January 2003
This Country Commercial Guide (CCG) presents a comprehensive look at Costa Rica’s commercial environment, using economic, political and market analysis. CCGs were established by the recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. Embassies through the combined efforts of several U.S. Government agencies.
The United States is Costa Rica’s most important commercial and agricultural partner. Costa Ricans welcome U.S. technology, products and services due to the close geographical proximity of the two countries and the high quality and wide selection of competitively priced products. In 2001, Costa Rica ranked 39th as a market for U.S. exports and early indications for 2002 show it has improved to 33rd place. Costa Rica’s GDP growth slowed to 0.9 percent in 2001 and is expected to be about 1.4 percent in 2002.
Costa Rica earned its first positive merchandise trade balance in decades in 1999, led by export processing industries. International reserves declined from a record high of USD 1.47 billion in 1999 to USD 1.28 billion in 2001 primarily due to declining traditional exports. FDI inflows rose from USD 409 million in 2000 to USD 448 million in 2001, of which 59 percent came from the U.S., an increase of eight percent over prior year. Costa Rica continues to be affected by the slowdown in the U.S. economy, the decline in worldwide agricultural commodity prices, particularly for coffee and bananas, as well as the increasing costs for imported petroleum. Contributing to the slowdown has been the cutback in production of microchips from Intel Corporation, which has become increasingly important to the overall performance of the economy. Open unemployment stands at 6 percent. In 2001-2002, currency devaluation has increased slightly to 9.1 percent compared to 7.4 percent for 2000-2001 and 6.7 percent for 1999-2000. Roughly 60% of all bank deposits are in US dollars; the colon is the official currency but people are permitted to make payments in U.S. dollars.
On April 7, 2002 Abel Pacheco, a psychiatrist by profession, won the Costa Rican Presidency for his Social Christian Unity Party (PUSC) with 58 percent of the vote in a two-candidate second-round election. This historic election was the first time an election was decided in a second round vote and was the first time the PUSC party succeeded itself in the Presidency. President Pacheco faces a major challenge in dealing with a fractured legislative assembly representing a broad range of political and economic ideologies. Otton Solis leads a new, growing political party, the Citizens Action Party (PAC), which emphasizes citizen participation and transparency. The Pacheco Government is expected to find broad support for its anti-corruption, anti-waste, and law enforcement initiatives. In foreign trade policy, the new Administration is expected to continue seeking bilateral and regional trade agreements.
Historically known as a producer of bananas and coffee, in the 1990s Costa Rica earned the reputation of being an attractive location for foreign investment by high-technology companies and a popular destination for tourists. The country’s relatively well-educated and productive work force, favorable tax and duties regime in free trade zones, and central location in the hemisphere have attracted foreign investors. Investors whose top priority is low cost labor go elsewhere in the region. The 1998 opening of Intel Corporation’s US$ 200 million microprocessor finishing and testing facility was a milestone in the country’s transition to high-technology industry and was followed by large new investments by Abbott Laboratories and Procter and Gamble. Despite the attacks of September 11th, Costa Rica’s tourism industry continues to successfully market the country abroad as an attractive destination, generating more foreign exchange than the traditional agricultural sector. Tourism grew 4% by year-end 2001; nearly 50% of the tourists come from the U.S. Over 30,000 U.S. citizens are Costa Rican residents who, like the tourists, are attracted by the climate, political stability, and hospitable atmosphere.
Costa Rica’s state-dominated economy cannot maintain adequate rates of economic growth at a time when the population continues to rise due to both natural population increase and immigration, mostly from Nicaragua, followed by Colombia and Argentina. The country’s economic problems include a large fiscal deficit, a growing debt burden, and high domestic interest rates. Efforts to open state-controlled essential services to private sector participation, (telecommunications, energy, water, insurance) face strong opposition. In April 2000, proposed legislation to open ICE, the telecommunications and energy monopoly, to private sector participation was withdrawn in the face of widespread opposition from key unions and political parties. The new Administration has not put forth any proposals regarding opening state monopolies to private sector participation. The only new legislation that has surfaced with regard to ICE is related to promoting Internet infrastructure development.
