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Cablegate: Costa Rica: National Trade Estimate

VZCZCXYZ0002
RR RUEHWEB

DE RUEHSJ #1140/01 3492004
ZNR UUUUU ZZH
R 152003Z DEC 09
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 0119
INFO RUEHSJ/AMEMBASSY SAN JOSE

UNCLAS SAN JOSE 001140

SIPDIS
STATE PASS TO OPIC
STATE PASS TO USTR FOR DOLIVER AND AMALITO
STATE PASS TO EXIMBANK FOR XCREQUE
DEPT FOR WHA/CEN,WHA/EPSC:SGARRO, EEB/TTP/BT:RMANOGUE AND DGROUT

E.O. 12958: N/A
TAGS: ECON ETRD EINV PREL PGOV CS
SUBJECT: Costa Rica: National Trade Estimate

REF: 09 STATE 105978; 09 SANJOSE 954

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TRADE SUMMARY

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1. U.S. goods trade surplus with Costa Rica was $1.7 billion in
2008, an increase of $1.1 billion from $639 million in 2007. U.S.
goods exports in 2008 were $5.7 billion, up 24.0 percent.
Corresponding U.S. imports from Costa Rica were $3.9 billion, down
0.1 percent. Costa Rica is currently the 38th largest export market
for U.S. goods.

2. The stock of U.S. foreign direct investment (FDI) in Costa Rica
was $3.5 billion in 2007 (latest data available), up from $3.3
billion in 2006. U.S. FDI in Costa Rica is concentrated largely in
the manufacturing and wholesale trade sectors.

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IMPORT POLICIES

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Free Trade Agreement

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3. On August 5, 2004, the United States signed the United States
-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR
or Agreement) with five Central American countries (Costa Rica, El
Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican
Republic (the Parties). Under the Agreement, the Parties are
significantly liberalizing trade in goods and services. The
CAFTA-DR also includes important disciplines relating to: customs
administration and trade facilitation, technical barriers to trade,
government procurement, investment, telecommunications, electronic
commerce, intellectual property rights, transparency, and labor and
environmental protection.

4. The Agreement entered into force for the United States, El
Salvador, Guatemala, Honduras, and Nicaragua in 2006. The CAFTA-DR
entered into force for the Dominican Republic on March 1, 2007, and
for Costa Rica on January 1, 2009.

5. In 2008, the Parties implemented amendments to several
textile-related provisions of the CAFTA-DR, including, in
particular, changing the rules of origin to require the use of U.S.
or regional pocket bag fabric in originating apparel. The Parties
also implemented a reciprocal textile inputs sourcing rule with
Mexico. Under this rule, Mexico provides duty-free treatment on
certain apparel goods produced in a Central American country or the
Dominican Republic with U.S. inputs, and the United States will
provide reciprocal duty-free treatment under the CAFTA-DR on
certain apparel goods produced in a Central American country or the
Dominican Republic with Mexican inputs. These changes will further
strengthen and integrate regional textile and apparel manufacturing
and create new economic opportunities in the United States and the
region.

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Tariffs

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6. As a member of the Central American Common Market, Costa Rica

agreed in 1995 to harmonize its external tariff on most items at a
maximum of 15 percent with some exceptions.

7. Under the CAFTA-DR, about 80 percent of U.S. industrial and
consumer goods now enter Costa Rica duty free, with the remaining
tariffs on these goods phased out by 2015. Nearly all textile and
apparel goods that meet the Agreement's rules of origin now enter
Costa Rica duty-free and quota-free, creating economic
opportunities for U.S. and regional fiber, yarn, fabric, and
apparel manufacturing companies.

8. Under the CAFTA-DR, more than half of U.S. agricultural exports
now enter Costa Rica duty free. Costa Rica will eliminate its
remaining tariffs on virtually all agricultural products by 2020
(2022 for chicken leg quarters and 2025 for rice and dairy
products). For certain agricultural products, tariff-rate quotas
(TRQs) will permit some immediate duty-free access for specified
quantities during the tariff phase out period, with the duty-free
amount expanding during that period. Costa Rica will liberalize
trade in fresh potatoes and onions through expansion of a TRQ,
rather than by tariff reductions.

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Nontariff Measures

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9. Under the CAFTA-DR, Costa Rica committed to improve transparency
and efficiency in administering customs procedures, including the
CAFTA-DR rules of origin. Costa Rica also committed to ensuring
greater procedural certainty and fairness in the administration of
these procedures, and all the CAFTA-DR countries agreed to share
information to combat illegal transshipment of goods.

