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### Viewing cable 06SANJOSE1792, COSTA RICA--BEING OUTSIDE CAFTA HAS CONSEQUENCES

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06SANJOSE1792 | 2006-08-15 22:10 | 2011-03-03 16:04 | UNCLASSIFIED | Embassy San Jose

Appears in these articles:
http://www.nacion.com/2011-03-03/Investigacion/NotasDestacadas/Investigacion2697430.aspx
http://www.nacion.com/2011-03-03/Investigacion/NotaPrincipal/Investigacion2697496.aspx
http://www.nacion.com/2011-03-03/Investigacion/NotasSecundarias/Investigacion2697489.aspx
http://www.nacion.com/2011-03-03/Investigacion/NotasSecundarias/Investigacion2697532.aspx
http://www.nacion.com/2011-03-03/Investigacion/NotasSecundarias/Investigacion2697535.aspx
http://www.nacion.com/2011-03-03/Investigacion/NotasSecundarias/Investigacion2701964.aspx
http://www.nacion.com/2011-03-03/Investigacion/Relacionados/Investigacion2701965.aspx

`

    VZCZCXYZ0001
    RR RUEHWEB

    DE RUEHSJ #1792/01 2272222
    ZNR UUUUU ZZH
    R 152222Z AUG 06
    FM AMEMBASSY SAN JOSE
    TO RUEHC/SECSTATE WASHDC 5827
    INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE

` `

    UNCLAS SAN JOSE 001792

    SIPDIS

    SIPDIS

    STATE PASS TO USTR FOR AMALITO

    E.O. 12958: N/A
    TAGS: ETRDEINVECINPGOVCS
    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

`