The government will continue to rely on the 1998 concessions law to build and manage public works projects. There has yet to be a successful concession completed in Costa Rica. Alterra Partners, a consortium led by the U.S. firm Bechtel in May 2001 assumed management of Costa Rica’s principal airport under a 20 year, USD 200 million contract. A final agreement on applicable tariffs for use of airport facilities is still pending, a year and a half after the contract was ratified. The railroad concession project was cancelled in 2001. In 2002, of the five bids for projects related to the principal Pacific seaport, two are being disputed in the Comptroller General’s office and the other three have been cancelled. The concession to build a new prison facility at Pococi was awarded to a U.S. company, Management Training Corporation (MTC) and approved by the Comptrollers office. However, specific issues have been raised as unconstitutional and the contract has yet to be finalized. The San Jose-Caldera highway project is also awaiting approval by the Comptroller’s office. The ongoing lack of resources for infrastructure projects can be seen in the backlogs for telecommunications services and congestion in the ports. The Government of Costa Rica has informally issued its plan for incentives to replace tax holidays for investment in free trade zones, which are scheduled to phase out beginning in 2007 according to World Trade Organization (WTO) agreements.
Regional integration of Central American markets is progressing due to the resolution of internal political conflicts, lowered tariffs and other trade barriers, and renewed attention to economic development. Approval of the Caribbean Basin Trade Partnership Act of 2000 (CBTPA) increased trade between the US and Caribbean countries and trade within the region for components of products destined for the U.S. market. CBTPA proved attractive to the garment assembly and tuna processing industries. On January 16, 2002 President Bush announced that his Administration would explore a Central American Free Trade Agreement, (CAFTA). The President’s announcement followed repeated expressions of interest in FTA negotiations from members of the Central American Common Market (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua). In September 2001, the United States and the CACM countries launched a series of technical workshops for discussion of various aspects of trade negotiations. Five such workshops have been held, the most recent one in Washington, DC (July 10-11, 2002) where issues such as E-Commerce, trade capacity, and technical assistance were raised. Topics discussed in prior workshops included: trade policy coordination, market access, government procurement, GSP, services, labor, environment, and investment. Costa Rica has concluded bilateral trade agreements with Mexico, Chile, Trinidad and Tobago and the Dominican Republic. A trade agreement with Canada has not yet been ratified by the Costa Rican legislature, largely due to its agricultural provisions. Costa Rica is enthusiastic about the proposed CAFTA; it is considered a top priority, as it will help jump-start the stagnant economy and improve the investment climate.
The state monopolies, infrastructure weaknesses and continuing deficiencies in the enforcement of intellectual property rights constrain the growth of FDI and pace of starting up operations in Costa Rica. Investors of all nationalities are subject to procedural and bureaucratic requirements that can be cumbersome and subject to literal interpretation. They also face an error-prone land titling system and sluggish judicial system vis-à-vis civil cases. Past government expropriation policies have created problems for some U.S. investors. In addition, land invasions by squatters also remain problematic. While the Costa Rican government has made progress in resolving expropriation cases and has made improvements in the legal framework, some cases, as well as land invasions by squatters, remain unresolved.
In April 2002, the USTR moved Costa Rica from the “Priority Watch List” to the “Watch List” under a Special 301 annual IPR review in recognition of Costa Rican efforts to improve its enforcement of intellectual property rights laws. The Legislative Assembly passed eight new laws in 2000 to bring domestic legislation into compliance with the WTO TRIPS Agreement, finishing with the law on enforcement passed in October 2000. Representatives of industries affected by copyright piracy continue to express concern that penalties and enforcement procedures codified by the new legislation are inadequate.
Country Commercial Guides are available for U.S. exporters from the National Trade Data Bank’s CD-ROM or via the Internet. Please contact Stat-USA at 1-800-STAT-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at http://www.stat-usa.gov; http://www.state.gov/; and http://www.mac.doc.gov. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country-specific commercial information should contact the U.S. Department of Commerce, Trade Information Center by phone at 1-800-USA-TRADE or by fax at (202) 482-4473.
