 Good afternoon. I'm Susan Collins, the John and Sanford Wildean here at the Gerald R. Ford School of Public Policy, and I'm delighted to welcome you to our afternoon's event. We are looking forward to hearing from a very distinguished policymaker, a scholar, and a teacher, Alberto Trejoz, who's professor of economics at NCI and former minister of foreign trade for Costa Rica. Today's event is cosponsored by the International Policy Center, or IPC, here at the Ford School, and also by the University of Michigan's Latin American and Caribbean Studies Center. And I'd particularly like to thank both those organizations for all of their support and their help in putting together today's event, and particularly to recognize Professor Jan Svanar, who's the director of the IPC who's here with us this afternoon. Professor Trejoz is here teaching at the Ford School this semester as our Towsley Foundation policymaker in residence. The Harry A. and Margaret D. Towsley Foundation policymaker in residence program was established in 2002 to bring distinguished individuals with significant policymaking experience to campus so as to interact with students and faculty here. The program was made possible by a very generous gift from the Towsley Foundation, and we really benefited tremendously in terms of the kinds of individuals who we've been able to bring to our community over the years. On a personal note, I'm very sorry, though, to report that John Riecker, the secretary of the Towsley Foundation, passed away this past Saturday. John and his wife, Ranny, have been great friends as well as supporters here of the Ford School community, and we will miss John tremendously. The printed program for today's event includes a full biography for Professor Trejoz, and you'll see that it's extremely distinguished. Many of us here, certainly me, first came to know Alberto Trejoz through his work contributing to the international economics literature, and in particular in areas such as dollarization and international trade liberalization and many other areas as well. In addition to his very distinguished academic career, Alberto has made significant impacts in both the private sector and the public sector. In particular, he served himself as Costa Rica's representative throughout the negotiations for the Central American Free Trade Agreement, or CAFTA. He's been a very active and lively presence here at the Ford School. We have benefited from his insights and his knowledge and expertise in a wide range of different areas, and he's really been a delight to have him with us over the past number of weeks and for the next few weeks to come. We're really honored to have him here to share his perspectives on the negotiations and the impact of CAFTA, and so please help me welcome Alberto Trejoz to the podium. Thank you, Susan, for your kind words. I want to take you through a particular policy experiment, one that is large and important and very noticeable in a country. Not only to tell you what does it contain, why would we make a free trade agreement, and so forth, but also trying to put it into perspective, how does that fit into what we're trying to do more broadly? How does that fit into the strategy of a nation, the development strategy of a nation? I come from a very small country. I mean, you could fit Costa Rica inside West Virginia easily. We're also about 4 and 1 half million people, which is, again, the size of some American cities. And but at the same time, we're a somewhat peculiar country. And one thing that is going to be sort of a late motif in this whole process is whenever Costa Ricans enact reform, especially reform that might be very deep or very changing of things, one of our main concerns is we don't want to lose that peculiarity. And I'm going to go into that peculiarity in a little while. But it's certainly the case that we have chosen a different path from others in how do we model ourselves. This is also a country that had a very major crisis in the early 1980s, the debt crisis that Latin America suffered and that was common throughout the hemisphere. In the case of Costa Rica, it was actually a much bigger event that was also largely the shifting point in the direction in which we were taking our economy. Ours used to be a very centrally commanded economy, not unlike those of Eastern Europe before the fall of the wall, a country where a big chunk of production was done by government-owned corporations, where many pieces of the economy were set aside by law for government. And that strategy largely also collapsed along with our finances in the 1980s debt crisis. So this is also a country that at some point had to stop, figure that it liked itself in many ways. It also disliked itself in many ways and find a way of making a turn on the road, keeping the first and changing the second. Finally, this is a middle-income country. One of the few middle-income countries in Latin America, a country that is neither here nor there, were certainly not as poor as most developing nations. But at the same time, we don't enjoy the living standards of a developed country. Our income per capita, once you correct for everything that needs to be corrected, is about a third of the United States, between a third and a quarter of the United States. So we're not an example of those dire forms of poverty that you often see in the developing world, but at the same time, there's still much, much that we have to achieve. A few indicators of success. Well, Costa Ricans live longer than Americans, for one. This is what happens when everybody has access to medical care. The numbers for things like access to clean water, access to electricity, enrollment and schooling system and so forth, are closer to those of a developed country than to those of a developing country. And in our case, it doesn't come from wealth. It comes from very peculiar choices. I mean, very specifically, choosing what to prioritize, what to do and what not to do. Since the 1980s and the changing in the direction of our economy, some more economic attainment numbers have also improved quite dramatically. I grew up in a country where less than 10% of the households had a car. I now share a traffic jam with a country where about a third of the households have a traffic jam. And typically, when you measure deep democracy indicators in Latin America, things like freedoms and rights and purity of suffrage and things like that, Costa Rica is either distinguished with the first or second along with Chile. The change in direction that our economy took in the 1980s has had much more important results than that. What you see in the wall right now is what happened to our property rate, which used to be in around 30% before the debt crisis went up to over 50% during the debt crisis and then has been coming down significantly and consistently ever since. This is not only an indicator of success when you take it from here to here, but also for some of us, an indicator of failure when you actually look that in the last 10 years, the rate at which poverty is falling has slowed down significantly. And for some of us that have dedicated significant effort at that poverty rate falling, it's obvious that some challenges are still ahead of us. Again, other indicators of this being an interesting country, well, this is the second fastest growing country in Latin America since we made that reversal of direction. Far behind number one, which is Chile. And you could say, well, Latin America in general is not that exemplary, right? And if we had this chart along with Asian countries, there would be quite a few Asian countries in the lower part of the chart and doing quite a bit better, right? So being second in Latin America comes with, well, we're playing in second division here. Of course we're doing better. But at the same time, a 5% per capita growth per year for 25 years in a country that already has the institutional construction and the level of equity to do something with it is not a small achievement. It's certainly better than what we were doing before. What is it that we're trying to do? Or what is the strategy that we have been pursuing for the last 25 years? The strategy on which I and most certainly many others before me have to put our signature and this is what we've been pursuing in charge of government in Costa Rica since the debt crisis. It's a combination, I think, of three key components in this strategy. The first one is those unique