Death Sentence for Costa Rican Foreign Investment

CAFTA’s October Referendum: A Death Sentence for Costa Rican Foreign Investment?

With a little under two months until the October referendum on the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), time is quickly running out for Costa Rican president, Óscar Arias, elected for a second time in 2006, to gain the necessary public support to pass CAFTA. The trade pact is strongly opposed by those who believe that it will not help the Costa Rican economy, while being significantly beneficial to the U.S. CAFTA is likely to supply Costa Rica with availabilities that it does not necessarily need, nor even seek, in the meantime, threatening the Central American country’s fundamental business interests. Its opponents insist that the danger in implementing CAFTA not only may threaten the future of Costa Rica’s commercial sector which has been growing in recent years. With the fate of CAFTA resting on public perceptions as well as massive efforts being carried out by advocates on its behalf coming from agro-industrial sectors and large-scale financial interests with big business, big agriculture and the U.S. and the other industrial nations in avid support of the pact. It is up to the opponents of CAFTA to marshal their forces in order to convince the public that CAFTA does not serve Costa Rica’s national interests. President Arias is a strong supporter of CAFTA, although he is permitting his people determine its fate, as opposed to pushing through his own agenda. He is well aware that his own standing has been significantly hurt after he narrowly won an election that had been largely focused on the issue.

CAFTA: NAFTA For Central America
DR-CAFTA is the Central American version of the North American Free Trade Agreement (NAFTA); it embraces the countries of Central America, the Dominican Republic and the U.S. CAFTA’s aim, similar to that of NAFTA, is to “liberalize U.S. and Central American markets, creating a free trade zone,” by eliminating tariffs on basic grains such as rice, beans and corn.

A Troubled Beginning to CAFTA
CAFTA is perhaps unique since it is one of the few pacts signed by such assymetrical signatories. Currently CAFTA does not include Belize, and Costa Rica has yet to ratify the document. CAFTA’s current member countries include the U.S., Guatemala, El Salvador, Honduras, Nicaragua and the Dominican Republic. In spite of President Arias’ strong deference to the Bush White House, his efforts to have his legislature ratify CAFTA have been thwarted by opposition from important sectors of civil society. Costa Rica has until March 1, 2008 to ratify the agreement. When the pact goes into effect, 80 percent of U.S. industrial and commercial goods will enter Costa Rica duty-free, with the remaining tariffs to be eliminated entirely after 10 years. In order for CAFTA to be successful, it requires “transparency and efficiency in administering customs procedures,” as stated the U.S. Government Export Portal. With its ratification and implementation in the six current member countries, CAFTA would be the “second-largest free trade zone in Latin America for US exports,” claims International Information Programs.

At the onset of deliberations over CAFTA, only El Salvador was ready to join, with the other member countries having to modify legislation in order to bring themselves into agreement with the draft proposal. The March 2, 2006 New York Times article, “Central American Trade Deal Is Being Delayed by Partners,” noted that “[w]hile the delay is in part a sign of how complex the negotiations have been, it also reflects the extent of the concerns about the agreement in the tiny economics it will affect.” It was at this time that domestic Costa Rican realities were beginning to delay the ratification of the agreement. According to the U.S. Chamber of Commerce hype, CAFTA gives “American businesses, workers, and farmers greater access to 44 million Central American consumers,” showing positive exports for the U.S. but not explicitly pledging itself what benefits Central American economies are likely to receive, or at what cost.

The Debate Brought to the U.S.
On July 25, the Economic Policy Institute (EPI) welcomed John G. Murphy, Vice President of the International Affairs of the U.S. Chamber of Commerce, and Ottón Solis, Costa Rica’s left-leaning presidential candidate and staunch opponent to CAFTA, to engage in a debate over the potential utility or detrimental effect that CAFTA would have on Costa Rica. The proposed agreement covers virtually every category of trade and commercial exchange among the affected countries. For Central America, CAFTA would require market liberalization for the majority of its goods and services, such as agriculture, manufacturing, public services and government procurements. For the U.S., it would supply increased market access to most economic sectors in Central America, including textiles and a limited increase in sugar quotas.

The Vote: Uncertainty Reigns
The Costa Rican mindset appears to be ever changing regarding CAFTA. According to a poll conducted by Universidad de Costa, as published by Angus Reid Global Monitor on August 7, 2007, 56.7 percent of decided voters say that CAFTA should not be ratified. This is a change from the results published in the August 3, 2007 issue of La Nación, which showed that the 52 percent majority would vote yes while the 42 percent minority would vote no on CAFTA. There needs to be a minimum of 40 percent of registered voters participating in the referendum to make it valid, and “53 percent plan to cast their ballot, which means the outcome of the referendum will be a definite one, in either direction.” But what these two polls show is that the population is not entirely certain which way it will vote, with the majority shifting, but when the referendum takes place, there will be a winner, but probably by a very narrow margin.

