Central America, China and the U.S.:What Prospects for Development?

Central America remains among the poorest sub-regions of Latin America, and many Central American countries are among the hemisphere’s most dependent upon primary-product exports. Unlike other commodity exporters in Latin America, however, Central American countries have not benefited from booming Chinese demand for primary products. We use a series of measures to assess Central American countries’ trade structure, and find that they face increasing competition from Chinese products in third country markets (like Mexico) but also little complementarity with Chinese demand (unlike Argentina or Chile). Central American countries continue to be very dependent upon the US market for exports—and, to a lesser extent, for foreign direct investment and foreign aid inflows—though dependence upon the US has slipped even as most of the countries in the sub-region have entered into a preferential trade agreement with the US. The pattern of exports has shifted from agricultural to assembly plant manufactures in several countries, and Costa Rica now exports sophisticated manufactured products to the US and China alike. We explore the role that diplomatic relations may have played in Central America’s tepid China trade: all Central American countries save Costa Rica (since 2007) recognize Taiwan and not the People’s Republic of China. We end with some considerations of development strategies in the region.