COSTA RICA RESPONSE TO USTR REQUEST FOR INFO ON CBI-

UNCLAS SAN JOSE 000921 STATE PASS TO OPIC STATE PASS TO USTR STATE PASS TO EXIMBANK FOR CREQUE STATE PASS TO FEDERAL RESERVE MIAMI BRANCH MANIERO TREASURY FOR OASIA/INC SIPDIS DEPT FOR WHA/CEN, WHA/EPSC:SGARRO, EEB/TTP/BT:RMANOGUE AND DGROUT, EEB/TPP/IPE:JURBAN PLEASE PASS TO USTR FOR DOLIVER, AMALITO AND KSHIGETOMI E.O. 12958: N/A TAGS: ECON ETRD KIPR EINV PREL PGOV CS SUBJECT: COSTA RICA RESPONSE TO USTR REQUEST FOR INFO ON CBI- BENEFICIARY COUNTRIES REF: SECSTATE 75599, SANJOSE 811, SAN JOSE 07 1963 ¶1. The following is Post's response to reftel A. The text replies to specific keyed reftel questions and updates Post's 2007 submission (reftel C) to USTR's request regarding CBI beneficiary countries. Questions can be directed to Economics Specialist, Kevin Ludeke at +506 2519-22261, Fax +506 2220-2470, or LudekeKJ@state.gov. ¶2. Costa Rica -- Population: 4,533,000 -- Per Capita GDP: $6,544 -- Exports to U.S.: $3,926 million -- Imports from U.S.: $5,682 million -- U.S. Trade Balance: +$1,755 million The Department of State's Economic Engagement Statistics are the source for the above date. All data are 2008 annual figures. ¶3. Commitment to the World Trade Organization (WTO) and Completion of CAFTA-DR: Costa Rica participates actively in the WTO and has taken its obligations under the Uruguay Round seriously. In 2000, Costa Rica ceased granting financial investment subsidies and tax holidays to new exporters. A law designed to bring the Free Trade Zone regime into compliance with WTO standards is currently under debate in the National Assembly. Although the WTO deadline for compliance was extended through the year 2014, the export sector pressed for prompt resolution of a new regime. Costa Rica is currently negotiating free trade agreements with China and Singapore and as a block with its Central American neighbors with the European Union. These negotiations and the January 1, 2009 entry-into-force of CAFTA-DR are clear signs of Costa Rica's commitment to free trade principles. ¶4. Protection of Intellectual Property Rights (IPR): Costa Rica has been on the Watch List since 2002 when it was moved from the Priority Watch List. Costa Rica is a party to all major international intellectual property agreements with the exception of the Budapest Agreement. In part due to a Priority Watchlist Country designation in 2001, the GOCR took steps at that time to combat piracy and passed several IPR protection laws including the requirement for the GOCR to not use pirated software. As a necessary condition for CAFTA-DR entry-into-force (EIF),Costa Rica passed a set of new IPR laws, significantly strengthening the IPR legal framework. Other heartening signs include a significant budget increase and corresponding increase in staffing levels at the patent and trademark office during the Arias Administration (2006-2010),continued efforts by the Judicial School to prepare judges and prosecutors in IPR, and sporadic action by uniformed police in confiscating pirated DVD's and CD's. However, the Prosecutor's Office has shown very little political will to pursue IPR violators, in part due to scarce resources and other "higher priorities." Criminal and civil remedies are available but the onus is on the victim of the crime, i.e., the victim not only has to investigate the violation through detective work but also, in most cases, needs to request seizure of the property, pay for all required analysis, and employ legal counsel to bring the case to trial. ¶5. Provision of Internationally Recognized Worker Rights: Costa Rica extends all internationally recognized worker rights to its citizens, though union leaders continue to call for enhanced protections for private sector employees who want to unionize. Costa Rican law guarantees the right of association, the right to organize and bargain collectively, and prohibits forced labor. Costa Rican law sets a minimum age for employment at 15; however, teenagers between 15-18 years of age may work for a maximum of six hours daily and 36 hours weekly with special permission from the National Institute for Children (PANI). The law prohibits night work and overtime for minors. Activities considered to be unhealthy or hazardous typically require a minimum age of 18. In addition, the law entitles working minors to attend educational establishments through school arrangements and timetables adapted to their interests and employment conditions and to participate in apprenticeship training programs. The law provides for a minimum wage set by the National Wage Council, which is updated annually. The constitution sets workday hours, overtime remuneration, days of rest, and annual vacation rights. Costa Rican law also enshrines acceptable occupational safety and health standards. The Labor Ministry, in cooperation with PANI, generally enforces regulations related to children's employment effectively through inspections in the formal sector; the regulations are not enforced effectively in the informal labor sector as a result of inadequate resource allocations by the government. According to the ILO, working minors ages 15 to 18 sometimes receive less than the minimum wage, which was corroborated by the chief of the Labor Ministry's Office for the Eradication of Child Labor. ¶6. Implementation of Commitments to Eliminate the Worse Forms of Child Labor: In 2001, the Costa Rican Legislative Assembly ratified Resolution 182 of the ILO related to eliminating the worst forms of child labor, including the sexual exploitation of children. Child labor is a problem mainly in the informal agricultural, fishing, construction, and service sectors of the economy. Children work in the production of bananas, coffee, and sugarcane. Some indigenous children from Panama migrate seasonally to Costa Rica with their families and work in agriculture. Child labor is used in domestic work and family-run enterprises. Child prostitution and other types of child sexual exploitation remain serious problems. The