Development, trade and trade negotiations

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Development, trade and trade negotiations

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

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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)

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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

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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

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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

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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?

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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

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

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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

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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

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Chart 3-1 Exports of goods and services
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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

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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.

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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

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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

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Value added in exported goods1991 and 2006
Per-capita 2006
1072
290
374
323
209
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Make-up of current regional exported value-added
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Unilateral and negotiated instruments
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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

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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

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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)

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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

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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

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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

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The US-CR trade relationship

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

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CR-US trade before CAFTAs negotiation
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Exports to the US
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Imports from the US
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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

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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

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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

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Most sensitive topics CR-US

• Agriculture, on both sides subsidies
• Textiles
• Telecoms, insurance and other state monopolies in
  CR
• IPR
• Labor
• Environment

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Main results of CAFTA
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Index

1. Initial arrangements
2. General definitions
3. Market access
4. Rules of origin
5. Costums management
6. SPS
7. Technical barriers to trade
8. Commercial policy
9. Government procurement
10. Investment
11. Trade in services

1. Financial services
2. Telecoms
3. Electronic trade
4. Intelectual property
5. Labor
6. Environment
7. Transparency
8. Management
9. Dispute resolution
10. Exceptions
11. Final arrangements

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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

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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

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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

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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

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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

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