Clock still ticking on CAFTA

Last year, after much domestic political activity, the U.S. signed the Central American Free Trade Agreement (CAFTA-DR), and in the opening days of 2006 seems ready to implement its provisions. After Mexico, the CAFTA region — comprising Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua — is the second largest market for U.S. exports, with the region as a whole buying more than $16 billion in U.S.-made goods.

However, there are still a number of speed bumps facing the new treaty, as well as one big rock in the road as this article was being prepared. Costa Rica had not yet ratified the treaty, waiting perhaps for the results of its Presidential election on February 5.

In the view of Hern·n Pacheco, president of the Costa Rican-American Chamber of Commerce (www.amcham.cr), if the front-runner in the polls, Oscar Arias, wins the election, CAFTA will be ratified. If the other major candidate, OttÛn SolÌs, wins, it is likely that CAFTA will not be ratified. Although both candidates support free trade, SolÌs is against certain provisions of the CAFTA treaty as it presently stands.

Pacheco, who is also a partner in the Pacheco Coto Law Firm, notes that of all U.S. investment in the region, some 48% presently comes to Costa Rica. Under existing programs, about 80% of all Costa Rican exports arrive in the U.S. with preferential tariff conditions. That would increase approximately 10% under CAFTA. It is the second largest Latin American exporter to the U.S., after Chile. The treaty would also aid in consolidation of the Central American Common Market.

"In the 1980s," explains Pacheco, "Costa Rica decided to focus economic development in trade and investments. A number of legislative and regulatory measures were enacted to help attract foreign investment. We moved from being a country where our exports were basically bananas and coffee to one where last year we exported close to $7 billion dollars of goods."

For the country, economic conditions began to improve in 1997, when Intel Corp. located a microprocessor plant there. Factors that influenced Intel's decision to offshore manufacturing to Costa Rica included tax incentives within the country's Free Trade Zone (FTZ), a population that boasts a 98% literacy rate, a stable political environment and low levels of corruption.

With Intel serving as an example, other multinationals have established manufacturing and other facilities in Costa Rica, such as Proctor & Gamble Co., Baxter and Boston Scientific are all working within the country's FTZ.

The expectation is that Arias will win the election and Costa Rica will ratify CAFTA. The next stepping-stone is for all countries to complete their internal requirements under the agreement and then to implement its provisions. Stephen Norton, speaking for the U.S. Trade Representative, notes that El Salvador is close to full compliance. But for that country and the rest, the U.S. recognizes that the January 1 deadline was just a target date.

"All countries recognized, however, that this was an ambitious goal, and that all countries might not have completed their implementation process by that time," says Norton. "Other U.S. free trade agreements have had a longer preparation period, so the need for additional time is not unusual. The U.S. will implement CAFTA on a rolling basis as countries make sufficient progress to complete their commitments under the agreement."

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