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Implementation challenges and case study
In summary, the effects of PTAs vary across firm types depending on their GVC links. TF provisions particularly help the export performance of GVC firms by reducing the trade costs and uncertainty associated with importing in both the home country and the destination country. In Peru, the main benefits of TF provisions in PTAs seem to be realized through efficiency enhancements at Peru’s own border, allowing the GVC firm to get its inputs faster and more predictably. So, Peruvian GVC firms are more likely to export and are likely to export goods and services with larger values to countries with which Peru has a PTA containing TF provisions.
The findings underscore the role of TF commitments in PTAs in enhancing Latin America and the Caribbean countries’ export competitiveness through importing by GVC firms, thus promoting countries’ further integration into GVCs. Moreover, bilateral GVC firms that import from and export to PTA partner countries benefit the most—with an extra boost from back-and-forth trade that could increase intraregional trade and regional supply chain development. And the econometric evidence demonstrates nondiscriminatory as well as preferential gains from PTAs’ TF commitments, because benefits are observed for GVC firms that import inputs, whether from partner or from nonpartner countries. That finding implies positive spillover effects on shipments from nonpartner countries due to TF commitments in PTAs, while preferential benefits are still provided to shipments from partner countries.
Although the firm-level analysis in this section provides empirical evidence that PTAs’ TF provisions enhance GVC firms’ exports, the benefits are not always easily secured. Many TF commitments require considerable investment of time and resources, because full implementation of major reforms can take several years. And the negotiation and implementation of TF in regional trade agreements can face challenges owing to differences in the partner countries’ maturity. Successfully implementing PTAs requires coordinating the partners’ efforts to identify and articulate the most suitable solutions, given their national contexts.
IMPLEMENTATION CHALLENGES AND CASE STUDY
Although Latin America and the Caribbean countries recognize that implementing TF commitments can reduce trade transaction costs and promote economic integration, doing so creates challenges.
Competing priorities. A national reform agenda typically faces competing priorities because of national expectations as well as commitments in multilateral, plurilateral, and bilateral agreements. This situation obliges the agencies engaged in implementation (such as the trade, health, customs, standards, immigration, sanitary
and phytosanitary, and other cross-border regulatory agencies) to prioritize, plan, and sequence reform projects in a coordinated manner while managing expectations and maintaining schedules. A coordinated effort is particularly important for complex TF reforms that take several years to implement because they require continued commitment across multiple agencies.
Lengthy implementation process. Some TF reforms imply major undertakings by governments, entail years of implementation efforts, and eventually involve multiple political and governmental mandates. For example, a full-fledged single window for trade demands huge effort and takes several years. Such projects need to mitigate the risks associated with maintaining political commitment and allocating resources throughout development and can be affected by changes of leadership and staff at the agencies responsible for the reform.
Need for strong governance and political commitment. TF projects also demand that governments secure buy-in and political commitment from multiple ministries and agencies. A robust governance framework must drive the reform to ensure adequate resource allocation and mitigate challenges to sustainability. Project implementation usually requires legal reforms (or completion of the legal process for internalizing international agreements); business process mapping and reengineering; infrastructure development at land borders, ports, airports, or inland facilities; procurement, development, or updates of information technology systems; review of operational procedures and regulations; adoption and integration of new technologies; promotion of adequate communication and coordination with stakeholders; effective change management; and capacity building for both public and private sectors affected by the reforms.
Private sector engagement. In addition, TF reforms depend on aligning solutions with business practices and procedures to minimize the private sector’s effort to comply with requirements for imports, exports, and the movement of cargo. One challenge is to properly engage the private sector at all stages: project inception and diagnosis; assessment of constraints and opportunities for improvement; design, development, and piloting of solutions; and rollout and implementation. Without trust, appropriate consultative and engagement mechanisms, and mutual understanding of the contributions needed from the public and private sectors, country capacity to successfully implement TF measures can be constrained.
Different levels of maturity in TF development. In PTAs, the negotiation of TF provisions must consider the different maturity of TF in each country. Jointly implementing PTAs can require coordinating the partners’ efforts, in view of their national contexts, to clearly identify and articulate the most suitable solutions. For instance, almost all customs administrations have already implemented some risk management solutions for targeting cargo for border inspection. Some administrations might be in early development, relying on human analysis of results and profiling, with border
inspections disconnected from other compliance controls beyond the borders. Other administrations might be much more advanced, with comprehensive risk-based compliance management strategies, border inspections complemented by compliance controls beyond the borders (desk monitoring, and automatic data analysis and audits), sophisticated intelligence using modern technologies such as artificial intelligence and machine learning, and advanced domestic and international cooperation and coordination.
Timeline coordination. Agreement on a timeline, also a challenge in negotiating and implementing DTAs, must consider the status of each measure in the partner countries. For instance, the parties may agree on the mutual recognition of AEOs and on corresponding benefits. Even so, the benefit to operators and the mutual recognition agreement’s impact on transactional costs can vary greatly depending on the feasibility and stage of implementation. At the initial stage, benefits might be limited to some services, such as the designation of contacts for guidance, orientation, and response to consultations as well as normal prioritization in carrying out processes. Later, the parties may implement exchanges of information and automatic recognition of AEOs, with treatment by the parties’ respective risk management engines, enabling border inspections to be reduced, measured, and jointly monitored with performance indicators. In an even more sophisticated arrangement, the parties might agree on implementing dedicated express trade lanes and procedures for mutually recognized AEOs, eventually with infrastructure changes at borders and specific logistics treatment (such as an automatic release upon arrival).
