China and Costa Rica move toward free trade agreement

SAN JOSE, Costa Rica — Jorge Vilarrasa's grandfather left Spain 50 years ago to start a wood production company. His business became a regional leader recognized for its forest conservation practices and eco-friendly plywood. 



"During our best times we were producing 2,000 cubic meters per month and we employed 400 people," boasted Vilarrasa, the company's president. Those days are over.



"Now we've closed our production line entirely," he said. The company has shed two-thirds of its work force and will transition entirely into forest protection and reforestation. Why? Vilarrasa said Chinese competition effectively chopped down his business. 



China's unbeatable prices have caused many local producers like Vilarrasa to tremble. This week, Costa Rica entered round five of negotiations for a free-trade agreement (FTA) with China, which would lift trade barriers between the countries. 
Negotiators say the deal is almost complete and should be wrapped up in the sixth round in late February.

For China, Costa Rica represents an important diplomatic tie, opening a gateway to strengthen its presence in the region, said Manuel Orozco, an analyst at the Washington-based Inter-American Dialogue. A deal would provide Costa Rican consumers with a host of Chinese-made goods and help the country diversify its exports.

But as Costa Rica inches closer to that FTA, a fierce opposition is mounting here.

"We don't see a win-win relationship through this agreement," said Mario Montero, vice president of the Chamber of the Food and Beverage Industry. China isn't on the growth radar for many companies here, he said, and business owners aren't convinced it's worth it to open up Costa Rican markets to Chinese imports.

Costa Rica's chief negotiator Fernando Ocampo said ample proposals from both countries are on the table, each offering more than 90 percent of their respective markets to no-tariff competition with the other. 



In political terms, these countries' relationship is only just beginning to bud. In June 2007, Costa Rican President Oscar Arias turned on longtime ally Taiwan and set up diplomatic ties with that country's neighboring rival, the People's Republic of China. 



Costa Rica's move to become China's first diplomatic friend in Central America did not come without Chinese gratitude: The Asian giant bought $300 million in Costa Rican bonds and pledged millions more in aid and projects, including San Jose's new national stadium and its first Chinatown. 



In commerce, however, the affair is in full bloom. China is this country's second largest trading partner after the United States. Exports to China — the bulk of which are high-tech products like Intel's computer microprocessors — soared from $12.7 million in 2000 to $848.7 million in 2007, an average growth rate of 90 percent a year.



The Ticos, as Costa Ricans call themselves, also have a voracious appetite for a wide variety of Chinese goods, ranging from toys and electronics to shoes and even beans. Imports from China have also climbed rapidly, from $78.4 million to $763.2 million, during that same seven-year span. 



For many businesses in Costa Rica, it's the imports they're worried about. Vilarrasa said Chinese companies sell plywood in Costa Rica for as much as 20 percent cheaper than Plywood Costarricense. 



Apart from threatening their cost structure, Tico business leaders claim Costa Rica is taking a big risk with a country that hasn't earned its trust yet. 



"With the United States we just entered a free-trade agreement," Montero said, referring to the Central American Free-Trade Agreement with the United States (CAFTA), which Costa Rica officially joined in January of this year. "But with the United States we have 200 years of relations — of all kinds, political and commercial. With China we didn't have a [diplomatic] relationship until not even three years ago."

Montero said businesses fear that questionable standards in China on environmental protection and labor rights put Costa Rica, which prides itself on such regulations, at a disadvantage.

"China is a communist dictatorship, while we have an economic system based on democracy. On an economic level, that creates enormous differences in the cost structures of products that will be in competition," the food and beverage sector leader said.

Costa Rica has brokered six FTAs — with Canada, Mexico, Chile, the Caribbean Community, Panama and CAFTA. These last two came about under the administration of President Oscar Arias. The leader is seeking to finish his presidency with at least three more such deals. In addition to China, Tico negotiators are in talks with Singapore and the European Union. 



But despite appearances, the Ticos aren't necessarily innate free-traders. CAFTA polarized the country, and only narrowly won a public referendum in October 2007. Even then, it still took more than two years for legislators to debate all the liberalizing reforms needed to join the club with the rest of Central America, the Dominican Republic and United States.

But not everyone fears the supposed threat of the dragon. Would-be exporters in the agricultural sector are hoping the trade pact will help diversify Costa Rica's portfolio, making exports a bit less computer chip- and U.S.-dominant. 



"We see it as a very important opportunity especially because it would mean being able to access one of largest markets in the world, which also has significant purchasing power," said Rigoberto Vega, vice president of the Chamber of Agriculture. 



He said several sectors want in on the agreement, including beef, poultry, pineapples and ornamental plants. 



"You have to accept the reality that Costa Rica already is trading with China without a free trade agreement," Ocampo said. An FTA "needs to be seen as an instrument to help us establish clearer rules over a relationship that's already being played out today." 



For some proponents, it seems to be a matter of going with the China flow. After Chile and Peru, Costa Rica would become Latin America's third country to broker an FTA with the Asian country. China is already the biggest buyer of goods from Chile and Brazil, and the second-biggest buyer for Argentina, Costa Rica, Cuba and Peru.

The U.N.'s Economic Commission for Latin America and the Caribbean has urged nations in the region to seek even closer contact with China, stressing its resilience during even the lowest slumps of the global economic crisis. 



For China, investing in Costa Rica could allow it to do business more easily with all of Costa Rica's current and future FTA partners. "Remember that Costa Rica has a platform built through trade agreements that allows it to sell, without paying taxes, to a large number of countries," Ocampo said. "China would like to gain access from here to all those markets, avoiding the great barriers that those countries impose on it." This would potentially bring in gains for both countries. 



But Vilarrasa, whose plywood business folded under the competition, believes free-trade with China is a step in the wrong direction. He said, "Sending the system of production out there, just like other countries have, from a strategic position means eliminating the factories and productive system here. It doesn't make sense."