COSTA RICA AND CHINA EXPLORE AN EVOLVING RELATIONSHIP

UNCLAS SAN JOSE 000985 SENSITIVE SIPDIS DEPT FOR WHA/CEN E.O. 12958: N/A TAGS: PGOV KDEM CH CS PREL PINR SUBJECT: COSTA RICA AND CHINA EXPLORE AN EVOLVING RELATIONSHIP REF: 07SANJOSE1173; 08SANJOSE133; 08 SAN JOSE 969; 09 SAN JOSE 389 ¶1. (SBU) Summary: Costa Rica and China continue to strengthen their marriage of convenience, increasing ties that are proving beneficial for both countries. Of late, this has focused on the negotiations surrounding a free trade agreement between the two countries, which both governments hope to conclude in 2010. China also continues to reward Costa Rica for establishing official relations with the PRC in 2007, the only country in Central America to have done so. However, various sectors of Costa Rican society, including the business community and immigration officials, are wary of tighter ties with the most populous country on earth. Even if the pace of Chinese aid and investment slows after this grand start, the GOCR sees its relationship with this ascending power as an investment that will grow in value over the medium to long term. End Summary. -------------- FOCUSED ON THE FTA -------------- ¶2. (SBU) Both sides are currently focused on concluding the negotiations over a free trade agreement (FTA). In early November the two parties concluded the fifth round of negotiations over the FTA, with the next and "final" round scheduled for February 2010. However, there are still a number of issues that need to be worked out before an agreement is reached, including agreement on agricultural products, such as sugar and coffee. ¶3. (SBU) The Arias administration is pushing hard to conclude the FTA though, which it sees as an important part of the Arias legacy. Not content just to pass the controversial Central American Free Trade Agreement (CAFTA-DR),Arias seems intent on 'doubling down' on globalization by completing the only FTA with China in Central America. However, negotiators for both China and Costa Rica privately deem it unlikely that the FTA can be passed through Costa Rica's Congress before Arias leaves office in May 2010. Most hope that the agreement can at least be ready to present to Congress before the change in administrations. ¶4. (SBU) The GOCR believes the conclusion of an FTA will boost trade between the two countries, which at USD 1.5 billion in 2008 has already risen almost 2,000 percent over the past ten years. (Note: In 2008 Costa Rica had a negative trade balance of 208 million with China. The value of Chinese trade is now 15 percent of the value of U.S. - Costa Rican trade. End Note.) Costa Rica hopes the FTA will allow them to import Chinese raw materials and semi-finished goods before exporting finished goods to other CAFTA-DR countries and Europe. However, some experts question how much more trade can grow in the short term due to the size of the Costa Rican market and additional constraints to trade (lack of trade networks, language, market knowledge, visa restrictions, etc.) The PRC's commercial/economic officer in San Jose recently told us that he thought trade had possibly reached a plateau over the past few years, and in fact projected a decrease for the 2009 numbers. A prominent academic we spoke with agreed, saying that without much experience operating in Asia or language/cultural knowledge, Costa Ricans would find it extremely difficult to access China's market in the short term. -------------- THE GOODS... -------------- ¶5. (SBU) One of the most visible outcomes of Costa Rica's recognition of the PRC in 2007 is the ongoing construction of a 35,000-seat stadium to serve as the home of Costa Rica's national soccer team. The PRC is paying for and building the USD 83 million stadium. In addition, the PRC brought 800 Chinese nationals to Costa Rica to complete the project on the western edge of downtown San Jose. Another prominent "reward" for recognition was the PRC donation of 200 police patrol cars in early 2009 (Taiwan had previously donated equipment, including motorcycles and cars, to the police). While the cars can often be seen roaming the streets with prominently displayed PRC flags painted on their sides, the Mazda-clones are of questionable quality. A contact at the PRC embassy recently told us that five of the vehicles are already out of commission, due, in part, to poor maintenance practices (Note: Proper maintenance practices have often been a challenge for Costa Rican law enforcement agencies. End Note.) He also commented, "we'll see how many they're still using in a year." ¶6. (SBU) Additional PRC initiatives were linked to the November of 2008 visit of PRC President Hu Jintao (reftel C),including the donation of USD 10 million to the GOCR for small business development, the extension of 40 scholarships annually to Costa Rican students to study in China (a program taken over from Taiwan) and the planned modernization of a large oil refinery on Costa Rica's Caribbean coast. This last project, estimated to cost up to USD 1 billion (of which approximately half would be financed by China, according to a PRC diplomat) is expected to begin in 2010 or 2011 and will triple the refinery's capacity to 60,000 barrels a day. ¶7. (SBU) For its part, China has also seen some limited returns on its "investment" in Costa Rica. This has primarily centered on the awarding of a USD 235 million GOCR contract to Huawei technologies to modernize the state-run telecom