choices that have made Costa Rica different that happened before the 1980s and which is our job to simply preserve and strengthen, although this is the work of centuries and not the work of a few administrations. Costa Rica is the fifth oldest democracy in the world. We were electing civilians to power in fair and free elections when very few Europeans were doing so. This is the only country in the world that has chosen unilaterally to disband entirely its armed forces and we have lived 60 years with diplomacy being how we defend ourselves. Of course, other countries with different locations or with different sizes perhaps could not aim at this completely. It comes with being small and in many ways largely irrelevant that you can actually do this. But at the same time, the fact that we could live through the Cold War which wasn't called in our neighbors, right? Central America was one of the battle fronts of the US-Soviet Union confrontation. And still be a way of conflict and still continue growing and making progress is largely thanks to the fact that we did not have what to fight a war after having been disarmed for 60 years. Costa Rica is a very committed country to environmental preservation. It was doing this before it was fashionable. It was doing it before you guys even knew there was an environmental problem. Costa Rica set aside about a third of its land for environmental preservation. That's part of the reasons why we have more animal species than North America and more plant species than Africa. In a country the size of West Virginia. We are fairly close to being carbon neutral. That is largely to the fact that 96% of our energy is generated through sustainable means rather than burning anything. It's a country where the arteries are a little bit clogged but the capillaries are there. And that has been our approach to many issues in development and certainly to infrastructure and to other things other than infrastructure. You look at the main highway from the big city to the second big city it is not that impressive. When you actually go to a very remote town and actually cause your attention that well there's a little paved road getting there. You go to the campus of the main university it is not that impressive. But you go to that little remote town and there's a school and it's been there for a century. You go to the main hospital and it looks a lot like the main hospital in any developing country. But again you go to that little town and there's a clinic and it's been providing healthcare for absolutely everybody for 60 years. In other words it's a country where many things are built from the bottom up rather than from the top down. And it's approach that we think has worked. Furthermore it's a country that has had for many years strong labor rights, strong investments in human capital out of the ordinary efforts in education very out of the ordinary efforts in healthcare and it shows. Now these things are not economic in their goals. We did not disband the army to save fiscally. We did not do environmental preservation because it'd be a wise investment once Whole Foods bought organic foods nor did we choose democracy because it led to more prosperity than any alternative system. However the interesting thing is these choices non-economic as they might be in their origin happen to represent also an economic potential. This is how you build or start building a prosperous country. Of course you need to put an economy on top of the whole thing but in the absence of some of these things there's no economy you can put on top of. And therefore I think that one of the key aspects in a strategy in our last 20 or 30 years has been okay let's make sure that these things yield economically and not only do their other obviously more important in many cases objective. Second component of this transformation has been implementing reform post-crisis in a very tailor made very peculiar, very funny way. Both in what has to do with micro-economic stabilization which obviously was necessary after the debt crisis. And second in the also very necessary shift from a very straight controlled economy to a more market-driven one. Which by comparison, certainly by comparison to yours is still not much of a market-driven economy with the government still playing quite a big of a role and with regulations still being fairly heavy-handed but certainly a lot less than it was in the past than going into a trend into the direction of allowing the market to do more things and allowing the state to specialize in the things that it has to do. It's sort of out of fashion to say that in the United States in the last couple of months but it's certainly not been out of fashion to say that in the United States in the last couple of centuries which is what I'm using as a reference. Finally, third component of the strategy is the least dramatic but the one that makes sense to talk about today, the one I'm going to talk about today. Which is that in the 1980s and after, Costa Rica pursued trade liberalization, pursued export growth and pursued foreign direct investment attraction as a key part of a strategy. In other words, when globalization came with whatever threats and opportunities it brings, we just embraced it. We just jumped on top of the thing. And attempted to make that a vehicle in how we become a more prosperous society. In this, we're not unique. In fact, we were following the example of quite a few countries, especially in Asia that had tried something like this before and quite successfully. In fact, what I don't have is an example of a small developing country that has tried the opposite and succeeded. But at the same time, the degree to which towards which we have attempted this is important. And that's the piece of the strategy in which the CAFTA exercise actually falls. Successful internalization has meant that since the debt crisis until now, exports have multiplied by 12. But more than multiplying by 12 by growing more coffee and more bananas, it has been multiplying by 12 by finding a variety, I mean a multitude of other products on which we can be competitive and we can be successful. Which means that not only we're exporting more but we're also a much more diversified exporter. When I was a kid, and my students were sitting on this end of the room have heard this anecdote a couple of times. When I was a kid, the most important thing that could show up in the newspaper was the climate in Brazil. If the resilience had bad climate, coffee prices would go up and we would have two Christmases. If the resilience had normal climate, coffee prices would stay the same and we would have no Christmas, right? So Santa Claus existence somehow was related to whether or not it froze in the right part of Brazil. Which made us very unstable, was obviously not how to build the dynamic economy. It also was quite in a way undignified. I mean, when the climate determines your future and it is in your own climate. This much more diversified base that we have today means that nothing today is more than a seventh of total exports. Even though we're still very heavily into agriculture because it's the sixth agricultural exporter per capita in the world. It has also meant that we are a more sophisticated exporter. In other words, that we went from being a country that was a little bit sophisticated and whose exports were lagging way behind, country with engineers exporting bananas to a country that has been trying to use its export base as a way to sophisticate the rest of itself. A country exporting microchips and trying to drag the educational system forward rather than in the other direction. Successful internationalization has been also meant bringing in the right kind of foreign direct investment. The growth of FDI into the country has been high and there's a sample, a little sample of a list of companies I put in there to show you the kind of companies we're talking about. In the case of Costa Rica, this is easily more easily done with less qualms than in other places because Costa Rica is not attractive if you're looking for mineral resources. We don't have them. It is not attractive if you're looking for a large local market. We don't have it. And it's not attractive if you're looking to exploit weakness in labor laws because as a matter of fact, we typically have stronger labor laws than the country that the investment is coming from, including the United States, by the way. Which means