government has a number of policies and programs that seek to address child labor. Policies include the National Agenda for Children and Adolescents 2000-2010; the Second National Action Plan for the Prevention and Eradication of Child Labor and Special Protection of Adolescent Workers 2005-2010; and the Third National Plan to Eliminate Commercial Sexual Exploitation of Children. The Conditional Cash Transfer program "Avancemos", which pays stipends to the families of children who stay in high school, has become one of the Arias administration's signature programs. The program currently benefits over 130,000 high school students or roughly 100,000 families. Stipends range from USD 26 per month for seventh graders up to USD 87 per month for twelfth graders. The program stipulates only two requirements: the family income is less than a prescribed threshold and the child attends high school. Direct funding for Avancemos in 2008 (before administrative costs) was USD 77 million, or one-fourth of one percent (.25 percent) of gross domestic product. This high level of funding demonstrates the Costa Rican government's commitment to keep children out of the labor market and in the school system. Other projects to address child labor are described in the Department of Labor's report entitled, "Findings on the Worst Forms of Child Labor", available at www.dol.gov/ilab/programs/ocft/PDF/2008OCFTre port.pdf. ¶7. Counter-Narcotics Cooperation: While Costa Rica remains a significant transshipment point for the smuggling of cocaine from South America to the United States and Europe, Costa Rican law enforcement officials fully cooperate with U.S. counter-narcotics efforts. Costa Rica continues to work closely with the United States in implementing the comprehensive Maritime Counter-drug Cooperation Agreement signed with the United States in 2000. Additionally, Costa Rica will receive over $10 million in counter-narcotics assistance from the U.S. via the multi-year Merida Initiative. ¶8. Implementation of the Inter-American Convention Against Corruption (IACAC): Costa Rica ratified the IACAC. Domestic law imposes a requirement that senior government officials file personal financial reports while in office. The Controller General's Office plays an active role both in filing those reports and monitoring potentially corrupt activity. The GOCR is currently prosecuting cases involving two ex-presidents who are charged with having been involved in two different corruption/kickback schemes. One of the trials concluded on October 5 with a conviction and a five year sentence for former President Rafael Angel Calderon Fournier (1990-1994). He accepted bribes to secure a contract for medical equipment between a Finnish firm and the Costa Rican government in ¶2004. The trial against former President Miguel Angel Rodriguez (1998-2002) will start soon. . Costa Rica has a robust financial enforcement system presided by the National Council of Financial System Supervision (CONASSIF) and composed of three Superintendents that report to CONASSIF. CONASSIF operates two boards: a seven member board for banking and stock exchange oversight and an eight member board for pension fund oversight. The Central Bank appoints the board members. Know-your-customer provisions are now implemented by all banks in the country such that no bank account or company owning a bank account can remain anonymous. Additionally, the Costa Rican Drug Institute (a rough equivalent to the U.S. Office of National Drug Control Policy) is charged with anti-money laundering responsibilities and carries out measures that also help in the fight against corruption. In 2008 Transparency International ranked Costa Rica 47 out of 180 countries in its Corruption Perception Index. ¶9. Transparency in Government Procurement: While the Government of Costa Rica generally requires all procurement to be done through open bidding, problems and complaints occur. Costa Rican government procurement practices are complex and cumbersome, resulting from the many layers of government supervision in place to prevent illegal practices. Bid awards are frequently delayed by appeals by the losing parties or the Office of the Controller's efforts to regulate government purchases and procedures. The aforementioned corruption scandals (paragraph 8) both involved state monopolies. In the case concluded in October, the convicted former President was the key political lobbyist for a medical-supplies company that channeled kickbacks to public officials for a social security contract. In the other case, ex-President Rodriguez, still in office at the time, allegedly received kickbacks from a company that had "won" a contract with the state-owned telecommunications company. -------------- Additional Issues -------------- ¶10. Expropriation: The Government of Costa Rica has expropriated large tracts of rural land for national parks, biological reserves, indigenous reservations, and public works projects during the past 30 years. The Costa Rican Constitution stipulates that no land can be expropriated without prior payment and demonstrable proof of public interest, but disputes often arise over title to the property and the amount of compensation. Expropriation processes follow clear legal processes (valuation, notification, appeal, etc.) but often last far longer than the subjects of the expropriation feel to be reasonable. Current and past governments have made some efforts to resolve several pending expropriation cases involving U.S. citizens, but long-standing cases remain and several new cases have come to our attention. There are cases where arbitral awards by the ICSID or by local arbitration in favor of U.S. citizens have been honored. Out of 183 countries surveyed in the World Bank's "Doing Business 2010" index, Costa Rica ranks 132 in "enforcing contracts" and 165 in "protecting investors", which accurately reflects the difficulties American investors experience in Costa Rica. ¶11. Other Free Trade Agreements and Adverse Effects: The GOCR has