefits for the five Central American nations are not so widely discussed across American media platforms.
In 2016, four of the five Central American nations involved in the deal (with the exception of Panamá) operated on a trade deficit, importing more than they were exporting. As one of the factors that goes into calculating a nation’s GDP is exports-imports, these Central American nations must begin to export more than they import if they want to stimulate economic growth.
One foreseeable benefit of the agreement involves the circulation of higher quality tech products throughout Central America. World-renowned economists, Gene Grossman, Elhanan Helpman, and Robert Feenstra, proselytize that “if a free trade system is formed under conditions in which technology transfer occurs between the involved economies, production efficiency can be improved, and free trade can therefore ultimately induce economic growth among the FTA signatory members.”
Panama, the nation with the highest GDP per capita in the region, currently leads in exports (containing of mostly coffee) to South Korea. Under the FTA, sugar from El Salvador will now begin to enter the South Korean market free of quotas and tariffs.
Central America is commonly known for its exports of fruit and vegetable products. Yet, this is only a small part of the picture. For instance, Costa Rica has a current portfolio that includes the exports of medical instruments ($1.99 billion) and orthopedic appliances ($505 million). Likewise, the majority of Nicaragua and El Salvador’s overall exports (in 2015) were textiles. Panama mostly exported chemical products. None of these countries have ever been major importers of South Korean goods, nor major exporters to South Korea, but this could all change under the FTA.