Looking back on the previous five years after the passing of the Dominican Republic-Central American Free Trade Agreement (CAFTA-DR), Costa Rica and the United States are enjoying the biggest fruits from the then-controversial free trade agreement, according to a World Bank report presented on Monday.
Costa Rica accounts for 40 percent of CAFTA’s exports to the United States, far outpacing its Central American neighbors. Thanks in part to CAFTA, Costa Rica has significantly diversified its exports, including computer processors and medical supplies, as well as more traditional goods like coffee, bananas and pineapple, valued at just under $4.5 billion in 2012, according to statistics from the Foreign Trade Ministry.
“The growth and development of a country like Costa Rica is inexorably tied to its integration in the global economy. That’s why we should continue working hard to eliminate obstacles both foreign and domestic that restrict our capacity to compete,” Foreign Trade Minister Anabel González said.
During the conference, hosted by the Americas Society/Council of the Americas in Escazú, World Bank’s Director for Central America Felipe Jaramillo said that CAFTA found “fertile ground” in Costa Rica, celebrating the country’s ability to attract foreign direct investment from the U.S., diversify its exports and increase its competitivity.
Jaramillo said that Costa Rica’s policy of “smart globalization,” investing in its human capital, has allowed it to succeed under the once-controversial trade agreement.
Costa Rica ratified CAFTA-DR, a free trade agreement with the United States, El Salvador, Honduras, Guatemala, Nicaragua, and the Dominican Republic, in 2007. A national referendum at the time passed with 51 percent voting “yes” after a protracted national debate. The vote was similarly close in the United States, where the House of Representatives voted 217-215 in favor of the regional free trade agreement.
Just under 75 percent of businesses surveyed said that CAFTA had a positive impact on their operations. Only 26.6 percent surveyed said that the trade agreement had “no effect” on their business.
Possible shocks to state monopolies, and consumer services and prices were at the core of critics’ concerns about CAFTA, but the World Bank director observed that some previous state monopolies have not been as hard-hit as some CAFTA critics feared.
The erstwhile state insurance monopoly, INS, has retained a 95 percent market share in life insurance policies since the market opened to outside competition three years ago. In other insurance markets INS still holds roughly 90 percent of the policyholders, according to the director’s comments.
The same could not be said for the Costa Rican Electricity Institute (ICE), which had a monopoly on the country’s telecommunications sector pre-CAFTA. ICE lost roughly 30 percent of its mobile market share to outside competition and 80 percent of its mobile broadband customers between 2010 and 2012.
Christopher Padilla, who was U.S. Under Secretary of Commerce during the CAFTA negotiations, reflected that there are limits to what a trade agreement can achieve.
“One thing that didn’t happen was the strengthening of democratic institutions,” Padilla said. “CAFTA was a necessary but not sufficient mechanism to strengthen democracy. [Nicaraguan President Daniel] Ortega has not messed with the agreement because he sees the benefits he gets from it, and that might have stopped certain actions like those seen in Venezuela, or Bolivia or Ecuador,” the trade negotiator observed.
Padilla seems to have overlooked a report last week from Nicaragua, which indicated that Ortega’s Sandinista government plans to overhaul no fewer than 39 constitutional articles – roughly one-fifth of Nicaragua’s Magna Carta. Key amendments would give Ortega additional powers to govern by fiat, empower the military’s role in government by allowing active officers to hold civilian posts, eliminate the already disregarded constitutional ban on presidential re-election, and give Sandinista party structures, known as “Family Councils,” a legal mandate to meddle in the private lives of Nicaraguans.
Nevertheless, Jaramillo said that Costa Rica must continue investing in infrastructure and education (a recent budget proposal by Laura Chinchilla’s administration would actually cut education spending), while encouraging innovation and a flexible regulatory framework to continue getting the most out of the trade agreement.
As speakers trumpeted the successes of CAFTA, González looked forward to the next major trade agreement in the wings, the Trans-Pacific Partnership. The TPP is a growing free trade alliance between several countries in the Asian-Pacific region. Costa Rica is one of several countries that have expressed interest in joining the TPP.