RESTRICTED
WORLD TRADE WT/TPR/G/1
12May1995
ORGANIZATION(95-1246)
Original: Spanish
TRADE POLICY REVIEW
COSTA RICA
Report bytheGovernment
Inpursuance oftheAgreement establishing theTrade Policy Review Mechanism (Annex 3
oftheMarrakesh Agreement Establishing theWorld Trade Organization), theinitial policy statement
submitted bytheGovernment ofCosta Ricaisattached.
Note:Thisreport issubject torestricted circulation andpress embargo untiltheendofthemeeting
oftheTrade Policy Review Body onCosta Rica.Costa Rica WT/TPR/G/1
Page i
CONTENTS
Page
I. Executive summary 1
II. Economic andtrade environment 1
III. Trade policy developments 1990-1995 2
(i) Unilateral opening 2
(ii) Participation intheCentral American integration system 3
(iii) TheFreeTrade Agreement between Costa RicaandMexico 4
(iv) TheUruguay Round 4
(v) Defence ofCosta Rica'strade interests 5
IV. Elements ofaforward-looking trade policy 5
(i) FreeTrade Area fortheAmericas 5
(ii) Thefuture multilateral agenda 6Costa Rica WT/TPR/G/1
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I. Executive summary
Costa Ricaisacountry withasmall andopeneconomy, highly dependent onforeign trade.
Inrecent years, ithasmade further progress inopening upandliberalizing itseconomy, adopting a
series ofunilateral measures topromote thecompetitiveness ofdomestic industry andimprove Costa
Rica'sintegration intheglobal economy.
Costa Ricahasutilized regional integration instruments andmultilateral negotiation asadditional
ways ofadvancing inthisdirection. Itstrade agenda hasincluded negotiations within theframework
ofCentral American integration, theconclusion ofaFreeTrade Agreement withMexico, taking part
inthenegotiations andadopting thecommitments under theUruguay Round, andactively defending
itstrade interests.
Costa Ricaattaches great importance toitsaction inthetrade sector overthenextfewyears,
including inparticular itscommitment toparticipate actively inimplementing theWTO 'sprogramme,
andintheestablishment oftheFreeTrade Area fortheAmericas.
II. Economic andtrade environment
Over thepast10years, Costa Ricahasmade great efforts toachieve thestabilization and
adjustment ofitseconomy andactive integration intheglobal economy. Thisorientation began in
themid-1980s andwasaccentuated andconsolidated from1990onwards, theyearinwhich Costa Rica
acceded toGATT andinwhich itseconomic environment wasreviewed intheGATT forum.
Following theeconomic andsocial problems which Costa Ricafaced inthe1980s asaresult
oftheexternal debtcrisis andthewinding-up oftheexisting import substitution model, intheearly
1990s economic performance improved significantly, leading tomajor progress intransforming
production structures. Thisisreflected inthehighlevels ofgrowth overthepastthree years, around
5percentormore ofGDP, verydifferent fromthelevels atthebeginning ofthe1980s, which were
evennegative in1981 and1982.
Theexternal sector hasbeenextremely important asthecatalyst foreconomic growth. The
traditional openness oftheCosta Rican economy hasbeenreinforced byaveryclear"outward-looking
orientation", inwhich exports andimports playamajor role. While trade ingoods andservices in
themid-1980s represented 60percentofGDP, thisfigure isnowover90percent. Thishashadan
extremely important effect onthelevel ofemployment, since unemployment, which hadreached
10percentintheearly 1980s, hasbeenaround 4percentinthepastfiveyears, despite thehuge
immigration flows intoCosta Rica.
Nevertheless, thereisstillthecyclical problem oftheimbalance inpublic finance, which in1994
reached unmanageable proportions, thereby jeopardizing theachievements inother macroeconomic
areas. Whereas theconsolidated public-sector deficit waslessthan1percentofGDP in1993, in
1994 itamounted to8percentofGDP, contributing towards further increases ininterest ratesand
growing pressure ontheprivate sector, increasing therateofinflation toaround 20percentandaffecting
investment. Internal debt, thelackoffunding forthepension system, andtheState payroll arethe
main short-term factors causing thefiscal deficit. Special programmes havealready beenproposed
topromote adjustment andgreater fairness ofthetaxsystem, theoverhaul ofthepension system, cuts
inpublic spending, labour mobility inthemajority ofStateinstitutions andanincreased roleforprivate
operators inareas hitherto runbythepublic sector. TheCosta Rican political regime, which operates
onthebasisofconsensus among thevarious sectors ofpolitical andeconomic activity, means thattheWT/TPR/G/1 Trade Policy Review Mechanism
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adoption ofstructural reforms requires lengthy priornegotiations. While draftlawsarebeing adopted
toallow theproposed comprehensive reform tobecarried out,andonastrictly temporary basis, the
import tariff hasbeenincreased by8percentinorder toobtain thenecessary resources tomeet
immediate financial obligations. Thereason whythismeasure hasbeenadopted inpreference toothers
isthatitistheonlyaction which theExecutive cantakeindependently, within certain limits, without
theneedtoobtain legislative approval. Thetarget istoreduce thepublic sector deficit to3.5percent
ofGDP byDecember 1995 andto1percentofGDP byDecember 1996.
