San José, Costa Rica, since 1956

Bernie Sanders' CAFTA reversal pledge worries Costa Rica businesses

Criticizing U.S. trade deals has become potent political ammunition for presidential candidates this election year. As candidates threaten to re-negotiate trade deals to get America “winning” again, the business sector here in Costa Rica is uneasy at the prospect of an uncertain relationship with its largest trading partner.

Vermont Senator Bernie Sanders has called for “reversing” a trade agreement with Central America that hasn’t made headlines for nearly 10 years, but that many government and business leaders here see as critical to Costa Rica’s economy: the Dominican Republic-Central American Free Trade Agreement, DR-CAFTA or just CAFTA.

The agreement created a free trade bloc that encompasses the United States, El Salvador, Guatemala, Honduras, Nicaragua, Costa Rica, and the Dominican Republic, and has been in effect here since 2009.

Sanders’ presidential campaign website lists “reversing trade policies like NAFTA, CAFTA, and [Permanent Normal Trade Relations] with China that have driven down wages and caused the loss of millions of jobs” as one of the candidate’s proposals for addressing wealth inequality in the U.S.

“If corporate America wants us to buy their products they need to manufacture those products in this country, not in China or other low-wage countries,” Sanders’ website says.

The socialist senator is hardly the only candidate talking about back-pedalling U.S. foreign trade. Republican frontrunner Donald Trump has tapped into a deep-seated anxiety over perceptions of unfair trade practices by China and blamed the North American Free Trade Agreement for the flight of U.S. industry to Mexico.

Meanwhile, Former Secretary of State Hillary Clinton has distanced herself from the proposed Trans Pacific Partnership.

Some 17,200 people in Costa Rica work in the manufacturing of medical and precision devices, according to the Foreign Trade Ministry.

Ronald Reyes/The Tico Times

Eric Farnsworth, vice president of the Americas Society/Council of the Americas, told The Tico Times that dismantling CAFTA would have significant costs for both the U.S. and countries like Costa Rica, but that the costs would be disproportionately high for Central American economies.

Farnsworth said that the Caribbean Basin Initiative — CAFTA’s predecessor — offered unilateral tariff-free access to the U.S. market for many Central American products but did not provide long-term certainty for investors. The CBI had to be regularly renewed by the U.S. Congress and one year’s benefits were not a sure thing in the future.

CAFTA, he said, created a stable environment where businesses could think longer term with their investments in the isthmus and Dominican Republic.

“Unwinding CAFTA would be a disaster,” Farnsworth said. “It would make U.S. investors and others that rely on the certainty that CAFTA provides reevaluate.”

Strong passions over trade are nothing new, Farnsworth said, but he has been surprised that both parties have prominent candidates speaking out against it. He doubted that a Bernie Sanders presidency would expend the political capital to renegotiate or exit CAFTA or other trade agreements, but “the fact that he brings up that somehow the United States can’t compete with the micro-economies of Central America shows just how ridiculous the trade discussion in the U.S. has become.”

The tough talk on trade might get crowds excited on the campaign trail in the U.S. but doesn’t sit well with the business community in Costa Rica.

“We hope that there’s no change in the letter of the agreement, it would harm legal certainty and there’s nothing that reacts faster to changes in legal certainty than businesses and investment,” said Costa Rican Chamber of Industry Executive Director Francisco Gamboa. “We want business, trade and investment between our countries to continue to grow.”

Gamboa said that Costa Rica has been among the biggest beneficiaries of CAFTA, especially in courting foreign direct investment. Costa Rica accounts for more than 40 percent of the region’s exports to the U.S. since the agreement went into effect. CAFTA was credited in part for the increase in foreign investment here in the business services and medical device sectors, according to a 2014 World Bank report (PDF).

Since the exit of Intel’s microchip manufacturing operations in Costa Rica, these have become Costa Rica’s most valuable export sectors.

Foreign Minister Alexander Mora said his office is following the political rhetoric in the United States with some trepidation, even though unwinding CAFTA is still hypothetical. Renegotiating CAFTA “would send an enormous signal of instability to investment and production,” Mora said.

The trade minister said he didn’t think it would be in the interest of the U.S. or any other member country to leave the trade agreement, considering its economic impact.

