Guatemala"s trade policy reform : analysis and recommendations

Since then, the CACM countries have made substantial progress in reducing external import tariffs, phasing out restrictive licensing, eliminating special exemptions from tariffs, and freeing intra-area trade from restrictions; even a common external tariff schedule has been proposed. Much less has been done, however, to improve the efficiency of customs administration, promote infrastructure in support of trade development, reform the exchange rate regime and other trade-related economic policies, and promote efficient investments to help the private sector survive and prosper under trade liberalization. Given Guatemala"s commitments to the CACM, the political influence of its private sector, and its desire to continue to protect some industries, Guatemala ought to adopt a two-phase approach to its ongoing trade policy reform. In the short-term, it should pursue two major policy changes that are both economically and politically viable: (1) adopt a two-tier tariff system specifying a 20% duty for some products to protect or stimulate specific local industries and a 5% duty for all other imports, including essential inputs for the protected industries; and (2) abolish the existing exchange control and adopt a Mexican-type, pre-announced stable rate of very small devaluations. In the medium-term, as the region moves toward broader free trade, Guatemala should seek a uniform tariff structure of about 10% for all imports, and, to strengthen the private sector"s ability to compete as trade liberalization progresses, further reform the exchange rate system, improve the infrastructure that would attract foreign investment, broaden the local financial market, and support industrial modernization. (Author abstract, modified)