Costa Rica’s legislators finally approved the country’s adherence to the Dominican Republic-Central America Free-Trade Agreement on November 11th, making it the last of the six regional signatories to the accord with the US to ratify it. The president, Oscar Arias, says he will push to make sure it is fully enacted by January 1st.
The trade deal, known as DR-CAFTA, was signed in 2004, and the other signatories ratified and implemented it over the course of the subsequent few years. In each case, this required passage of a series of domestic laws to adhere to the conditions of the trade pact. Passage of these laws was subject to repeated and often lengthy delays in Costa Rica, however, leading to several extensions of the deadline for implementation.
Numerous hurdles
Previous hurdles to DR-CAFTA ratification included stiff congressional opposition to its passage from the start, and in particular to provisions that opened up the state-run insurance and telecommunications industries to competition. This forced the president to call a national referendum on the accord in October 2007. Around 52% of voters endorsed the trade pact against 48% who opposed it. While the results were close, they were sufficient to make the referendum binding and to hand a political victory to Mr Arias.
Joining the club
With its January 1st implementation, Costa Rica will join the other signatories—Dominican Republic, Guatemala, Honduras, El Salvador and Nicaragua—in benefiting from enhanced market access to the US and to each others’ markets. The government also believes that DR-CAFTA will attract investment, boost economic growth, reduce unemployment and benefit the poor.
Unlike previous trade perks offered the Central American countries under the Caribbean Basin Initiative, which expired this year, DR-CAFTA offers the security of a permanent treaty. Not only will it expand Costa Rica’s access to the US market, it will also safeguard that access under international law. Further, the accord includes enhanced protection for foreign investors and recognises patents for US-made medicines. It is therefore apt to attract new long-term foreign investors looking at Costa Rica as a base for exports to the US.
Even without the treaty, Costa Rica has been more successful than many of its neighbours in diversifying its economy and attracting specialised foreign direct investment (FDI) in areas such as call centres and high-tech manufacturing. DR-CAFTA will now open up previously closed sectors, like telecommunications, insurance and other services, bringing in more FDI.
At the same time, however, new competition could well hurt the state-run phone and insurance companies as well as vulnerable producers such as small businesses and farmers. Many such producers, hit with US goods that will now enter Costa Rica tariff free for the first time, will either have to modernise and adapt, or risk having to shut their doors completely.
Beyond DR-CAFTA
Meanwhile, Costa Rica sees trade as its most important motor of economic growth and is seeking other free-trade deals. It intends to pursue deeper regional trade integration and to secure trade agreements with the EU (together with the other countries in Central America), China and Panama.
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