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Costa Rica May Lose CBI Benefits In Rejecting CAFTA

by Mike Godfrey, Tax-News.com, Washington

03 October 2007


A rejection of the Central American Free Trade Agreement (CAFTA-DR) by Costa Rican voters in an upcoming referendum casts an uncertain cloud over the preferential treatment of Costa Rican goods entering the US under the Caribbean Basin Initiative (CBI), part of which is due to expire next year.

Costa Rica, which has signed up to CAFTA-DR, remains the only country not to have ratified the deal, and has remained bitterly divided over its participation since the agreement was sealed in 2004. On Sunday, more than 100,000 demonstrators took to the streets in San Jose for an anti-CAFTA rally - a huge protest in a country of just 4 million people - which highlighted the level of feeling against the proposed move to open up the country to free trade with the US, as unions fear mass job losses.

The issue will be settled in a referendum on October 7, but the weight of opinion is seemingly against ratification. This suggests that the outcome will not be a favourable one for the government of President Oscar Arias, which supports CAFTA-DR, nor, ironically, for Costa Rican farmers who could see high levels of tariffs imposed on their products entering the US when CAFTA-DR is supposed to replace certain CBI provisions in 2008. According to US Deputy Trade Representative John Veroneau, this presents a dilemma for the US Congress, which would have to decide whether to retain these trade benefits for Costa Rica alone.

"There has been considerable speculation over how CBI benefits could be affected by the outcome of the referendum," Veroneau noted in a statement.

"Some have suggested with certainty that these benefits would not be extended in the face of a rejection of CAFTA. Others have suggested with equal certainty that these benefits would be extended. The truth is that no one can say for sure what the impact would be since Congress has never been asked to extend preferential benefits to a country that has rejected a bilateral trade agreement. Hopefully, the referendum will be decided on the merits of the agreement itself," he observed.

Under the US Caribbean Basin Initiative (CBI), which has been in effect since 1984, food and agriculture products are exported duty-free to the US market. However, when some provisions of the CBI lapse in 2008, certain goods exported to the United States could be subject to 35% tariffs.

CAFTA would immediately eliminate duties on more than half the value of US farm exports to the region, expand intellectual property protections, and open telecommunications and other markets. It would also eliminate tariffs on 80% of US exports of consumer and industrial goods in signatory countries, with the remaining tariffs phased out over 10 years.


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