ITA: a key ingredient for integrating Costa Rica in Global Value Chains

Consistent trade liberalization FDI attraction: cornerstone of development strategy Costa Rica and the ITA INTEL: turning point for FDI attraction performance Diversification and sophistication of exports Integration in GVCs What next? Summary

Outline

Consistent trade liberalization

Robust export platform provides for security and predictability to trade and investment:

9 FTAs in force and 3 forthcoming (Singapore, Peru and EU-CA EPA)

1990 1995 1997 2009 2011

Accession to the GATT

WTO Member

First bilateral FTA (with Mexico)

ITA Signatory

CAFTA-DR enters into

force

FTA with China enters

into force

80´s

Unilateral trade liberalization started in the mid 80s

Consistent trade liberalization

Source: own elaboration, using data from COMEX.

46.3%

15.6%

10.5%

6.2% 5.9%

1982 1986 1995 2000 2011

Costa Rica: Average tariff (1982-2011)

Consistent trade liberalization

67% 73%

19% 8%

14% 19%

0%

20%

40%

60%

80%

100%

Exports Imports

Costa Rica: Trade covered by FTAs (2011)

FTAs in force FTAs negotiated Not covered yet

Source: own elaboration, using data from PROCOMER and BCCR.

Source: own elaboration, using data from BCCR.

FDI attraction: cornerstone of development strategy

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Perc

en

tag

e

Year

Costa Rica: FDI as a share of GDP (1981-2011)

FDI / GDP Average Trend

Unilateral Trade

Opening GATT

Accession

WTO and

PTAs GVCs and

PTAs

Source: own elaboration, using data from PROCOMER and BCCR.

FDI attraction: cornerstone of development strategy

-1,000

1,000

3,000

5,000

7,000

9,000

11,000

0

500

1,000

1,500

2,000

2,500

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Exp

ort

s

FD

I

Year

Costa Rica: Exports of goods and FDI (1991-2011)

FDI Exports

• Agricultural exports accounted for 53% of Costa Rica’s total exports by 1995 • Nevertheless, Costa Rica was an early supporter and signatory of the ITA • The entry into force of the ITA coincided with the time in which INTEL and other leading high-tech firms were considering Costa Rica as a potential destination for their investments • Costa Rica’s early support and membership to ITA signaled the country’s commitment to shift its export supply towards the knowledge economy • Such shift has taken place through the diversification and sophistication of the country’s exports, which are now integrated in GVCs

Costa Rica and the ITA - Why?

Source: own elaboration, using data from PROCOMER.

Costa Rica and the ITA

3%

22%

5%

34%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1996 2011

Costa Rica: share of ITA products in exports

Total exports Manufactured exports

Source: own elaboration, using data from PROCOMER.

U.S.A. 35%

Hong Kong 22%

EU-27 18%

Malaysia 8%

China 7%

Chinese Taipei 3%

Japan 3%

Other 4%

Costa Rica: Destination markets for ITA exports (2011)

Costa Rica and the ITA

INTEL: turning point for FDI attraction performance

Agroindustrial Sector

First contact centers

Blue-Chip companies

Consolidation of CR as one of the main FDI locations in Latin America

1st leading medical devices company

19

60

19

82

19

86

19

90

19

95

20

00

20

04

20

11

Pioneer of the industrial

sector

CR ranks 1st among high-tech exporters in Lat.Am

16.3% 14.9% 19.6%

23.5%

12.9% 4.0%

36.2%

20.4% 25.9%

15.5%

12.8% 14.2%

8.5%

39.0% 36.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 2001 2010

Costa Rica: Structure of Industrial Exports by Intensity in the Use

of Factors of Production

Differentiated product Labor-intensive (L)

Natural resources-intensive Scale-intensive (K)

Science-based

Source: COMEX, using data from BCCR and PROCOMER.

1994: Top 10 Exports

Bananas 22%

Coffee 12%

Pineapple 2%

Jewelry 2%

Cotton panties 2%

Hair dryers 2%

Melons 2%

Boned beef 1%

Shrimp 1%

Ornamental plants 1%

Other 53%

2011: Top 10 Exports

Electronic integrated circuits 18%

Bananas 8%

Pineapple 7%

Serum infusion and transfusion equipment 6%

Coffee 4%

Food preparations 3%

Other medical devices 3%

Medical prosthesis 2%

Pharmaceuticals 2%

Crude palm oil 2%

Other 47%

Diversification and sophistication of exports

Diversification and sophistication of exports

Source: CINDE, using data from the World Bank.

0%

10%

20%

30%

40%

50%

Kore

a

Ch

ina

Irela

nd

US

A

Me

xic

o

OE

CD

Surin

am

e

Barb

ad

os

Bra

zil

LA

C

Fin

land

Boliv

ia

Ecu

ado

r

Arg

entina

Para

gu

ay

Peru

Spain

Uru

guay

El S

alv

ador

Gua

tem

ala

Ch

ile

Co

lom

bia

Vene

zu

ela

Nic

ara

gua

Ho

ndu

ras

Jam

aic

a

Trin

& T

ob

Share of high-tech exports in manufactured exports

2010

1997

GVC-related exports 37%

Other exports 63%

Costa Rica: Average share of GVC-related exports in total exports (2009-2011)

Source: own elaboration, using data from COMEX.

Integration in GVCs

Integration in GVCs

Source: own elaboration, using data from PROCOMER.

Electronics 55%

Medical devices 36%

Automotive 7%

Film & Broadcasting 1%

Aeronautic /Aerospace

1%

Costa Rica: GVC-related exports by industry (2011)

• Attraction of FDI • Interagency execution

Strategic vision Proactive and coordinated

approach

• Political and economic stability • Export processing zone regime

Sound business environment

• WTO (incl. ITA) + 12 PTAs • Robust air transportation network

Solid export platform

• Quality of educational system -1st in Latin America (WEF) • Cost competitive

Educated work force

• Middle of the Americas • Proximity to US market

Privileged geographical location

Integration in GVCs: key drivers

• Trade liberalization

• The role of PTAs

• Removal of non-tariff barriers

• Increased competition in trade-related services

• Exploring new ideas

• Eg. expansion of the ITA

• Trade facilitation

• Simplification and harmonization of trade regulations and procedures

• Other

• Protection of IPRs

• A multilateral investment framework?

What next? Role for trade policy in enhancing Costa Rica’s participation in GVC?

What next? Prospects for expanding ITA

• Substantial transformation occurred in IT over the years calls for an expansion of the Agreement

• Coverage of ITA should be expanded to respond to the needs of IT-trading agents and to contribute to global economic recovery

• Need for new signatories: non-signatory IT producers should be brought on board

• Broader product coverage: as technology advances and becomes more important in everyday life, more IT products should benefit from ITA

Costa Rica is supportive of the prompt beginning of

negotiations to expand the coverage of the ITA

Summary

• Costa Rica has pursued a significant diversification and sophistication of its exports through trade liberalization and FDI attraction

• The ITA has contributed to the diversification and sophistication of Costa Rica’s exports

• Costa Rica ranks 1st in Latin America (and 4th worldwide) on the share of high-tech exports in manufactured exports

• A significant share of Costa Rica’s total exports is integrated in GVCs

• Costa Rica is supportive of the prompt beginning of negotiations to expand the coverage (signatories and products) of the ITA, which has been a key ingredient for integrating in GVCs

/comexcr

The experience of developing ITA participants: the case of Costa Rica