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Costa Rica may derail US free trade plans

Financial Times (

Costa Rica may derail US free trade plans

By Richard Lapper in San Jose, Costa Rica

12 October 2003

As befits a man whose very surnames are enough to conjure up
images of Latin American radicalism, Fabio Chaves Castro is
threatening to derail an ambitious plan to open up trade
between the United States and the five small republics of
Central America.

If the union leader of Costa Rica’s 15,000 telecoms and
electricity workers have their way, a series of
demonstrations over the next few weeks against the deal
known as Cafta will eventually force the government to
postpone an agreement for at least six months, which would
potentially put the whole accord at risk.

That would represent another big blow to free trade
proponents in the region, coming so soon after the failure
of last month’s World Trade Organisation meeting in

Mr Chaves argues that Cafta forms part of a broader
geo-political plan to allow US-based multinationals free
rein in Latin America, and says the deal should be put to a

"A treaty of this importance cannot be agreed in just 11
months," the union leader warns.

Yet only weeks ago the ratification early next year of Cafta
 which would form a southern extension of the 1994 North
American Free Trade Agreement (known as Nafta) between
Mexico, Canada and the US - looked set to be trouble-free.

Big US farmers opposed to opening up agricultural trade with
South America have little to fear from their Central
American competitors, while local business has already
adapted to greater competition, with tariffs down to an
average of between 10 and 11 per cent compared with over 80
per cent 15 years ago.

Both Costa Rica and Guatemala ruffled US feathers by joining
the efforts of the G-22 group of developing countries, but
both have now withdrawn from the grouping (along with other
countries close to the US such as Peru and Colombia).

Costa Rica’s problem is that the government is far less able
to accede to another US demand which was unexpectedly
stressed by Robert Zoellick, US trade representative, during
a visit to San José 10 days ago.

That demand is the liberalisation of industries like
telecommunications, electricity and insurance that - almost
uniquely in Latin America - remain in public hands.

Three years ago plans to privatise ICE, the telecoms and
electricity company, were scrapped in the face of some of
the largest and most violent protests in the largely
peaceful history of Costa Rica. Public opinion remains
opposed to change and President Abel Pacheco’s centre-right
government does not have the stomach to reopen a
controversial issue it believed was safely buried until Mr
Zoellick made his comments.

Alberto Trejos, the trade minister, says the government is
ruling out even limited liberalisation that would, for
example, let private operators compete in internet service
provision - currently dominated by an ICE subsidiary.

"We are agreed that we should not take steps that would
weaken the status of public companies and generate the kind
of political upheaval we saw three years ago," Mr Trejos
told the Financial Times.

Mr Zoellick hinted that in this case the US is prepared to
sign a deal with just four Central American countries.

But this would be necessarily smaller in scope, since Costa
Rica accounts for about half the $6.4bn non-textile trade
between the region and the US and is by far the most
democratic, institutionally stable and economically diverse
country in the region.

In addition, successful leftwing mobilisation to stop Cafta
in Costa Rica could embolden opposition in its neighbours.
In El Salvador Shafik Handal, presidential candidate of the
leftwing FMLN party, is currently leading polls ahead of
next March’s election and is critical of US trade.

Negotiators are confident a compromise can be agreed. They
insist the interests of small farmers can be defended and
say the costs of exclusion for Costa Rica would be massive.
Although local producers benefit from the Caribbean Basin
Initiative, a trade concession agreement regularly renewed
since the early 1980s, Cafta would put the benefits on a
firmer footing, giving businesses greater security and
helping foreign investors make longer-term commitments.

Roberto Artavia, rector of the Incae business school in San
José, says flows of foreign direct investment could rise
30 per cent annually in the next four years from between
$1bn (£600m) and $2bn a year currently.

The US also has a lot of interest in reaching a deal, partly
because the added prosperity expected to flow from Cafta
should help to secure political stability in a region
troubled by growing drugs-related crime.

But, for the time being at least, Mr Chaves is convinced
that the US trade representative has managed to give a new
lease of life to his campaign to delay Cafta.

"Mr Zoellick," he says, "has done us a favour."