Development, trade and trade negotiations
Some questions and a few answers
based on the case of Costa Rica
A changing world
Globalization
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
Integration: after decades of policy that tried to minimize the economic interaction across countries, most nations are now pursuing to promote it
Regionalization
Regionalization: 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,
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
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 important May not be the same for a small country than a
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,
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 advantage Economies of scale
FDI attraction Growth engines
Technology, learning
Diversification and risk-pooling
Resource reallocation
Agricultural area0 30 60 90 120 150 180 210
1980 1985 1990 1995 2000 2005
Grains Traditional exports
New exports
Other
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
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
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
Chart 3-1
Exports of goods and services
0 200 400 600 800 1000 1200 1400 1600
1991 1993 1995 1997 1999 2001 2003 2005 Chart 3-2a:
Foreign Direct Investment
3.000 4.000 5.000 6.000 7.000
Chart 3-2b:
Stock of FDI
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
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.
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
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
Value added in exported goods 1991 and 2006
$1072
$290
$374
$323
$209 Per-capita 2006
Make-up of current regional
exported value-added
Unilateral and “negotiated”
instruments
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
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 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,
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
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
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
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
Imports from the US
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
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
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
Most sensitive topics: CR-US
Agriculture, on both sides; subsidies Textiles
Telecoms, insurance and other state monopolies in CR
IPR Labor
Environment
Main results of CAFTA
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
12.Financial services 13.Telecoms
14.Electronic trade
15.Intelectual property 16.Labor
17.Environment 18.Transparency 19.Management
20.Dispute resolution 21.Exceptions
22.Final arrangements
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
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
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
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
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