that if an investment comes it's because it's seeking efficiency. It's seeking for a good place to transform products to then take them to a foreign market. And therefore some of the issues that make many people, myself included sometimes, queasy about blindly attracting foreign direct investment in many developing countries are not issues affecting us and how we see the topic. Trade is important for many reasons, exploiting comparative advantage. That is, taking advantage of the fact that you're different from others. And if you're weird, not only different, there's a lot of comparative advantage to reap. Here's a tropical, low-middle-income country but with good education, democratic, stable. Here's a tropical country that can do certain things like develop nations and in other ways it has costs and challenges of developing nations. We are a very unique combination. And therefore there's a lot of comparative advantage to take advantage of. Because in the world market, the weirder the better. Economy's a scale because our market does not allow efficient production of almost anything if you're only producing to the local market. Take our two biggest export product which are actually on opposite ends of sophistication. Bananas and computer chips. We're arguably the best in the world at both. And a company whose total output was the size of a local market couldn't exist anywhere in the world because in both there are big economic scale. So if exports are not part of the issue, we can't make it in those industries even though we're very good at those industries. Foreign direct investment attraction becomes an objective in itself. With investment has come a lot of learning. I saw this statistic that I thought was lovely. Of the new exporting companies in Costa Rica, I think it was in 2006, which most of which are of course small new companies. More than 50% of their owners and general managers previously immediate job had been working for a multinational in Costa Rica in the same field. In other words, there's a transfer of technology of know how, of understanding how the market works when they're attracting the right kind of investment. I know what we need to do to make the local market grow 8% per year this year, maybe next. Sadly, it's exactly the same thing that I have to do if I want the financial crisis three or four years on the road. Meanwhile, the foreign market can grow for a small country like ours, 8%, 9%, in our case almost 10% for three decades without that meaning any financial contradiction. Of course, if you're large, if you're China, that is not sustainable either, right? I mean, how much can the world buy? But if you're our size, what is the constraint of having that end of the economy draw double digits? And if you can have that, why not have it? Why not have a chunk of the economy growing double digits and having your total growth being higher year after year after year? There's no store where they sell you a pound of technology, 500 pages of know how to litters of science. You acquire technology, you acquire learning by trading with selling to buying from investing with receiving and sending with those that like you are doing training, are doing education, are doing research. That's the only way to do it. And if you're in isolation, it's a lot harder to do it. For us, pursuing trade also meant diversification For us, trade can be an instrument rather than an obstacle in the pursuit of equity, in the pursuit of environmental sustainability, and having an economy that is trading very aggressively has allowed us to make more tailor-made jobs. Costa Ricans are big feminists, right? Usually when you look at the list of first woman in the Americas that did X or Y or Z, almost independently of X, Y and Z, what are they? There's a Costa Rican near the top of the list. In an economy based on coffee and bananas and cutting sugar and rearing cattle, where are those jobs for women? In an economy that has diversified into light manufacturing, into services, there are jobs for women. It's a country that is bet significantly in education. How do we use it in the banana business? In environmental preservation, how is it an advantage rearing cattle? Because environmental preservation is a huge advantage if you're in micro-scale organic agriculture or in ecotourism. And education is what the game is about if you're in sophisticated services or in high tech. In other words, the country we were making did not fit the economy we had. And one of the things that trade and diversification has brought is a closer fit between the two. In order to pursue trade, in order to pursue investment, there's three things you have to do. The first one you have to do is let it happen. Trade and investment are two-way streets. If you don't let it come in, it will not go out. I'm not sure how many of you know the story of what happened when Italians legalized divorce. The next day, of course, was a record number of divorces, but more interestingly, there was a record number of marriages. It turns out that if you can't go out, you might go in. For more sophisticated reasons than that, although there is some economics in the anecdote I just said, a country that remains close to foreign products coming in will never be a successful exporter. In addition to that, in addition to liberalization, there's things that you have to actively do. It's not a matter of liberalizing and then allowing the invisible hand of government to do its thing. The invisible hand is very powerful, but like most hands, it does quite much better if there's a visible hand next to it, right? And that visible hand involves in two things. One is fostering competitiveness, doing things to train, to improve the business climate, to regulate better, to help companies, especially small companies, do better. And there's a lot of that that you can do. And the third thing that you need, or in our case that we have needed, is engage in the negotiation of agreements with others. To secure markets and to stabilize the rules in those markets. This is particularly important when you are our size, because when you are our size, rules might be very unstable, almost without consequence for the counterpart. And therefore, casting things into law is particularly important. A trade agreement sets simply three things. First, it's an agreement by two parties to lower the barriers that they put to the goods, to the services, and to the investment of the other. This is usually typically very clear, very calendarized, which barriers go when, how, and so forth and so on. Not all barriers, not immediately, but the notion that what you're committing is, you're gonna allow more stuff from the other guy to come in. And in exchange, he's gonna allow more stuff of yours to go in. Both ends, by the way, happen to be in your interest, not only the taking stuff out part. The second thing that a trade agreement is, is an effort to harmonize rules, to coordinate rules. How do we deal with the fact that you do this this way and I do it that way? Which means that when somebody's producing something in one end and selling it in the other, he has to deal with rules that are not the same. Worse, they might be contradictory. How do we deal with that challenge? How do we make sure that it doesn't become an extra reason why we can't trade? And the third thing that a trade agreement is, is a mechanism to solve disputes. It's a set of rules that comes with an arbitration process. What do we do if we don't agree on whether or not you are coming up with your end of the bargain? You ask Canadians what they think about NAFTA and they'll tell you, well, the first part we already had because there's been free trade between Canada and the United States since before they were Canada and the United States. The second thing we also had because let's face it, Canada and the United States are the same country. The big value for Canada wasn't the third thing. Canada is so small, the United States is so big that if instead of rules you have day to day informal interaction, the US will just push you around. So having rules and being able to have those rules complied with is particularly valuable for Canada in that relationship because Canada is very small. Imagine us. When the WTO's dispute resolution mechanism came into place in 1995 and everybody expected the US and the European Union to have their first of what happened now more than 200 fights. We surprised everybody on the first