I.                   introduction

1.                   Since its previous Trade Policy Review, Costa Rica has continued consolidating its strategy of integration into the global economy through active participation in bilateral, regional and multilateral trade negotiations, as well as through policies aimed at attracting foreign direct investment, particularly in services and high-tech activities.

2.                   The success of this trade policy is reflected in the sustained growth of exports driven by the diversification of products and markets, as well as in increased foreign direct investment.

3.                   It is planned to continue with this model over the next few years, with the aim of further increasing the volume of exports and consolidating markets important to Costa Rica, through active participation in the Doha Round negotiations and the negotiation and entry into force of new trade agreements with partners of key importance to the Costa Rican economy.  The ultimate goal of this strategy is to support national development policies which promote the generation of new sources of employment and improved living standards for the entire population.

II.                economic and trade policy environment

4.                   In recent years, the external sector has continued to be one of the main engines of the Costa Rican economy.  In the period 2001-2006, exports grew at an average rate of 10.46 per cent, reaching a level of 17.9 per cent in 2006, and a record total of US$8.215 billion.

5.                   Goods exports grew by an average of 10.46 per cent during the first five years of the present decade, driven primarily by industrial goods, which account for roughly 69 per cent of total exports.  Some of the most important industrial export products are integrated circuits and computer parts, medicines, textiles and medical devices.  At the same time, agricultural products account for 31 per cent of total Costa Rican exports, including bananas, pineapples, melons and coffee in particular.

6.                   Foreign trade in services has expanded over the last six years.  While services exports totalled US$1.9255 billion in 2001, the corresponding figure for 2005 was US$2.5355, an increase of 24 per cent over that period.  Tourism was the market leader, followed by transport, computer and information services and other business services.  The services sector's share of Costa Rican GDP in 2005 was slightly more than 60 per cent, while it accounted for 64 per cent of total employment in the same year, reflecting the importance of this sector in the domestic economy.

7.                   The policy to attract foreign direct investment has focussed on four specific areas:  the electronics industry, the medical devices sector, information technology-based services and tourism.  This strategy has generated a significant increase in employment opportunities together with substantial transfers of technology and know-how, which has boosted productivity and the volume of remuneration in recent years.

8.                   The increase in investment flows, which began to intensify at the end of the 1990s, has continued apace since that period.  Over the last six years, Costa Rica has recorded an average annual growth rate of 4.5 per cent, reaching a level of 7.9 per cent in 2006.  In the latter year, Costa Rica achieved a historic record in attracting US$1.41 billion worth of foreign direct investment, more than double the inflow of the previous year.  This figure represents 6.4 of the gross domestic product.

9.                   Despite the solid performance by the external sector of the economy, Costa Rica has been unable to achieve the desired fiscal balance.  The Government has endeavoured to stabilize public finances through expenditure control measures and reforms to improve tax collection, which served to lower the deficit from 2003.  The public sector deficit in 2005 stood at 2.3 per cent of GDP and is expected to be roughly 0.5 per cent of GDP in 2006.

10.               However, the financial situation in the public sector has not hampered the effectiveness of efforts to maintain stability.  With the aim of reducing the inflation rate, the exchange rate system of mini-devaluations was modified in October 2006 through the adoption of a system of exchange rate bands.  The annual rate of increase in consumer prices was successfully lowered from 14.6 per cent in 2005 to 10.6 per cent in 2006, and it is expected to continue falling more sharply in 2007 as a result of this change.

III.             trade policy developments 2001-2006

11.               The overarching objective of Costa Rica's trade policy is to promote, facilitate and consolidate the country's integration into the global economy in a manner consistent with its domestic economic and social welfare objectives.  To that end, a package of core strategies was implemented between 2001 and 2006 to guide and lend consistency to national policy in the quest for a larger presence on world markets.

12.               They consisted of improving and ensuring access for Costa Rican products to foreign markets;  safeguarding Costa Rica's commercial interests against protectionism by other countries;  establishing rules and procedures for the proper management of trade relations;  monitoring compliance with all obligations under trade or investment agreements signed by Costa Rica;  broadly linking all sectors in the country with export activities;  promoting Costa Rica's exportable supply abroad;  effecting the internal changes needed to develop a more efficient economy that fosters the growth of foreign trade;  and creating the conditions necessary to attract domestic and foreign investment.

