Type to search

Costa Rica’s CAFTA Choice

CAFTA will open doors for Costa Rica's workers, farmers, and entrepreneurs.


In October, Costa Rican voters will go to the polls to decide whether to join the other six countries that have signed, ratified, and implemented CAFTA, as the U.S.-Dominican Republic-Central America Free Trade Agreement is often called. (...) I’d like to present some of the reasons why the agreement will be good for Costa Rica. (...)

1) CAFTA is Good for Growth and Jobs

First, consider the first fruits of the agreement in terms of growth, investment, and jobs. In 2006 Central America experienced its highest economic growth rate since 1993. Clocking in at 6 percent, the improvement in the region’s economic outlook is not due to any one factor.

But clearly, growing trade and investment are paying benefits for Costa Rica’s four neighbors, each of which implemented CAFTA over a year ago. (...)

Companies from around the world are looking at Central America and the Dominican Republic in a new light thanks to CAFTA, and they are directing investment to the region and creating jobs, sometimes in hundreds, sometimes in thousands.

Nina Simone, a Brazilian shoe manufacturer, is investing $3.5 million in El Salvador and will create 400 jobs during the first year of operations. The firm reports it would not have invested in El Salvador had it not been for CAFTA. In July, Saturn, the General Motors company, announced it would invest $2 million in an auto components operation in El Salvador, creating 500 jobs.

Less than a month after CAFTA’s entry into force in Nicaragua, International Textile Group announced plans to locate a $100 million textile mill in Nicaragua creating 750 direct jobs and some 8,000 jobs indirectly.

Since Nicaragua approved CAFTA in October 2005, at least $200 million in new investments have been announced in the textile and apparel sectors. Together, these investments will generate more than 13,000 Nicaraguan jobs. A similar amount of investment that could bring another 10,000 jobs is in planning stages.

Exports of automotive harnesses to the United States from Honduras have risen by over 50 percent over the past two years. This year, Honduran exports to the United States in this category could surpass $400 million, generating thousands of jobs.

The Honduran affiliate of UPS has noticed a large surge in exports to U.S. markets since the entry into force of the CAFTA. According to Oscar Mendez at UPS: “In 2003, UPS Honduras had 11 Honduran employees; now we have 29. CAFTA has greatly increased the volume of shipments between Honduras and the United States.” (...)

2) CAFTA is Good for Small Business

The most impressive results we are seeing under CAFTA are for smaller companies. You see, large multinationals typically don’t need a free trade agreement to be able to access foreign markets. They simply create a local affiliate and hire the local talent they need to build a plan to succeed in the market. (...)

That’s why it’s so great to hear about so many new companies benefiting from trade under CAFTA. Hundreds of these success stories are coming in.

Consider Muebles Guayacán, a small company located near Antigua, Guatemala. The firm makes furniture, doors, and other wood products. The owner joined a trade mission to New Orleans early this year organized by AmCham Guatemala, an affiliate of the U.S. Chamber of Commerce. With the help of the Trade Capacity Building Institute in New Orleans, which was created as part of the CAFTA process, the owner of Muebles Guayacán was introduced to some construction companies, including a woman who was in the market for doors for post-Katrina reconstruction in Louisiana. So far a deal worth $135,000 is in the offing, an astronomical sum for a small manufacturer in semi-rural Guatemala. Talk about a win-win! (...)

3) CAFTA is Good for Agriculture

Nowhere is the CAFTA choice more dramatic than for farmers.

Because U.S. barriers to imports from Central America were higher for agricultural products than for other kinds of products, farmers in Central American countries other than Costa Rica are harvesting remarkable gains as those barriers fall.

Today, approximately 90 percent of all of all agricultural exports from Costa Rica’s Central American neighbors now enter the U.S. market duty free under CAFTA. In El Salvador, farm and agribusiness exports to the United States reached than $297 million last year, an 85 percent increase from 2005. (...)