two panels were Costa Rica against the European Union and Costa Rica against the United States in bananas and textiles respectively. We're yay size, we have no power, we cannot threaten anybody. But we happen to be right in both issues. We won both panels and the European Union and the United States whom we could not have cajoled, pushed, begged or lobbied into changing these laws internally had to change these laws because they were found to be wrong. That is the value of being able to appeal to dispute resolution mechanism when you're small. That's something we couldn't have done in the absence of something like that. Why do we pursue bilateral trade agreements? Well, first because it is not enough to pursue unilateral openness, you also need the other guy to do his end. In fact, many countries have tried it alone and succeeded but it's certainly easier if the other guy does his end. Of course, you could rely on WTO, multilateral liberalization, having world rules that allow you to have low barriers, clear rules and dispute resolution mechanisms. The problem there is impatience. The problem there is I actually like my kids way, way more than I like my grand, grand, grand kids. At the pace that we're going and sadly we're slowing down so maybe even that is optimistic, the WTO will not imply free trade enough rules for a century, at least for half a century. And this is something that countries can in bilateral negotiations pursue imperfectly because it's one by one with a million technical problems that half of you are bored of listening to but you can move in that direction. Poor countries sometimes also have another temptation, don't go into agreements, just rely on preferences. Rely on the fact that you're poor and most rich countries give some concessions and some preferences to countries that are poor. In our case, that doesn't work. First of all, because we're no longer that poor and the plan is to cease to be poor. And therefore lack of, I mean, at that point, preferences would disappear because preferences are concessions, they're not rights. And anybody who's had my job in government knows that one of the things you do is you actually spend Monday mornings because usually bad things happen in customs during the weekend. Fixing what happened to your products all over the world. You call countries with which you have agreements with a harsh tone of voice. We agreed you would do this, turns out you're doing that. You call countries that give you preferences with a hat in your hand. Would you please not do this? Because you don't have a right to what you're asking. There's a big difference, especially if you're small, between being a client of concessions or being a holder of rights. Preferences are also transitory and fragile. In our case, preferences that we get from the United States came from Reagan because there wasn't war with the Soviets next door. I mean, how more outdated do you want something to be? Do you want your future trade to depend on something like that? Preferences are usually insufficient because the granting party would never give you anything that is inconvenient to give since it is not taking anything that is inconvenient to take. And finally, we live in a world in which many have much, much more than preferences and we're trying to compete with them too. So we pursue trade. So we pursue free trade agreements and so we pursued one with the United States. The U.S. is our most important market. It's also a big country. It's also a bit of a bully, if you let me tell you. And therefore, all the arguments that I mentioned a while ago apply in particular for us with you guys. We already had suffered significant trade deviation when the United States entered NAFTA. When U.S. allowed Mexican products to enter into U.S. territory more easily than products coming from us, suddenly companies that we had beat because we were better than them were beating us because we're better than them at the door of the factory. But what happens when the thing takes the whole trip and confronts the different rules that the United States had for Mexico or for us? Our fear was that the deviation that we had suffered with manufacturing with Mexico would be replicated with agriculture while the United States had never been with Chile. And therefore, after NAFTA and after the U.S. started with Chile, Costa Rica pursued with the United States government, led us in, have a negotiation with us. We're very small, we've not been worth it, but at the same time we're a bit of an example. You might use it, at least for that, unsuccessfully. Our relationship with you is actually quite big from our point of view. Trade is huge, is about a quarter of our economy, is products that end up exported to the United States. We export quite a bit of manufacturing and quite a bit of agricultural products to you. And interestingly, the United States is where we get our raw material. Small tropical countries typically are very poor in metals, are very poor in plastics, are very poor in paper, are very poor in raw material. The United States is who sells that to us. When President Clinton came to his last summit with Central American leaders in the year 2000, a free trade agreement was the only topic being put on the table by Central American presidents. Clinton favored the endeavor, but he had no fast track. His Congress never allowed him to negotiate free trade agreements. And therefore, when we began withing that President Bush actually would get a trade promotion authority and would be able to negotiate free trade agreements, we started running to make sure that we could squeeze CAFTA in the agenda. This wasn't easy because the Bush administration has been, sadly in my opinion, a lot more led by other type of foreign policy concerns rather than economic concerns in how it relates with the rest of the world. So there were other parts of the world that had clear priority over us. But on the other hand, because we're not an irrelevant trade partner, one thing that we could offer is this negotiation was ready to start. Central America had half a dozen or more free trade agreements standing. Central America had been working at this for a decade. And that readiness is what in the end allowed President Bush to announce when he got his TPA that one of the first negotiations he would undertake would be with Central America. Negotiations were announced in late 2002 and they started in 2003. Now why would the US care outside of the fact that we were ready? The first one is that Central America, like objects in your rear view mirror is larger than you would imagine. We trade with the United States more than India, Russia and Indonesia combined trade with the United States. We're very small, but we're very close and we're very open. Second, if you believe that trade aids development, there's a lot of reasons why the United States would want development in Central America before development in other places because we're very close. So for issues like drugs, terrorism, immigration, political stability, even labor and the environment, although I'm not quite sure that was high in the administration's agenda, trade with Central America plays a special role. And finally, United States has other geopolitical issues at stake in this region. In particular, it already has a very aggressive relationship wanted or not with a set of countries that are going one way and it could not settle with just not having any kind of relationship with the set of countries that were going the other way. It was obvious that a negotiation between us would have a series of sensitive topics and in fact that those topics would be way more sensitive for Costa Rica, given its peculiarity than for our neighbors. Agriculture is sensitive, that's not new in any trade negotiation worth its salt, but more interestingly, agriculture in this case is sensitive on both ends. There's powerful agricultural interest in the United States like sugar, like dairy, and a few others, for whom Central America is actually quite a fearsome competitor. So not only you have the usual grain producers on the other side terrified of the Midwest, in this case you also had quite a few American farming interests terrified of the partner. Textiles are a complex issue, especially nowadays that the birth pains of China's entry into the WTO are finally over and that we're beginning to see the impact that the Chinese have on the world textile market. It was clear