1. (SBU) SUMMARY: Embassy San Jose warmly welcomes AUSTR Everett
Eissenstat. His visit to Costa Rica is timely, and will help us keep
the pressure on the GOCR to complete CAFTA implementation. The Arias
administration remains deeply committed to CAFTA, and is making
progress, but slowly. Although all the major parties in the
legislature have agreed to move ahead on CAFTA, the government's pro-
CAFTA coalition remains fragile. The legislature (Asamblea) has also
been distracted by other issues including domestic security, an
investigation into allegations of FARC ties to Costa Rica, and the May
1 leadership elections. Six of 12 CAFTA-related bills have been
completed; six others remain in work, including those covering
controversial IPR and insurance issues, and one more remains to be
introduced. Whereas the entry-in-force (EIF) extension granted on
February 27, Commerce U/S Padilla's February 28-29 visit (Ref A) and
WHA DAS Madison's March 31-April 3 visit (Ref B) described the red
lines on the schedule for implementation (no later than October 1),
this visit can set the red lines on substance. See snapshot of pending
issues, para 11. END SUMMARY.

===================
THE CAFTA SCORECARD
===================



2. (U) As of April 21, the Asamblea has completed half the CAFTA-
legislation (six of 12). Of these, three are law (covering foreign-
owned firms, penal code reforms and UPOV compliance), and three are
pending signature and publication as law (the Budapest Treaty, the UPOV
convention and a bill governing certain patent and trademark reforms).
A seventh and eighth bill (ratifying the International Trademark Treaty
and opening the telecom sector) are pending the Asemblea's second and
final vote. A ninth bill (on IPR reforms) was bounced by the Supreme
Court for constitutional questions (see para 6 below). Three bills (on
modernizing telecommunications, opening the insurance market, and
making additional IPR changes) are in varying stages of action. Of
note and new to this process, there will be a 13th bill, according to
the Ministry of Foreign Trade (COMEX), which will ratify various CAFTA
amendments accepted by the other parties. To summarize:

COMPLETED BY ASAMBLEA:
Signed into law: 3
Pending signature: 3

IN WORK BY THE ASAMBLEA:
Returned by Supreme Court: 1 (Asamblea to correct and vote again)
Pending final vote: 2
Under debate: 3

To be introduced: 1
TOTAL 13

====================
THE CAFTA CHALLENGES
====================



3. (SBU) This Asamblea had made more progress on CAFTA legislation in the four months from November-February than its predecessor had in the previous four years, but momentum dissipated after the EIF extension was granted. The leaders of the 38-seat pro-CAFTA coalition well understand the need to keep moving, but have found this challenging.



4. (SBU) Their first challenge: keeping all 38 coalition members (the
G38) together. This is important because a two-thirds majority
(precisely 38) is needed to form a quorum, to set rules and to manage most legislation. From time to time, various members of the coalition have tried to parlay their "38th vote" into support for pet causes.
Christian Unity Party (PUSC) member Bienvenido Venegas, for example, has stubbornly refused to support the CAFTA legislation until his home province (Puntarenas) received more attention and resources from the central government. Despite a parade of senior officials to Puntarenas in late March-early April, including President Arias, Venegas's support has remained elusive. His thinly-veiled true motive: to back ex- President Rafael Calderon (PUSC), a CAFTA opponent who is hoping to overcome corruption charges to run again for the legislature in 2010.



5. (SBU) Their second challenge: the opposition, led by the Citizens
Action Party (PAC), a steadfast opponent of CAFTA even after the
October 7 referendum ratified the agreement. PAC's reluctance to
cooperate blocked quorum on a number of occasions, and stalled the legislation. PAC leaders insisted there was no hurry to pass the
bills, and reveled in the pro-CAFTA coalition's internal wrangles.
However, under relentless pressure from the GOCR and a private sector ad campaign that criticized them for ignoring the will of the people as expressed in the referendum, PAC finally reached an agreement with the pro-CAFTA parties. They would no longer block debate on remaining CAFTA bills as long as the Arias administration would permit debate on PAC-supported legislation creating a social development bank, reforming electoral laws and other initiatives. The GOCR-PAC agreement has helped circumvent problematic legislators like Venegas, but it is only temporary, lasting until the new legislative year begins on May 1.



6. (SBU) Their third challenge: the Supreme Court, specifically the
Constitutional Chamber (Sala IV), which reviews most legislation
between the required first and second votes of the Asamblea. The
opposition has ensured that all CAFTA bills are reviewed by the Sala
IV, delaying the legislative process, but only one bill has been
bounced for corrections to date. By unanimous vote on April 4, the
Sala IV found the penalty provisions of the IPR bill
"disproportionate," and in violation of the principle of "reasonable
penalty." By the same vote, the Sala IV also ruled that the provision
which permitted seizure of items produced in violation of IPR
protections contravened the right to private property. The Asamblea is
to begin action on these corrections as soon as the final text of the
Sala's ruling is available.



7. (SBU) Their fourth challenge: political distractions. A special
committee is to begin taking testimony the week of April 21 on
allegations by the previous Minister of Public Security that the
Colombian FARC had ties to some political figures, including
legislators, in Costa Rica. This stemmed from information discovered after the Colombian March 1 raid which killed FARC leader Raul Reyes in Ecuador. The ex-minister was to testify on March 31, but was removed from office the day before so he could not speak in an official capacity (Ref C). His sudden removal only fueled speculation that he was going to "name names." (COMMENT: We do not believe there is any hard evidence linking Costa Rican political figures actively or recently to the FARC. END COMMENT.)



