Development, trade and trade negotiations

1. Development, trade and trade negotiations Some questions and a few answers based on the case of Costa Rica

2. A changing world • Globalization: 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 • Integration: after decades of policy that tried to minimize the economic interaction across countries, most nations are now pursuing to promote it • Regionalization: in many parts of the world, the economic boundaries between neighbors are blurring, and there is co-government for many economic issues • “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)

3. A world in change • Many of these changes are unconscious, the consequence of technology rather than decision • Are 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 strategies • Can they be separated from other controversial fenomena? • That is perhaps the most salient internal debate in Latin America today

4. Globalization: four questions and an important current affair • Do we prefer a global world or an isolated world? • Should we react with integration or isolation as a national strategy? • Should we pursue integration by unilateral action or by negotiated, binding agreements? • 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 important • May not be the same for a small country than a

5. Costa Rica • Much 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 $11,434 • Growing at about 5% per year since mid 1980s • 7.5% in 2003-08 • Several peculiar development choices • Income distribution as a high priority with deteriorating results • We export half our value added • Electronics, textiles, medical equipment, fruits, tubers, processed foods, many services

10. 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?

11. Why is trade important • For a small developing country, trade is an essential part of the strategy • Comparative advantage • Economies of scale • FDI attraction • Growth engines • Technology, learning • Diversification and risk-pooling

12. Resource reallocation Agricultural area 210 Traditional exports 180 150 New exports 120 90 Grains 60 30 Other 0 1980 1985 1990 1995 2000 2005

13. Economic history • Costa Rica pursued during the 1950s-70s the typical economic policy of Latin America at the time • Isolation from the world • Heavy state intervention and ownership • Macroeconomic expansionism • Uncontrolled disequilibria • This is often linked to the very significant crisis in the early 1980s • Financial: debt, currency, inflation • Structural: it was obvious that it was not working

14. Recent economic history • After the crisis, significant policy shift • Stabler macroeconomics: no financial crises, mid-inflation, currency control, solvent government finances • Deregulation • Open economy with aggresive export promotion and FDI attraction • Reform is largely unfinished and has become hard to implement politically • Further fiscal resources and infraestructure • Role of government, deregulation, competition policy • Ideological doubts and the local political environment

15. 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 exports • High FDI attraction • Diversification and sophistication of exports • Higher foreign purchasing power

16. Chart 3-1 Exports of goods and services

17. Chart 3-2b: Stock of FDI 7.000 6.000 5.000 4.000 3.000 2.000 1.000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Chart 3-2a: Foreign Direct Investment 1600 1400 1200 1000 800 600 400 200 0 1991 1993 1995 1997 1999 2001 2003 2005

18. Some FDI examples • Medical 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 Soft • Call 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

19. Some FDI examples • Telecoms: Sawtek, Smiths Inteconnect, L3 Comunicaciones, Multimix Microtechnology, Panduit, Suttel • Assemblies: 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: INTEL • Manufacture: Aetec, Camtronics, Irazú Electronics, Tico Electronics • Final 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.

20. A more “tailor-made” economy • Less concentrated geographically, by activity, by scholarity level • More sophisticated production • Taking better advantage of our historical strengths, and a better reflection of our choices • Not contradictory, although still falling short, of our distributional challenge

21. Some intangibles • Diversification 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 growth • Why? 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 / education • Services & light manufacturing / gender • High value agriculture & tourism / environment • “Good” MNCs / health, social standards, and much more • Ag reform and productivity • A more efficient allocation of resources in countries with such peculiar endowments

22. Value added in exported goods1991 and 2006 Per-capita 2006 $1072 $290 $374 $323 $209

23. Make-up of current regional exported value-added

24. Unilateral and “negotiated” instruments

25. Trade instruments • Many of the instruments to promote a better insertion in the world market are unilateral actions • Unilateral tariff phaseout and costums modernization • Export promotion and incentives • Investment attraction and incentives • Competitiveness & SD measures • Competition/consumer/industrial/environment issues • Macro management including exchange rate • We chose to complement these steps with negotiated agreements • WTO and multilateral agreements • Hemispheric, sub-regional and bilateral FTAs and BITs

26. What is a Trade Agreement • An agreement by the parties to reciprocally reduce and eventually eliminate barriers to the trade of goods, services and investment between them • Terms to harmonize and coordinate rules and procedures affecting trade • Procedures to legally and orderly resolve disputes between the parties, and to manage the relationship

27. Trade barriers • Tariffs • Quotas and bans • Costums procedures • SPS • Inappropriate use of anti-dumping and trade defense mechanisms • Technical obstacles to trade • Barriers to government purchases • Restrictions in the provision of services (investment, competition and cross-border)

28. Relevant rules • Competition and consumer protection • Inocuity, labelling, SPS, quality, etc. • Unfair trade practices and subsidies • IPR • Labor and environment • Investment protection • Service and financial supervision

29. 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

30. In defense of pursuing both approaches simultaneously • Not one FTA, partner not chosen randomly • Big FTAs remove obstacles to eventual multilateral negotiation • Create a clientele for trade • Same advocates, same opponents • Accumulation and harmonization • Incentives 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

31. The US-CR trade relationship CAFTA as a part of a development strategy where trade is key

32. CR-US trade before CAFTA´s negotiation

33. Exports to the US

34. Imports from the US

35. Formally • Both are members of WTO • Costa Rica is party of several preferential access arrangements from the US • Caribean Basin Initiative • CBTPA (til 2007) • SGP

36. Why go further? • Preference are a concession and do not create rights • Transitory and fragile. Consequence of a different reality • Insufficient • Not all products • Non-tariff barriers • No rules • No dispute resolution • In disadvantage against competitors

37. Why does the US care? • Trade and investment • $20 billion each way • Political • Distance, drugs, terrorism, immigration, political stability • Labor and environmental rights • Strategic • FTAA

38. Most sensitive topics: CR-US • Agriculture, on both sides; subsidies • Textiles • Telecoms, insurance and other state monopolies in CR • IPR • Labor • Environment

39. Main results of CAFTA

40. Initial arrangements General definitions Market access Rules of origin Costums management SPS Technical barriers to trade Commercial policy Government procurement Investment Trade in services Financial services Telecoms Electronic trade Intelectual property Labor Environment Transparency Management Dispute resolution Exceptions Final arrangements Index

41. Trade in goods • Immediate, 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 barriers • Access for Free Trade Zone products • Elimination of export subsidies within CAFTA • Comprehensive agreement in textiles

42. Investment, services and rules • CAFTA will act as the Bilateral Investment Treaty that the US does not have with most these nations • Liberalization in services • Notably, in Costa Rican insurance and telecommunications • Strenghtening of IPR law enforcement • Multilaterality and other CACM issues • Government procurement, labor, environment and dispute resolution mechanisms

43. Peculiarities • Phaseouts are gradual and careful, asymmetric in favor of the small • Innovative in many areas • Standard in labor and environment is compliance of own law • Regional rather than bilateral structure

44. The key decisions involved • True integration and market access • Breakdown of some public monopolies • Better rules and practices in some areas • Compliance and time stability of some elements of the status quo • A formal relationship based on the law • Architecture of Central American Integration • Consolidation of a development strategy

45. Why do we need this • The size of the relationship • The need to go beyond preferences • Mexico, China and the like • Need for clearer rules and a legalized, normalized relationship with US • Central American Integration • Maturity and depth • Pursuit of a better development strategy