Itishoped thatthereforms proposed willplace public finance onapermanently sound footing
soastorestore themacroeconomic balance needed toprovide anenvironment favourable toproduction
andeconomic growth.
III. Trade policy developments 1990-1995
Themost distinctive feature ofCosta Rica'seconomic policy from 1990-1995 hasbeenthe
liberalization oftradeandthederegulation oftheeconomy. These objectives havebeenachieved through
theadoption ofanumber ofmeasures under fourdifferent approaches: unilateral opening, participation
intheCentral American integration system, negotiation ofaFreeTrade Agreement withMexico and,
ofcourse, theadoption ofthecommitments negotiated within theframework oftheUruguay Round.
Thepolicies andmeasures taken inthese areas have yielded verypositive results forthe
strengthening ofCosta Rica'sexport capacity anditsgreater integration intheglobal economy. Since
1990, exports haveincreased atanannual average rateof14percent,rising toafigure of29percent
forthefirstthreemonths of1995. Thecomposition ofexports haschanged, withanoticeable decrease
inthedependence ontraditional crops andanincrease innon-traditional exports, which nowamount
tomore than50percentoftotalexports. Inaddition, themarkets forCosta Rica'sexports have
diversified, moving away from thefocus ontheCentral American market during the1970s, which
thenreceived around 70percentofexports, towards other markets, mainly around 45percenttothe
United States and30percenttoEuropean countries. Imports havealsoincreased overthepastfour
years atanannual average of13percent.
Theincrease inexports, aswellastheirimportance asthedriving force forgrowth intheCosta
Rican economy, means thatCosta Ricahashadtoplayanincreasingly active andaggressive rolein
defending itstrade interests, above allendeavouring tomaintain andincrease access tothemarkets
ofother trade partners andtodefend itsexports against theprotectionism prevalent inother markets.
Inorder todoso,Costa Ricahassought toavailitself oftheinstruments offered bythemultilateral
system.
(i) Unilateral opening
Overthepastfiveyears, Costa Ricahasliftedimport barriers, increased competition indomestic
markets, endeavoured toeliminate theanti-export biasofitseconomy andpromoted more effective
allocation ofresources. Thefollowing aresome ofthemostimportant measures unilaterally adopted
forthispurpose:
- Elimination ofimport surtaxes, which amounted to10percentandaffected around
50percentoftariff headings;
- reduction andbinding inthetariff schedule ofathree percenttaxoncustoms value
forallimports;Costa Rica WT/TPR/G/1
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- eliminationofpriordepositsforimports,whichcouldamounttoasmuchas100percent
ofthevalue ofthegood imported;
- totalliberalization ofthecapital account;
- planned phasing-out ofexport subsidies;
- elimination ofproduction subsidies;
- elimination ofState participation inthemarketing ofagricultural products;
- elimination ofthemajority ofexport taxes;
- transposition oftheCentral American Customs Nomenclature IItotheNomenclature
oftheHarmonized Commodity Description andCoding System;
- enactment oftheLawonthepromotion ofcompetition, under which allnon-tariff
barriers onimports andallexport licences areabolished;
- adoption ofanewlawongovernment procurement, under which theprocedure for
administrative contracting isrationalized andsimplified;
- approval ofreforms totheelectricity co-generation power legislation, providing for
increased participation byprivate operators inthissector.
Theopening upoftrade inCosta Ricahasnotledtotheuseofother lesstransparent butalso
perverse instruments suchasthemisuse ofcountervailing oranti-dumping duties orsafeguard measures.
Itshould bestressed that,since therelevant legislation wasamended in1993, nocharges ofthisnature
havebeenimposed under suchrules.
Anumber ofdraftlawswillbeapproved inthenearfuture, including alawregulating public
services, legislation tomodernize thecustoms, andalawreforming thefinancial services sector. These
areallaimed atopening upandtransforming theeconomy.
