The Central America – US- DR Free Trade Agreement

1. The Central America – US- DR Free Trade Agreement Impact and relevance on Central American development and the CA-US relationship

2. Contents • Role of trade in development • Instruments available to trade for a small, developing country • What is an FTA? What is in CAFTA? • Pros and cons…outlook • Looking further

3. Why is trade important • For a small developing country, trade is an essential part of the strategy • Comparative advantage • Economies of scale • FDI attraction • Growth engines • Technology, learning • Diversification

4. Costa Rica • 4 million people, $4.750 per capita income ($9.200 PPP) • Old democracy without army • Role of education, health, labor rights, environment • We export half our value added • Electronics, textiles, medical equipment, fruits, tubers, processed foods, many services

5. The last twenty years • Relative to our history and to others, in the last 20 years Costa Rica has achieved: • High levels and growth rates in exports • High FDI attraction • Diversification and sophistication of exports • Higher foreign purchasing power

6. Export growth • Notice: growth, sophistication and diversification

7. Employment and growth • Real growth in the last two decades has come mostly from export growth • Domestic market growing at 1.5%; exports growing at 9% • 50.000 jobs needed every year just to keep unemployment constant • And nearly 300.000 jobs in firms that export directly to the US at least 10% of their output • Several very sensitive industries

8. Foreign Direct Investment and Exports: Twin Endeavors Fuente: Banco Central de Costa Rica

9. Some samples of FDI in Costa Rica • 1997: Intel • 1998: Abbott Laboratories, Alcoa • 1999: Aetec International, Inamed, Procter & Gamble, Western Union, Baxter Labs • 2000: Narda Microwave, WestStar Medical • 2001: Laser Modules, Merrimac Industries, Arthrocare, Align Technologies, MBT • 2002: Maersk Inc., Alienware Corp., Copamex, Seton • 2003: Boston Scientific; Microtech; Hewlett-Packard, IBM International • 2004: General Electric, Hospira, Western Union

10. Risk pooling • Export diversification means the country is less sensitive to losses in terms of exchange Café y banano eran en 1982 el 53% de la exportación; ahora el 12%. La factura petrolera absorbía el 21% de las exportaciones en 1982. Hoy, aún con los precios actuales, el 5.5%.

11. A more “tailor-made” economy • Less concentrated geographically, by activity, by scholarity level • More sophisticated production • Taking better advantage of our historical strengths, and a better reflection of our choices • Not contradictory, although still falling short, of our distributional challenge

14. Trade and investment tools

15. Trade instruments • Export promotion and incentives • Investment attraction and incentives • Competitiveness & SD measures • WTO and multilateral agreements • FTAA / Central American Integration • Free Trade Agreements and BITs • Implementation and followup actions • Competition/consumer/industrial issues

16. What is a Free Trade Agreement • An agreement by the parties to reciprocally reduce and eventually eliminate barriers to the trade of goods, services and investment between them • Terms to harmonize and coordinate rules and procedures affecting trade • Procedures to legally and orderly resolve disputes between the parties, and to manage the relationship

17. Trade barriers • Tariffs • Quotas and bans • Costums procedures • SPS • Inappropriate use of anti-dumping and trade defense mechanisms • Technical obstacles to trade • Barriers to government purchases • Restrictions in the provision of services (investment, competition and cross-border)

18. Relevant rules • Competition and consumer protection • Inocuity, labelling, SPS, quality, etc. • Unfair trade practices and subsidies • IPR • Labor and environment • Investment protection • Service and financial supervision

19. Relationship management • Committees, practices, communication • Transparency • Judicial, balanced mechanism for the resolution of the trade disputes between the parties

20. The US-CR trade relationship

21. ANTECEDENTES:Costa Rica- Intercambio comercial con Estados Unidos 1990-2003

22. ANTECEDENTES:Costa Rica- Principales productos exportados a Estados Unidos, 2001

23. ANTECEDENTES:Costa Rica- Principales productos exportados a Estados Unidos, 2001

24. Formally • Both are members of WTO • Costa Rica is party of several preferential access arrangements from the US • Caribean Basin Initiative • CBTPA (til 2007) • SGP

25. Why go further? • Preference are a concession and do not create rights • Transitory and fragile. Consequence of a different reality • Insufficient • Not all products • Non-tariff barriers • No rules • No dispute resolution • In disadvantage against competitors

26. Why does the US care? • Trade and investment • $20 billion each way • Political • Distance, drugs, terrorism, immigration, political stability • Labor and environmental rights • Strategic • FTAA

27. Most sensitive topics: CR-US • Agriculture, on both sides; subsidies • Textiles • Telecoms, insurance and other state monopolies in CR • IPR • Labor • Environment

28. Main results

29. Initial arrangements General definitions Market access Rules of origin Costums management SPS Technical barriers to trade Commercial policy Government procurement Investment Trade in services Financial services Telecoms Electronic trade Intelectual property Labor Environment Transparency Management Dispute resolution Exceptions Final arrangements Index

30. Trade in goods • Immediate, permanent access to Central American products in the US market • Gradual phase-out for the sensitive products in the Central American market • NTB elimination, including improvements in costums and in sanitary barriers • Access for Free Trade Zone products • Elimination of export subsidies within CAFTA • Comprehensive agreement in textiles

31. Investment, services and rules • CAFTA will act as the Bilateral Investment Treaty that the US does not have with most these nations • Liberalization in services • Notably, in Costa Rican insurance and telecommunications • Strenghtening of IPR law enforcement • Multilaterality and other CACM issues • Government procurement, labor, environment and dispute resolution mechanisms

32. Peculiarities • Phaseouts are gradual and careful, asymmetric in favor of the small • Innovative in many areas • Standard in labor and environment is compliance of own law • Regional rather than bilateral structure

33. The key decisions involved • True integration and market access • Breakdown of some public monopolies • Better rules and practices in some areas • Compliance and time stability of some elements of the status quo • A formal relationship based on the law • Architecture of Central American Integration • Consolidation of a development strategy

34. Where are we • CAFTA has entered into effect in El Salvador-US this week (door closes 2/29/08) • Nicaragua, Guatemala, Honduras and DR have congressional approval and are involved in the implementation process • Costa Rica will face a very significant delay, if it enters the agreement at all • Not passed in Congress; nature of the debate