8. (SBU) In addition, political maneuvering is under way, even among
the pro-CAFTA coalition, for leadership positions during the
legislative year which begins May 1. Complicating the political dog
fighting this time: the president of the Asamblea who takes office on
May 1 will likely become the next VP of Costa Rica, when the incumbent,
Laura Chinchilla (whom Eissenstat will meet), resigns as expected (and as required by law) in early 2009 to campaign for the presidency. Both the special FARC investigation and the electioneering have slowed action on the CAFTA bills.

====================================
THE CAFTA COMMITMENT, WITH A CAVEAT?
====================================



9. (SBU) Despite these challenges, the Arias Administration remains
committed to completing the legislation and implementing CAFTA. Citing
the newly-cooperative attitude of the PAC party, Arias himself told
visiting WHA DAS Kirsten Madison on April 1 that the CAFTA laws should
be completed in the next three months (i.e., by the end of June).
Arias (and by implication, his pushing to complete CAFTA) remains
popular. He received a 50 percent good or very good rating in a UNIMER
poll released March 24 with the lowest negative rating (14 percent)
since taking office. The public and most political parties are tired
of the protracted CAFTA debate and want to close this chapter and move
on to other important issues, such as tougher laws on domestic
security, which tops the polls as the public's chief concern.



10. (SBU) Because of these challenges, GOCR interlocutors including VP
Laura Chinchilla, Minister of the Presidency (and the President's
brother) Rodrigo Arias and COMEX Minister Marco Vinicio Ruiz may press
AUSTR Eissenstat for "political" solutions to the most difficult
pending CAFTA issues on IPR, insurance and biodiversity. We do not
expect them to ask for more time to implement CAFTA; they understand
that the extension to October 1 was a one-time exception. They may ask
for more "understanding" and political room to maneuver to wrap up the
remaining legislation (and regulations). In response, Eissenstat can
affirm the USG's positions on the pending issues, in effect,
establishing red lines on substance while urging continued progress.

=============================================
THE CAFTA CONTENT: PENDING PROBLEMATIC ISSUES
=============================================



11. (SBU) The pending issues include:

- On IPR, the issue is dangerously fluid as the legislators do not
always follow COMEX's counsel; COMEX responds by advocating for
leniency from USTR. Although graduated penalties were included in the
legislation and passed, legislators from all parties agreed with the
Sala IV's "disproportional" ruling, and the generic drug industry
continues to pressure select G38 members to soften the IPR legislation
in their favor;

- On insurance, the GOCR reacted favorably to USTR's new phrasing on
the issue of a government guarantee. Timing is the problem as the
insurance bill matriculated in the Asamblea to a point where it now
cannot be amended. The GOCR needs to develop a legislative tactic for
introducing an insurance amendment;

- On biodiversity, the GOCR wants its existing biodiversity law to
remain intact, claiming "it was progressive in its time," although it
is in conflict with legislation required for CAFTA compliance. The
GOCR desires to paper over the difference by asserting that
international treaties have priority over domestic law without having
to change the law;

- On the patent law, legislators acted independent of COMEX's counsel
and changed wording which now makes the law non-compliant with CAFTA.
Though the intent was not to undermine CAFTA, the results of the change
create a new problem;

- On the regulations, USTR needs to review all of the regulations well
in advance of October 1, and Essenstat will want to reinforce this
message. For telecommunications, the GOCR must develop a solution to
unravel the coordination problems between ICE (the state
telecommunications and energy utility), MINAE (Ministry of the
Environment and Energy), and ARESEP (Regulatory Authority of Public
Services); and

- On the amendments, the Asamblea needs to pass the CAFTA amendments
which are about to be introduced.



12. (SBU) Having come so far on CAFTA, and increasingly focused
on/distracted by other priority issues, it is tempting for Costa Rican
legislators to assume that implementation is inevitable. As the recent
challenges indicate, however, political focus and discipline are still
required to get the job done. This would be another useful message from
Eissenstat. His interlocutors will also be interested in the "view
from Washington" on the Colombian FTA, and the general (anti-trade)
tone in the Congress and in the U.S. presidential campaign.

=====================================
THE CAFTA CONTEXT: WHAT IS AT STAKE?
=====================================



13. (U) Without CAFTA, the textile and the tuna sectors are at risk due
to the short-run possibility of the loss of Caribbean Basin Trade
Promotion Act (CBTPA) trade preferences on October 1 and the long-run
risk that Costa Rica will not have permanent, tariff-free access to the
U.S. market. For Costa Rica, both risks would portend a competitive
disadvantage with its CAFTA neighbors. Business leaders predict 20,000
jobs in the tuna and textile sectors are at stake. Since DAS Madison
visited a leading tuna cannery to underscore this risk during her
visit, we plan to have AUSTR Eissenstat visit an at-risk textile plant.



14. (U) In the intensely competitive textile industry, buyers want
price certainty which Costa Rican companies currently cannot provide.
Indicative of the uncertainty, the industry contracted from $730
million in 2002 to $557 million in 2006. The Costa Rican textile
industry is heavily reliant on the U.S. market and the preferential
treatment it receives under the CBTPA (Ref D). The U.S. accounted for
86 percent of its total textile exports in 2006 and CBTPA lowers the
U.S. tariff from 18 percent to zero for most textile products.
Thus, without an implemented CAFTA, industry uncertainty has
reached critical levels as producers openly talk about moving
production outside of Costa Rica. Eissenstat will also be able
to discuss these issues further with AMCHAM members during his visit.

HENIFIN