A Long Year With CAFTA
Just over 12 months have elapsed since Costa Rica became an active participant in the Central American Free Trade Agreement with the United States (CAFTA), the largest and most controversial free trade agreement approved in the country’s history.
To join CAFTA on Jan.1, 2009, Costa Rica had to usher in a host of government, environmental and economic reforms – across a handful of sectors – that were expected to significantly improve the quality of life for the country and the Central American region.
Pivotal changes were expected to accompany CAFTA, including the lifting of tariffs for goods and services traded among the seven countries in the agreement – El Salvador, Honduras, Nicaragua, Guatemala, the Dominican Republic, Costa Rica and the U.S. The trade accord also included the opening of two long-held state monopolies – telecommunications and insurance – to spur competition and generate more employment.
But, two weeks after the agreement’s one-year anniversary, economists, trade boards and national media have begun to gauge the progress of CAFTA. If the results were measured by the numbers alone, it would appear the trade agreement has failed to live up to its promised benefits, thus far. Tico exports to the U.S. fell 15 percent, imports from the U.S fell 30 percent, unemployment rose to 7.8 percent from 4.9 percent in 2008 and foreign direct investment fell an estimated 30 percent.
But according to the Foreign Trade Ministry (COMEX), Foreign Trade Promotion Office (PROCOMER), the U.S. Embassy in Costa Rica and a host of people with vested interest in the agreement, these alarming figures are a representation of the worldwide economic crisis, and they cannot be attributed to CAFTA.
“It is fair to say that, after the first year of CAFTA, individual, tangible results – meaning results seen by individual companies – are a little difficult to discern because of the global economic crisis that we are experiencing,” said Mark Kissel, the chief of economic affairs at the U.S. Embassy in Costa Rica.
This sentiment is shared by most economists, as well as officials in the food, trade and agricultural sectors. Though export and import numbers fell considerably in Costa Rica, they also plummeted worldwide, as the economic crisis rattled the financial foundations of nearly every country. Therefore, as far as international trade is concerned, 2009 is perceived as an aberration year and does little to demonstrate the potential impact of CAFTA in Costa Rica, trade experts told The Tico Times.
“The main issue here is the recession in the U.S. and, therefore, the decline in consumption and imports from the U.S. from all over the world, whether the country has a free trade agreement or not,” said David E. Lewis, vice president of Manchester Trade Ltd., which represents U.S. government and business interests in free trade negotiations in the Caribbean andLatin America. “Last year was marred, not by how CAFTA did in and of itself, but really the fact that because of the fall in the U.S. market, no exporter in the CAFTA Dominican Republic region did well at all.”
Though concrete results from CAFTA are limited and premature, some effects can be seen, most notably in the telecommunications market. When CAFTA was passed, it carried with it legislation that dismantled the telecom monopoly of the Costa Rican Electricity Institute (ICE) and set up a governing body called the Superintendence of Telecommunications (SUTEL). In the first year of telecom competition, SUTEL authorized a handful of companies to compete in the telecom market and received more than 500 requests for entry, most of which still are under review for authorization.
ICE remains a government-run company, but it must make room for industry newcomers, from home and abroad, particularly in offering Internet and mobile service.
But the biggest piece to the telecom reform under CAFTA is yet to be realized.
Companies haven’t begun to enter the cellular phone market, which remained closed as ICE and SUTEL slogged through regulation debates for much of 2009. With aspiring participants in the cell phone market banging on the door, SUTEL expects to officially welcome new market competition in the first half of this year.
“The fact that there will be the choice for your wireless provider; that is important,” Kissler said. “The real significance of that is all the investment that goes behind the phone call: cell towers will be built, IT architecture will be built, people will be employed, professional software and IT (personnel) will be employed to run the new networks. The investment that goes behind that is significant. It is well more than $50 million. Easily.”
Aside from the fracturing of ICE’s monopoly, economists also applauded CAFTA for installing sound and navigable legislation. Proponents also lauded an enhanced regional relationship with the U.S., which experts say will attract further foreign direct investment in the years to come.
Despite the mammoth drop in national exports overall, some sectors – such as pineapple, melon and medical devices – continued to surge, and sugar exports saw 77 percent profit margins, attributed to the lifting of CAFTA tariffs.
Are You Insured?
Like the telecom market, CAFTA also opened the national insurance industry to competition, and, similarly, the move has been a slow one.
