COSTA RICA--BEING OUTSIDE CAFTA HAS CONSEQUENCES

UNCLAS SAN JOSE 001792 SIPDIS SIPDIS STATE PASS TO USTR FOR AMALITO E.O. 12958: N/A TAGS: ETRD EINV ECIN PGOV CS SUBJECT: COSTA RICA--BEING OUTSIDE CAFTA HAS CONSEQUENCES ¶1. (U) Summary. The Dominican Republic and Costa Rica are the only signatories where CAFTA-DR is not yet in force. Costa Rica is the only country that has not ratified the agreement. Although the Arias Administration has placed a high priority on both ratification and passage of the necessary implementing legislation to bring the treaty into force, little progress has been made during the first 100 days of his administration. Post has identified serious specific negative consequences for Costa Rica should they remain outside the FTA. End Summary. -------------- Ratification and Implementation Process -------------- ¶2. (U) Although Costa Rica took an active role in negotiating CAFTA-DR, the ratification process has not gone smoothly. Against a backdrop of significant opposition from various sectors, former President Pacheco steadfastly refused to send the treaty to the National Assembly for ratification until October 2005. Such reluctance on the part of the executive branch of government disappeared when President Arias took office on May 8. He consistently said during his campaign, after his election, and after taking office that CAFTA-DR ratification and implementation was a high priority for his Administration. Arias's party has the largest bloc in the unicameral Asamblea and controls 25 of the 57 seats. The International Relations Committee has undertaken an aggressive schedule of hearings to take testimony from the long list of interested civic sectors that demanded to speak on the treaty. From early June until late August the committee plans to meet twice weekly to listen to testimony from 38 different groups representing various sectors and viewpoints. Embassy contacts suggest that the Committee's action, an up or down vote on whether to recommend ratification for a plenary vote, may not take place until December for strategic political reasons. ¶3. (U) Meanwhile the Arias administration continues to move forward with some of the legislation that will be necessary to bring the treaty into force. Although the other CAFTA-DR countries have followed a pattern of first ratifying the treaty and then considering implementing legislation, the GOCR is fully aware that the clock does not give them the luxury of doing them sequentially, so the process is unfolding in parallel. Under an unusual legal framework, the Executive branch controls the Legislative agenda during the month of August and from December 1 through March 31 of each year. During these intervals, the Administration can force the legislative branch to consider CAFTA-related legislation. To date the Administration has requested action on CAFTA-related legislation in the areas of intellectual property rights and opening of the state insurance monopoly. Although drafts of the highly controversial telecommunications reform have been quietly circulated, Embassy contacts indicate that this legislation most likely will not/not be forwarded to the Assembly during the current August session. Telecom legislation is arguably the legislation that will be most difficult to pass in Costa Rica where the telecom parastatal ICE is a much beloved public institution. ICE's vocal labor union threatens to take the matter to the streets. The Administration has sent conflicting signals on when it will introduce telecom reform legislation. During September, October and November the leadership in the Asamblea will determine the pace of CAFTA-related legislation. -------------- Negative Consequences of Not Bringing CAFTA-DR Into Force -------------- ¶4. (U) Tariffs: Under CBI currently 74% of Costa Rica's products enter the U.S. duty free; under CAFTA 99.8% would be tariff-free. Not entering CAFTA immediately denies a significant advantage to 25.8% of Costa Rica's products that are still subject to duties. For example, a local textile plant recently laid off 200 of its 1500 workers due to declining sales that the company attributes to the 18.5% duty it must now pay that its CAFTA competitors do not face. A plastics company has stated that if CAFTA is not passed it will move 20% of its production to Nicaragua at a cost of 200 Costa Rican jobs. A large melon exporter has recently purchased 4,000 hectares of land in Nicaragua stating it would not be able to continue to do business in Costa Rica if CAFTA is not approved. Some 50% of the company's export sales go to the U.S. where the products are subject to a 29.9% tariff, which is not required for melons grown in Nicaragua. An eventual shift in production to Nicaragua would cause a loss of 5,000 jobs in Costa Rica. ¶5. (U) Foreign Direct Investment: Costa Rica has traditionally received about 48% of U.S. FDI in Central America. During the last year the percentage dropped to 42%. The difference is due to increased investment in the countries that have already entered CAFTA. For example, El Salvador is experiencing increased FDI and growth in textiles. Most worrisome for Costa Rican decision makers is the increased competition from Salvadorian call centers, a traditional Costa Rican strength. Comment: While Costa Rica has experienced overall growth in FDI recently, much of that can be attributed to the purchase by foreign banks of three large local private banks and very significant residential real estate investment by foreigners. End Comment. ¶6. (U) Manufacturing: A large manufacturer of kitchens and refrigerators linked to 160 local suppliers had announced plans to make an $US80 million investment in an attempt to double sales. The investment would generate 1,000 new jobs. But the company president subsequently announced that without the business security that CAFTA-DR would bring, his company will not invest further in Costa Rica. Costa Rica's sewing thread industry has suffered an 80% reduction in exports because of the difficulty in complying with CAFTA's rules of origin. One plant is considering an offer to move operations to El Salvador where the GOES has reportedly offered to pay 50% of the costs of both moving the plant and training new employees. A textile industry spokesperson has said that a large firm that produces boxer shorts may soon move from Costa Rica to either El Salvador or Honduras where production would not be subject to duties. The same source said a Swiss fabric company is contemplating an investment of $US100 million and has visited both Costa Rica and Honduras. The source believes this investment will not come to Costa Rica unless the country brings CAFTA-DR into force. ¶7. (U) Comment: Costa Rica's roads are notorious for their potholes, but the country will face more than a few economic and political bumps, as well, in the coming months. With a deadline to bring CAFTA-DR into force before March 2008, the clock is rapidly ticking while the Costa Rican political process moves at a glacial pace. It remains to be seen whether President Arias can generate enough additional public support for CAFTA-DR to overcome the current legislative inertia and the type of procedural feints that could allow a minority to prevent passage of CAFTA's implementing legislation. Meanwhile, the Costa Rican economy is beginning to fray around the edges. End Comment. Langdale