Guatemala’s sugar growers saw an 83 percent increase in their sales to the United States. One of these growers, Pantaleón, which is the largest sugar grower in the region, just won the Organization of American States corporate citizenship award. Also in Guatemala, exports of melons and papayas to the United States are up 37 percent.

Nicaragua is exporting to the United States 10,000 tons of peanuts, a lucrative export product that was largely barred from the U.S. market prior to CAFTA.

Critics of CAFTA have called for the agreement to be rejected in Costa Rica because it does nothing to limit U.S. farm subsidies. But do U.S. farm subsidies harm Costa Ricans?

Remember, not all U.S. farm goods are subsidized, and many that are indeed subsidized, such as wheat, soya, and yellow corn, are not grown at all in Costa Rica for reasons having to do with the climate and soil conditions.

In other words, for these products, the American taxpayer is simply giving Costa Ricans a price cut.

A key product at the heart of the debate is rice, which is subsidized in the United States. However, Costa Rican farmers produce only about half of the rice Costa Ricans consume; in other words, imports are absolutely necessary.

Moreover, Costa Rican rice farmers are subsidized as well, and they have a guaranteed selling price. Under CAFTA, Costa Rica’s rice farmers themselves would manage the gradually growing quota under which U.S. rice would enter Costa Rica.

Costa Rican negotiators won an extremely long phase out for the country’s tariffs on rice imports, a phase out which doesn’t start for 10 years and doesn’t finish for 20. This long and gradual implementation phase will give ample time for farmers to raise productivity or diversify their crops.

In addition, Costa Rica’s negotiators won the right to completely exclude two key products from tariff cuts — onions and potatoes. This was done out of concern for Costa Rica’s subsistence farmers, who grow these crops and are among the country’s poorest citizens.

Having said that, it’s critical to recall that subsistence agriculture is not a development strategy. No one in the salons of Washington should wax romantic about the hardscrabble life of these subsistence farmers, no more than Bobby Kennedy did when he visited Appalachia 40 years ago.

The path forward for Costa Rica’s subsistence agriculture isn’t to freeze their conditions in time. Their conditions are bad. The path forward is to present them with new opportunities. (...)

CAFTA creates vast new markets for Central American farm goods. Costa Ricans simply have to say yes to those opportunities.

4) CAFTA is Critical for Textiles and Apparel

The CAFTA choice is particularly urgent for its beleaguered textile and apparel sector. With the end of the global quota system that constrained trade in textiles until 2005, international competition for the textile and apparel sector has become much more intense.

In this context, CAFTA is proving to be an indispensable tool to ensure the continued competitiveness of the textile and apparel industry in the Western Hemisphere in the face of rising Chinese exports.

For Costa Rica, it’s a tool that its neighbors are using to good effect … and one that Costa Rican producers would dearly like to have. Remember, in the United States, just about the entire textile and apparel supply chain supported Congressional approval of CAFTA because it strengthened the industry’s partnership with Central America and the Dominican Republic. (...)

In Costa Rica, the long uncertainty about CAFTA approval has cast a pall on the textile and apparel sector. The industry employs about 15,000 people directly, and another 5,000 indirectly. The total payroll for these workers was about $65 million last year. These are not small numbers for the Costa Rican economy, where a quarter of the labor force must seek employment in the informal sector.

In some textile and apparel firms, 90 percent of workers are single mothers who are heads of households. For the vast majority of these women, working for an apparel manufacturer is their first experience in formal sector employment, and for the first time they are receiving the benefits of being enrolled in the state social security system.

The alternative for these women, which many of them left behind, is subsistence agriculture or domestic employment — alternatives that pay significantly less and usually provide no benefits whatsoever.

As the industry waits and waits to see if Costa Rica will join CAFTA, some firms have been unable to hold on. About 1,000 jobs in the sector have been lost in the past year. (...)  Procomer, Costa Rica’s export promotion agency, has prepared a study of the possible effects of a decision not to join CAFTA. The agency identified 73,000 jobs as particularly vulnerable, including the entire textile and apparel sectors. Nearly a billion dollars in exports would be at risk.