Washington: Unabashedly Pro-CAFTA
Eva Carazo Vargas said in his March 8, 2007 article, “Costa Rica: Why We Reject CAFTA,” for the Americas Program Citizen Action Focus, that the “pro-CAFTA camp goes between promises of new opportunities and a fear campaign- saying there will be commercial repercussions from the United States if the agreement isn’t ratified, despite the fact that U.S. congress members have indicated, and reiterated, that cutting off current trade benefits is not a possible course of action.”

John G. Murphysays that CAFTA offers Costa Rica “unparalleled opportunities” and looks to other CAFTA-approved countries as purported evidence to prove this. El Salvador, since implementing CAFTA, has seen its economic growth increase 68 percent, and in 2006, the economic growth rate (including trade and investment) increased by six percent among CAFTA members. He notes the need to create new textile apparel markets in order to remain competitive with Asia, acknowledging that the Caribbean Basin Initiative (CBI) is inadequate in today’s market. According to the Office of the U.S. Trade Representative, the CBI “is intended to facilitate the economic development and export diversification of the Caribbean Basin economies.” The CBI provides duty-free access to the U.S. for the 24 Caribbean Basin countries, including the Dominican Republic, Honduras, Nicaragua, El Salvador, Guatemala and Costa Rica.

Those Against CAFTA, Make Yourselves Known
CAFTA could have a markedly deleterious effect on Costa Rica’s agricultural sector because relatively small-scale farmers will not be able to compete with subsidized agricultural imports from the U.S., which could, it is argued, destroy Costa Rica’s rice industry. Oscar Camps, head of the CONARROZ rice federation stated that rice is “the only product that continues to be regulated by law.” By allowing a more internationalized market to have access to Costa Rican products, local farmers would be competing against U.S. producers, and CAFTA could lead to “privatization of the state-run telephone company and hurt the social security system,” thus losing domestic control of production. According to The Economist’s July 12, 2007, “Trading Arguments: Costa Rica’s Referendum on CAFTA,” “unions oppose a requirement to open up to competition the country’s telecommunications and insurance industries, both of which are state monopolies.” Maintaining local control over telecommunications, though inefficient, has kept costs low, and if international multinationals had power over the industry, this would certainly not have been the case. What Murphy failed to stress is that the telecommunication industry is the vehicle of choice for the deluge of bribes to one Costa Rican president after another for recalling kickback from foreigners controlling cell-phone and related contracts.

In order to launch CAFTA, “13 implementation bills, of which the most controversial bills would dismantle the telecommunications monopoly and dismantle the insurance monopoly,” would have to be put into effect, according to Global Exchange article, “CAFTA Faces New Uncertainty in Costa Rica with Public Referendum.” That act alone would open markets where privately held companies would have to compete with state monopolies, a situation that the country has been trying to shun for many years.

Ottón Solis, founder and president of the Costa Rican Citizen’s Action Party and who was narrowly outflanked by Arias in the last election, heads the opposition to CAFTA. During the EPI debate, Solis stated that the agreement is not a bilateral one and while Costa Rica, in principle, does not object to such an agreement, he believes that it deserves a better deal. His reasons for opposing CAFTA include the possible lack of transparency in negotiations and failed past political promises, insufficient parliamentary discussion and oversight and his belief that Costa Rica will lose something substantial through CAFTA’s implementation. Solis affirms that the substantive issue of the international labor market is not advantageous to Costa Rica. Market forces are performing poorly, there often are very few openings, and the idea of liberalized immigration is not an option with CAFTA. He believes that the U.S. places capital above all else in importance and that CAFTA forbids performance criteria, something that Costa Rica would like to see. Solis has declared that, while there may be universal rules regarding some topics, in terms of economics, “countries must be allowed to design and agree upon their own strategy and apply it.”

The Threat of Failing to Ratify CAFTA
While CAFTA is viewed as aiding Costa Rica’s economy, both within an international as well as domestic venue, it is being faulted for not taking into account the fate of workers that will be adversely affected by it. Albino Vargas, Secretary of the National Association of Public and Private Employees (ANEP), says that, “not only will this free trade agreement fail to generate employment, but we have shown in various studies that it actually threatens up to 200,000 service, agriculture and manufacturing jobs.” That is not to say that all trade unions object to CAFTA, but rather, that they want “another kind of deal—preferably bilateral.” This would take into account the natural advantages that Costa Rica has over its neighbors, including its average minimum wage of $250 per month, which is significantly higher than that of its largely impoverished neighbors. Nevertheless, this high minimum wage could be a potential competitive liability.

