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CAFTA’s Impact On Costa Rica

Costa Rica's approval of CAFTA will be an overall benefit to the Central American country, most experts say.

Latin America Advisor

In a nationwide referendum, Costa Ricans voted [October 7] in favor of a free trade deal with the United States through the Central American Free Trade Agreement (CAFTA), according to a preliminary vote count. What impact will the agreement have on Costa Rica's economy? Will it bring the benefits, such as lower costs and more investment, that supporters predict? Will it, as opponents fear, drive thousands of farmers and small business owners into ruin?

José Antonio Muñoz, Partner at Arias & Muñoz in Costa Rica: Approval of CAFTA guarantees that Costa Rica's economy will continue to diversify and expand much in the same manner it has done for the past 25 years, when the decision was made to promote a more open, export-based economy, thus diversifying its export offer away from the traditional agricultural exports of sugar, coffee, bananas, and beef to over 4,000 products in non-traditional agriculture, software and electronics, industrial goods, and services. Lack of CAFTA approval would have imperiled this continued growth. Approval of CAFTA will confirm Costa Rica's position as a magnet for foreign direct investment in Latin America. Investors, not only from the US but also from the European Union and Asia, will have even greater confidence in Costa Rica's acceptance of international rules for resolution of investment disputes. Lower costs for raw materials, services, and know-how may also come about. Costa Rica should really continue focusing on production and provision of higher value-added goods and services for which markets are now guaranteed through CAFTA. Costa Rica's farmers have already adjusted or disappeared over the past 25-30 years as a consequence of the country's structural adjustment plans. Agricultural production has shifted from rice, beans, and yellow corn for domestic consumption to the highly successful production for export of pineapples, melons, strawberries, winter vegetables, dragon fruit, and the like. This new agriculture has been so successful that countries as large as Brazil and as competitive as Ecuador have tried to emulate it. Small business owners will not suffer under CAFTA. They will have wider lines of products to import, export, and distribute.

Epsy Campbell, head of Costa Rica's Citizen Action Party, and a former member of Congress and vice presidential candidate: If we understand Costa Rica to be all of its people and not just some of them, this treaty will definitely hurt the country's middle and poor sectors, and will bring some advantages to the highest sectors. In the case of health, the agreement on intellectual property will hurt users of the Costa Rican social security system, which serves 90 percent of the population, since each year medicines will become more expensive in the country because the entry of generic medicines into the Costa Rican market will be delayed for years. The same thing will happen with telecommunications services, which will tend to become more expensive like in the rest of Latin America. In addition, the entry of new US products into the national market will generate more profits for the big national or foreign importers without having any impact on middle- or lower-class consumers in an environment where in which almost 70 percent of the supermarkets in Costa Rica have been acquired by Wal-Mart. Although those defending CAFTA predict the increase in investment will bring the country big benefits, experience with these agreements is that these benefits are concentrated among the highest sectors, which increasingly offer precarious jobs with temporary contracts and without social benefits. In addition, this agreement exposes the Costa Rican state to possible multimillion dollar complaints that in every case would have to be paid with everybody's income, further weakening not only the state's ability to undertake social and infrastructure investments, but also to fulfill its role as regulator. As has already happened in other countries like Mexico, small national producers will be big losers with the approval of this agreement in Costa Rica, since they will not only be unprotected and receive no government support such as technical advice, loans, and subsidies, but they will also have to confront the million-dollar subsidies of US producers.

Jon Huenemann, a Principal in the International Department at Miller & Chevalier, and a former Assistant US Trade Representative with responsibilities in the Americas: If other trade agreements of this type are any indicator, the implications for the Costa Rican economy will on balance be positive. The fact is that more open economies perform better, all other things being equal, than more closed economies. Will there be segments of the Costa Rican economy, when exposed to more competition, that will fail to perform and suffer employment losses? That is certainly possible. Will there be segments that rise to the occasion and perform well and generate new opportunities, higher wages, and more jobs? That is certainly possible too. Let's also remember that trade agreements, even agreements that are as comprehensive in their scope as the FTA with the US, are not the fundamental foundation that broadly determines whether an economy will succeed or fail. In spite of the relatively small size of the Costa Rican economy, the 'foundation' is largely in the hands of Costa Rican policymakers. It is Costa Rican policymakers that will determine whether the fiscal condition of the economy is sound, whether the education system functions effectively at all levels, whether infrastructure around the country supports growth and opportunity, whether competition in markets is fairly regulated and transparent, and whether the tax system and other policy instruments are fair and reasonable. These and other variables are not the function of trade agreements, even when the trade agreement is with the largest economy in the world. Costa Rica should view the FTA as yet another opportunity to take advantage of, and if the history with other developing countries that have engaged in an FTA with the US is any indicator, there will certainly be more trade and investment to look forward to. At the same time, Costa Rica must shoulder the overall responsibility to shepherd its economy forward. Furthermore, Costa Rica should ask for and expect the US to work in a partnership to make the FTA as successful as possible for both countries.

Sonia Picado, President of the Inter-American Institute of Human Rights in Costa Rica: A negative result would have probably forced some industries to move to another of the signatory countries. This was also true for maquila and technological investments that have proved to be a tremendous asset for the country's economy. Naturally, there are tradeoffs, and likely some agricultural and industrial sectors will require support to adapt to the new circumstances. I trust the creativity of our people and feel confident that working with all CAFTA members will benefit not only Costa Rica, but the region as a whole.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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