13.               In pursuit of these goals, the Government of Costa Rica is applying in combination a package of instruments that include participation in the multilateral system, deepening regional integration and negotiating trade and investment agreements.

(i)         Multilateral system

Costa Rica's participation in the WTO

14.               Costa Rica has unwaveringly maintained its commitment to the multilateral trading system represented by the WTO.  This commitment has been reflected, in particular, in its active participation in the Doha Round and its interest in a successful outcome to those negotiations.  Costa Rica has endorsed the goals of the work programme, and has accordingly upheld high levels of ambition on the main topics of the Round, particularly agriculture, market access for non-agricultural products and the strengthening of the WTO's rules and principles.  In this connection, it is hoped that Members will shortly adopt agreements that facilitate progress on the objectives of the Doha Round and the achievement of a successful outcome thereto.

15.               Costa Rica resolutely supports efforts to foster the inclusion of developing countries in the global economy.  In this connection, in the market access negotiations concerning both agriculture and NAMA, it has adopted an approach based on the importance of the export or offensive dimension of special and differential treatment.  Similarly, Costa Rica considers that the way in which trade contributes to development is rooted in the principle of non-discrimination, one of the fundamental principles of the multilateral trading system, and it has promoted respect for that principle.

16.               In the light of these objectives, Costa Rica has put forward a number of negotiating proposals and has participated actively in formal and informal coalitions with other Members which share its interests.  Some of the topics that are of interest to Costa Rica in the ongoing negotiations are outlined below.

Agriculture negotiations

17.               Costa Rica has been a proponent and active supporter of thoroughgoing agricultural reform for many years.  In this area, the aim has always been to achieve for agricultural products treatment similar to that received by industrial products, making them subject to the same rules and conditions.  With this aim, and as a member of the Cairns Group, we have made sustained and serious efforts on the three negotiating pillars.

18.               Costa Rica's development goals are clearly linked to the opening up of markets and the achievement of a distortion-free trading system in which agricultural products have access to new markets under better conditions.  It is a matter of priority for Costa Rica to make significant headway in reducing and disciplining domestic support and subsidies which distort production and trade in agricultural products.  Similarly, as a result of these negotiations, Costa Rica considers it essential to make substantial improvements in market access for agricultural products and, in particular, to ensure full compliance with the long-standing commitment to achieve the fullest liberalization of trade in tropical agricultural products and alternative products, as was recognized in the Framework Agreement on modalities adopted in July 2004.  To that end, Costa Rica has acted as coordinator for a group of developing countries, with the aim of securing fulfilment of the mandate for tropical and alternative products and in order to defend the basic principle of this Organization:  the most favoured nation principle.  Costa Rica will also seek to ensure compliance with the commitment adopted at the Hong Kong Ministerial Conference concerning the elimination of all forms of export subsidies, and it hopes that this commitment can become a reality very soon and  before the agreed date.

NAMA

19.               Costa Rica is mindful of the fact that its future as a small country aspiring to development depends on its capacity to continue expanding the volume and sophistication of its industrial exports.  This calls for greater market access with clearer rules.  Costa Rica supports an ambitious formula for reducing industrial tariffs, under which commitments would be expressed entirely in ad valorem terms and all participants would bind all of their tariffs.  To this end, Costa Rica continues to favour the adoption of a harmonizing, straightforward and single Swiss formula to be applied line by line to all participants, with two coefficients, one for developed countries and another for developing countries, which would serve substantially to reduce tariffs, eliminate tariff peaks and high tariffs and significantly improve market access.

Services

20.               Costa Rica recognizes the importance of negotiations on market access in services and the development of GATS rules.  In this connection, it submitted an initial offer and will in due course submit a revised offer as part of its contribution to the successful outcome of these negotiations.  Similarly, it hopes that those Members to which it has addressed particular requests in this area, especially developed Members, will give a satisfactory response to those requests.

WTO Rules

21.               The aim of improving access to other markets must be supplemented by full compliance with the commitment to clarify and improve the WTO's rules, particularly its anti-dumping rules, so as to guarantee that these mechanisms do not undermine such market access and are not used abusively and for protectionist purposes.

Trade facilitation

22.               Costa Rica has actively supported the trade facilitation negotiations because of the importance to its exporters and importers of regular, straightforward, fair, transparent and efficient cross-border procedures that can be used to take full advantage of the opportunities created by trade liberalization.