that we needed, but it was not easy to do, a new arrangement in textiles in the region. Costa Rica's line of where does the market end and the government start is put at a different place than the United States. And this would become an issue. This would become an issue because on the United States and there would be people saying we're allowing these guys to compete on this on our market because it's a market on this product. Yet we're not competing on their market because it is not a market on the same product. And that prompted an issue to be discussed. It was by the way an issue that had already been controversial inside Costa Rica for years, especially in telecommunications and insurance. Intellectual property rights are also a controversial topic and labor and environment promise to be a controversial topic. Not as much because of us, because we can actually claim that the problem is dealing with a country whose workers have so little rights and whose environment is as unprotected as America's. But rather because we were carrying baggage that includes our four neighbors and our four neighbors obviously bring up serious challenges in both fronts. In addition to that in both ends there was fear of a consolidation of a path. The transformation that we have made in Costa Rica over the last 30 years after the debt crisis is a transformation that has not been unanimous. And there are people that do not like the direction we took and by not liking that direction they actually see serious danger in an agreement with a partner that consolidates that direction. Meanwhile, in the United States there's people who like trade agreements one way rather than another or who prefer to not have trade agreements rather than to have them and setting the precedent of a trade agreement with such a nearby region and such a sensitive region was also a difficult thing to accept. Getting ready for a negotiation of this kind involved many things. We needed to set up an internal consultation process. So we would have a truly national position for the negotiations. And that consultation process needed to be not only something that you did at the beginning before you started negotiation, but more importantly something that is kept alive during the negotiation. So you have the feedback from society on what you're doing, on what you're agreeing, especially once things begin to get tough. One of the problems that you have in processes like this is that people who know from the outset that chances are they're not gonna like this agreement when it ends, don't want to give the political process for the agreement and a legitimacy and often choose to not participate or to stop participating from fairly early on. We needed a process of coordination with the government and I was part of, I cannot tell you how weak an administration and with Congress. We needed to negotiate with the United States as one. Central America as one unit, not as five units. Otherwise we were cooked. And finally, we had the problem that getting the attention of the United States is not always easy. The United States government, especially when it negotiates trade and quite especially I think in this administration, is essentially pushing quickly to get the standard agreement out. They have a blueprint and they're pushing hard for that blueprint. That standard agreement between Costa Rica and the United States doesn't work. Costa Rica cannot live with an agreement that is a copy of the one Chile had or a copy of the one Canada had. And in the meantime, we had to sort of trip the negotiation enough for the US to engage. This actually was harder than you would imagine. The negotiation was very fast-paced. It was scheduled to be monthly meetings during a year of negotiation. After all, we were ready. After all, all these countries that had many negotiations of this type before. After all, this had huge priority for us. We know each other very well and actually, once you decide if you're big that you're actually gonna listen to this small guy, challenge number two becomes, how do we understand each other? How do I understand what you want and vice versa? We had very significant progress in everything that was not controversial. CAFTA is really version 2.0 in many issues, right? Is the next generation technically and many of the non-controversial, yet actually very important topics that some of these agreements involved. However, the table still, we were not successful enough at getting the United States to focus the radar on what we couldn't do and what we wouldn't do. And that meant that by December of 2003, the table still did not reflect the specificities that were necessary for Costa Rica. And that meant that the Central American block started eroding because the other Central American countries were ready. I might say that a couple of them were ready since before we started. And that meant that at 3 a.m. on December 17, 2003, in the middle of negotiations and where no table was moving anywhere whatsoever, Ambassador Algyr and I talked and said, this is going nowhere. And I told him, I'm taking my team and we're going home. Ambassador Selleck and I met five hours later and announced the world our differences, the next day, while the rest of the country signed. And the fact that the rest of the country signed ended up being quite a fortunate turn in our fate. We were anticipating a very different end game. We were anticipating we walk out. The US walks out of the table, doesn't even pay attention to us. People get terrorized in Costa Rica. I get fired and six months from now, some successor gets put in front of him, pretty much the same thing that I were put in front of me. We were trying to build our strategy around that. However, because they still had to finish negotiation with the rest of the parties, that day Washington was ours. Congressman and a press that had learned to trust us as relevant counterparts were being contacted by Costa Rica and not by the United States on the reasons for the disagreement. This happened the same week that the United States couldn't close with Morocco, couldn't close with Australia. The same semester that they couldn't close FTAA, that they couldn't close in WTO. And somehow a different picture painted. And that different picture meant that instead of an end game that involved a lot of dragging the feet on the United States, when we actually re-approach, the United States was as eager as we were to re-engage in negotiation. Anybody who's ever been involved in negotiation like this knows that 300 hours of negotiation are like 100,000 hours of man hours of work. We were 300 principle time hours of negotiation away. That's what it took from where we were there with the standard deal on the table to the deal that we actually got. But we finally got it in early 2004, which then it was a legal scrub. Then we had to add the Dominican Republic, which wasn't easy even though the Dominicans were not asking for any terms. And then this got passed by most countries when the United States voted it in July 2005 and the agreement got enacted in 2006. Everywhere but in Costa Rica. And I'm gonna tell you why and how in a moment. Before that, let me tell you roughly what this agreement is like. I always put the index first because people, I don't know, maybe people have never seen one of these things. There's no chapter for trading of children or things like that. You would be laughing if you were back home because this is actually one of the issues that brought up where the opposition, free trade of children. Most of the agreement, everything that you see on the left column is on the technicalities of moving goods around. There's an agreement on government procurement. If I'm giving you my access to my private market in exchange for yours, what access do I have to the purchase that your government does in exchange for the ones mine does? Chapter 10 is an investment chapter giving rights to the investors in each side. Certain rights when they invest in the other side. This is usually controversial in the United States although I'll go through the reasons in a moment. The next few chapters are about trading services. Financial service on telecoms because they're regulated in funny ways are typically apart. And then the rest is about rules. Intellectual property, labor standards, environmental standards, and the very important chapter 20 which is what happens if we don't agree. What is the legislative process