San José, Costa Rica, since 1956

E.U. Treaty Hinges on CAFTA

Just as Costa Rica seems to be creeping toward a conclusion in the three-year drama over the Central American Free-Trade Agreement with the United States (CAFTA), the European Union waits in the wings to begin negotiations on its own free-trade agreement with the region.

The fate of CAFTA here, however, could determine whether the E.U. trade negotiations even make it onto Costa Rica’s stage. At issue are several key requirements the Union has placed on the region for the trade negotiations to go forward.

For one thing, Europe will be negotiating with the region as a bloc, and as such, regional integration (especially commercial integration, which would include free flow of goods between the countries and standardization of Customs and tax systems) will be a requirement for negotiations to move forward, say E.U. representatives.

For another thing, E.U. representatives don’t expect state monopolies such as the Costa Rican Electricity Institute (ICE) and the National Insurance Institute (INS) to be sticking points in the negotiations, because they don’t expect them to exist.

“If we have monopolies in a country, that obviously prohibits the free flow of goods and services,” Germany’s Ambassador to Costa Rica Volker Fink told The Tico Times, adding that such prohibition would interfere with regional integration.

“There has to be an opening (of the markets),” he said.

Both of those requirements could be aided by a “yes” vote in the CAFTA referendum Oct. 7. But a “no” vote on CAFTA would throw a serious wrench into the works according to trade experts, by halting Costa Rica’s commercial integration with the rest of the region and sending a signal that Costa Rica is reluctant to remove its state monopolies.

Costa Rica’s position in the region is especially important because it accounts for 60% of the Central American exports that make it to E.U. countries. Indeed, the first round of trade negotiations between the Union and Central America has been pushed back until sometime in the second half of October – after Costa Rica’s referendum vote on CAFTA.

“We are clearly running the risk’’ of endangering the trade negotiations with the European Union, said Alonso Elizondo, executive director of the Costa Rican Chamber of Commerce, adding that moving ahead with trade talks after a “no” vote on CAFTA would be “very difficult.”

What Gets Traded?

E.U. countries, taken as a bloc, were Costa Rica’s second-largest trading partner in 2006, after the United States. Costa Rica exported more than $1.2 billion worth of goods to Europe and imported more than $1.4 billion worth of goods from the Union.

While it’s too early to speculate on any details of a potential free-trade agreement with Europe, the president of the National Chamber of Agriculture and Agro-industry (CNAA), Alvaro Sáenz, said that agricultural products are bound to be central as far as Costa Rica is concerned.

About 65% of Costa Rica’s exports to Europe are agricultural products, he said – principally bananas, pineapple, coffee, ornamental plants, orange juice and concentrate, and melons.

While most of Costa Rica’s products – including agriculture products – already have privileged access to the European market thanks to the Europe’s Generalised System of Preferences (GSP+), that status can change, as the Union demonstrated in 2006 when it raised banana tariffs on Latin American fruit to 176 euros ($242) per ton, from 75 euros ($103) (TT, Dec. 2, 2005).

“For the agriculture sector, it’s very important because it guarantees market access,” Sáenz said.

“But overall,” he added, “(it can bring) new markets,” noting that the greatest potential is for niche products that could be hits in certain parts of Europe yet to be discovered.

“Maybe in Poland you could find a population that likes cassava,” Sáenz said, referring to a common edible tuber grown here.

Meanwhile, Fink noted that Germany – which did $600 million worth of business with Costa Rica last year – would like to sell its cars, medicines and industrial chemicals in Costa Rica, tariff-free.

Other important European products could include cheeses (which currently have a 60% tariff ), medical implements and services.

As far as niche agriculture products, Fink said there are already German companies in Costa Rica operating organic tropical fruit farms, and that he expects that segment of the market to grow in popularity.

Wanted: Commercial Integration

One of the Union’s requirements for the negotiations to move forward, however, is the greater integration of the Central American region when it comes to commerce, something that has turned out to be quite complicated.

Central America has been talking regional integration for decades, yet the process stalled in the 1980s due to civil wars in the region. It started up again in 1991 with the founding of the Central American Integration System (SICA), yet since then Costa Rica has often balked on issues of immigration and tariff adjustment (TT, Jan. 25, 2005).

Negotiations stalled again two weeks ago when Costa Rica declined to sign onto a framework agreement that would have furthered the integration.

Foreign Trade Minister Marco Vinicio Ruíz said it was “prudence” that kept Costa Rica from signing onto the framework (TT, June 29), since if Costa Rica votes down CAFTA in October, it would need its northern Customs border to regulate the tariff-free U.S. goods that will be flooding into the Central American countries that have ratified CAFTA.

The European Commission representative in charge of the negotiations, Tomás Abadía, was out of the country, but Fink confirmed that Costa Rica would “have the status of observer” to the negotiations, until it signs onto the Customs framework, which Ruíz has said Costa Rica will do “immediately” if CAFTA is approved in October.

And if not?

“From a personal point of view, I am sure Costa Rica will say yes,” Fink offered, declining to speculate further.

Ruíz confirmed in e-mail comments that, “The non-approval of CAFTA would have significant technical implications that would make the advance of the Customs union difficult in certain areas.”

Likewise, state monopolies are a topic on which Fink said the European Union is clear: “If the state monopolies are not opened, it will be very difficult to have a free-trade agreement with the Union,” Fink said.

Opening state monopolies has always been a touchy subject in Costa Rica, where the issue of the country’s insurance and telecommunications monopolies bogged down CAFTA negotiations and remains a key complaint of the treaty’s opponents.

CAFTA now contains provisions that would open those two markets to competition, but a “no” vote in the CAFTA referendum could mean Europe would face the same uphill battle as the United States did in its negotiations with Costa Rica.

On the other hand, a “no” vote could mean nothing at all – the implementation legislation that would open the insurance and telecom markets is already under consideration in the Legislative Assembly, and President Oscar Arias has indicated that he will seek to pass it regardless of how the referendum turns out.


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