Dispute Settlement Understanding review

23.               Costa Rica continues to regard the Dispute Settlement Understanding as the best guarantee for the protection of its interests, for safeguarding its rights and ensuring predictability and security in its trade relations.  Hence the importance to our country of the negotiations on this review, in which it has taken an active part, having put forward proposals and ideas to further the process.  Costa Rica considers that this review should serve to strengthen the role of the Dispute Settlement Understanding as a guarantee of compliance with multilateral rules and commitments and to ensure the integrity and credibility of the multilateral system.

(ii)        Regional forums

Central America

24.               The Central American countries are Costa Rica's third most important export market after the United States and the European Union.  In 2006, 14 per cent of Costa Rica's exports were sent to the region, with a value of close to US$1.137 billion.

25.               During the period 2001-2006, work continued on the establishment of a Central American customs union.  Thus far, 94.9 per cent of tariff lines have been successfully harmonized and substantial progress has been made in respect of sanitary and phytosanitary registration, rules of origin, safeguards and unfair practices, and customs procedures and regulations.  In 2003, the Council of Ministers for Central American Economic Integration approved the implementation of the mechanism for the settlement of Central American trade disputes as well as the model rules of procedure and the code of conduct, which were modified by the same Council in 2006 with a view to improving their functioning.  Work is currently proceeding on the conclusion of an agreement on trade in services and investment.

26.               Costa Rica takes an active and constructive part in all aspects of the negotiation of the customs union and considers it important to focus efforts on the achievement of concrete and attainable goals, taking into account the reality of the countries of the region.

(iii)       Negotiation of trade and investment agreements

Free trade agreements in force

27.               Free trade agreements with Canada, Chile, the Dominican Republic and the countries of the Caribbean Community (CARICOM) were negotiated and put into effect by Costa Rica between 2001 and 2006.  Apart from Central America, a free trade agreement with Mexico has been in force since 1995, and a partial scope agreement with Panama since 1973.  In addition, a free trade agreement with the Dominican Republic, Central America and the United States was concluded in 2004 and is expected to enter into force by the end of 2007.

28.               Costa Rica's exports to markets with which is has preferential agreements accounted for 24 per cent of total exports in 2006, an increase of 17 per cent compared with the previous year, while the country's imports from those markets accounted for approximately 13.8 per cent of total imports.  For the year in question, Costa Rica posted a positive trade balance of US$371 million with those trading partners.

Free Trade Agreement between Costa Rica and Mexico

29.               The Agreement between Costa Rica and Mexico, which has been in force for 12 years, provides for duty free access for 98 per cent of goods in the countries' two-way trade.  Trade under this agreement has been very buoyant, with average growth rates of 15.6 per cent for exports and 9.1 per cent for imports over the last five years.  Despite the continuous increase in exports, Costa Rica continues to have a negative balance in its trade relations with Mexico.

Free Trade Agreement between Costa Rica and Chile

30.               The Free Trade Agreement with Chile entered into force in February 2002, becoming the second new-generation agreement for Costa Rica, which contains rules and disciplines applicable not only to trade in goods, but also to other areas such as trade in services, investment and government procurement.  Trade with Chile has traditionally been small and in deficit for Costa Rica.  In 2006 Costa Rice exported products worth US$14.8 million to Chile, including medicines, food preparations and aluminium sheet and strip.  Imports from Chile amounted to US$214 million, mainly owing to the increase in imports of petroleum oils and copper wire.

Free Trade Agreement between Central America and the Dominican Republic

31.               The Free Trade Agreement between Central America and the Dominican Republic entered into force for Costa Rica in March 2002 and provides duty free access for roughly 92 per cent of goods.  Costa Rican exports to that market have grown by an average of 22.2 per cent during the years in which the agreement has been in force.  Exports totalled US$141.5 million in 2006.  Import levels have behaved more erratically, having doubled between 2003 and 2004, before falling slightly in 2005 and rising again in 2006, with a closing value of US$18.4 million.

Free Trade Agreement between Costa Rica and Canada

32.               The Free Trade Agreement with Canada, a new-generation agreement and Costa Rica's first with a developed country, entered into force in November 2002.  Over the last four years, trade between the two countries has recorded high average growth rates, particularly in the case of exports, which have grown by an average of 27.1 per cent, compared with a rate of 6.1 per cent for imports.