Make no mistake — CAFTA is not a panacea, for the textile and apparel sectors or for any other sector in the Costa Rican economy. But CAFTA gives these industries a fighting chance, as shown by how companies elsewhere in Central America, the Dominican Republic and the United States are investing, trading, and enhancing their competitiveness.

5) Pharmaceuticals and Telecoms: CAFTA is Good for Consumers

I do want to respond to two assertions [CAFTA opponent Otton] Solís has made previously. First, he has asserted that approving CAFTA will drive up the price of medicines in Costa Rica and render generics either more expensive or unavailable.

The fact of the matter is that CAFTA will do no such thing. Here, we have only to consider the results of earlier FTAs that include protections for intellectual property similar to CAFTA.

Consider Mexico, which approved new intellectual property protections in 1991 as part of a series of reforms that led to NAFTA. Or consider Jordan, with which the Clinton Administration signed a free trade agreement in 2000. In neither of these countries have the prices of pharmaceuticals risen. In fact, prices have fallen. In neither of them have generics become less readily available — quite the opposite. (...) If Costa Rica is to succeed in attract high-end investment, CAFTA and strong IP protections are part of the package.

Next, let me simply correct the assertion that CAFTA mandates privatization of Costa Rica’s telecommunications network. CAFTA does not mandate the privatization of the ICE, Costa Rica’s state monopoly for the provision of telecom services.

Rather, CAFTA requires Costa Rica to allow other companies, both Costa Rican and foreign, to compete with the ICE in the open market. In other words, it opens the door to new choices for consumers. It promises new competition in the marketplace, which everywhere else in the world has brought innovative services and lower prices.

In fact, there is a bill today in Costa Rica’s legislature that will strengthen the ICE by eliminating many of the restrictions that have kept it from investing and modernizing. This is why Costa Rica lags its neighbors in mobile telephony. El Salvador benefits from a wide open telecom market with fierce competition thanks to reforms that pre-date CAFTA.

This has brought down prices for mobile phone services, and 41 percent of the population has a mobile phone. In Costa Rica, by contrast, only 29 percent of the population has a mobile phone, despite the fact that Costa Rican incomes are about twice Salvadoran incomes on average. Mobile phone coverage is growing in El Salvador at twice the pace it is in Costa Rica.

For telecoms, CAFTA promises choices for Costa Ricans. Does that sound so threatening?

6) This CAFTA is the Only CAFTA

Mr. Solís often says he dislikes this CAFTA, the agreement that we all know, which was initiated by Costa Ricans, negotiated by Costa Ricans (along with the other signatories), and signed by the Costa Rican trade minister. He suggests we could renegotiate it or negotiate a brand new agreement. This is a mirage. If Costa Ricans reject CAFTA, there will be no new agreement, bilateral or otherwise, for the foreseeable future. (...)

Nor should anyone in Costa Rican put too much hope in extension of trade preferences. The Caribbean Basin Trade Partnership Act approved in 2000 gives Costa Rica duty-free access to the U.S. marketplace for many of its exports, but it will expire in a little over a year. Mr. Solís says it will surely be extended. As a long-time trade lobbyist here in Washington, I would contend that this is a dangerous misreading of Congressional attitudes toward trade. (...)


We hope our friends in Costa Rica will seize CAFTA with both hands — not because it’s a panacea — it’s not — but as a doorway to opportunities.

To decline the CAFTA choice would be to close the door on substantial opportunities, on markets, on enterprises that need what CAFTA has to offer.

To say yes to CAFTA will open doors, doors that lead to new opportunities for workers, farmers, entrepreneurs. Doors that lead to a better tomorrow.

John Murphy is the vice president for international affairs at the U.S. Chamber of Commerce and executive vice president of the Association of American Chambers of Commerce in Latin America (AACCLA). This column is based an an excerpt of his remarks at a recent event in Washington, D.C. hosted by the Economic Policy Institute.


To read this post, you must purchase a Latin Trade Business Intelligence Subscription.
Scroll to top of page
Begin Zoho Tracking Code for Analytics