(ii) Participation intheCentral American integration system
Over thepastfiveyears, Costa Ricahasplayed animportant roleintheefforts tooverhaul
theCentralAmericanintegrationsystem.TheGovernment,withthesupportofthebusinesscommunity,
hasadvocated aconceptual change intheintegration process, promoting anoutward-looking orientation
whose main objective istoserve asaplatform forintegration withtherestoftheworld.
TheliberalizationmeasuresimplementedwithintheCentralAmericanintegrationsysteminclude
thelowering oftariff levels toamaximum ceiling of20percent, aftertheyhadreached afigure of
40percentinthelate1980s. Once thepresent abnormal situation hasbeenovercome, Costa Rica
hopes tocontinue lowering tariffs toamaximum levelof15percent.
Inaddition, Costa Ricasupports thedevelopment oftheCentral American FreeTrade Area
because itisanimportant market which absorbs around 15percentofitsexports andprovides just
under 10percentofitstotalimports. Costa Ricahasalsogiven strong support totherenewal and
modernization ofthelegal instruments oftheCentral American system, especially asconcerns theWT/TPR/G/1 Trade Policy Review Mechanism
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negotiations onrulesoforigin tobeapplied tointra-Central American trade andrulesonunfair trade
practices andsafeguards.
(iii) TheFreeTrade Agreement between Costa RicaandMexico
Another important feature ofthedevelopment ofCosta Rican trade policy inrecent years has
beentheconclusion oftheFreeTrade Agreement between Costa RicaandMexico. Thismarks aturning
point inCosta Rica'sforeign trade policy because itisthefirstagreement ofglobal scope concluded
byCosta Rica.
Following theexample oftheNorth American FreeTrade Agreement, thisAgreement, which
entered intoforce on1January 1995, comprises tenparts, namely: general aspects, trade ingoods,
tradeinservices, technical barriers totrade, government procurement, investment, intellectual property,
administrative provisions, settlement ofdisputes andotherprovisions. Under theAgreement, theparties
willreduce alltheirtariffs, withveryfewexceptions, either immediately orwithin five,tenor,in
afewcases, fifteen years fromthedateofentry intoforce oftheAgreement. Intheservices sector,
thestatus quoisbound andthebases forsubsequent liberalization ofthesector arelaiddown.
Thenegotiation andconclusion ofthisAgreement were strongly supported bythebusiness
communityinCostaRica,whichactivelybackedGovernmenteffortstoconcludeahigh-qualityagreement
inorder toprovide better access totheMexican market andincrease theflowofinvestment. These
negotiationswerealsoseenasprovidingvaluableexperienceforpossibleparticipationinlargereconomic
integration arrangements.
TheAgreement willshortly benotified totheWTO andwillbesubmitted toallitsmembers
forconsideration. Costa Ricabelieves thattheAgreement significantly liberalizes trade between the
twocountries anddoesnotraiseanynewbarriers totrade withother partners; rather itstrengthens
andcomplements thenewagreements under theUruguay Round.
(iv) TheUruguay Round
Costa Ricaattaches thegreatest importance toastrong multilateral trading system withclear
andtransparent rules regulating trade. Since theUruguay Round hasmade aconcrete contribution
towards theachievement ofthose objectives, Costa Ricahasenthusiastically supported itsresults.
After being signed inMarrakesh, theAgreement Establishing theWorld Trade Organization
wasapproved bytheCosta Rican Legislative Assembly inDecember 1994, intimetoenter intoforce
on1January 1995. Itshould benoted thatitwasapproved byaunanimous voteofallthemembers,
something thatdoesnotoccur veryfrequently intheplayofforces operating inCosta Rica'sdemocracy,
thusreflecting Costa Rica'sdegree ofcommitment totheWTO andthemultilateral trading system.
Atthesame time, thelegislation implementing theUruguay Round wasapproved, which not
onlyfulfilled theobligations resulting from theRound butalsocontained important provisions to
strengthen Costa Rica'sactive participation inthemultilateral system.
Ingeneral terms, CostRicadoesnotderive anysubstantial advantage fromarealopening up
ofnewmarkets because forsome years ithasbenefited from various systems ofpreferences which
facilitate itsaccess tomarkets, particularly thoseofcertain developed partners. Theconcessions granted
intheUruguay Round onamost-favoured-nation basiswilleliminate suchpreferences. Nevertheless,
CostaRicaattachesgreaterimportancetotheenhancedsecurityintraderesultingfromtheseconcessions.Costa Rica WT/TPR/G/1
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From thequalitative standpoint, Costa Ricabelieves thatmany elements oftheUruguay Round
Agreements arebeneficial toitforexample, thecreation ofaframework ofdisciplines toregulate trade
inagricultural products, clearer rules onsubsidies andcountervailing duties, andabove allthe
strengthening ofthedispute settlement mechanism. Withregard tothelatter inparticular, Costa Rica
isconvinced thattheimplementation ofthenewprovisions andcompliance withthem byalltrading
partners willhelptoensure thetruevictory ofmultilateralism overpolitical power andunilateral action.