Free Trade and Preferential Exchange Agreement between Costa Rica and Panama

33.               Under Costa Rica's Free Trade and Preferential Exchange Agreement with Panama, in force since 1973, tariff preferences of around 25 per cent are granted on Harmonized System products.  Trade between the two countries amounted to approximately US$430 million in 2006, with a balance of US$105.5 million in favour of Costa Rica.

34.               In May 2001, Central America concluded negotiations on the normative aspects of the establishment of a free trade agreement with Panama.  One year later, Costa Rica initiated bilateral market access negotiations, which were suspended that same year, and it was not until 2006 that the countries resumed the negotiations, which are expected to conclude in the next few months.

Free Trade Agreement with the Caribbean Community

35.               On 9 August 2005, the Legislative Assembly approved on second reading the Free Trade Agreement between Costa Rica and the Caribbean Community (CARICOM), a trade agreement between Costa Rica and 12 CARICOM countries, namely:  Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname and Trinidad and Tobago.

36.               The Agreement entered into force on 15 November 2005 with respect to Trinidad and Tobago and in 2006 with respect to Guyana and Barbados.  Adoption of the Agreement is still pending in the other CARICOM countries.

37.               While it is too early to evaluate the agreement with CARICOM, which moreover is valid only for Trinidad and Tobago, Guyana and Barbados, it is important to note that exports to the Trinidadian market increased by 34 per cent between 2005 and 2006, with a closing value in 2006 of around US$27 million.

38.               The agreement with CARICOM provides for immediate duty-free access for approximately 90 per cent of goods in two-way trade.  Costa Rica grants special and differential treatment to the smaller economies of CARICOM by allowing duty-free access for their products on a non-reciprocal basis.

Agreements on the Promotion and Reciprocal Protection of Investments

39.               Costa Rica has continued with the negotiation, conclusion and legislative approval of agreements on the promotion and reciprocal protection of investments.  These agreements are designed to protect and encourage foreign investment through a series of substantive and procedural guarantees for investors.  In this context, 13 agreements are in force between Costa Rica and the following countries:  Argentina, Canada, Chile, China, Czech Republic, France, Germany, Korea, the Netherlands, Paraguay, Spain, Switzerland and Venezuela.  At the same time, legislative approval is pending for the agreements with Ecuador, Bolivia, Finland, Belgium and Luxembourg.

IV.              FUTURE POLICY DIRECTIONS

40.               Costa Rica will continue the process of intelligent integration into the global economy over the next few years, by identifying important challenges to be met as a way of generating income to enable the population to attain higher standards of living and social welfare.  Creating quality, well paid jobs, enhancing local producers' involvement in foreign trade by promoting production linkages, continuing to attract high quality foreign direct investment, safeguarding the environmental sustainability of economic development and increasing the added value of exports are just some of these challenges.

41.               With a view to meeting the challenges, Costa Rica has drawn up a short, medium and long term foreign trade strategy focusing on five main priorities;  trade negotiations, export promotion, investment promotion, administration of trade agreements and relations with civil society organizations.

42.               Costa Rica will continue to seek better market access conditions for its products and services through trade negotiations with key economic partners.  Particular attention will be paid to the Doha Round multilateral trade negotiation efforts, the commencement of negotiations in 2007 for the conclusion of an association agreement between Central America and the European Union, and consolidation of the process of customs union with the Central American countries.

43.               Export promotion is a key component of the policy of integration into the global economy.  Given the satisfactory results achieved thus far, the Government aims to achieve sustained export growth with a view to meeting the target of US$18 billion by 2010.

44.               In the area of investment promotion, the country's primary objective will be to continue to establish national and foreign companies with high added value, in order to promote the diversification of production and the development of new products that will contribute to the transfer of know-how and technology and stimulate the process of production linkage.  The medium term goal is to achieve annual investment of US$1.5 billion.

45.               As the trade negotiations with other trading partners draw to a close, the issue of the administration of trade agreements will become increasingly important.  Hence, one of the main goals is to ensure due compliance with all obligations under all treaties, agreements and other trade and investment instruments, whether bilateral, regional or multilateral in nature.

46.               Finally, it is extremely important to promote and maintain a continuous dialogue with the organizations representative of Costa Rican society, in order to explain the import and benefits to the national development strategy of the linkage with foreign trade, as well as to ascertain and address their points of view.

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