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Cablegate: Costa Rica Input - Usitc Biennial Caribbean Basin

VZCZCXYZ0000
RR RUEHWEB

DE RUEHSJ #1248/01 1791213
ZNR UUUUU ZZH
R 281213Z JUN 07
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 8397
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SAN JOSE 001248

SIPDIS

STATE PASS TO USITC FOR LSCHLITT
STATE PASS TO OPIC
STATE PASS TO USTR
STATE PASS TO EXIMBANK FOR CREQUE
STATE PASS TO FEDERAL RESERVE MIAMI BRANCH MANIERO
TREASURY FOR OASIA/INC

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ASEC ECON ETRD OTRA XL EFIN CS
SUBJECT: COSTA RICA INPUT - USITC BIENNIAL CARIBBEAN BASIN
INVESTMENT SURVEY

REF: SECSTATE 065843

1. (U) SUMMARY: The Caribbean Basin Initiative (CBI/CBERA/CBTPA)
has played a key role in the growth of the Costa Rican economy over
the last 23 years, fueling Foreign Direct Investment (FDI), which
has expanded the economy and diversified export opportunities. In
the past seven years, according to Government of Costa Rica
statistics (from http://www.comex.go.cr/estadisticas/exportaci ones/
Exportaciones 20Totales 20x 20destino 202006.pdf) total exports have
increased 39.0 percent, from $5.897 billion in 2000, to $8.198
billion in 2006. According to the same source, exports to the U.S.,
most of which enter under CBI/CBERA/CBTPA benefits, have increased
3.4 percent, from $3.056 billion in 2000, to $3.161 billion in 2006.
According to U.S. National Trade Data (from http://tse.export.gov/)
Costa Rican exports to the U.S. increased 8.4 percent from $3.547
billion in 2000 to $3.844 billion in 2006. Costa Rica now has the
opportunity to cement its trade relationship with the U.S. by
ratifying and implementing CAFTA. However, it is uncertain whether
the country will do so before the March 1, 2008 deadline. END
SUMMARY.

FOREIGN DIRECT INVESTMENT OVERVIEW
----------------------------------

2. (U) Costa Rican FDI continues to increase each year. The latest
figures show that FDI totaled $1.410 billion in 2006. The U.S.
continues to make up the dominate share of FDI in Costa Rica,
accounting for 80.4% of all FDI, with real estate excluded. Real
estate now constitutes a significant portion of Costa Rica's
reported FDI, which was not the case in previous years. The
industrial sector represents 40.4 percent of total FDI (excluding
real estate) in 2006, the financial services sector followed at 30.3
percent, and the tourism sector was a distant third at 13.6 percent.
In 2006 the Free Zones (FZ) remained the largest single recipient
of FDI. As of June 2007, there were 212 companies operating within
the FZ, the vast majority U.S.-owned. Fifty-nine percent of all
Costa Rican exports to the U.S. are produced in FZ. The ratio of
FDI (ex. real estate) to GDP averaged approximately 3.6 percent
between 2001 and 2006.

3. (U) Industrial activities have been the most significant in
attracting FDI since 1997, with the tourism and services industries
typically ranking a distant second and third, respectively. The
sectors that averaged the largest share of FDI (ex. real estate)
during the period between 1999 and 2006 were the industrial sector
(57.9 percent) and the tourism sector (12.74 percent). After
several years of steady decline, in 2006 investment in the tourism
sector had a record year for FDI inflows.

4. (U) TABLE ONE

FOREIGN DIRECT INVESTMENT BY SECTOR
-----------------------------------
(in millions of dollars, current)

2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ----
Industry 231.4 482.7 386.8 456.0 344.9 428.7
Real Estate 0.0 21.0 31.0 178.4 234.6 350.0
Financial 43.1 17.2 2.2 22.6 40.9 321.6
Tourism 111.5 76.0 88.3 41.4 53.5 144.1
Services 57.4 52.8 83.2 17.2 73.3 60.1
Commercial 8.3 15.2 6.0 14.6 47.6 45.4
Agriculture 1.0 -8.6 -36.3 14.0 37.1 37.6
Agro-industry 5.2 2.8 8.4 7.6 29.6 9.4
Other 2.4 .3 5.6 15.9 -0.5 13.9

TOTAL 460.4 659.4 575.1 793.8 861.0 1410.8

Ex Real Est. 460.4 638.4 544.1 615 4 626 4 1060.8
(Source: BCCR, FDI in Costa Rica 2005-2006 July, 2006)

5. (U) It appears that in 2004 and 2005 the U.S. has significantly
increased its FDI flows to Costa Rica relative to the rest of the
world. In 2005 alone 80.4 percent of FDI flows to Costa Rica
(excluding real estate) originated from the U.S. During the last
six years, Canada, Mexico, The Netherlands, Panama, Colombia,
Switzerland, Venezuela, Argentina and four other Central American
countries (Guatemala, El Salvador, Honduras, and Nicaragua) have
also continued to function as important sources of FDI. (See Table
Two for details.) Reinvestment by foreign companies already
operating in Costa Rica represents almost one-half of total FDI.