Prior to CAFTA, the state-run National Insurance Institute (INS) held a monopoly on the insurance market since 1924. In light of new legislation, an insurance regulator, SUGESE, was established to create regulations for incoming insurance companies looking to compete in the market.
Through 2009, no companies had entered the market, though five applications had been submitted to SUGESE for future entrance.
Subdued Debate Persists
The decision to join CAFTA in 2007 divided the country, and President Oscar Arias called for a national referendum on Oct. 7, 2007, to determine whether or not Costa Rica should become the 7th and final nation to join the accord. In the end, CAFTA was passed by a 51.6 percent to 48.4 percent vote, meaning that, of those who voted, almost half of them disagreed with the alleged benefits that CAFTA would bring to the country.
Some of those sentiments remain.
According to Román Macaya, vice president of Agroquimica Industrial RIMAC and a fervent lobbyist against CAFTA, the benefits expected from the opening of the telecom market will be missed by poor capitalization of profit opportunities.
“There is one aspect about the opening up of ICE that bothers me a lot. The competitors who come in will not have to pay a high cost to enter the market,” Macaya said. “CAFTA basically mandates that all the cell phone infrastructure, including cell towers, are to be leased to the new operators at cost, which means there will be no profit in the exchange. Creating hundreds of these towers is incredibly expensive, not only in time, but in getting approval to get them constructed in different neighborhoods around the country…This has all been at ICE’s expense, and now the newcomers from Mexico or Spain or wherever get to use this infrastructure without paying a dime.”
Guido Vargas, secretary general of the Union of Small and Medium Costa Rican Farmers (UPANACIONAL), contends that the tariffs lifted by CAFTA are beginning to effect small farmers, and will continue to do so in the coming years.
“When we are talking about CAFTA, we are talking about com-pe-ti-tion,” Vargas said, emphasizing his point by annunciating each syllable. “Costa Rica is a small country with many small farmers. With CAFTA we’ll have let an agricultural giant (the U.S.) into the market. This makes small farmers, who don’t make very much money, have to defend or lower their prices to compete. CAFTA has put in place a market that could dismantle small farmers in the country.”
Both Macaya and Vargas mentioned poorly implemented legislation and contended that reforms should be made but, as CAFTA enters its second year and a new administration is waiting on the doorstep, there appears to be little push for such reforms in the near future.
Only Time Will Tell
According to Lewis at Manchester Trade, of the countries in the region that joined CAFTA in 2006 and 2007, projections at the time indicated that all would experience a minimum of 5 percent annual growth in exports to the U.S. Lewis cited El Salvador, which saw exports to the U.S. boom in the first two years of its CAFTA relationship.
But the timing was off for Costa Rica’s CAFTA rollout, and, as year one of the accord coincided with the deepest economic crisis in decades, very few effects of the agreement are yet to be realized.
As Lewis put it, “This was sort of like the worst year ever to have your free trade agreement come into force.”
And, because of that, the impact of CAFTA is unseen after one year. Perhaps in another 12 months, the biggest trade agreement in the country’s history will leave a bigger mark.
The CAFTA Decision
The decision to join CAFTA was historic in Costa Rica .
Prior to ratification, the anticipated economic and social reforms of the accord – as well as the opening of the government controlled telecommunications market – were met with staunch advocacy and opposition throughout the country. On the pro-CAFTA side, it was perceived that a free trade agreement among Central American countries, Dominican Republic and the United States would bolster Costa Rican exports, promote foreign direct investment and create new employment opportunities.
On the anti-CAFTA platform, many insisted that approval of the agreement would allow foreign competition to march into Costa Rica – tariff-free – and extract market share from local producers.
The opposing sides of the debate were so polarized that, while the other six confirmed nations in the agreement waited as Ticos bickered, the Costa Rican government decided to take the CAFTA decision to a vote in October of 2007. On Sunday, Oct. 7, 2007, 60 percent of eligible Tico voters turned out to vote on the free trade agreement. In the end, CAFTA was approved by a narrow margin – 51.6 percent “Yes” to 48.4 percent “No” – and, after some molding of the legislative guidelines in 2008, Costa Rica was officially the last nation to join CAFTA, which includes El Salvador, Honduras, Nicaragua, Guatemala, the Dominican Republic and the U.S.
“Today the borders that divided us disappear,” President Oscar Arias said the day CAFTA won approval by the people. “We are no longer ‘yes’ and ‘no.’
Today we are just one Costa Rica , one people who want, need and deserve progress.”
That “progress” will be monitored in the years to come.
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