sectors is negative.

The pattern of adjustment in the _CBL_<sup>_hi_scenariolargelyparallelsthatof</sup><sup>_CBL_.Sincedemand</sup> growth in this scenario is more import-intensive, imports volumes increase more than twice as much as in the _CBL_ simulation. The effects on exports volumes are also much larger than under _CBL_ , which is largely due to the same mechanisms as those identified in the previous paragraph. Consider the effects of _CBL_<sup>_hi_on domestic production.In agriculture, where the effects of lower input</sup> prices dominate the increased competition from imports, domestic producers are able to benefit even more by demanding more import-intensive inputs. In manufacturing, Honduran firms have difficulties competing with cheaper imports and total production rises by less than _CBL_ while also becoming more export-oriented. The net effect is a significant acceleration in total production, which increases from a 0.9 percent gain in the _CBL_ scenario to 1.9 percent in _CBL_<sup>_hi_.</sup> _BL_<sup>.</sup> The outcome of the _CML_ simulation is quite different from the scenarios described above due to the higher level of tariffs levied against the CACM partners and the Dominican Republic, combined with significant differences in the structure of protection and trade. The removal of protection vis`a-vis the rest of Central America leads to import volumes rising 2.8 times as much as in the _CBL_ simulation, while the volume of exports is 2.7 times higher. On the import side, the sectors experiencing the largest increases in imports include food, beverages, and tobacco, textiles, metals, minerals, and machinery, and domestic crops. Metals, minerals, and machinery register only minor changes in import volumes in the _CBL_ scenario, largely due to the fact that imports in this sector are protected from US competition by a relatively low tariff of 2.2 percent (as opposed to 8.8 percent tariff on exports from the rest of Central America). Thus, removal of protection throughout DRCAFTA results in a larger increase in import competition in this sectors than tariff reductions with the US alone.

Unlike in _CBL_ , textiles is no longer the sector that experiences the biggest increase in export volume following the liberalization of trade throughout CACM and the Dominican Republic. Instead, metals, minerals, and machinery and paper register the largest gains due to the fact that the tariff rates in these sectors are more than twice the average faced by a Honduran exporter and the majority of exports of these products are already destined for the CACM and the Dominican Republic markets. Overall, the increase in the volume of non-farm exports outpaces the rise in farm exports by a factor of 5 to 1, compared with a 2 to 1 ratio in the _CBL_ simulation. The largest differences between the two scenarios, however, can be found on the production side. In contrast to the _CBL_ scenario, in which higher export prices and lower input costs in manufacturing led to a rather mild increase in the volume of output, in the _CML_ scenario non-farm production rises by 10.9 percent relative to the baseline and 9.3 percent relative to the _CBL_ scenario. The magnitude of these changes should be interpreted with caution, since it is mostly driven by a very large production increase in a single sector. However, the overall pattern of changes in production in the _CML_ scenario parallels the full liberalization outcome much more closely than the _CBL_ simulation. This suggests that bilateral trade liberalization vis-`a-vis the US may not only result in a sectoral allocation of resources that is not fully consistent with a multilateral reduction in tariffs, but also inconsistent with a full implementation of DR-CAFTA. This issue will be addressed in more detail in section 6.5.

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