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