VZCZCXYZ0000
PP RUEHWEB

DE RUEHSJ #0011/01 0092235
ZNR UUUUU ZZH
P 092235Z JAN 09
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC PRIORITY 0399
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHDG/AMEMBASSY SANTO DOMINGO PRIORITY 1616
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SAN JOSE 000011 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA, WHA/CEN, WHA/EPSC AND EEB; PLEASE PASS TO 
USTR AMALITO AND DOLIVER; TREASURY FOR SSENECH 
 
E.O. 12958: N/A 
TAGS: CS EAGR ECON ETRD KIPR PGOV PINR PREL
SUBJECT: COSTA RICA CREEPS INTO CAFTA 
 
REF: SAN JOSE 959 AND PREVIOUS (NOTAL) 
 
¶1.  (SBU) SUMMARY:  Nearly six years after negotiations 
began, CAFTA-DR entered into force for Costa Rica on January 
1, achieving a major policy objective of the USG, the Arias 
administration and the Embassy.  Although the end-year 
holidays muted the headlines, there was some 
(characteristically) last-minute political drama, including 
the legislature,s vote to approve the membership of the new 
telecommunications board (SUTEL), and appeals from President 
Arias (to the Ambassador) and Minister Arias (to the 
Secretary) to forgo the 2010 tariff rate quota (TRQ) holdback 
on sugar that will go into effect if the GOCR does not enact 
an IPR technical corrections bill in 2009.  Economically, 
CAFTA EIF may have come just in time to help soften the 
impact of the US financial crisis on Costa Rica. 
Politically, EIF means the national legislature faces a 
virtually CAFTA-free zone for the first time since October 
2005, freeing the Arias administration (in theory) to 
concentrate on other priorities such as fighting crime and 
improving infrastructure.  CAFTA,s completion should also 
disarm the PAC-led opposition, which has focused almost 
exclusively since 2006 on stopping CAFTA.  The CAFTA 
telenovela remains a case study in dysfunctional democracy; 
the agreement required a national referendum and over three 
years of on-again, off-again legislative action during two 
Costa Rican administrations to come to fruition.  END 
SUMMARY. 
 
---------------------------------- 
YES, IT IS REALLY OVER 
---------------------------------- 
 
¶2.  (U) It ended with a whimper, not a bang.  On December 23, 
as the USG began to shut down for the holidays, and after the 
GOCR had already started its two-week holiday hiatus, POTUS 
signed the requisite proclamation, the two sides quietly 
exchanged diplomatic notes (in the Department cafeteria), and 
the Costa Rican Embassy deposited the notes with the OAS in 
Washington.  In a statement issued the same day, USTR Schwab 
was "pleased to celebrate the entry into force of this 
important multi-country agreement," which marked "an 
important milestone in our relationship with Costa Rica." 
 
¶3.  (U) GOCR statements were no less glowing.  COMEX Minister 
Ruiz noted that "finally, the Arias administration is 
fulfilling the popular mandate given the government in the 
referendum of October 7, 2007."  He added that with CAFTA 
EIF, Costa Rica was "in a strategic position to compete in 
the international market."  Minister of the Presidency 
Rodrigo Arias expressed his "enormous satisfaction," 
stressing that "it is time to send positive signals to the 
rest of the world about our capacity to work together," and 
to "demonstrate our seriousness as a country to take 
decisions, and our determination to participate in the 
globalized world with excellence and success." 
 
¶4. (U) The good news generated large headlines in leading 
(and pro-CAFTA) daily La Nacion on December 24.  Other 
year-end coverage, although positive, reminded readers of the 
length of this ordeal, which began with negotiations in 
January 2003, moved to the Asamblea (national legislature) in 
October 2005 (after five other CAFTA partners had already 
ratified), witnessed the first national referendum on a trade 
agreement (and the first-ever referendum in Costa Rica) in 
October 2007, and required extensions in February and 
September 2008 to reach completion.  (COMMENT:  For those 
keeping score, since signing in August 2004, Costa Rica spent 
more time "fighting" for CAFTA than the United States spent 
fighting WWII.  END COMMENT.)  The media also noted the 
financial cost; over USD 850,000 in overtime pay and copying 
costs for the Asamblea alone (not to mention the cost to 
exporters -- primarily in the beleaguered textile industry 
--who lost opportunities and orders while waiting for EIF). 
 