(v) Defence ofCosta Rica'strade interests
After onlyafewyears ofGATT membership, Costa Ricaveryearly onresorted toGATT
instruments inorder todefend itself against certain policies ofitstrade partners. Forexample, in
February 1993, Costa Rica, together withother Latin American countries, requested theestablishment
ofaPanel toconsider theimport regimes forbananas inseveral member States oftheEEC. In
June1993, thesamecountries requested theestablishment ofanother Panel toreview theunified import
regime forbananas adopted bytheEuropean Union on1July1993. Inbothcases, thePanels concluded
thatthepolicies reviewed werenotcompatible withtheprovisions oftheGeneral Agreement. Neither
ofthetworeports hasbeenadopted.
InMarch 1994, Costa Ricaandother Latin American countries negotiated anagreement with
theEuropean Union which toacertain extent attenuated theinjury caused bytheunified import regime
forbananas. Costa Ricaistoday thesubject ofaninvestigation under Section 301oftheUnited States
Trade Actforalleged discrimination claimed byaUnited States company.
Costa Ricaalsotookpartasaninterested thirdparty inthePanel established attherequest
oftheEuropean Union toreview United States restrictions onimports oftuna; thePanel found that
therestrictions imposed bytheUnited States were contrary totheGeneral Agreement. Thereport
hasnotbeenadopted.
Asaresult oftheforegoing experience, Costa Ricaconsiders thatagreat dealremains tobe
doneinorder tomake thedispute settlement mechanism agenuine alternative thatwould allow small
countries tocombat theprotectionist policies adopted byother trade partners, andithopes thatthe
changes introduced under theUruguay Round canbeimplemented forthatpurpose.
IV. Elements ofaforward-looking trade policy
Thegreatandgrowing importance offoreign tradeinCosta Rica'seconomy means thataforeign
trade policy which promotes greater andmore secure access tomarkets, aswellasthestrengthening
ofthemultilateral system, constitutes apriority inCosta Rica'seconomic policy.
Costa Ricaisadopting measures torespond better tothenewchallenges arising inthesphere
ofmultilateral trade, withtheaimofstrengthening theinstitutional capacity needed toplayanactive
andconstructive roleincoming years.
(i) FreeTrade Area fortheAmericas
InDecember 1994, thePresidents of34countries ontheAmerican continent agreed toestablish
aFreeTrade AreafortheAmericas bytheyear2005. Costa Ricaattaches greatimportance toworking
actively towards theestablishment ofthiseconomic area, because itbelieves thatitwillopen up
considerable opportunities foralltheinhabitants oftheAmerican Continent and,taking asabasistheWT/TPR/G/1 Trade Policy Review Mechanism
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rulesanddisciplines oftheWTO, ithasthepotential tobecome averyimportant complement tothe
WTO inthetaskofpromoting trade liberalization andenhanced prosperity forall.
(ii) Thefuture multilateral agenda
Costa Ricarecognizes thattheWTO agenda forthenextfewyears isextensive andcomplex,
notonlybecause ofthelargenumber ofissues which theUruguay Round Agreements make itnecessary
todealwithingreater detail butalsobecause theactual implementation ofthese Agreements raises
newandambitious challenges thathavetobemet. Costa Ricaismaking surethatitwillbeableto
fulfil itsduties within thenewsystem responsibly. Itsparticipation inthereview mechanism asthe
firstcountry tobeexamined under thenewdisciplines andagreements oftheUruguay Round isproof
ofthiscommitment.
Itisasource ofconcern toCosta Ricathatnewissues, notrelevant tothediscussions inthe
Uruguay Round anditsprovisions, noteventotradeeither, areincreasingly brought before thisforum
bysome trading partners. Costa Ricafearsthat,infact,behind theseapparently praiseworthy initiatives
thereareprotectionistforceswhichaimtoclosemarkets,usingtheexcuseoflabourrights,environmental
protection orother aspects. Costa Ricaisalsoconcerned thatthevalues ofparticular societies might
beimposed onothers through themedium oftradeprovisions. Itbelieves thattherulesofthemultilateral
trading system arefullyconsistent withthepursuit ofother social objectives ofwider scope, butit
doesnotbelieve thatthistrade forum isthebestplace todealwiththem.