Costa Rica’s economy is tightly interwoven with the U.S., from the agricultural sector to hi-tech manufacturing, services and tourism. Mora said that, for example, Costa Rica exports $7.2 worth of agricultural products for every $1 worth of agricultural imports.

More than 70 percent of the businesses in Costa Rica’s free trade zones arrived since the implementation of CAFTA, he said, and they employ one million people here.

“Politicians come and change their minds from one day to the next,” Mora said. “That’s exactly why there are agreements like this so countries can guarantee a stable development model and their conditions for investment and production.”

Ottón Solís, left, and Bernie Sanders during a visit to Costa Rica.

(Via Instagram/Ottón Solís presidential campaign)

One local politician who would be happy to see Costa Rica dial back CAFTA is Citizen Action Party (PAC) founder and lawmaker Ottón Solís. Solís was a prominent critic of CAFTA and enlisted the support of then-Rep. Bernie Sanders to help convince Costa Ricans to vote “no” in the 2007 national referendum on the trade agreement.

Though Solís said he was resigned to some of CAFTA’s biggest changes to the Costa Rican economy, including the break-ups of the telecommunications and insurance public monopolies, he would welcome the chance to renegotiate other parts of CAFTA, especially agricultural exports.

“Get rid of the [U.S.] subsidies on agricultural products and we could carry on with CAFTA,” Solís said.

The PAC lawmaker pointed to free tarde agreements as one of the causes for illegal immigration to the U.S., another hot campaign topic.

“One of the major reasons for immigration is free trade with [the U.S.]. You subsidize agriculture and more migrants are going to leave the countryside in Costa Rica and Central America and you’re going to have an issue there,” Solís said, “Mexico’s the example.”

The benefits of free trade tend to be broad, while the costs are narrow and concentrated. Eric Farnsworth of the Americas Society/Council of the Americas said that CAFTA has sent some U.S. jobs south to the isthmus, but he doubted that the trade deal was a threat to U.S. workers.

Trade is an easy target for voter ire, he said, because workers know a certain company moved operations abroad. But trade can become a stand-in for bigger, more amorphous changes in the economy that affect employment trends, like the transition away from manufacturing toward a knowledge or service-based economy.

Farnsworth said that politicians in the U.S. have taken for granted how voters feel about these changes, perhaps to their own detriment this election year.

“It’a political mistake to overlook or minimize that concern,” he said, “this hits people where they live and their livelihoods.”

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If I were Puerto Rico and especially a South American business engaged in trade with the U.S. benefiting from CAFTA.. and if I was confident that our business/trade practice was morally & ethically sound then I wouldn’t worry about Sanders rhetoric against Foreign Trade deals.

As someone who has followed Sanders’ campaign extremely closely I feel like I’ve been able to develop a very good feel for where he stands on issues and it’s enormously helpful that he is soo genuinely transparent about his positions and pragmatism; so with that in mind I feel confident in saying that any roll backs or reviews of Trade agreements will keep the best elements which positively strengthen ties and endear the US with it’s trade partners while roll back dangerous concessions which have been used to exploit American workers and cannibalize domestic industry

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Ken Morris

Wow, the arguments for CAFTA’s benefits to Costa Rica are amazing.

Argument #1 in this article is that CAFTA has encouraged foreign investment, mainly in business services and medical devices.

Well OK, these create jobs for Ticos, but only at the cost of sending the profits those jobs generate back to the investor countries. This dries up investment capital in Costa Rica, at least compared to what locally-owned business profits would provide, and therefore makes Costa Rica increasingly dependent upon more foreign investments. There is a vicious cycle of accepting capital outflows in exchange for jobs, not a treadmill Costa Rica wants to walk any longer than it has to. Oh, and the capital outflows are greater than the companies report. The last estimate was that Costa Rica loses about $1 billion a year off the books as a result of the multinationals cooking their books via “transfer pricing,” or basically billing themselves whatever they want to bill themselves for intrafirm “sales,” which most of these exports are.

Meanwhile, note that these multinationals are setting up shops in free trade zones, which an analysis by La Nación showed shifts the tax burdens to those outside the zones. Thus, Tico taxpayers (including Tico businesses) are subsidizing these investing foreign businesses, which go figure, tend to leave the country the day after their tax subsidies end.