that we step, sorry, the judicial process that we start if one of us thinks the other one is not complying? More specifically, in trading goods is a very deep agreement. Every good gets liberated with one exception in the case of the US and two exceptions in our case. Every good ends up with tariff zero. Even the couple of goods that are exceptions at least have huge quotas. So you can say that market access is created in this agreement in absolutely every good. The peculiarity there is that it's very gradual on our end and very quick on your end. The United States which is large opens its market to Central America almost entirely on day one. Central America which is small and needs help and time to do the transition opens its market very slowly. There's a good elimination of non-tariff barriers. I mean a lot of things that are not tariff but that somehow happen in customs and for which the United States actually is one of the worst clients there is. I don't know, I have a few of these that are favorite examples. Chrysanthemums for a while when I was in government got put in quarantine in the biblical sense. Can you imagine selling a Chrysanthemum that has been 41 days in a lab? The machine that checks ornamentals that are bigger than 18 inches broke in the port of Miami in 1995. And it's never been replaced. So not surprisingly there's now an industry that buys 17 inch high plants, grows them to full size and resells them in the United States in Florida. All these little barriers that are more effective than tariffs and are not regulated anywhere require clear rules for them not to exist and we got pretty clear rules there. There's an elimination of export subsidies within CAFTA, we cannot sell it to each other, anything that is subsidized. We got a complicated agreement in textiles. The United States apparel industry is dying. And the problem is that the United States cloth industry was dying by extension because its only client was the apparel industry. We can compete with China in apparel but we are not good at making cloth. So in a way, in the end, what we agreed to was admitting that the United States apparel makers would die and making the United States cloth makers, the suppliers of the Central American apparel makers. Hoping to have a combination that can actually compete with China because on our own we're certainly not competing with China. We have a bilateral investment treaty, the one that we had never made with the US, we had two dozen, we had one with almost every European country. The agreement contains liberalization and service in particular in Costa Rica in insurance and in three lines of telecommunications instead of a law that says that their government monopoly. We transit to competition although it's a competition with a very strong Costa Rican flavor, that is with a government company still present in the market and with Costa Rican-like rather than American-like regulation. And if you want to understand what is the difference between the two types of regulation, you could compare it by the amount of bitching and moaning that our bankers had three months ago about we not letting them do what your bankers were able to do or you can compare it last month with our bankers actually healthy because we never let them do certain things. Our regulation is very heavy in certain areas. The agreement strengthens intellectual property right, law enforcement, almost keeping the same WTO standards untouched but having those standards at the same time applied which is relevant. The agreement on labor and the environment is controversial was in the end what made this topic very controversial in the United States. There's two types of trade agreements in this topic. On one, like the one the United States has with Cambodia or with Vietnam or with Jordan, the country with the highest standards asks the other party to rewrite its laws on labor and environment. And the big concession is the changing of the laws. In almost every other agreement the United States has, the commitment is not with changing the law but rather with enforcing the law. What do we do if you have a law but you don't enforce it? In this case we went for the second version which what, I mean, some people call it the Republican version hence the controversy. Have we gone with the first version? I'm not sure how we would have done it because to tell you the truth, I actually think that we have higher labor and environmental standards than you guys and I don't see the United States Congress changing its environmental and labor laws based of an agreement with Costa Rica. The agreement is peculiar because the phase outs and tires are gradual and careful, asymmetric in favor of the small. It's also peculiar because the United States does not get away with not opening the products that it always got accepted, like dairy or like sugar. It's innovative in a variety of areas. Standard labor and environment is compliance, I just said. It's regional rather than bilateral. There's not a hub and a spoke between each of us and you. It's actually an agreement that encompass all of us. This is important because Central America's in the process of becoming a customs union like the European Union once was. And finally, the reform in telecoms and in insurance is not what the US wanted at the beginning and has always gotten. It's not what we wanted at the beginning and we had always gotten, but rather, something in the middle that could be acceptable to both. And of course there's a few key decisions here involved. I'm gonna fast forward a little bit. Who loses from CAFTA in Costa Rica? You always start with who wins, but let me tell you who loses. Actually the list, according to me, is not that big. Unless aided, rice and pork growers, the pharmaceutical companies that were living off the loopholes in the intellectual property rights laws, which are about half, the other half actually needed the laws. And those with vested interest in the current scheme in insurance and in telecoms. The claim from the opposition is that the list of losers is bigger. Small farmers in general. The argument I never understood because most of our farming is exporting. 83% of our farming is in crops in which we're net exporters. So it's not obvious what the loss is there. Assembly manufacturers, because there's a tariff face out, although they don't agree, they were in favor of the agreement. Or government workers in general. And this one, while I never understood the argument, the government workers certainly did because the government workers did oppose the agreement very aggressively. Who supported the agreement? Business in general, except for rice growers and some pharma companies. The labor unions who are employed in the private sector. Most, although certainly not all cooperatives. Most organize agriculture even outside of cooperatives. Cooperatives are a big thing, Costa Rica. The political parties in the center and the center left. Costa Rica has no right wing party, fortunately. And those that identify themselves as with a stake in the change of direction that the country had had from the debt crisis forward. Who opposed it, public sector unions as opposed to private sector unions that included public sector universities who were very involved in this fight. The educational system, although in the case of the teachers unions, it was largely because they were having a separate fight with government. Once you have a fight, you have a fight on everything. And that included the students. Left wing parties, the Catholic church, and I have more on that in a little while. And if you're married, woman, not working, and over 45, the Catholic church includes you. The telecom, rice insurance, and pharma businesses. Some farming organizations, although in the minority. And finally, those with a stake in the opposition to the system, which means those that don't like trade, those that don't like the US, which are actually a big chunk of this, or those that would have preferred a different direction after the 1980s crisis. Enacting CAFTA in Costa Rica became difficult. You notice of 2004, my old boss, President Noel Pacheco, felt that this was a job for his successor and not for him. Why? Well, first, because he had other priorities. More importantly, because he felt very weak, he had a divided party, a messy Congress, and two major corruption scandals coming up. That he knew I didn't. He felt very threatened by opposition groups that have