Alejandra Orias Garita, Alejandro Paniagua Vargas, Ricarda Schmidt – International Relations students

Against the backdrop of ongoing discussions regarding the advantages and disadvantages of Free Trade Agreements, it might be interesting to take a closer look at how these economic agreements influence Costa Rican’s exports. Having many free trade agreements with certain individual states, as well as being a member of DRCAFTA, and considering the option of joining the Pacific Alliance as a full member (Procomer, n.d.), these effects could play an important role for the country’s future decisions in whether to or whether not to negotiate a further agreement.

For small and medium-sized enterprises, it might lead to less costs caused by no tariffs existing. However, it was found that as SMEs do not have such a high productivity as big companies, they are not simply able to the new and higher quantities they would have to produce in order to be more competitive, and increase their supply to a free trade zone market (Campbell, 1996).

This shows a general problem for not only small and medium-sized enterprises but also for Costa Rica, in general, when facing Free Trade Zones with many different parties, and not only one country is involved. Because compared to many other countries in Latin America, and especially in South America, Costa Rica is relatively small. This means that the cumulative amount of products it can produce is naturally smaller than the ones of other bigger countries such as Chile, Argentina or Mexico. This applies especially to product categories in which quantity influences the price, such as agricultural products. Therefore, they could suffer from too high competition because if other countries in the more-party-agreement can easily produce higher quantities, they will also be able to sell at a far lower cost, which will make the Costa Rican products less competitive. And as many of Costa Rica’s main exports consist of coffee, bananas, pineapples, melons, and further agricultural products (Procomer, n.d.), FTAs involving many bigger countries would have a negative influence on this percentage of Costa Rica’s exports.

However, agreements with more than one party, involving countries having an equal size, and an equal or lower production possibilities of agricultural products compared to Costa Rica, can increase the competitiveness of exports. The reason is that in this situation, Costa Rica is in a far better and more equal position when it comes to the quantity and price of its agricultural products.

Regarding FTAs with individual countries, the situation is a different one. If there is an agreement with only one other party, this simply takes away tariffs and trade barriers without adding additional competition from other countries playing under the same conditions. In this way, with reduced tariffs, the Costa Rican products can be sold at a lower price in another trade partner’s country. They, thereby, get more competitive compared to the products sold in the same country by countries that do not have an FTA with the respective country, and therefore still have to pay tariffs. An example is the United States, where ‘’Costa Rica is the largest source of agricultural imports from Central America’’ (Koo, Taylor, & Mattson, 2003, p.6).

When it comes to industrial products, on the other hand, a different perspective has to be chosen. Electronic components, textiles, microprocessors, and medical equipment belong to the main industrial goods being exported (Procomer, n.d.). As Free Trade Agreements open the market also for Costa Rican companies, they are able to buy resources at much lower prices than before. This, in consequence, also makes their products much cheaper and more competitive in foreign markets. In summary, it can be stated that besides some negative effects of FTAs on certain specific export goods, there are overall more positive effects of FTAs on the Costa Rican exports.

 

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Bibliographic references:

• Campbell, A. J. (1996). The effects of internal firm barriers on the export behavior of small firms in a free trade environment. Journal of small business Management, 34(3), 50.
• Procomer (n.d.). Trade Agreements. Retrieved from https://www.procomer.com/en/commercial-agreements-costa-rica.
• Koo, W. W., Taylor, R. D., & Mattson, J. W. (2003). Impacts of the US-Central America Free Trade Agreement on the US sugar industry. Retrieved from https://ageconsearch.umn.edu/record/23069/