free trade agreements with the following countries/groups (year in which ratified): Panama (originally in 1973, updated 2008),Mexico (1995),Canada (2001),Chile (2001),the Dominican Republic (2001), CARICOM which comprises Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, Saint Lucia, St. Vincent's and the Grenadines, Suriname, and Trinidad and Tobago (2005). None of these agreements appears to have had any adverse effects on U.S. commerce. The Government of Costa Rica is currently negotiating free trade agreements with China, Singapore, and (together with its Central American neighbors) the European Union. ¶12. Government Broadcasting: There are no government-owned broadcasting entities that broadcast copyrighted materials without the express consent of U.S. copyright-holders. ¶13. Extradition: Costa Rica does have an extradition treaty with the U.S. and GOCR personnel work with Post personnel in arranging extraditions. ¶14. Economic Review: Costa Rica has experienced significant economic growth in recent years as it continues to pursue an economic strategy based on trade liberalization and investment promotion. While this growth trend has reversed with the current global economic crisis, Costa Rica's economy nevertheless appears to be more resistant to the downturn than those of some of its major trade partners. Annual Foreign Direct Investment (FDI),which is both a key indicator of investor confidence and an important driver of export and tourism growth in the country, has grown continuously since 2003 and reached USD 2.016 billion in 2008. The tourism and export sectors have been particularly notable recipients of FDI in recent years. Annual real GDP growth in recent years rose from 4.3 percent in 2004 to a high of 8.8 percent in 2006, down slightly in 2007 (7.8 percent) then down significantly to 2.6 percent in 2008. The Central Bank estimates annual GDP growth for 2009 to be -1.3 percent -- and may dip lower than -2 percent -- while the investment promotion agency CINDE estimates that FDI in 2009 may be down 30 percent. The CAFTA-DR entry-into-force (EIF) January 1, 2009 is one of the positive countercyclical factors working to dampen the effects of the current global recession in Costa Rica. The telecommunications and insurance sectors are both opening up to competition as a consequence of commitments made by Costa Rica in the CAFTA-DR framework and both market openings will likely provoke significant investment and competitive activity. The Arias Administration is also budgeting counter cyclical spending in 2009 and 2010 after having posted a government budget surplus in 2007 and presided over a major reduction in outstanding government debt as a percentage of GDP. ¶15. Equitable and Reasonable Access for U.S. Goods: Through implementation of CAFTA-DR, Costa Rica has assured the U.S. of its commitment to provide equitable and reasonable access for U.S. goods and services to its market. The Arias Administration continues to conduct its commercial policy in a way consistent with its commitments made under CAFTA-DR. ¶16. Export Subsidy, Export Performance or Local Content Requirements: We know of no Costa Rican export subsidies or performance requirements. Costa Rica does currently offer Free Trade Zone incentives (see paragraph 3) and there are de-facto sugar subsidies generated by a protected internal market. In either case, Costa Rica is acting in a manner consistent with its international commitments. ¶17. Contribution to CBI Region: Costa Rica continues to be the leading example of economic and political stability in the Central American region. Both CAFTA-DR and the pending trade agreement between Central America and the European Union (EU) have helped motivate the Central American countries to work together. However, on the latter, progress is still slow due to political, historical, and cultural differences both within the Central American block and with the EU. ¶18. Self-Help Measures for Economic Development: The Administration of President Oscar Arias (2006-2010) has pursued an explicit policy of trade and business-friendly policies (successful passage of CAFTA-DR) coupled with a strong social-welfare orientation. An analysis of the 2007-2009 period reveals a notable increase in spending on infrastructure, education, health, support for workers, and the judiciary as a percentage of the total budget (reftel B). The increases are remarkable when compared to budgets of the previous administration (2003-2006 budgets) and considering that an estimated 90 percent of the budget consists of mandated expenses and debt payments. Much of this spending has been presented conceptually as part of the so-called "complementary agenda" to CAFTA-DR with such initiatives as improvement of customs' clearing systems, roads and other infrastructure, and investment in education and training to ensure the flourishing of small- and medium-size businesses. ¶19. Administrative Cooperation with the U.S.: To our knowledge, the GOCR has consistently communicated and cooperated with the U.S. in addressing any issues that arise under the umbrella of bilateral or multilateral agreements. The Ministry of Foreign Trade (COMEX) is often the lead agency in coordinating any trade and investment related disputes and has shown itself to be a reasonably responsive agency. -------------- SUMMARY -------------- ¶20. Costa Rica continues as a responsible trade and political partner with the U.S. While the country displays a series of shortcomings -- notably in the intellectual property rights (IPR) field and more generally in a lack of procedural efficiency -- it has also made sustained efforts in a number of the areas of concern highlighted in this cable. Worker rights, prevention of child labor, anti-corruption, and anti-narcotics are all areas in which Costa Rica has worked to improve. The recent Entry-Into-Force of CAFTA-DR is a reaffirmation of the country's commitment to free trade principles and continued close relations with its neighbors and trade partners. BRENNAN