The only longterm economic benefit these foreign companies could provide to Costa Rica is if they spawned spinoff Tico businesses. However, if they operate like Rawlings does in Cartago, there are no such spinoff businesses. Rawlings imports all its materials; the only thing Ticos supply is the labor (which they compete with Haiti to offer at a low wage). I also don’t see Tico-owned medical device companies springing up and can’t fathom why a multinational providing business services would subcontract with Tico firms for its needed business services.

Argument #2 for CAFTA’s benefits to Costa Rica, and the main one usually offered (though strangely only mentioned here in a post) is that it has brought down the prices of telecommunications services as well as some insurance products for local consumers.

Good for the consumers, but there is the usual wrinkle that the profits these companies earn leave the country. They don’t stay in the country to create a pool of capital available to local businesses, but reduce the availability of capital locally. Oh, and they also drove most of the Tico-owned internet cafes out of business.

These kinds of deals would only be good for Costa Rica in the long run if as a condition of investing in and profiting from the country, these foreign businesses were required to leave their profits here, where they could be invested in locally-owned business. But no such provision exists in CAFTA.

Indeed, as the article suggests, the heart of all free trade is that capital and goods are free to cross national borders, only people are not. Labor and would-be local entrepreneurs are stuck where they are, and are unfree, while capital goes wherever it wants to–which when the capital takes the form of profits, is usually back to the headquarter country.

Argument #3 for CAFTA, I’m amused to read, is that it helps Costa Rica’s agricultural exports. Wait a second, what exactly are these exports? Most of them are bananas, pineapples, and coffee–all low-wage enterprises that amount to essentially exporting goods with zero value-added components. Meanwhile, Iowa’s beef producers are hustling to export their hormone-enriched and otherwise value-added beef to Costa Rica while Starbucks is expanding in Costa Rica with a business model that amounts to selling Costa Rica’s coffee back to Ticos at a profit.

Everyone knows that when a country exports unfinished goods and imports value-added goods, the country loses, yet this is exactly what’s happening with agriculture.

And some hambones declare that this and therefore CAFTA are good for Costa Rica. The only thing I can figure is that they either failed Economics 101 or are the executives in the banana firms, since sure, the executives profit from running banana republics.

If you look at David Ricardo’s theory of comparative advantage, which is where all this free trade thinking originates, it assumes that the trading countries are relatively equal and trading similarly value-added goods. It also doesn’t consider the possibility of investors from one country investing in other countries in order to operate a business that trades with itself, or of one country offering businesses from another country tax subsidies.

As Ricardo outlined the theory, sure, free trade is good, and Costa Rica shouldn’t close its doors to it. However, only a market fundamentalism can maintain that it is good for Costa Rica in its present form. Ottón Solís has been right from the get go. In principle, CAFTA or something like it isn’t bad for Costa Rica, but in its present form it is. It needs to be renegotiated.

But I doubt Costa Rica will have that opportunity. Bernie isn’t going to win the presidency of the US, and while Trump probably won’t win it either, once Trump becomes aware of CAFTA (he’s got a steep learning curve) he’ll probably like it. He after all wants the US to prevail in trade deals, and that’s exactly what CAFTA is accomplishing.

The puzzle is Trump’s apparent misunderstanding of NAFTA, which was in large part a skewed trade deal that once again bailed out the US auto industry. But maybe Trump doesn’t care that much about the auto industry, since he personally travels by private helicopter and jet, and anyway NAFTA is another subject.

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When CAFTA was proposed and finally ratified I thought Costa Rica will gain much more than any United States company.

The only good effect I can see here (Costa Rica) is the breakup of the telephone and insurance monopoly. However, these sectors in reality still maintain a background monopoly, but service has greatly improved. For example, no longer do Costa Ricans wait in line for a cell phone number for days when ICE announces there will be 100 numbers available.

Outside of that, being a consumer in Costa Rica, I have not noticed any improvement on the purchase of products made in the United States. I understand CAFTA applies to like products, however with Costa Rica’s limited ability to manufacture, you would think there would be some sensibility applied.

For example, a few years back, the US Embassy sponsored a US Wine symposium. However, I have not noticed any decrease in price after CAFTA.

Unless I am mistaken, the Honorable Ottón Solís is not at risk without CAFTA. That is, he is a politician, not a producer. I also venture to say that he has taken advantage of the telecom and insurance breakup.

CAFTA benefits Costa Rica much more than the US. If the agreement cannot be renegotiated to provide for free trade for all products produced in each respective country, then it should be cancelled.

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