San José, Costa Rica, since 1956

What’s Really at Stake with the Trade Pact?

What’s really at stake with the Central American Free-Trade Agreement with the United States (CAFTA)?

As the nationwide vote on the most debated issue in the country’s recent history approaches, more and more information, factual or not, is finding its way onto Costa Rican televisions, newspapers and computer screens.

Both sides of the debate have points worth considering. Here are some of the key issues:

Development Model

Is the CAFTA debate more than a debate about CAFTA? Apparently. In the broadest sense, the debate over the U.S. trade agreement is a discussion about whether the country, widely praised for its economic and social stability, should change its developmental model.

CAFTA supporters say the country should stay on the course of an exportbased, diversifying economy that attracts foreign investment that in turn helps reduce poverty. Exports account for about a third of Costa Rica’s gross domestic product (GDP), and foreign direct investment (FDI) is growing rapidly. FDI now represents 6% of the GDP, up from less than 1% in 1982. CAFTA supporters say protectionist policies helped cause the economic crises the region underwent in the early 1980s, and that trade liberalization policies helped pull the region out of the crises.

CAFTA opponents say Costa Rica’s export-based, investment-attracting model has resulted in rapid, unfettered growth that has contributed to environmental damage, deforestation and corruption. CAFTA opponents say developed countries have more to gain from trade agreements than developing countries, which have seen increased inequalities thanks to trade liberalization.

They also say reforming key public institutions such as the Costa Rican Electricity Institute (ICE), which provides electricity and runs the state telecommunication monopoly, and the National Insurance Institute (INS), which runs the insurance monopoly, will lower the quality of life in Costa Rica, especially for the have-nots (TT, Nov. 3, 2006,March 2).

Foreign Investment

Foreign investment in Costa Rica is on the rise, thanks to political stability, geographic location and high educational level of the workforce.

Many foreign investors say CAFTA must be passed for Costa Rica to maintain its competitive position as a destination for foreign investment. Some have told The Tico Times they’re waiting to make more investments until CAFTA is voted on (TT,March 23).

Some CAFTA opponents say Costa Rica has enough advantages to stay competitive without passing CAFTA, and that Costa Rica could always renegotiate a trade agreement with the United States that is more favorable for Costa Rica while also protecting U.S. investors.

Other CAFTA opponents say foreign investment is a big part of the country’s problem. A deluge of foreign investment flowing into real estate, tourism and coastal development has changed the country for the worse by bringing in high-end projects that don’t benefit average Costa Ricans or small businesses, contributing to deforestation and environmental problems here, and inflating real estate prices so Ticos can’t afford property (TT, March 16).


Both sides of the CAFTA debate claim the U.S. trade pact will affect employment – the “yes” side says it will bring more employment, the “no” side that it will cause a loss of jobs. CAFTA supporters say it will encourage foreign investment that will result in more jobs, and that it will consolidate the country’s access to the U.S. market, making Costa Rican businesses more likely to hire for the long term.

The “no” side, on the other hand, argues that relatively few jobs will be created since Costa Rica’s exports already have access to U.S. markets under the Caribbean Basin Initiaive (CBI). On the contrary, they say, Costa Rica will lose jobs as subsidized U.S. agricultural products like rice and milk enter the Costa Rican market and undercut small producers here.

National Sovereignty

CAFTA’s Chapter 10, which covers investment, sets some ground rules so investors have a way of seeking retribution for investment losses due to government actions. Supporters say the chapter promotes investment in CAFTA countries by promising investors security.

CAFTA opponents charge Chapter 10 is a threat to Costa Rica’s sovereignty and gives foreign investors a means by which to sue the government directly before an international arbitration court and bypass the country’s court system. Opponents say the chapter limits the state’s ability to govern and serves as a deterrent to the passage of new laws that might affect business, such as stricter environmental laws (TT, March 23).


CAFTA requires the opening of Costa Rica’s state-run telecom sector on key services – Internet and cell phones. Costa Rica still has every right to make its own telecommunications law, CAFTA supporters point out.

Supporters say breaking the telecom monopoly will give clients access to more and better services, as well as create a more competitive investment climate.

CAFTA opponents, including many ICE workers, say Internet and cell phones are ICE’s most lucrative businesses, and under CAFTA the institute wouldn’t be able to continue using these profits to subsidize inexpensive phone service in remote rural areas.

Today, Costa Rica has some of the lowest cell service prices in the region and some of the most expansive access to public telephones. CAFTA opponents also say foreign telecom companies will flood the market and jack up prices, negatively affecting consumers.