company. PRC representatives had also initially expressed an interest in oil exploration in Costa Rica. However, nothing yet has come out of PRC oil interest and the Arias administration has ruled out any additional exploration indefinitely. -------------- ...AND THE BAD -------------- ¶8. (SBU) Closer ties with China have also highlighted areas of concern for various sectors in Costa Rica. Many within the local business community continue to be fearful of cheap, imported goods from the PRC. One businessman we spoke with also questioned the GOCR's capacity to properly conduct quality control checks on imported goods, citing his experience with the poor quality of imported bridge materials. Though the Costa Rican Chamber of Industries (CRCI) supported both CAFTA-DR and negotiations over an FTA with the European Union, they have gone to considerable (and sometimes absurd) lengths to oppose the China FTA. This has included insisting that goods such as helicopters, circus equipment, and vehicles be excluded from any FTA, in spite of the fact that none of these items are currently produced in Costa Rica. CRCI capped off their opposition by recently announcing they will oppose the China FTA outright, along with any other new FTAs in the near future. ¶9. (SBU) There are also some security issues that bear watching. GOCR immigration officials, along with their counterparts in the PRC, broke up a child-trafficking ring in late 2008 (reftel D) which authorities said was run by the Chinese Snakehead mafia, with the goal of bringing up to 300 minors to Costa Rica to work in indentured servitude. Immigration officials remain concerned about the possibility of additional Chinese smuggling or trafficking, to the extent that they hosted a regional conference on the subject in May 2009. In spite of Chinese complaints that the policy stifles tourism and business travel, Costa Rica has kept the PRC in its highest category of visa restriction and requires MFA-approval for all visa applications. ¶10. (SBU) China has also often sought to conduct their affairs with Costa Rica behind a veil of secrecy, and both diplomats and the press have complained about the lack of transparency in PRC-GOCR programs. A scandal emerged in 2008 over a USD 300 million bond deal (China purchased the bonds from Costa Rica at only 2 percent interest) which both countries tried to keep secret. Then, in September of 2009, the PRC offered Costa Rica a USD 650,000 "donation" to attend a trade fair in Shanghai in 2010, with the stipulation that the transaction remain confidential. After Costa Rican press uncovered the story the GOCR announced that it would not accept any agreement with China that had a confidentiality clause. -------------- PRC COMPLAINTS -------------- ¶11. (SBU) Chinese embassy officials with whom we recently spoke (who all arrived to Costa Rica after the establishment of relations two-and-a-half years ago),noted some differences from the rosy picture of the bilateral relationship painted in the press. They described Chinese tourism as almost non-existent, despite the PRC's naming of Costa Rica as a 'preferred' tourist destination in the Americas, and believed trade had already reached its peak-both facts they blamed on the GOCR's visa policy. They also believed the PRC and the roughly 10,000 Chinese citizens living in Costa Rica were often unfairly criticized in the Costa Rican press (a complaint we've heard before). -------------- COMMENT: WHAT'S IN IT FOR ME? -------------- ¶12. (SBU) China has handsomely rewarded Costa Rica for its 2007 recognition of the PRC. However, that assistance may have reached its peak, since China now has delivered almost everything it promised as part of that exchange. While there had initially been talk that the PRC would use Costa Rica as a springboard towards extending into the rest of Central America, a Chinese embassy official recently told us he expected the thawing of relations with Taiwan to put a hold on expansion in the short-term. However, with the small size of the local market and lack of available natural resources, Costa Rica's main utility to China still remains as an example to Central America of the PRC's benevolence. This, along with possible support in international fora and occasionally favorable consideration of Chinese companies for GOCR contracts, are the true "take-homes" the PRC can expect out of their still-evolving relationship. Costa Rica has long maintained that its recognition of China would not influence its focus on human rights, but that position has not yet been put to the test. ¶13. (SBU) The GOCR sees China as a large source of donor aid and a sizeable potential market for Costa Rican goods. The amount and visibility of Chinese assistance in recent years dwarfs that of any other country. The focus on concluding the FTA, in spite of the objections of local industry, shows the GOCR's determination to broaden Costa Rican trade away from a dependence on the U.S. market. On the political front, building the relationship with China has been a significant component of the Arias administration's efforts to diversify its bilateral relationships: increasing ties with Asian countries in recognition of that region's growing influence on the world stage. Even if the pace of Chinese aid and investment slows after this grand start, the GOCR sees its relationship with this ascending power as an investment that will grow in value over the medium to long term. BRENNAN