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

The Central America – US- DR Free Trade Agreement

Impact and relevance on Central American development and the CA-US relationship

ContentsRole 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

Why is trade important

For a small developing country, trade is an essential part of the strategy

Comparative advantageEconomies of scaleFDI attractionGrowth enginesTechnology, learningDiversification

Costa Rica

4 million people, $4.750 per capita income ($9.200 PPP)Old democracy without armyRole of education, health, labor rights, environmentWe export half our value added

Electronics, textiles, medical equipment, fruits, tubers, processed foods, many services

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 exportsHigh FDI attractionDiversification and sophistication of exportsHigher foreign purchasing power

Export growth

Notice: growth, sophistication and diversification

Costa Rican exports

0

2.000

4.000

6.000

8.000

10.000

12.000

Tradicionales

Otros agrícolas

Industriales

Regímenes

Servicios

Bienes

TOTAL

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 outputSeveral very sensitive industries

-

2.000,0

4.000,0

6.000,0

8.000,0

1985

1987

1989

1991

1993

1995

1997

1999

2001

Expo

rtaci

ones

0

200

400

600

800

IED

Export IED

Fuente: Banco Central de Costa Rica

Foreign Direct Investment and Exports: Twin Endeavors

Some samples of FDI in Costa Rica

1997: Intel 1998: Abbott Laboratories, Alcoa1999: Aetec International, Inamed, Procter & Gamble, Western Union, Baxter Labs2000: Narda Microwave, WestStar Medical2001: Laser Modules, Merrimac Industries, Arthrocare, Align Technologies, MBT2002: Maersk Inc., Alienware Corp., Copamex, Seton2003: Boston Scientific; Microtech; Hewlett-Packard, IBM International2004: General Electric, Hospira, Western Union

Risk poolingExport diversification means the country is less sensitive to losses in terms of exchange

Pérdida términos de intercambio

0

50

100

150

200

250

300

350

400

450

500

1998 1999 2000 2001 2002 2003

Petróleo

Café, banano

Café y banano eranen 1982 el 53% de laexportación; ahora el 12%.La factura petroleraabsorbía el 21% delas exportacionesen 1982. Hoy, aúncon los precios actuales, el 5.5%.

A more “tailor-made” economy

Less concentrated geographically, by activity, by scholarity levelMore sophisticated productionTaking better advantage of our historical strengths, and a better reflection of our choices

Not contradictory, although still falling short, of our distributional challenge

Trade and investment tools

Trade instrumentsExport promotion and incentivesInvestment attraction and incentivesCompetitiveness & SD measuresWTO and multilateral agreementsFTAA / Central American IntegrationFree Trade Agreements and BITsImplementation and followup actionsCompetition/consumer/industrial issues

What is a Free Trade Agreement

1. An agreement by the parties to reciprocally reduce and eventually eliminate barriers to the trade of goods, services and investment between them

2. Terms to harmonize and coordinate rules and procedures affecting trade

3. Procedures to legally and orderly resolve disputes between the parties, and to manage the relationship

Trade barriersTariffsQuotas and bansCostums proceduresSPSInappropriate use of anti-dumping and trade defense mechanismsTechnical obstacles to tradeBarriers to government purchasesRestrictions in the provision of services (investment, competition and cross-border)

Relevant rules

Competition and consumer protectionInocuity, labelling, SPS, quality, etc.Unfair trade practices and subsidiesIPRLabor and environmentInvestment protectionService and financial supervision

Relationship management

Committees, practices, communicationTransparency

Judicial, balanced mechanism for the resolution of the trade disputes between the parties

The US-CR trade relationship

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

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

Los demás45.4%

Bananos12.5%

Semiconductores de óxido10.2%

Instrumentos médicos

8.6%Melones

2.3%Café2.8%

Art. calcetería, de algodón2.9%

Partes de computadoras

3.4%

Pantalones de algodón, de hombres

4.0%Bragas de algodón

3.0%

Piñas frescas5.1%

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

Los demás49.4%

Plásticos1.1%

Trigo1.1%

Arroz1.2%

Soya1.4% Maíz

1.6%

Jeringas2.0%

Papel2.5%

Textiles9.6%

Aceites2.5%

Electrónica27.7%

Formally

Both are members of WTOCosta Rica is party of several preferential access arrangements from the US

Caribean Basin InitiativeCBTPA (til 2007)SGP

Why go further?

Preference are a concession and do not create rightsTransitory and fragile. Consequence of a different realityInsufficient

Not all productsNon-tariff barriersNo rulesNo dispute resolution

In disadvantage against competitors

Why does the US care?

Trade and investment$20 billion each way

PoliticalDistance, drugs, terrorism, immigration, political stabilityLabor and environmental rights

StrategicFTAA

Most sensitive topics: CR-US

Agriculture, on both sides; subsidiesTextilesTelecoms, insurance and other state monopolies in CRIPRLaborEnvironment

Main results

Index1. Initial arrangements2. General definitions3. Market access4. Rules of origin5. Costums management6. SPS7. Technical barriers to trade8. Commercial policy9. Government procurement10.Investment11.Trade in services

12.Financial services13.Telecoms14.Electronic trade15.Intelectual property16.Labor17.Environment18.Transparency19.Management20.Dispute resolution21.Exceptions22.Final arrangements

Trade in goodsImmediate, permanent access to Central American products in the US marketGradual phase-out for the sensitive products in the Central American marketNTB elimination, including improvements in costums and in sanitary barriersAccess for Free Trade Zone productsElimination of export subsidies within CAFTAComprehensive agreement in textiles

Investment, services and rulesCAFTA will act as the Bilateral Investment Treaty that the US does not have with most these nationsLiberalization in services

Notably, in Costa Rican insurance and telecommunications

Strenghtening of IPR law enforcementMultilaterality and other CACM issuesGovernment procurement, labor, environment and dispute resolution mechanisms

Peculiarities

Phaseouts are gradual and careful, asymmetric in favor of the smallInnovative in many areasStandard in labor and environment is compliance of own lawRegional rather than bilateral structure

The key decisions involved

True integration and market accessBreakdown of some public monopoliesBetter rules and practices in some areasCompliance and time stability of some elements of the status quoA formal relationship based on the lawArchitecture of Central American IntegrationConsolidation of a development strategy

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 processCosta Rica will face a very significant delay, if it enters the agreement at all • Not passed in Congress; nature of the

debate