--------------------------------------------- ------ 
BUT NOT WITHOUT SOME (MORE) DRAMA 
--------------------------------------------- ------ 
 
¶5.  (SBU) There was plenty of last-minute political drama as 
January 1 drew near, however.  On December 10, Minister Arias 
was a surprise participant in the Pathways to Prosperity 
Summit in Panama, joining FM Bruno Stagno and Minister Ruiz 
in their "pullaside" with the Secretary.  His mission 
(according to COMEX sources):  to ask that their be no 
"penalty" (i.e., no holdback) for Costa Rica,s completion of 
a needed IPR technical corrections bill after the January 
2009 EIF target. (COMEX and USTR had been discussing a 
possible -- and generous -- TRQ holdback on sugar, which 
would only go into effect if the GOCR could  not complete the 
last law by 2010.)    In an interview upon his return from 
Panama, Ruiz quickly (and incorrectly) characterized the 
Secretary,s politely non-committal response as clearing the 
way for a condition-free EIF. 
 
¶6.  (U) On December 12, the Asamblea rejected two of the four 
names proposed for the new Superintendency for 
Telecommunications (SUTEL), the oversight board required for 
full CAFTA implementation.  This ignited a political and 
legal firefight which put EIF in question until the last day 
of the legislative year, December 19.  One of the two 
candidates rejected was from the Arias administration,s PUSC 
party pro-CAFTA allies.  The dumped PUSC nominee challenged 
the legislature,s actions in the Constitutional Court (who 
rejected the case out of hand), but, backed by the Court,s 
refusal to hear the case, the Asamblea leadership was able to 
bend procedural rules enough to permit brief debate and swift 
(but last-minute) approval of two replacement nominees. 
(NOTE: The SUTEL board was sworn in on January 5.) 
 
¶7.  (SBU) Adding to the tension, the GOCR placed the IPR 
technical corrections bill on the legislative agenda December 
15, prompting multi-party criticism of COMEX for its lack of 
transparency and for not launching the final bill sooner; a 
few (mostly opposition) members even called for Minister Ruiz 
to resign.  For his part, Ruiz explained that the last bill 
was not required for EIF (it would have never been approved 
in time, anyway) and was intended simply to correct three 
"material errors" in CAFTA-related IPR legislation.  COMEX 
staff confided to us that they would have launched the last 
bill sooner, but were waiting for the SUTEL vote to be 
completed.  Miffed pro-CAFTA contacts in the legislature 
confirmed to us that COMEX had told them nothing about the 
last bill until it was placed on the agenda. 
 
¶8.  (SBU) The furor had faded by Christmas week, with the 
SUTEL board approved, the final CAFTA-related regulations 
promulgated and the agreement letters on insurance, 
telecommunications spectrum allocation and the TRQ holdback 
signed, but President Arias threw one last curveball.  In a 
call to the Ambassador on December 22, Arias claimed that the 
planned TRQ holdback was a "surprise" to him, and he reprised 
Minister Arias, request not to "penalize" Costa Rica for at 
last entering into force with nearly all the implementation 
requirements met.  The Ambassador responded that the 
proclamation which would mark EIF for Costa Rica was ready 
for White House approval.  The choice was thus to pull it 
back, if that could be done at all, likely forcing the GOCR 
to ask for yet another EIF extension, or to let things stand 
and proceed to EIF as planned, with the holdback.  Faced with 
those options, Arias backed down. 
 
-------------------------------------- 
THE DETAILS OF THE DEAL 
-------------------------------------- 
 
¶9.  (SBU) Once the SUTEL vote secured membership for the four 
nominees, the "deal closing" narrowed to a commitment letter 
and two side letters.  The commitment letter described the 
terms for the GOCR,s entry into force predicated on the 
passing of the technical corrections bill (addressing the 
three outstanding IP issues, see Reftel).  The three 
corrections represented USTR,s final position in a process 
that started with 20  issues and ultimately focused on three, 
all having material legal consequences counter to CAFTA.  In 
addition, we learned that USTR requested a small modification 
to the technical corrections bill which will require an 
amendment by a cooperative legislator in the national 
assembly. 
 