6. (U) TABLE TWO

FOREIGN DIRECT INVESTMENT
BY COUNTRY OF ORIGIN
-------------------------

(Selected countries, not comprehensive, excluding real estate
investment, in millions of dollars, current)

2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ----
United States 279.5 260.3 329.6 357.7 446.3 524.9
Mexico 29.3 30.7 29.6 38.0 28.5 29.9
Canada -2.7 36.0 -9.6 17.5 3.7 26.5
El Salvador 15.1 16.4 23.4 25.4 12.8 19.0
Netherlands 0.0 2.5 229.2 29.7 17.5 18.7
Panama 26.2 61.2 30.6 -1.1 17.3 10.5
Spain 21.8 25.7 0.1 7.5 3.0 10.2
Italy 6.6 5.4 5.8 4.7 4.1 8.7
Venezuela 0.5 1.5 1.9 17.2 8.3 5.0
Guatemala 2.4 4.6 1.8 0.0 0.1 4.9
Colombia 1.0 6.4 3.5 -0.2 16.4 4.8
Nicaragua 1.8 5.5 2.5 1.8 1.6 1.8
Argentina 0.0 0.0 0.0 0.8 7.9 0.6
Peru 0.0 0.0 0.0 0.0 3.0 0.6
Taiwn 2.9 0.6 0.0 0.1 -0.2 0.2
Honduras 0.0 0.0 0.0 0.0 1.7 -1.3
Germany 10.3 3.3 1.3 57.8 9.7 -2.7
Switzerland 2.2 -0.6 5.0 8.4 22.2 -8.2

Central America* 36.0 19.4 26.4 27.7 27.2 24.4

TOTAL FDI 408.6 458.5 658.4 574.2 617.3 653.2
U.S. Share FDI 68.4% 56.8% 50.1% 62.3% 72.3% 80.4%

* Central American FDI is the sum of the four countries (Guatemala,
El Salvador, Honduras, and Nicaragua)
(Source: BCCR, FDI in Costa Rica 1997-2005, July 2006)

7. (U) According to many Free Zone U.S. operators, an end of CBI
benefits along with the proposed 15 percent income tax included in
the pending tax reform bill would force them to leave Costa Rica.
The failure to ratify and implement CAFTA to date is already having
negative effects in Costa Rica, particularly in the textile sector.
With CBTPA set to expire on September 30, 2008 and uncertainty over
Costa Rica's participation in CAFTA, textile shops have already
begun searching for more stable investment environments where there
is no question that access to the U.S. will continue unabated.

LARGEST U.S. EXPORTERS IN COSTA RICA
------------------------------------

8. (U) TABLE THREE

Top Ten US Firms in Costa Rica
based on Exports to US
------------------------------

Rank Company Exports ($ mn)
---- ----------------------- ----------------
1 Intel 1,832.1
2 Hospira (formerly Abbot Laboratorios) 315.9
3 Del Monte 163.9
4 Baxter Medical Products 149.5
5 Coca Cola 132.7
6 Conducen Wire & Cable 125.2
7 Remec Inc. 106.4
8 Trimpot Electronics 104.0
9 Scott Paper Company 101.3
10 Atlas Industrial 92.8
-------
Total Exports 3,123.8


Other US Firms with Significant
Investment in Costa Rica
-------------------------------

Babyliss (Costa Rica)
Boston Scientific
Bridgestone Firestone

C&K Components
Comercializadora Bananeros de Costa Rica
Confecciones Bor Kar
Confecciones H.D. Lee
Confecciones V.F.
Diversificados de Costa Rica (Dicor)
Frutas Tropicales Venecia
Gretex Manufacturera
Inamed Costa Rica
Melones del Pacifico
Mundial Comercializadora Internacional
Panduit de Costa Rica
Rawlings de Costa Rica
Compaa Bananera Atlntica
Teradyne Costa Rica
Ticofruit

(Source: Procomer)


IF COSTA RICA IS OUT OF CAFTA, WHAT NEXT?
-----------------------------------------

9. (U) Costa Rica currently faces an uncertain future regarding
unilateral trade preferences granted under CBI/CBTPA. The country
is in the throes of a national debate about the Central American
Free Trade Agreement that will culminate in a referendum tentatively
scheduled for October 7 to ratify Costa Rica's participation in
CAFTA. Assuming the referendum results in approval of CAFTA, Costa
Rica will have less than five months to pass the implementing
legislation that must accompany the ratification to bring the
country into compliance with its treaty obligations before a March
1, 2008 deadline. If this occurs, CAFTA will replace and expand the
benefits of CBI, accelerate exports between the two countries, and
attract even more foreign direct investment to Costa Rica.

COMMENT
-------

10. (SBU) There are three things that have to happen between now
and CAFTA's March 1, 2008 deadline for Entry Into Force: 1) a
plurality of participating Costa Rican voters must approve CAFTA in
the referendum scheduled for October 7; 2) this first-ever
referendum must garner a minimum percentage of the eligible
electorate (probably 40%) to be binding; and 3) the Costa Rican
legislature (or Asamblea) must pass all legislation necessary to
implement the agreement. We think the first condition is likely to
be met, and the second condition probably will be met. The third
condition remains extremely challenging, however, and will require
more political discipline and stronger leadership in the Asamblea
than the Arias administration and its pro-CAFTA coalition partners
have exhibited to date.

11. (SBU) If Costa Rica does not implement CAFTA before March 1,
2008 and no new legislation is passed to extend CBTPA beyond its
September 30, 2008 expiration, Costa Rica will lose, at a minimum,
preferential access for what in 2006 amounted to $350 million in
exports to the U.S. Additionally, we believe that if Costa Rica
rejects CAFTA, it would be difficult to certify that Costa Rica was
in compliance with several of the conditions of CBI. These include:
that it was providing equitable and reasonable access to its
markets, that the trade policies of Costa Rica were contributing to
the revitalization of the region, and that Costa Rica was
undertaking self-help measures to promote its own economic
development. If the referendum rejects CAFTA or the GOCR fails to
implement by March 1, 2008, we recommend a mid-term review of Costa
Rica's CBI eligibility.
LANGDALE

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