10. The establishment of the Information Technology Customs Control
(TICA) system has significantly improved a traditionally complex
and bureaucratic import process. Under the TICA system, the Costa
Rican customs authority has changed its focus from the verification
of goods to the verification of processes and data. Customs
officials now have up to four years to review the accuracy of
import declarations, which allows customs to facilitate the free
flow of goods while gathering necessary documentation. Costa Rica
launched the TICA system in mid 2007 for imported goods in all
ports of entry. For exported goods, Costa Rica initiated TICA in
early 2009 in all ports. The Free Trade Zone and "perfection of
goods" regimes are the only import/export categories that are not
yet covered under TICA and they are scheduled to be included during
the first half of 2010.

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STANDARDS, TESTING, LABELING, AND CERTIFICATION

--------------------------------------------- --

11. Please see San Jose 954 for our submission on Standards,
Testing, Labeling, and Certification and Sanitary and Phytosanitary
Measures.

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GOVERNMENT PROCUREMENT

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12. The CAFTA-DR requires that procuring entities use fair and
transparent procurement procedures, including advance notice of
purchases and timely and effective bid review procedures, for
procurement covered by the Agreement. Under the CAFTA-DR, U.S.

suppliers are permitted to bid on procurements of most Costa Rican
government entities, including key ministries and state-owned
enterprises, on the same basis as Costa Rican suppliers. The
anticorruption provisions in the Agreement require each government
to ensure under its domestic law that bribery in matters affecting
trade and investment, including in government procurement, is
treated as a criminal offense or is subject to comparable
penalties. Costa Rica is not a signatory to the WTO Agreement on
Government Procurement.

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EXPORT SUBSIDIES

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13. Tax holidays are available for investors in free trade zones,
unless tax credits are available in an investor's home country for
taxes paid in Costa Rica.

14. Under the CAFTA-DR, Costa Rica may not adopt new duty waivers
or expand existing duty waivers that are conditioned on the
fulfillment of a performance requirement (e.g., the export of a
given level or percentage of goods).

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INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

---------------------------------------------

15. The country's record of protecting IPR is mixed primarily due
to varying levels of commitment by different institutions and
branches of the government. The Attorney General of Costa Rica (a
semi-autonomous member of the Judicial Branch) generally does not
prosecute IPR violations. He asserts that he cannot allocate
scarce resources to IPR issues and places higher priority on
prosecuting other types of criminal behavior such as organized
crime. The Executive Branch has generally been strongly supportive
of IPR enforcement. Yet neither that focus nor the training of
judges and prosecutors on IPR laws has produced significant
improvements in the prosecution of IPR crimes. The Executive
Branch has failed to obtain the Legislative Assembly's approval of
the final IPR-related CAFTA-DR law that it committed to have in
place by the end of 2009.

16. In terms of process, Costa Rica has taken significant steps in
recent years to improve the protection and enforcement of IPR.
Costa Rica strengthened its legal framework for the protection of
IPR by substantially modifying its IPR laws and regulations in
preparation for the entry into force of the CAFTA-DR. The CAFTA-DR
provides for improved standards for the protection and enforcement
of a broad range of IPR, which are consistent with U.S. and
international standards, as well as with emerging international
standards, of protection and enforcement of IPR. Such improvements
include state-of-the-art protections for patents, trademarks,
undisclosed test, and other data submitted to obtain marketing
approval for pharmaceuticals and agricultural chemicals, and
digital copyrighted products such as software, music, text, and
videos and further deterrence of piracy and counterfeiting.

17. The government increased the budgets of the patent and
trademark office and the copyright office and is currently building
a new Intellectual Property building for those offices on the
grounds of the National Registry. The copyright office tripled in
personnel from 2006 and upgraded equipment. Patent registration
continues to experience a considerable backlog of applications
waiting for a patent examiner, although the number of patents
examined increased through the use of contracted examiners. The
patent office plans to continue and expand the use of contracted
examiners while also contracting five in-house patent examiners
with industry-competitive salaries. These positions were posted


for hiring in 2008, but the National Registry has not filled the
positions due to pending confirmations for the position salary
levels. The number of patents registered annually during the last
several years significantly increased:

18. Attribute 2006 2009

Industrial Registry Payroll 26 60

Registered Patents 9 84 (through Nov 30)

Registered Trademarks 9,191 10,282 (through Nov 30)

19. As part of the CAFTA-DR entry into force, Costa Rica agreed to
institute a special prosecutor's office in the Office of the
Attorney General. The Attorney General designated a person to
specialize in IPR crimes. However, the position has not evolved to
function as a separate entity or office outside of the
Miscellaneous Crimes office. The government restarted the
previously dormant IP Interdisciplinary Commission which the
Ministry of Justice leads and consists of representatives from the
Ministries of Foreign Trade, Public Security, and Science and
Technology, National Registry of Copyrights and Trademarks,
Industrial Property Registry, Customs, Office of the Attorney
General, and the Judicial School. The Commission operated
informally until December 1, when the president issued a decree
formally establishing it.