¶10. (SBU) The GOCR has until January 1, 2010 to pass the 
technical corrections bill.  If it does not, the USG can 
exercise a condition to &withhold and/or suspend the 
application of benefits under the CAFTA-DR to Costa Rica to 
such extent as the United State deems appropriate.8  During 
the drafting of the commitment letter, USTR and COMEX 
discussed the holdback of tariff rate quotas for sugar 
(though not specified in the letter itself).  If the GOCR 
passes the technical corrections bill (and it meets USTR,s 
approval) prior to January 1, 2010, any withholding or 
suspension of benefits becomes a moot point.  The side 
letters address Costa Rica,s state insurance guarantee 
(pledging no competitive advantage for the state insurance 
entity INS) and a schedule for allocating telecommunications 
spectrum. 
 
--------------------------------------------- -- 
THE GOCR: LOWER EXPECTATIONS; LOOK AHEAD 
--------------------------------------------- -- 
 
¶11. (U) Despite the criticism against him, Ruiz was 
comfortable enough (and the Arias team obviously comfortable 
enough with him) to give in-depth interviews about the year 
ahead which were published on New Year,s Day.  Ruiz set out 
to lower expectations.  In light of the U.S. financial 
crisis, he predicted that CAFTA would help Costa Rica keep 
jobs and maintain exports, instead of generating major growth 
in either.  He noted that the export sector directly or 
indirectly generated over a million jobs in Costa Rica, and 
that even with the global and regional downturn, exports were 
estimated to have grown five percent in 2008.  CAFTA should 
help that trend continue.  Ruiz described CAFTA as but one 
tool to help Costa Rica improve its competitiveness, and he 
looked forward to building on CAFTA by completing 
FTA/association negotiation agreements with the EU and China. 
 
 
¶12. (U) Others in the export sector echoed Ruiz,s muted 
optimism.  Edgar Herrera, Executive Director of the LAICA 
sugar cooperative lauded Costa Rica,s higher quota under 
CAFTA, which would permit annual exports of over 13,000 MT at 
preferential prices.  Gabriela Llobet, Director of CINDE (a 
quasi-governmental investment development entity), described 
the growth in high-tech and service sector employment in 
Costa Rica in pre-CAFTA 2008, despite the financial crisis. 
With EIF, the outlook for those sectors should remain fairly 
bright.  CABEI chief economist Pablo Rodas cautioned in the 
media that CAFTA would not produce "an economic miracle," but 
coupled with the policies already in place, should continue 
to attract (and perhaps increase) FDI to Costa Rica.  La 
Nacion editorialized on December 28 that although CAFTA 
brought "undoubtedly positive potential" for development, it 
was "just one more step" toward full development; much work 
remains to be done. 
 
--------------------------------------------- ----- 
THE OPPOSITION (AND THE COALITION): NOW WHAT? 
--------------------------------------------- ----- 
 
¶13.  (SBU) The biggest short-term changes generated by CAFTA 
completion may not be economic, however, but political.  Both 
the GOCR and the opposition are facing a  (virtually) 
CAFTA-free political landscape in 2009.   This should allow 
the Arias administration to focus on other legislative 
priorities set aside/slowed during the CAFTA epic, including 
completing the pending domestic security and anti-organized 
crime legislation, approving the USD 850 million IDB 
infrastructure loan, overhauling concessions laws (which 
should help with the infrastructure projects), and according 
to Minister Arias, having a better dialogue between the GOCR 
and the legislature.  Without the centrifugal force of the 
CAFTA fight, however, the Arias team may face increasing 
distractions leading to legislative inertia as the 
campaigning heats up for the 2010 national elections.  The 
SUTEL struggle and PUSC criticism of the organized crime bill 
suggest that the fissures will continue to grow in the old 
pro-CAFTA coalition.  Both the PUSC and the Libertarian Party 
(ML), another erstwhile coalition member, are already 
describing themselves as &opposition8 parties going into 
¶2009. 
 