If Costa Rica rejects CAFTA, the country faces the possible migration of the companies now housed there to CAFTA-ratified countries, as well as the future disappearance of corporations looking to establish Central American headquarters in Costa Rica. Without CAFTA, goods exported by the country to the U.S. can look forward to being subject to 35 percent tariffs. Shirley Saborío, executive director of the Union of Private Sector Chambers and Associations (UCCAEP), which represents Costa Rica’s private business sector in Costa Rica, stated that if Costa Rica failed to ratify the pact, the country would be at a competitive disadvantage in global markets. There is no alternative to CAFTA and its indecisiveness places Costa Rica’s development at stake. Saborío says, “what we have now is a worst-case scenario, where every country except ours has ratified CAFTA. The pressure to cut off unilateral benefits for a country that negotiated but did not ratify CAFTA will be tremendous.” Furthermore, according to Murphy and other CAFTA militants, failure to sanction CAFTA would place 73,000 jobs and $1 billion dollars in exports at risk in Costa Rica.

Costa Rica: The Strongest Central American Democracy
Costa Rica can be seen as the most successful Central American country, economically and socially speaking. It has the area’s highest minimum wage and it also has the most foreign investment within the CAFTA group. Cesar Trujillo, in the Latin Business Chronicle article “Costa Rica Awaits CAFTA,” wrote “Costa Rica continues to be a major hot-spot for multinational companies looking to establish their operations centers in Central America.” Unlike other area countries, Costa Rica is a constitutional social state that invests in healthcare, insurance, education, energy and telecommunications and has a much more balanced and successful society than the CAFTA-ratified countries. The October referendum “opens the possibility that Costa Rica might well reject the deal altogether,” which Costa Rican President Arias is allowing the people to debate so that the country could decide its future. This referendum makes Costa Rica the first country to hold a popular vote on the issue rather than having a legislative body approve or reject the trade pact.

Other CAFTA-ratified countries, such as El Salvador, have done so because of what theu hope to achieve through the pact with respect to broader relations with the U.S. But Costa Rica has a better constituted economy than the area’s other countries and is widely considered to be Central America’s oldest and strongest democracy. While Costa Rica is currently more economically secure than the other member countries, which would make it appear to be better positioned to deal with these various problems as well as the beneficent prospects of an expanded CAFTA-DR, many fear that the country’s social security and health care system could still be undermined through CAFTA. Solis has stated that rejection of the pact, rather than signing onto CAFTA, would strengthen Costa Rica’s position rather than weakening it.

What Ratifying CAFTA Would Signify To Other Democracies in the World
Murphy states that many countries want to be part of an FTA and that Costa Rica’s rejection of CAFTA will not change the desire of some developing economies to join them. But if Costa Rica backs away from adhering to CAFTA, it will “set off warning bells,” seeing that it had previously been one of the initial countries seeking an FTA with the U.S. and because it was an active participant all along in the CAFTA discussions. While Peru and the U.S. renegotiated their FTA, it did not set a precedent, because the U.S. amended the agreement before it was passed. But in the case of CAFTA and Costa Rica, other countries already have implemented CAFTA, and Costa Rica now insists upon further discussion it to make the agreement more amenable to its basic interests, an act which would be a violation of CAFTA’s ground rules regarding the negotiation process.

What Murphy failed to state in the July 25 debate, Is CAFTA Good For Costa Rica?, were concrete reasons how CAFTA would be able to help Costa Rica. He brought up past examples of what CAFTA has done for other countries, such as El Salvador, but he failed to mention that economically, as of now, that El Salvador falls far behind Costa Rica. If Costa Rica were in a position where it was in pressing need of help to attract more foreign investment and to expand its economy, CAFTA would be a sensible next step, but as a country not particularly in need of such help, Costa Rica might better serve its cause by continuing to act independently and waiting for certain CAFTA provisions to be more usefully renegotiated.

However, Murphy did insinuate that Costa Rica should be less apathetic about adhering to CAFTA, because of the fact that it could lose the physical presence of current and potential new international companies if it rejects the agreement. But, if Costa Rica accepts CAFTA due to a fear of losing business, it would set a worrisome precedent for U.S.-Costa Rican relations. In the two years between the initial drafting of CAFTA and its implementation, Costa Rica’s economy has boomed and it would be unwise for its planners to settle for an agreement that may not be mutually beneficial. If Costa Rica ratifies CAFTA as it currently stands, it shows that the U.S. is able to intimidate a small, less developed country through pressure and bully tactics that lead to decisions that are not necessarily in the country’s best interests.

Current Legislative Conflicts with CAFTA
The Supreme Elections Tribunal (TSE) has decided, with regards to CAFTA, that instead of voting in the National Assembly where pro-CAFTA members have a majority, there will be a nationwide referendum. The TSE postponed the national referendum from September 23, 2007 to October 7, 2007. The high court will want to examine whether the assembly violated its procedures in its handling of legislation in relation to the pact and whether CAFTA violates the country’s constitution. If the justices of the Constitutional Chamber of the Supreme Court (Sala IV) find errors in procedure, the Tribunal would have to call off the referendum and, in that eventuality. The country would not have the opportunity to approve CAFTA in its present shape.

This analysis was prepared by COHA Research Associate Martha Lauer
August 14th, 2007

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