San José, Costa Rica, since 1956

Costa Rica to Benefit From European Pact

By inking her name alongside the signatures of five other Central American presidents, President Laura Chinchilla prepared the way for thousands of shipments of Costa Rican bananas, sugar, rice and tuna to make their way into European markets.

That small action, the result of hundreds of hours of high-pressure meetings, consultations and debates, has the potential to generate millions of dollars for the country through exports and private investment.

In her second week on the job, Chinchilla flew to Madrid with the aim of consummating the agreement, and she accomplished her goal.

Before packing her bags to return home, she triumphantly told the local media via videoconference, “One more time, Costa Rica has won.”

For Costa Rica, the association agreement with Europe, which awaits legislative approval before going into effect, is far from symbolic.

As Europe’s biggest trading partner in the Central American isthmus, Costa Rica is in a favored position to take advantage of the agreement. In 2009, Europe spent ¢2.8 billion ($3.6 billion) on Costa Rican products, over 55 percent more than on goods from the other five nations – Panama, El Salvador, Honduras, Guatemala and Nicaragua – combined.

The trade agreement gives the six-nation Central American bloc a 10-year head start in many areas. It lifts tariffs on 91 percent of products coming from Central America immediately, whereas only half of the products sent from Europe will be tariff-free. A decade into the newly cemented relationship, the trade balance is expected to even out.

“For a small country like Costa Rica, this agreement is a key element for growth,” said Carolyn Robert, a trade specialist at the Inter-American Development Bank. “It puts Costa Rica in a privileged position in terms of access to European markets.”

But Costa Rica will be able to leverage more than just its relationship with Europe in the years to come. With a polished trade relationship with the United States and an agreement pending with China, the tiny country of 4.5 million people stands at a crossroads between three major world markets.

“Because trade barriers have been eliminated or reduced, Costa Rica becomes more attractive to private investors,” said Robert. “There’s no magical recipe for success, but if Costa Rica puts other factors into place, it will be in an advantageous position.”

The agreement will also help Costa Rica escape any vulnerabilities that may have arisen from the 17-month-old Central American Free Trade Agreement with the United States (CAFTA), said political analyst Luis Guillermo Solís.

“Had we not been able to sign this agreement, we would have remained very much a captive of CAFTA,” he said. “We needed to keep opening. We needed to diversify. Otherwise, we would have been too dependent (on the U.S.)”


Building on a 26-year foundation


Costa Rica’s trade relationship with Europe stretches much further back than the initiation of formal trade talks in June 2007.

In 1984, Costa Rica signed the San José Dialogue with Europe at a ministerial meeting and subsequently saw an increase in trade and in development aid, to the point where Europe outpaced the United States in its assistance to the country.

But political unrest in the region and improved relations between Europe and other nations saw Costa Rica drop in priority among Europe’s trading partners.

In a 2002-2006 regional strategy document and memorandum of understanding, Europe expressed interest in reviving its relationship with Central America. It proposed helping the isthmus become integrated as a bloc as a precursor to a possible trade agreement.

“The Europeans have always wanted to find (and promote) a second regional integration  (process),” said Solís, “and Central America was seen, and it continues to be seen, as the regional integration mechanism most similar (to the EU).”

As a precondition to an eventual association agreement, Europe required Central America to reach certain regional integration benchmarks, including the development of common policies, the implementation of a customs union, and the creation of a shared effort to reduce natural disasters.

While Costa Rica voiced its support for greater integration at forums and foreign trade meetings, in practice, the country was resistant. Concern about the potential impact of free-flowing immigration and powerful regional organizations on the local economy and institutions caused Ticos to drag their feet.

“On the political front, Central American countries have a long way to go to achieve integration,” said Robert. “In terms of economics, I think things are going faster.”

Despite hesitation in several countries and resistance to a European Union-like model, negotiators pushed ahead with the association agreement.

By November 2009, participating countries were at the point of closure, with only the longstanding banana wars and the recent Honduras crisis standing as obstacles.

In March of this year, the two sides aimed to close talks by the May 18 EU – Latin American summit. Despite sessions running late into the night and a near-stalemate over the issue of powdered milk, they managed to close the deal at 11 a.m. that day.


The Risks at Home


The rushed ending left some economists concerned that Central America made too many concessions, thus exposing local producers to lopsided competition.

The EU – Central America Association Agreement is another example of the lack of international trade consensus within the Doha Development Round,” said Oscar Ugalde, economics professor at the National University (UNA) and the Latin American University of Science and Technology (ULACIT). “The Doha Development Round started in 2001 and was intended to enhance equitable participation of poorer countries in world trade.

“However, the negotiation has been constantly bogged down by disagreements between farmers in developed countries and bulk agricultural exporters over (safeguards) to protect farmers from surges in imports.” Robert agreed that there would be increased competition in Central American markets.

“While local producers do gain access to foreign markets, the relationship is reciprocal,” she said. “It means that for some producers in the Costa Rican market, there will be competition, which isn’t bad in itself, it just requires an adjustment.”

Costa Rica will have to adjust in other ways to take full advantage of the existing and pending trade agreements, said Solís. The workforce needs to be trained, more people need to be taught English and Mandarin, and producers need to be prepared for competition.

“The trade agreements have certainly enhanced the country’s potential to jump ahead,” he said. “But they are only the blueprints – or the platform – on which Costa Rica will have to elaborate,” Solís said.

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