become very vocal. And he relied on the perceived strength of Oscar Arias as his successor. Oscar Arias had been our president in 1986. In the process, not only had had a very fruitful government internally, but he had also been the leading character in having the parties in the Civil Wars in their three neighboring countries to sit down and negotiate peace. This was, by the way, the one big defeat in Ronald Reagan's foreign policy. Everything else went pretty much his way. But he didn't agree with this particular process. I just go on an old price, an old peace price for his efforts, and he was fondly remembered by Costa Rica as the best president we ever had, except according to our law, he couldn't run again. When the courts revised the constitutionality on the law that said that he couldn't run again, everybody understood the man's gonna run again and the man's gonna win. And since he supported the agreement, President Pacheco felt, eh, what the hell? Let's leave Arias this problem. This revelation led me and my team to resign government, and a few months later when the administration was not defending the agreement, we created an NGO for Costa Rica that pursued the education and the debating on the agreement. President Pacheco finally sent the agreement to Congress two months before the election at a time when it wouldn't be able to be discussed. But the ghost of President Arias, fortunately, kept the agreement alive. President Arias, by the way, never saw a fight that he wouldn't want. So he was extremely outspoken about his support, even when nobody was asking him. And that meant that in a way, the agreement became the center of this election. Partly because of CAFTA, partly because of Arias, the dividing lines among parties, and we're talking about 12 political parties here, became very clear. Every candidate in this election had to say whether or not he supported CAFTA. I found this funny because I got used for ages and ages and ages. On candidates always looking for the middle ground, which in this case would have meant some version of yes but no. But in this case, everybody had to be very outspoken because Arias was being very outspoken. The agreement won, 61% of the president's votes were cast for the seven candidates that were for CAFTA, and 60% of the congressional votes went to the five parties that sat people in Congress for CAFTA. Arias did not win the election by that much because the 39% against was all in one party. So he won the election by two or 3%. And that took us to this Costa Rican Congress. The Costa Rican Congress is not by design the most agile of organizations. It comes with our old tradition of democracy. It all comes with our peacefulness. Pursuit for consensus, which the founding fathers seem to have interpreted into let's make everything in Congress so slow that people will always look for unanimity as the only way to speeding it up. Stupid as it might sound, that's what occurred to them. And passing 12 enabling legislations plus the agreement itself in 17 months, which is the time we had, was not possible. Which meant that in April of 2007, President Arias sent CAFTA. To referendum, to become the first law ever decided in Costa Rican history, not in Congress, but rather by popular vote. And also the second free trade agreement in history after Canada's accession to NAFTA to be decided by popular vote. The referendum, I think changed political history of Costa Rica in many ways. It implied a clear alignment of forces. I mean, it is clear to me that even though what we were voting on in that ballot on October 7th was simply, do you want that agreement to be part of, to be law or not to be law? In the end, we were debating a lot more things. And in the end, the political momentum that would have been given to those that want to go back to pre-1980s policies would have been huge if they won. And the political momentum and validation that we get for having won is also huge. We had a big margin in favor of the agreement, in favor of the yes coming in. And then we engaged in one of the worst political campaigns I ever seen in my life. And I've been in many political campaigns and they're no good ones, so almost no good ones. So the worst is actually pretty bad. The first few months of the campaign was very shallow. On our end, well, the two big political parties suddenly were on the same side. So their machineries were essentially selling toothpaste. They had a very shallow, very jingly, very happy, very undeep, very uneducational message in the media. And at the same time, the opposition figured we need to move people in the middle towards the no. And in my opinion, essentially what they did is lie. Essentially what they did is tell that the agreement contained very fearsome things that I think it doesn't contain. The very shallow campaign made people very angry. People were very angry with both sides. If this is important, why are you singing about it? Is what they will say yes. And they couldn't believe the size and the magnitude of the strategy that was being described by the no. And then a few things happened. The first one is that we went from yes winning by a lot to no winning by a lot. Because President Thaddeus had in his cabinet a fairly large and fairly unfortunate corruption scandal. And the corruption scandal largely had to do with the advice that the scandalese were giving on how to run the campaign. That made people very suspicious and very angry. But the other thing that happened towards the end of this referendum, and it was a very, it's a beautiful lesson on how people are usually better than their governments and better than their parties and how democracy is actually not such a bad system, is that people started demanding to be talked seriously. This happened in many ways. First of all, the both sides ended up being pushed into a lot more argument, a lot less jingle, a lot less advertising. I remember being in a banana farm, speaking after work, and having the workers stay there and ask questions for four hours after my speech. I remember banana workers, which are the poorest people that exist in the world, banana workers, walking to me at the end of events with copies of the law. Does this mean this? We've been discussing it. Does this mean that we have seven televised debates? The last one has only been beaten in audience by the Germany Costa Rica World Cup game with which the 2006 World Cup opened. Everybody tuned in to see these debates. On election day, we were very aggressive, we were very nasty, we were very hyperactive, and the other side too. And the voters were amazingly calm, amazingly clear, amazingly paused, and they voted. And this meant two things. First of all, there was a reversal of voter intentions, went from yes winning to yes losing to again, yes winning. But second, I think that we got a pretty good lesson there. We got a pretty good lesson on how do people like to be treated seriously. If you ask me, I think that the main reason why people voted for Barack Obama last Tuesday is because he, before the others, was treating people seriously too. People don't like to be sold toothpaste, or government as if it was toothpaste. Of course, outsiders were involved in this vote. This was internationally a fairly important vote. Costa Rica is very symbolic to begin with, even though it's small. Trade votes are rare because in most places, if trade agreement went to a vote, it would lose. We had involvement by United States politics into this. I mean, your campaign began showing into there. Your Speaker of the House and your just re-elected senator from the state played a role that I don't remember fondly. And the demographics in this election were very funny. In any other country, when you're actually trying to figure out how is somebody gonna vote, you approach a household and you ask for a few things about that household. Income, what does the head of the household work on, how old, how educated, raised, location of the house, and you pretty much can guess how the household as a whole is gonna vote. This election was different. The division was within the household. This is from a poll taken when we were winning by 12. In the end, we won by four, so the numbers should not be taken too seriously. But let me show you some of the contrast I mean. The first question is what do you do for a living? Do you work? Do you work as study? Do you only study? Have you retired? Or are you a homemaker? In the people