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Mercado Común Centroamericano– The Compatibility of the Central American Customs Union with the World Trade Regime

by doctoral candidate Philipp Johst

The doctoral thesis deals with regional economic integration in Central America and the compatibility of the Central American Customs Union with the world trade regime. Focal points of my research are the emerging preferential trade agreements, the so-called PTAs, the Understanding of Art. XXIV GATT and the future of the multilateral trade regime. Moreover, I put emphasis on some Central America specific aspects and problems of economic integration, such as the ramshackle institutionality of integration, the lack of supranationality, political and social disruptions as stepping stones for economic integration.

The members of the Central American Common Market have not reached their aim of installing a customs union being consistent with the world trade regime, more precisely with the exception clause of Art.XXIV GATT for regional economic integration. By analyzing the Central American problems it is striking, that they are not only caused by the absence of inevitably unconditional political will but also by deficiencies of technical know-how and administrative capacities. It requires permanent efforts, internal and intraregional reforms, as well as external aid and capacity building to culminate the process of integration in the formation of a functioning customs union. The political conditions in the region of instability and discontinuity of long term processes does not allow a prediction on a timeline for the customs union process yet.

The thesis is opened by an introduction explaining the theory and levels of integration as well as its specific terminology.

The first chapter is about the historical background of integration. The idea of regional integration - not only the economic one – has a long tradition on the Central American isthmus. Especially the second half of 20th century had been formative years for the economic integration and the foreign trade policies of the Central American States. The 1960s - the Central American Common Market (CACM) was just founded - had been the boom years of integration. Implementing trade tools of import substitution policies by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) the CACM members was able to foster the intraregional trade and raised economic wealth, albeit on a comparably modest level. In the so-called “lost decade” of 1970s and 1980s civil wars as well as energy and financial crises led to frustration of the achieved. After peace in the region and the beginning of political and economic reconstruction in the 1990s, the CACM members turned to open regionalism, i.e. they tore down most of the extremely high tariff barriers, got members of the WTO, opened themselves to world market, and made policies of liberalizing trade.

The second chapter deals with the legal framework of the integration process, e.g. legislative sources, organs and institutions, competencies, regional forms of action, and trade dispute settlement. Unfortunately, the Central American Integration (SICA) is bloated and overlapping bureaucracy hinders efforts at deepening political and economic integration on the isthmus. Most Organs and Institutions are of intergovernmental character and there is a lack of “real” regional competencies, so that progress is very little. Another institutional problem is the lack of acceptance by all members of the system. As long as only three out of five members accept and participate in organs like the Central American Parliament or the Court of Justice, there is no opportunity for reaching the state of integration of a customs union, which requires a certain set of common institutions.

The third chapter forms the core of the thesis. It is subdivided into a part analyzing WTO law part, and secondly a assessment of CACM compliance with the world trade regime, i.e. the requirements of article XXIV GATT.
The relationship between the multilateral world trade order and regional trade agreements is one of the most recent aspects in world trade law and a key question for the future of the WTO. Do we have the consider regional trade agreements as stumbling or as building blocks multilateral trade regime? Therefore the first part treats of legal prerequisites of the world trade order, macroeconomic aspects of regional economic integration, transparency aspects an compliance control competency.

Nevertheless, the main focus is on the compliance test defining the requirements of Art.XXIV GATT and subsuming the CACM.

The internal trade regime of the CACM is less problematic. Regarding the tariffs the CACM members eliminated barriers for substantially all the trade. There are still some deficiencies concerning other restrictive regulations of commerce, especially sanitary and phytosanitary regulations. By far more severe is the discrepancy between rulemaking on the one hand and handling and execution of customs regulations on the other. Although they try hard to establish common standards of application it is still a way to go to a harmonized congruent customs handling.

Likewise, the other restrictive regulations of commerce are the reason why the CACM members fail to meet the external requirement of Art.XXIV GATT for customs unions. The members are not applying substantially the same regulations of commerce yet. Eminent aspects are the tariff classification, application of safeguards and sanitary and phytosanitary measures. Moreover, it can be observed that Central American countries hardly follow common trade policies. They do not only speak with a single voice at the Free Trade Area of the Americas (FTAA) negotiating sessions or multilateral gatherings such as the WTO, but they do not even coordinate their negotiating positions in these for as, as does the Andean Community, for example. Accordingly, SICA appears to be failing in what should be its most important role, positioning Central America for better insertion into the hemispheric and international market places.

The investigation concludes with the ascertainment that CACM is promising but not compatible with the exception clause of Art.XXIV GATT yet. Shifting to the Enabling Clause will not be an option as it would require a notification anew. More alarming would be the political message since the referral the Enabling Clause would be understood as a confession of failure.

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