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SERVICES BARRIERS

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20. Under the CAFTA-DR, Costa Rica granted U.S. services suppliers
substantial access to its services market, including financial
services. Costa Rica committed to provide improved access in
sectors like express delivery and to grant new access in certain
professional services that previously had been reserved exclusively
to Costa Rican nationals. Costa Rica also agreed that portfolio
managers in the United States would be able to provide portfolio
management services to both mutual funds and pension funds in Costa
Rica. Mutual funds originating in the U.S. are reportedly
available now in Costa Rica but are receiving little investment
capital; tax issues and unfavorable perceptions of U.S. markets
appear to have made such mutual funds an unattractive investment.

21. In 2008 and 2009 Costa Rica made significant changes in its
legal and regulatory framework intended to implement its CAFTA-DR
commitments on insurance and telecommunications.

The newly-established insurance regulator SUGESE (still operating
under the wing of the Pensions Superintendent SUPEN), authorized
six insurance companies to compete with the former monopoly state
insurance provider and will accept applications from other
interested insurers. These new competitors are expected to start
operating in the market in January 2010. U.S. insurance suppliers
are now permitted to provide most forms of insurance, with the
remainder of the market to be opened by 2011. U.S. insurance
suppliers are able to operate as a branch or a subsidiary.

22. Under the CAFTA-DR, Costa Rica agreed to open three important
segments of its telecommunications market: private network
services, Internet services, and mobile wireless services.
Previously, Costa Rica's entire telecommunications market also was
reserved for the state monopoly, the Costa Rican Electricity
Institute (ICE). The telecommunications regulator SUTEL and the
telecommunications vice-ministry within the Ministry of
Environment, Energy and Telecommunications (MINAET) are
progressively opening the markets in private network and Internet
services. Both organizations are struggling with the challenges of
starting anew in an emerging wireless market. The mobile wireless
market has the necessary regulatory framework in place but is
dependent upon a successful auction of frequencies that is expected

to take place mid-2010, which would then set the stage for the
first new cell phone market entrants in early 2011.

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INVESTMENT BARRIERS

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23. The CAFTA-DR establishes a more secure and predictable legal
framework for U.S. investors operating in Costa Rica. Under the
CAFTA-DR, all forms of investment are protected including
enterprises, debt, concessions, contracts, and intellectual
property. U.S. investors enjoy, in almost all circumstances, the
right to establish, acquire, and operate investments in Costa Rica
on an equal footing with local investors. Among the rights
afforded to U.S. investors are due process protection and the right
to receive fair market value for property in the event of an
expropriation. Investor rights are protected under the CAFTA-DR
through an impartial procedure for dispute settlement that is fully
transparent and open to the public. Submissions to dispute panels
and dispute panel hearings will be open to the public, and
interested parties will have the opportunity to submit their views.

24. The Costa Rican regulatory environment can pose significant
barriers to successful investment in Costa Rica. One common
problem is that municipal government and central government
institutions at times disagree in their treatment of specific
projects, leaving the investor in limbo. Even when dealing only
with central government institutions, an investor may follow the
technical advice of one institution only to find himself accused of
illegal behavior by another institution. Several large investors
have faced the related problem that the central government's
approach towards a specific project has changed significantly over
the years, stranding the investor. Though the law protects land
owners against squatters, in practice illegal occupancy of property
looms as a threat to investors through coercion and/or illegal
changes of ownership on property titles.

25. Many U.S. investors cite the slow pace of Costa Rica's judicial
system as a barrier. A related concern is the frequent recourse to
legal challenges before Costa Rica's constitutional court to review
whether government authorities have acted illegally or to review
the constitutionality of legislation or regulations. Some U.S.
investors believe that such challenges have been used at times to
thwart investments or hinder the quick resolution of disputes.

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ELECTRONIC COMMERCE

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26. The CAFTA-DR includes provisions on electronic commerce that
reflect its importance to global trade. Under the CAFTA-DR, Costa
Rica has committed to provide nondiscriminatory treatment of
digital products, and not to impose customs duties on digital
products transmitted electronically.

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OTHER BARRIERS

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27. Under the CAFTA-DR, Costa Rica agreed to modify its dealer
protection regime to provide more freedom to negotiate the terms of
commercial relations and to encourage the use of arbitration to

resolve disputes between parties to dealer contracts. In December
2007, Costa Rica enacted legislation intended to implement this
commitment.

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DISTRIBUTION

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28. We will send a Word document with paragraphs 1 through 27 above
via e-mail to the Office of the United States Trade Representative
(USTR) as specified in reftel.
BRENNAN

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