that said that they study alone, we were losing by 48%. And the people that say that they work only, we were winning by 25%. That means dad and the kids. It doesn't mean the people in this house and the people in that house. What do you do for work? Do you work in a company? Do you work for the government? Do you work on your own? Do you work in a company? Yes, was winning by 40%. Do you work for the government? Yes, by losing, was losing by 15%. In other words, it was an election that caught us very deep. My interpretation of this is that this is something that helped the intense of the debate because people, unlike in most elections, including the one you just passed through, actually interacted with others from the opposite side constantly, right? As opposed to, say, the students in Michigan who would only see other Obama supporters day to day, versus workers in Alabama who would only see McCain supporters from day to day, this was different. It was also a very volatile election. I've never seen tracking polls like this one. This is a tracking poll day to day of the last week. We're winning, we're losing, we're winning, we're losing, we're leaning, we're losing. What next? We're still in the process of passing the enabled legislation. I think we're gonna be done before there's a change of government in the US, hopefully because otherwise we're gonna end up doing all the concessions, the Bush ones, and then all the concessions that Obama wants. And even though I like probably the second better than the first, I certainly don't want, I don't like the sum of the two, the challenge becomes for us now several things. First, what is our future with CAFTA? How do we take advantage of it? One thing that I believe we did quite exemplarily is along with the negotiation we prepared a series of policy measures to be enacted to improve the chances of the country to do well under CAFTA. Thanks to the very extended debate, those things have been delayed. We have to go back to those. It is clear also that we need to look at how we do politics, right? The country is very divided now. And the old tradition among parties that were very similar ideologically, which is what we had for ages, like you do. Of whoever wins the election is in charge. Whoever loses the election sucks it for a while. Now that we have a huge ideological debate between a couple of parties that seem that the goal is going to win and a party that is large, but it seems like it's never going to win. We have to find a way of having dialogue with ourselves. Because otherwise, the message, you always lose, you suck it. Well, it's nice for me, since I always win. It's not really democracy. And it's not really conducive to a better way forward. How does this fit in the broader policy debate in Latin America? From the United States, it's very noticeable and very easy to find out that Latin America is swinging to the left. Well, Latin America is swinging to the left in a funny way, because it is swinging towards two very different movements in the left. Costa Rica, along with Panama, with Chile, with Uruguay, with Brazil, is swinging to the left in the sense of modernized European socialism. Tony Blair, Felipe González, La Clajavelle, still pro-market, still pro-democracy, but very engaged in issues about income distribution, about society's fiber, about the disenfranchised, about equality. The others are shifting to a left that is actually very different, much more concerned about foreign policy, much more concerned about geopolitics, much more concerned about the economy pre-1980s. Venezuela, and Ecuador. And after the election next week, El Salvador, and a few others. So now that Latin America is swinging to the two different versions of left, we have one, the one I have scarred to, by the way, considering these instruments and a very active peaceful relationship with the United States as a very valuable instrument. And the other one, not only not liking these instruments, but in general, not liking an intense relationship with the United States. What does this mean for the new administration in the US? And I believe that things look better with President Obama. Had I been a citizen, I would have certainly voted for him. But at the same time, I can't fail but realize that sadly, the aggressive new protectionist language that is being spoken in the United States was shared not only by some people in the Republican Party, but also by a lot of people in the Democratic Party. What is the message that this gives to the rest of the world, to Latin America? Because the rest of the world, especially the places who have been distant or even antagonic to you, is receiving what I consider to be a very welcome message from this change in the United States of let's go back to the table, let's re-engage, let's re-embrace, let's see if we can iron out these differences rather than shooting each other about them. But at the same time, what about the Chinese guy that used to be building missiles to shoot them at you? And who then shifted into a market economy modeled after yours, followed your example on your advice and became able to lend you money? Is he evil for lending it to you? Or is it really your government, the one that borrowed it to begin with? What about those countries where Americans and especially American companies were not welcome and where suddenly became welcome? Are these new friends or are they stealing your jobs? Would you want them doing what they were doing before? Instead of pursuing investment? How about your new trade partners? I believe that the new administration in the United States has a leader to understand the positiveness, the peacefulness and the enormous potential that trade and investment with the rest of the world present, even though there are some in his party, and in the opposite party, by the way, who would prefer this protectionism? But more importantly, if you follow this argument for new protectionism in the United States all the way through, where does it end? Because it is not obvious that you have actually went through the entire game. Finally, for us, CAFTA, of course, is only an instrument, and CAFTA is not the difference between Costa Rica developing or Costa Rica not developing. If we use this instrument well and we make another hundred good decisions and we play the game the way it should be played and we keep along the path, I believe we will become the first developed country in Latin America. In my lifetime, I believe that my children will be able to choose, like I did, to be in Costa Rica instead of outside, but unlike me, without that meaning, a sacrifice in the kind of things that they can aspire to. And that is the reason why I spend my time trying to affect policy. Turning it around, what would it mean for the world? What would it mean for United States if there was a developed country in Latin America? If there was an example the same way that Japan and in Korea, in a way, were examples in Asia. What, on top of that, if it happened to be the good guy, the poster child for a bunch of other things, the democratic one, the environmentally sustainable one, the equitable one, what is the value of that geopolitically? Shouldn't those be the questions related to us or related to other trading partners that you ask yourself? When you are deciding on matters like this, isn't that a lot more valuable than protectionism as an agenda for how the United States relates to the rest of the world? I say this at a time when the new administration of the United States has not voiced clearly what direction it's gonna take. But I also say, I think I say it at a time when it is clear, at least, that it is being led by somebody whose head and heart are in the right place about this topic. Let's hope that he prevails over many interests. Let's hope that he prevails over his opponents. And let's hope that he prevails also over quite a few of his supporters who seem to be right on many things, but wrong on this one. Thank you very much. Thank you very much for a very insightful and thought provoking perspective on a variety of things. CAFTA, free trade agreements, Costa Rica, and trade issues going forward. Because of the time, and I know that there are other things going on, and we have a reception out in Wild Hall, I think that perhaps we will do the discussions informally with people in Wild Hall. So please join me again in thanking Alberto Trejoz for his extremely insightful comments. Thank you.