Development, trade and trade negotiations

Some questions and a few answers based on the case of Costa Rica

A changing world

GlobalizationGlobalization: a dramatic fall in the cost of communications and of the long-distance transportation of the average good

Hence, there is more international trade, there is some international convergence in some non-economic aspects, and organizations (especially firms) are changing to be able to operate across borders

IntegrationIntegration: after decades of policy that tried to minimize the economic interaction across countries, most nations are now pursuing to promote itRegionalizationRegionalization: in many parts of the world, the economic boundaries between neighbors are blurring, and there is co-government for many economic issues““Formalization”Formalization”: the terms of the economic links across nations are increasingly moving to the realm of government-negotiated, parliament-approved, legally binding, enforceable, comprehensive, agreements (regional, bi- and multi-lateral)

A world in changeMany of these changes are unconscious, the consequence of technology rather than decisionAre these tendencies good tendencies?

In particular, should we expect developing countries that shy away from globalization do better than those that embrace it and fit it into their national strategiesCan they be separated from other controversial fenomena?

That is perhaps the most salient internal debate in Latin America today

Globalization: four questions and an important current affair

1. Do we prefer a global world or an isolated world?2. Should we react with integration or isolation as a

national strategy?3. Should we pursue integration by unilateral action

or by negotiated, binding agreements?4. Bilateral vs multilateral “negotiated” integration

Our profession is bad in making formal arguments about some of the latent issues in these matters, which does not make those issues less importantMay not be the same for a small country than a

Costa RicaMuch of what I am going to say is thought-through from the optic of my own country

4 million people, 20.000 sqm, in Central America$5.800 per capita GDP, PPP $11,434Growing at about 5% per year since mid 1980s

• 7.5% in 2003-08Several peculiar development choicesIncome distribution as a high priority with deteriorating resultsWe export half our value added

• Electronics, textiles, medical equipment, fruits, tubers, processed foods, many services

Chart 1-1: PPP per capita GDP growth 1983-2006

0% 1% 2% 3% 4% 5% 6% 7% 8%

Chile

Costa Rica

Uruguay

Panama

Colombia

El Salvador

Mexico

Brazil

Ecuador

Argentina

Peru

Honduras

Bolivia

Guatemala

Venezuela

Paraguay

Nicaragua

Tasas de pobreza desde 1980

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Pobreza

Intensidad

Extrema

Chart 1-15 Gini Coefficients

0.34

0.36

0.38

0.40

0.42

0.44

0.46

0.48

0.50

0.52

1976

1977

1978

1979

1980

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1983

1984

*

1985

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1991

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Asal/ISA Ocup/ILA Fam/IFA

Chart 1-14Income Gaps

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80

Richest 10% to Poorest 10% Richest 20% to poorest 20%

Trade or isolation

Can a developing country like Costa Rica achieve economic development more effectively by pushing its own market away from the world market, or by merging them?

Why is trade important

For a small developing country, trade is an essential part of the strategy

Comparative advantageEconomies of scaleFDI attractionGrowth enginesTechnology, learningDiversification and risk-pooling

Resource reallocationAgricultural area

0

30

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1980 1985 1990 1995 2000 2005

Grains

Traditional exports

New exports

Other

Economic historyCosta Rica pursued during the 1950s-70s the typical economic policy of Latin America at the time

Isolation from the worldHeavy state intervention and ownershipMacroeconomic expansionismUncontrolled disequilibria

This is often linked to the very significant crisis in the early 1980s

Financial: debt, currency, inflationStructural: it was obvious that it was not working

Recent economic historyAfter the crisis, significant policy shift

Stabler macroeconomics: no financial crises, mid-inflation, currency control, solvent government financesDeregulationOpen economy with aggresive export promotion and FDI attraction

Reform is largely unfinished and has become hard to implement politically

Further fiscal resources and infraestructureRole of government, deregulation, competition policyIdeological doubts and the local political environment

The last twenty years

Relative to our history and to others, in the last 20 years Costa Rica has achieved:

High levels and growth rates in exportsHigh FDI attractionDiversification and sophistication of exportsHigher foreign purchasing power