The deep integration agreement between Guatemala and Honduras, also referred to as the customs union agreement, demonstrates good practices in which the parties have overcome the implementation challenges just described. The bilateral agreement led to establishing integrated border posts and a single electronic document that serves as both invoice and declaration—the Central American Invoice and Single Declaration (FYDUCA). The implementation of the agreement substantially reduced bordercrossing times between the two countries (SIECA, n.d.).
The origin of the agreement can be traced to the General Treaty on Central American Economic Integration, signed in 1960. That agreement, besides creating a common market, established a permanent secretariat to ensure the correct application of the treaty. Now called the Secretariat for Central American Economic Integration (SIECA), it acted as the forum for the Guatemala–Honduras bilateral agreement.
Since the beginning of Central American economic integration, one of its central objectives has been to gradually and progressively form and operate a customs union. Although major political and legal integration instruments repeatedly mentioned that
goal for more than 60 years, it faced major implementation challenges. For instance, the numerous agencies that would participate (health, trade, customs, agriculture, immigration, and others) were uncoordinated both within and between countries and had priorities other than implementing trade agreements. There were many attempts to achieve concrete progress on the customs union, but resources were lacking to implement reforms or improve infrastructure. And limited private sector pressure for reforms hindered implementation.
In 2015, aiming at a deep integration agreement, the region adopted new legal instruments for Guatemala and Honduras. The instruments contain TF measures such as border agency cooperation within each country and with its neighbor country, simplified formalities using information and communications technology, collection of duties and taxes at the final destination, and an institutional framework to coordinate implementation. In June 2017, the deep integration between the two countries began operation, although mandatory FYDUCA use started in March 2018. In 2021, the countries implemented other TF measures such as anticipated electronic transmission of sanitary and phytosanitary certificates, and prearrival processing.11
Legal framework
The regulatory framework of the deep integration between Honduras and Guatemala comprises six legal instruments:
• The Enabling Protocol for the Deep Integration Process (2015) establishes the central aspects of the deep integration model. • The Agreement for the Compatibility of Internal Taxes Applicable to Trade between the States Parties to the Central American Customs Union (2006), which creates the FYDUCA, concerns value added taxes (VAT) and income taxes, which are collected at the destination. • The Framework Agreement for the Central American Customs Union (2007) established the model and the stages for the construction of the customs union. • Regulation of the Organization and Operation of the Ministerial Agency (2017) defines the main functions and attributions of the ministerial body in charge of implementing, managing, and constantly improving the customs union. • Regulation for the Operation of Deep Integration (2017) develops the operational procedures of the customs union both for goods under free movement and goods that are exempted. • Protocol for the Accession of El Salvador to the Customs Union (2018) ratified the protocol of El Salvador’s accession, but the free movement of goods to and from El Salvador has not yet begun. However, in December 2021, Guatemala,
Honduras, and El Salvador jointly approved a road map for the implementation of the customs union for El Salvador.
Operational details and implementation
The main concept in the customs union is free movement of goods as the regime applicable to community goods. Community goods are those obtained, collected, produced, elaborated, or transformed in the single customs territory, as well as goods from third countries that have been nationalized in any of the countries in the customs union, complying with tax and nontax obligations.
Guatemala and Honduras established three integrated border posts: Agua Caliente, Corinto, and El Florido. At each integrated border post, officials from the tax administrations (customs and internal taxes) and immigration from both countries operate two types of control posts: the TF post and the integrated control center post. Each post has a unique purpose:
• The TF Center simplifies and uses technology for formalities. Tax officials use FYDUCA, a single electronic document that serves as both invoice and declaration (box 3.3). Tax officials validate that the FYDUCA tax payments have been made, and immigration officials check truck drivers’ immigration documents without exerting any physical controls on the transportation unit.
Value added tax is paid electronically so that the funds go to the destination country. • The Integrated Control Center simplifies formalities. For goods that are not in free circulation, both countries’ customs, immigration, and quarantine authorities are in a single area to carry out import and export controls.12
Faster border crossings, more trade
The customs union using the FYDUCA was launched on March 1, 2018. About 75 percent of bilateral trade enjoys free movement. Although not enough data are yet available for a thorough impact evaluation of this reform, the World Bank prepared a baseline and measured the preliminary results (Alfaro de Morán and Sarmiento 2019).
By early 2018, the time to cross land borders between Guatemala and Honduras had dropped from 10 hours to 15 minutes during pilot exercises. More-recent measurements at the end of 2018 showed even better results: a border crossing time of only 6 minutes on average. According to data from the Banco de Guatemala, bilateral trade between Guatemala and Honduras grew by 10.9 percent from 2017 to 2018, from US$1,352.0 million to US$1,498.8 million.
The major reduction in border-crossing time and the resulting increase in bilateral trade between Guatemala and Honduras is likely to tighten the GVC links between the two countries. As discussed earlier, reducing the time and costs of cross-border trade is particularly important for GVC firms that rely on the timely delivery of foreign inputs. Inputs represent a substantial share of bilateral
