Regional integration options for Central America and the Caribbean after NAFTA

Abstract

From the adoption of NAFTA to the movement toward Mercosur, the entire hemisphere faces a wide range of options for choosing a new integration agenda, one that muse be able to provide for global competitiveness and equitable growth while being politically sustainable in both the United States and Latin America. In this article, we present a computable general equilibrium (CGE) model for analyzing the effects of alternative integration strategies in the United States, Mexico, Central America, and the Caribbean. The CGE model simulates the static and dynamic effects of alternative integration scenarios on production, income distribution, and the flows of trade, capital, and labor migration. The results point to a number of essential strategic choices that will have to be made in order to generate the most optimal regional outcome. Such an outcome will be possible if and only if: (1) the United States is able to overcome a domestic political economy debate on the distribution of the gains from trade which could then allow it to provide a strategic leadership role in the region, and (2) the Latin American countries in the region resolve an almost classic “prisoner's dilemma” collective action problem. As a NAFTA partner with veto power, Mexico thus must make a key decision: to share the NAFTA market with its competitors or to block NAFTA accession and risk unilateral U.S. FTAs with Mexico's rivals and geopolitical neighbors.