0

2.000

4.000

6.000

8.000

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12.000

Services

FTZ manuf

Local manuf

Other ag

Traditional

Chart 3-1Exports of goods and services

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1991 1993 1995 1997 1999 2001 2003 2005

Chart 3-2a:Foreign Direct Investment

1.000

2.000

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7.000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Chart 3-2b: Stock of FDI

Some FDI examplesMedical equipment: ArthroCare, Coloplast, Baxter, PPCIndustries, Smith Sterling, Precision Concepts Costa Rica, Sábila Industrial, DeRoyal, Horizons International Corp, The MedTech Group, CYTYC, INAMED, Boston Scientific, Weststar,Specialty Coating Systems, ATE Inc., Point.Software: Cypress Creek, Intel LAES,Avionyx, Fiserv,Via Information Tools,Round BoxMedia, Slim SoftCall and contact centers: SYKES, Supra Telecom, Van Ru, Amadeus, Alienware, Language Line, Omnex, UPS Supply Chain, Western Union, Qualfon, PeopleSupport, Fujitsu.Business related services: Procter & Gamble GBS, Chiquita Brands GTC, Baxter Americas, Dole Shared Service, British American Tobacco SSC, Intel SS, APL, Maersk Americas, Seton Centra, Hewlett Packard, IBM, LL Bean, Dakota Imaging, Trax Technologies, Equifax, Access Personnel, BPO International

Some FDI examplesTelecoms: Sawtek, Smiths Inteconnect, L3 Comunicaciones, Multimix Microtechnology, Panduit, SuttelAssemblies: Phelps Dodge, Schneider, Sylvania, Bticino, Eaton.Components: Bourns/Trimpot, ITT Industries, Pharos, Merlin VMS, Marysol Technologies, Controles de Corriente, Magnéticos Toroid, Hitrónicos, Wai Semicon, CML, Micro Technologies.Semiconductors: INTELManufacture: Aetec, Camtronics, Irazú Electronics, Tico ElectronicsFinal goods: Conair/BabyLiis, Vitec/CPP, Costa Vista Trade, Panasonic, Saco Internacional.Engineering and repair: Teradyne, KES Systemes.Metalmechanics: Oberg Industries, Olympic Machining, Prolex, Ryan Group, Daniels Manufacturera.

A more “tailor-made” economy

Less concentrated geographically, by activity, by scholarity levelMore sophisticated productionTaking better advantage of our historical strengths, and a better reflection of our choices

Not contradictory, although still falling short, of our distributional challenge

Some intangiblesDiversification of exports during growth

Why? When closed, latent comparative advantages on some commodities are too strong to prevent trade; they only concentrate it

Sophistication of exports during growthWhy? Human capital investment makes us better at producing complex products for which our own demand is small. Also, FDI crosses over the capital barriers to entry

Better match-up between the composition of the economy and the underlying national objectives; reflects in productivity

High tech & services / educationServices & light manufacturing / genderHigh value agriculture & tourism / environment“Good” MNCs / health, social standards, and much moreAg reform and productivity

A more efficient allocation of resources in countries with such peculiar endowments

Value added in exported goods1991 and 2006

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1,000

2,000

3,000

4,000

5,000

6,000

COSTARICA

GUATEMALA HONDURAS ELSALVADOR

NICARAGUA

$1072

$290

$374

$323

$209

Per-capita 2006

Make-up of current regional exported value-added

757

1194

1391

720

233

913

426

1,404

1232.2

1241.6

552.3

322.1

385

336

269

801

0

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1,000

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CR ES GU NI

Maquila

Non-trad

CA

Tradit

Unilateral and “negotiated” instruments

Trade instrumentsMany of the instruments to promote a better insertion in the world market are unilateral actions

Unilateral tariff phaseout and costums modernizationExport promotion and incentivesInvestment attraction and incentivesCompetitiveness & SD measuresCompetition/consumer/industrial/environment issuesMacro management including exchange rate

We chose to complement these steps with negotiated agreements

WTO and multilateral agreementsHemispheric, sub-regional and bilateral FTAs and BITs

What is a Trade Agreement

1. An agreement by the parties to reciprocally reduce and eventually eliminate barriers to the trade of goods, services and investment between them

