How economic, trade ties of China and Honduras will benefit many regions

Honduran President Iris Xiomara Castro Sarmiento paid a sixday state visit to China from June 9 to 14, during which time she and President Xi Jinping, her Chinese counterpart, had a historic meeting following the establishment of diplomatic relations between China and Honduras in March.

The two sides signed a series of fruitful agreements in fields including trade, investment, culture and education, and, in a joint statement, pledged to negotiate a free trade agreement.

In light of the actual economic situation of Honduras, its expectations for bilateral economic cooperation are mainly in the following three aspects.

First, Honduras would like to expand exports to China for more robust economic growth. With a small domestic market and limited resources, Honduras has a relatively high foreign trade dependence.

The United States is Honduras’ largest trading partner and export market. Each year, about half of Honduras’ export revenue comes from the US, making foreign trade vulnerable to US economic fluctuations and policy adjustments.

Honduras needs to expand and diversify exports to increase economic resilience. China’s strong demand for imported agricultural products can help Honduras achieve this goal.

Second, the Central American country wants to attract traditional and digital infrastructure investments for improvement of livelihoods and the business environment.

There is a huge infrastructure gap in Honduras that needs to be narrowed in order to meet the needs of people’s lives and business development.

Third, Honduras is seeking to expand bilateral financial cooperation to overcome international financing bottlenecks. It is one of the poorest countries in the Western Hemisphere, classified as a “Heavily Indebted Poor Country” by the International Monetary Fund.

Over the past three years, the Honduran economy has suffered the double blow of COVID-19 and hurricanes. Facing the arduous economic recovery and post-disaster reconstruction, Honduras urgently needs external financial support.

Currently, the US is the largest aid donor to the country. Multilateral institutions led by the US, such as the World Bank, the IMF and the Inter-American Development Bank, are also its main lenders.

The application for membership in the BRICS New Development Bank will help Honduras increase financing channels and reduce its dependence on one single country.

There are three major foundations for economic and trade cooperation between China and Honduras.

First, Honduras has significant locational advantages, which are expected to make it a hub country for economic and trade cooperation between China and countries in the Americas.

The country also has FTAs with, among others, the US, Canada, the European Union, Japan, Mexico, Peru, Chile, Colombia and Dominica. The FTAs give it market access and tariff preferences, helping it to be closely connected to American, European and Asian markets, with the potential to serve as a global processing, manufacturing, logistics and trade center.

Almost all products of Honduran origin can enter the US duty-free, greatly enhancing the attractiveness of Honduras for foreign investment.

With low labor costs, the country is suitable for labor-intensive industries. Although its official language is Spanish, English has become increasingly popular in Honduras, enabling the country to meet the needs of multinational companies.

Second, based on the differences in resource endowments, the trade structure between China and Honduras is highly complementary.

Currently, main exports of Honduras include coffee, bananas, palm oil, shrimp, sugar and tobacco among others.

However, due to the backward industrial development, it mainly relies on imports for products like machinery, electronic equipment, chemical products, fuel, lubricants, and industrial manufactured products.

At present, trade between China and Honduras, especially the export potential of Honduran products, has yet to be explored. From 2011 to 2021, the average annual growth rate of Honduras’ imports from China was 12 percent, while that for exports to China fell 21 percent.

Despite the boom in international transportation logistics and cross-border e-commerce over the past decade, the scale of Honduran exports to China is far below the peak level in 2012.

In 2021, China accounted for only 0.2 percent of Honduras’ export trade, ranking 28th. South Korea and Japan, which are also in East Asia but have much smaller markets than China, ranked 16th and 20th, respectively, all ahead of China. The lack of diplomatic relations, the absence of FTAs and consultation mechanisms were the main factors that previously limited Honduras’ exports to China.

Third, Chinese enterprises have already made progress in project construction in Honduras. Before the establishment of diplomatic relations, Sinohydro had completed construction of hydropower plant Patuca III and China Harbour Engineering Co Ltd built the container terminal of the largest port Cortes in Honduras.

At present, Honduras’ largest hydropower project Arenal Hydropower Station is being steadily built by Sinohydro. Chinese enterprises have gained a good reputation in the local market for high-quality and lowprice products, strong performance ability, job creation and social responsibility.

Based on the main expectations of Honduras and the realistic basis for bilateral cooperation, China can further promote economic and trade relations with Honduras along the following five paths, with a view to enhancing people’s welfare and promoting development on both sides.

First, China can accelerate the negotiation of a bilateral FTA to reduce trade barriers and promote the flow of goods, services, capital and personnel.

Before a bilateral FTA comes into effect, priority arrangements can be made in Customs procedures and trade facilitation to reduce transaction costs.

Cross-border e-commerce can also be brought into play to strengthen the supply-demand interface between the two markets to reduce geographical obstacles and information asymmetry.

Second, against the background of global industrial and supply chain reconstruction, Chinese enterprises can treat Honduras as a link to deeply embed in American FTAs, and further explore its potential as a global processing and manufacturing, logistics and trade center.

Chinese enterprises can make use of the preferential policies of Honduras free trade zone and other special economic zones to invest and set up factories there, and obtain low-cost raw materials, intermediate products and capital goods with the advantages of its geographical location and free trade network.

They can also develop labor-intensive industries, such as garment and auto parts manufacturing, with the advantages of its human resources, and take Honduras as a link to expand export trade to markets in the Americas and global markets.

For Honduras, Chinese companies will bring more capital and employment opportunities to the country, helping accelerate its economic recovery.

Third, China can expand bilateral financial cooperation and actively promote cross-border RMB settlements to reduce the adverse impact of changes in liquidity of major international currencies on bilateral trade and investment.

The possibility of cooperation in local currency swaps can also be explored.

Fourth, China can further expand multilateral cooperation on top of consolidating the foundation of the China-Honduras relationship and deeply participate in the construction of infrastructure connectivity in Central America.

In terms of traditional infrastructure investment, priority can be given to key regions to carry out new and repair work of transportation infrastructure such as railroads, highways, airports and ports, and to explore the creation of a new landsea corridor in Central America that spans two oceans.

Chinese companies can also dovetail with the digital economy policies of Central American countries and participate in projects of new digital infrastructure and digital transformation of traditional infrastructure, using China’s advantageous 5G, AI, internet of things, blockchain and other information and communication technologies to empower the economic development of the Central American region.

Fifth, China can take the establishment of diplomatic relations between China and Honduras as an opportunity to build more consensus with Latin American and Caribbean countries, to strengthen policy communication and coordination and to promote the development of a comprehensive partnership based on equality and mutual benefit for China and those countries.