Costa Rica - International trade

Following a period of protectionism during the 1960s and 1970s, Costa Rica has slowly opened to greater foreign investment. The result has been an increase in import and export activity. Whereas imports and exports each barely amounted to US$200 million in 1969, in 1998 they had reached levels of US$6.2 and US$5.5 billion, respectively. The bulk of this growth occurred during the

1990s. In the case of imports it took the country from 1977 to 1990 to double its import volume from US$1 to US$2 billion, but only 8 years (1990-98) to triple that level to US$6.2 billion. The main sources of these imports in 1998 were the United States (41 percent), Japan (8.1 percent), Mexico (7.3 percent), and Venezuela (4 percent). In the case of exports it took from 1980 to 1992 (12 years) to double its export volume around the US$2 billion level, but only 6 years (1992-98) to more than double again and reach US$5.5 billion. The country's main export destinations in 1999 were the United States (49 percent), the European Union (22 percent), and other Central American nations (10 percent).

This growth has been accompanied by an important shift in the composition of trade. The importance of agricultural exports has diminished in favor of industrial exports. From 1991 to 1999, industrial goods went from 49 percent to 77 percent of total exports, whereas agricultural goods fell from 51 percent to 23 percent, respectively. This shift was largely the result of policies conducted to promote direct foreign investment and stimulate exports. These investments were carried out in free zone areas and their contribution to exports grew from 22 percent in 1991 to 60 percent in 1999. During the same period, local industry reduced its contribution to exports from 27 percent to 17 percent.

This growth of exports was driven by the arrival of foreign manufacturers—most importantly, the Intel Corporation. With its arrival in 1997, free zone exports shot up by a factor of 4, from US$891 million to US$3.6 billion. The relevance of Intel's exports can be gauged by their impact on the total volume of country exports, which rose from US$4.2 billion in 1997 to US$6.6 billion in 1999.

Since Costa Rica relies heavily on imports of raw materials and capital goods , industrial export growth has been accompanied by a substantial growth in imports. The country has carried a deficit in its balance of trade for every year since 1995, except 1999. However, the deficit has shrunk from over 33 percent of total exports in 1995 to just over 7 percent of total exports in 2000. This trade deficit has been financed by foreign capital flows, which have totaled US$2.4 billion in the past 5 years. Income from the service sector, particularly from tourism, has also helped finance the trade deficit.

The country's dependence on foreign capital flows to sustain imports is one of its recognized weaknesses. Although so far it has managed to attract sufficient levels of investment through its aggressive promotion policies, its stable social and political circumstances, and its highly educated workforce, the inability to generate sufficient foreign exchange through exports alone makes the country vulnerable to changes in international circumstances. Investment attraction policies have also been

criticized as expensive and fiscally unsustainable since they require substantial subsidies and tax exemptions.