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Don’t forget to read the trade deal’s fine print

Embassy, Canada

Don’t Forget to Read the Trade Deal’s Fine Print

By Luke Eric Peterson

30 May 2007

It’s a trade negotiator’s nightmare.

The Costa Rican Supreme Court has announced plans to review the United States-Central American Free Trade Agreement (CAFTA) to assess the impact of that agreement upon civil liberties and human rights.

Meanwhile, Costa Ricans will get a chance to vote in a national referendum on whether to approve the agreement.

It’s rare that trade agreements are subjected to such searching scrutiny—much less forced to steer between a gauntlet of the courts and the electorate.

A generation ago, former Canadian trade minister John Crosbie could idly boast that he had not bothered to read the Canada-U.S. Free Trade Agreement—even as he encouraged Parliament to adopt it.

These days, that kind of talk could get you impeached in parts of Latin America, where politicians, the courts and even ordinary citizens are reaching for their reading glasses.

A big part of the reason for the heightened scrutiny of such deals is that "free trade agreement" has become an outdated misnomer.

Sure, "free trade" agreements remove barriers to the flow of goods between countries—but they do much more as well.

"Free trade" agreements may dictate which sectors of an economy will be opened to foreign takeovers. They may dictate domestic public policies for sensitive sectors of the economy: from media to telecommunications to health insurance to drug pricing policies. And they may open the door for local laws—and even rulings of the local courts—to be reviewed by international tribunals

It might be more accurate to treat modern free trade agreements as "constitutional agreements," because the agreements set so many rules that bind the hands of domestic governments.

In the case of Costa Rica, the country’s obligations under the US-CAFTA include the wholesale dismantling of that country’s telecommunications monopoly—which uses subsidies to provide telephone service to poorer communities—as well as an end to a public system of social and health insurance.

Opposition to the US-CAFTA is running high in Costa Rica, and it comes amidst a wider bout of regional skepticism as governments from Nicaragua to Venezuela to Ecuador and beyond are growing wary about the deep implications of trade and investment agreements.

Canadian business interests should be glad that Canada managed to sew up a free trade agreement with Costa Rica in 2002. That agreement supplemented an existing foreign investment protection agreement negotiated a few years earlier.

The Canada-Costa Rica trade deal got nowhere near the level of scrutiny that the US-CAFTA has attracted. However, Costa Ricans may soon get a clearer sense of the scope of the bargain struck with Canada.

Recently, a group of a hundred-odd Canadian citizens announced that they are suing Costa Rica, charging the country with inadequate oversight of its domestic financial services industry.

The Canadian grievance relates to the forceful winding up of a controversial Costa Rican investment fund, following a request by the RCMP to investigate potential use of the fund by a group of alleged Canadian drug dealers for money-laundering purposes.

Costa Rica responded by shuttering the so-called Brothers Fund, and charging the proprietors, the Villalobos brothers, with fraud and other financial crimes.

Thousands of foreigners who had parked their funds with the Villalobos accuse the government of killing the Golden Goose—rather than simply trying to sniff out any bad eggs.

For years, the Brothers Fund offered a much-sought-after brand of financial alchemy. Investors could park "guaranteed" investments with the fund and collect hefty monthly interest payments. Commercial banks in Canada might pay in the area of three to four per cent a year on guaranteed savings accounts; the Brothers Fund was offering approximately 10 times that return.

No one seems to have known how the Villalobos Brothers were generating those returns for investors—and many appeared content not to ask too many questions.

Many believed that the Villalobos were funneling foreigners’ cash into legitimate up-and-coming investment opportunities in Costa Rica. The Wall Street Journal has reported that others suspected a massive Ponzi scheme, or some other form of chicanery.

The worst suspicions of the latter group may have been confirmed this month when one of the two brothers, Oswaldo Villalobos, was convicted by a Costa Rican court of fraud and running an illegal financial institution.

However, only a few million dollars of the missing investments have been recouped thus far, and foreign investors peg their losses in the hundreds of millions.

A group of Canadians are now hoping to pin responsibility on the Costa Rican government—and they’re brandishing provisions of Costa Rica’s little-examined economic pacts with Canada.

The Canadians argue that Costa Rica has a duty to monitor and police financial activities like those of the Villalobos, effectively protecting Canadian investors from getting caught up in financial deals that are too good to be true.

Costa Rican officials take a different view. They express surprise that trade and investment agreements with Canada would allow Canadians to sue Costa Rica for millions of dollars lost to allegedly unscrupulous investment houses.

For Costa Ricans, the multi-million dollar Canadian lawsuit could prove an education in the meaning of "free trade" in the 21st century.

Perhaps not coincidentally, Costa Ricans are taking the time to pore over the fine print of other "free trade" deals like the new US-CAFTA pact.

John Crosbie might not approve, but the Costa Rican public appears determined to understand all of the terms of future trade deals before agreeing to be bound by them.

Luke Eric Peterson writes a regular column for Embassy.