2. Terms to harmonize and coordinate rules and procedures affecting trade

3. Procedures to legally and orderly resolve disputes between the parties, and to manage the relationship

Trade barriersTariffsQuotas and bansCostums proceduresSPSInappropriate use of anti-dumping and trade defense mechanismsTechnical obstacles to tradeBarriers to government purchasesRestrictions in the provision of services (investment, competition and cross-border)

Relevant rules

Competition and consumer protectionInocuity, labelling, SPS, quality, etc.Unfair trade practices and subsidiesIPRLabor and environmentInvestment protectionService and financial supervision

Multilateralism vs bilateralism

If we only care about the end result, and not about the timing, and we focus on the barriers rather than the rules, then it is clear to me that global, multilateral institutions, rules, agreements and integrations are better than a plethora of bilateral and regional instruments for the same purpose

Is bilateral integration a stumbling or a building block?

If I care about timing, and about rules, and realize that neighbors have special issues, then it is not at all so obvious

In defense of pursuing both approaches simultaneously

Not one FTA, partner not chosen randomlyBig FTAs remove obstacles to eventual multilateral negotiationCreate a clientele for tradeSame advocates, same opponentsAccumulation and harmonizationIncentives to laggards in the multilateral process The challenge is how to make or improve upon bilateral deals so that they are better building blocks, not whether they are stumbling blocks

The US-CR trade relationship

CAFTA as a part of a development strategy where trade is key

CR-US trade before CAFTA´s negotiation

Exports to the US

3 fruits17,2%

Intel14,0%

Med eq8,8%

Rest46,9%

Coffee2,9%

Clothing10,2%

Imports from the US

Cloth9,6%

Grains+oils7,7%

Paper-plastic3,5%

Rest49,5%

Medical parts2,0%

Wafers27,7%

Formally

Both are members of WTOCosta Rica is party of several preferential access arrangements from the US

Caribean Basin InitiativeCBTPA (til 2007)SGP

Why go further?

Preference are a concession and do not create rightsTransitory and fragile. Consequence of a different realityInsufficient

Not all productsNon-tariff barriersNo rulesNo dispute resolution

In disadvantage against competitors

Why does the US care?

Trade and investment$20 billion each way

PoliticalDistance, drugs, terrorism, immigration, political stabilityLabor and environmental rights

StrategicFTAA

Most sensitive topics: CR-US

Agriculture, on both sides; subsidiesTextilesTelecoms, insurance and other state monopolies in CRIPRLaborEnvironment

Main results of CAFTA

Index1. Initial arrangements2. General definitions3. Market access4. Rules of origin5. Costums management6. SPS7. Technical barriers to trade8. Commercial policy9. Government procurement10.Investment11.Trade in services

12.Financial services13.Telecoms14.Electronic trade15.Intelectual property16.Labor17.Environment18.Transparency19.Management20.Dispute resolution21.Exceptions22.Final arrangements

Trade in goodsImmediate, permanent access to Central American products in the US market, and to most US goods in Central American market

Gradual phase-out for the sensitive products, mostly those flowing South

NTB elimination, including improvements in costums and in sanitary barriersAccess for Free Trade Zone productsElimination of export subsidies within CAFTAComprehensive agreement in textiles

Investment, services and rulesCAFTA will act as the Bilateral Investment Treaty that the US does not have with most these nationsLiberalization in services

Notably, in Costa Rican insurance and telecommunications

Strenghtening of IPR law enforcementMultilaterality and other CACM issuesGovernment procurement, labor, environment and dispute resolution mechanisms

Peculiarities

Phaseouts are gradual and careful, asymmetric in favor of the smallInnovative in many areasStandard in labor and environment is compliance of own lawRegional rather than bilateral structure

The key decisions involved

True integration and market accessBreakdown of some public monopoliesBetter rules and practices in some areasCompliance and time stability of some elements of the status quoA formal relationship based on the lawArchitecture of Central American IntegrationConsolidation of a development strategy

Why do we need this

The size of the relationshipThe need to go beyond preferencesMexico, China and the likeNeed for clearer rules and a legalized, normalized relationship with USCentral American IntegrationMaturity and depthPursuit of a better development strategy