Despite the country’s tidy green image, the fervent debate over CAFTA has exposed an ugly reality: Costa Rica’s environmental legislation is severely handicapped. Because of this, issues with waste management, water and air pollution are spiraling out of control. Most agree that CAFTA will only aggravate the issue, attracting more economic investment and development, and creating more problems the country is simply not prepared to handle.

Proponents say CAFTA should inspire new legislation to protect the environment – providing the country with an incentive to better its laws and take a stand.

Opponents worry that CAFTA would “freeze” new environmental legislation, despite the fact that Chapter 17 states “each country can adopt and modify its environmental laws and policies.”Opponents argue that new environmental laws would be difficult, if not impossible, to pass if they affect business in any way.


Supporters say that under CAFTA, a large percentage of farmers will be granted permanent access to one of the world’s most ravenous consumer markets – the perfect outlet for the country’s thriving tropical fruits, such as pineapple and banana, that don’t grow in the North’s cooler climes.

The opposing team – those who will vote no – say Costa Rican farmers will suddenly, and viciously, lose their way of life, as a result of a national market suddenly flooded with subsidized U.S. products.

The truth lies somewhere in between: Some, including rice and dairy farmers, who will compete directly against subsidized North American farmers, will suffer. Others, such as citrus farmers, who export valueadded juice products to the enormous U.S. market, stand to gain.


CAFTA proponents argue the added protection for drugs under the trade agreement will be an incentive for innovation in the pharmaceutical industry at large, and the pact will not have a significant impact on drug prices in Costa Rica, since the World Trade Organization (WTO) already allows for 20-year patents for new drugs.Any drug with five to 20 years left on its patent will simply use up its five data-protection years concurrently. In other words, only products with five years or less left to go on their patents would enjoy extended protections under CAFTA.

However, under CAFTA’s intellectual property rights clauses, manufacturers of generic drugs must either wait five years to register their copies of new drugs or pay for their own tests – requirements that CAFTA opponents argue would impede access to affordable medicines.

Generic drug prices would skyrocket, CAFTA opponents say, creating problems for the national socialized health-care system (TT, March 11, 2005). The Social Security System (Caja), which runs the health-care system, relies largely on generic drugs, and most Costa Ricans depend on the Caja to meet their medical needs.

Trade Benefits

CAFTA supporters say the pact must be approved by 2008, because some of the benefits of the Caribbean Basin Initiative (CBI) expire in September 2008 and Costa Rica would have to go back to paying high tariffs on certain exports such as tuna and textiles as it did two decades ago.

However, CAFTA opponents say the United States is not planning to take away the remaining CBI benefits from Costa Rica, and that CAFTA doesn’t offer much better benefits than CBI. In other words, not much is gained by switching to CAFTA from CBI.

Even CAFTA supporters agree on this point, but argue that the important thing is that it consolidates unilateral benefits into a multilateral agreement that provides greater security for businesses.


Anti-CAFTA leaders such as former presidential candidate and Citizen Action (PAC) founder Ottón Solís say there’s no reason Costa Rica can’t turn down this pact and renegotiate its own trade agreement with the United States, as did Panama (TT,March 31, 2006). Such an agreement could include better conditions for Costa Rica, he says.

CAFTA supporters say the pact has been signed and can’t be renegotiated. Even if it could, renegotiation would be a waste of resources, they add.


Foreign Trade Minister Marco Vinicio Ruiz said approving CAFTA would rid investors in the textile industry of uncertainty created by Costa Rica’s indecision on the pact. He partly blames textile industry’s poor performance on the country’s indecision on CAFTA (TT, Jan. 12).Without CAFTA, business leaders say, the already ailing textile industry will lose 15,000 jobs immediately, since import duties are one of the industry’s biggest costs.

Critics say CAFTA implementation in other countries hasn’t lived up to its prior billing that it  could make inroads into China’s dominant position in the textile-export industry.

With the exception of Nicaragua – which benefits from cheap labor and bilateral breaks on rules-of-origin – the rest of the signatory countries’ stagnating textile export industries pale in comparison to China’s textile export growth (TT,May 12, 2006).


Water is at once the country’s most precious and least protected commodity, say environmentalists, who fear Costa Rica’s bountiful supply of water will suddenly become the target of transnational companies looking to exploit (and export) the resource.

The existing water law dates back to 1942 – and CAFTA opponents argue it does nothing to restrain the commercialization of water. As the population of the United States continues to expand, many believe that country will begin to look elsewhere – including Costa Rica – to quench its thirst.

CAFTA proponents say such commodities belong to all Costa Ricans, and the agreement does nothing to change that. Instead of confusing the debate about the agreement, they argue, they should call for the country to update its archaic laws (TT, Oct. 14, 2005).


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