World Bank says it’s still too early to tell impact of U.S. trade treaty

A World Bank study says that the jury still is out on the impact in Costa Rica of the free trade treaty with the United States and other Central American nations

The report said that this is due to the relatively short time that has elapsed since ratification and the difficulty to identify the impact of the free trade treaty relative to the impact of the international financial crisis and the role of previous and successive trade agreements.

The treaty is called the Dominican Republic-Central America-United States Free Trade Agreement. Although it was signed in 2004, Costa Rica did not approve it in full until 2009.

The 109-page World Bank report said that for Costa Rica the treaty is more than a trade agreement. Besides eliminating tariffs and reducing non-tariff barriers between member countries, the treaty also brought serious changes to the legal framework of member countries, reducing barriers to services, promoting transparency and ensuring a secure and predictable environment for U.S. investors.

The most substantial transformation was breaking down the government monopolies in the telecommunications and insurance sectors, the report noted.

The World Bank effort was based on interviews, surveys and the use of third-party data to assess what has happened over five years.

What has not happened is a big jump in exports from the United States to Costa Rica. The report said any change was insignificant while there is some indication that in the case of exports some of the increase in trade to the U.S. can be linked to the treaty.

The report focused on the insurance, telecom and intellectual property aspects of the agreement.

It made these points:

A major shift in recent years has been the increase in foreign investment inflows into the services sectors, which have surged since the signing and ratification of the treaty.

In spite of the adverse effects of the global financial crisis on world economies, the number of total multinational corporations and the total amount of foreign direct investment to Costa Rica increased significantly following the ratification of the treaty in 2004 and its implementation in 2009.

The liberalization of trade was marginal because Costa Rica already benefited from the U.S. Caribbean Basin Initiative.

The foreign direct investment share of the electronics sector has been stagnating since 2004, while the share of medical devices and business services has been on an impressive upward path, especially after the treaty came into force in 2009.

One of the most important benefits of the treaty for foreign investors was to reinforce the governments’ commitment to liberal trade and investor-friendly policies and to strengthen the legal framework on the rights of foreign investors, according to the responses to the bank’s survey.

The treaty is still new, and because it came into force in the middle of the global financial crisis, many of its anticipated effects will take longer to be realized.

Implementing the treaty required Costa Rica to approve three additional international treaties, approve or amend almost 20 laws, 29 regulations and approximately 15 rules or decisions in all areas.

The insurance sector, which was open to private firms, is showing benefits through improved operating performance, solid growth, product innovation, and improved efficiency. Expense rates have reduced by 10 percent during 2010.

The former state monopoly, the Instituto Nacional de Seguros, still has about 90 percent of the insurance market.

There are some areas that would be useful for policy makers to consider for the future. First, the liberalization of compulsory automobile and occupational risk business will likely require specific attention from the regulating authority.

Even though telelcom market penetration was on the rise before liberalization, the market has showed extraordinary growth in access and price reductions. The forces of competition by private firms provided an abundant supply of services, prices for Internet access were reduced dramatically, and Costa Ricans have responded by subscribing massively to the new services.

Four important telecom challenges remain regarding tariffs, investment needs, the availability of spectrum for private investors, infrastructure sharing and municipal permits for cell towers and the development of the Fondo Nacional de Telecomunicaciones.

Despite the debates on the impact that intellectual property provisions would have on the the financial results or the national health provider’s access to generics, the treaty did not diminish the state´s ability to fulfill its obligations in relation to the right to health of the Costa Rican population. Some were concerned that the higher prices for patented drugs would be budget busters for the Caja Costarricense de Seguro Social’s hospitals.

Most of the drugs that are developed every year and registered in the world by pharmaceutical companies are new presentations or formulations of preexisting medicine doses, and only a small portion of these products are actually new chemical entities that could receive patent protection according to Costa Rica´s definitions.

After the approval of the treaty, Costa Rice entered into a number of other trade pacts with other countries.

The treaty was a major political issue, and opponents held a number of marches and protests. The opposition was so great that then-president Óscar Arias Sánchez was forced to call the public referendum. The vote was in October 2007 with 50.6 percent of the participants in favor. Opposition came mainly from public employee unions, students and opportunistic political parties.

* This article was published originally in The CAFTA Report., an A.M. Costa Rica Ltda. publication.

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