¶14.  (SBU) And what about the PAC-led CAFTA opposition?  They 
begin 2009 with their primary platform OBE,d.  Since 
October, PAC leader Otton Solis has claimed to have 
widespread Democratic support in the U.S. Congress (and in 
the region) to "renegotiate" CAFTA, and he visited Washington 
in November to make his case.  However, backed by 
well-informed sources such as STAFFDEL Meacham, who visited 
Costa Rica in December, we have quietly made clear to 
legislative contacts that the new U.S. administration is 
likely to focus on many other, much higher-priority issues 
before turning to CAFTA, if at all.  The word may be 
filtering back to Solis, who conceded to interviewers last 
week that with CAFTA now a fact, his/PAC,s time might be 
better spent focusing on the (so-called) CAFTA-complementary 
agenda: improving education, infrastructure and 
competitiveness.  Solis is not likely to easily relinquish 
his attacks on the Arias administration, however. 
 
¶15.  (SBU) Like their party leader, the PAC faction may also 
be slow to truly back down.  On December 18, the faction 
wrote Speaker Pelosi to allege that three of the CAFTA 
implementation laws (on telecom, trademarks and the UPOV 
treaty) had been improperly approved by the Constitutional 
Court, and to report that the PAC was consequently legally 
challenging those laws on technical grounds.  (COMMENT:  A 
more detailed report on this was emailed to WHA/CEN and H on 
December 30.  We do not expect this after-the-fact technical 
challenge to go far, but it highlights that some in the PAC 
have not yet given up.  END COMMENT.)  Meanwhile, the most 
radical anti-CAFTA groups, who don,t necessarily support 
Solis and the PAC, have been largely silenced by EIF, 
although they still insist that the October 2007 referendum 
(and even Oscar Arias, 2006 election victory) were "rigged". 
 
--------------------------------------------- --- 
COMMENT: LESSONS IN DYSFUNCTIONAL DEMOCRACY 
--------------------------------------------- --- 
 
¶16. (SBU) The Arias administration can look back at 2008 with 
a sense of accomplishment and a sigh of relief.  CAFTA, which 
became the centerpiece of Arias, agenda, has finally entered 
into force, and the once-sacred, state-run monopolies on 
insurance and telecommunications will now be opened to 
competition.  If the GOCR could show enough discipline and 
focus to enact 58 laws in 2008, including 13 to implement 
CAFTA, they should be able to complete the single IPR 
technical corrections bill fairly quickly.  (On January 7, in 
fact, Asamblea  President Francisco Pacheco publicly 
predicted smooth passage for the new law.)  Completing CAFTA 
did show what can be done here, with determination and focus. 
 We may point to the inordinate and repeated delays in 
getting to EIF, but this was a Herculean task for the Tico 
political system, and another historic accomplishment for an 
Arias administration. 
 
¶17. (SBU) The CAFTA saga has prompted more thoughtful 
examination of Costa Rica,s hyper-legalistic and largely 
dysfunctional democracy, which could eventually prompt some 
badly-needed reform.  Supreme Court President Luis Paulino 
Mora acknowledged to the media at year,s end that the legal 
framework which permits the Constitutional Court to review 
thousands of issues each year (including the CAFTA laws and 
CAFTA itself in 2007-2008) may require adjusting.  "Political 
problems should be solved according to political criteria," 
he said, and not always by legal and constitutional means. 
Minister Arias himself ended 2008 floating the idea of a 
constituent assembly to modernize Costa Rica,s archaic 
political and legal system.  Key legislators are again 
talking of revising and streamlining parliamentary procedures 
to avoid the mountains of motions which slowed CAFTA.  We'll 
see.  Change of any sort does not come quickly or easily in 
Costa Rica, and with national elections just 13 months away, 
it will be tempting to toss any radical efforts to the next 
administration (and beyond). 
 
¶18.  (SBU) And what will we do with all our "free time" now 
that CAFTA is completed?   EIF closes the major chapter, but 
not the entire book; CAFTA "implementation management" will 
also take time and energy.  Working with the GOCR, we will 
highlight the benefits of CAFTA, keep expectations realistic 
and help U.S. companies take full advantage of the agreement. 
 We will also continue to work with the GOCR on the "next big 
thing," the Merida Initiative, plus other aspects of domestic 
security and law enforcement, and continued capacity-building 
across ministries.  There is plenty left to do as we help 
Costa Rica,s democracy better deliver for its people. 
CIANCHETTE