Introduction: A Milestone in Costa Rica-China Trade Relations
Thirteen years ago, the Costa Rica-China Free Trade Agreement (FTA) came into effect, marking a significant turning point in bilateral relations. For Costa Rica, this agreement represented an opportunity to diversify its export markets, tap into the immense purchasing power of the world’s most populous nation, and strengthen economic ties with a rapidly growing global economic powerhouse. During this period, Costa Rica’s exports to China multiplied by ten, reflecting a staggering growth of 965%.
However, more than this dramatic export increase is needed to balance the scales. Costa Rica continues to grapple with a substantial trade deficit, primarily driven by high imports from China. As the trade imbalance grows, policymakers and industry leaders are considering strategies to enhance Costa Rica’s export potential and take advantage of the opportunities the Costa Rica-China FTA provides.
Costa Rica’s Trade Deficit with China: A Growing Concern
According to preliminary figures from the Foreign Trade Promoter (Procomer), by the end of 2023, Costa Rican exports to China reached $402.7 million, while imports surged to $3.393 billion. This left Costa Rica with a trade deficit of nearly $3 billion. The imbalance in trade flows between the two countries has persisted since the inception of the Costa Rica-China Free Trade Agreement, and despite the growth in exports, the gap has only widened.
The nature of this deficit can be attributed to several factors, including the structure of Costa Rican exports, which focus on specialized, high-value goods like medical devices and agricultural products. In contrast, Chinese exports to Costa Rica are predominantly mass-produced consumer goods such as electronics, automobiles, and textiles. This disparity in trade composition makes it difficult for Costa Rican exports to offset the volume of Chinese imports.
A Decade of Negotiations and Commercial Growth
The Costa Rica -China FTA was the result of several years of negotiations. Talks officially began in 2008, just a year after Costa Rica made the bold geopolitical decision to switch diplomatic recognition from Taiwan to China. Over six rounds of negotiations, the two countries reached a deal that was signed in April 2010. By June 2011, Costa Rica’s Legislative Assembly ratified the agreement, and on August 1, 2011, the FTA formally came into effect.
This agreement signaled a new chapter in Costa Rica’s international trade strategy. Historically reliant on the United States and the European Union as its main trading partners, Costa Rica sought to diversify its economic relationships. With China’s entry into the World Trade Organization (WTO) in 2001 and its rising influence in global trade, it made sense for Costa Rica to seek closer ties with this Asian giant.
China as Costa Rica’s Major Trading Partner
China is Costa Rica’s second-largest import source, trailing only the United States. The scope and scale of Chinese exports to Costa Rica, which include a wide range of consumer and industrial goods, underscore the deep economic ties between the two countries. Meanwhile, China ranks as Costa Rica’s ninth-largest export destination, a position that reflects the limited but growing nature of Costa Rican goods entering the Chinese market.
Despite the challenges, industry leaders see significant potential for growth in exports to China. While medical devices and agricultural products currently dominate the export list, there is optimism that Costa Rican producers can tap into additional sectors and further diversify the trade relationship under the Costa Rica-China Free Trade Agreement.
Room for Export Expansion
Duayner Salas, a trade specialist at the University of Costa Rica (UCR), points out that while it may be difficult for China to overtake the U.S. as Costa Rica’s top trading partner, the Costa Rica-China Trade Agreement provides a solid foundation for future growth. Salas highlights that Costa Rican exporters have only scratched the surface of what could be achieved in the Chinese market. With a population of over 1.41 billion, China offers immense potential for market expansion.
Costa Rican goods have generally succeeded in niche markets within China, but there is growing recognition that a broader strategy is needed. Salas underscores the importance of identifying new product categories and enhancing the competitiveness of existing exports. He also points out that Costa Rican exporters must adapt to the specific demands of Chinese consumers, which may require product quality, branding, and packaging adjustments.
Logistical Challenges and Market Entry Obstacles
Logistics is one of the primary obstacles to realizing the full potential of Costa Rica’s export capacity to China. The lack of a direct trade route between the two countries has long been a sticking point. Costa Rican goods must be routed through third countries without a direct shipping line, increasing transportation costs and prolonging shipping times.
Salas notes that high shipping costs can affect profit margins, particularly for small and medium-sized exporters. This logistical bottleneck has made it difficult for Costa Rica to establish a more robust and consistent presence in the Chinese market despite the opportunities provided by the Costa Rica-China Free Trade Agreement.
In addition to logistical challenges, non-tariff barriers such as technical, sanitary, and phytosanitary standards have posed hurdles for Costa Rican exporters. Meeting China’s stringent regulatory requirements can be costly and time-consuming, particularly for smaller businesses that need more resources to navigate complex compliance procedures.
The Evolution of Costa Rican Exports to China
Despite these challenges, Costa Rica has successfully exported a range of goods to China. Medical devices have emerged as the leading export, driven by the growth of Costa Rica’s medical device manufacturing sector, which has benefited from foreign direct investment and specialized knowledge.
Agricultural products also play a vital role in the export mix. Beef, citrus fruits, and concentrated juices have gained traction in China, alongside other exports like copper waste, bovine hides, leather, and coffee. Costa Rican coffee, in particular, is prized for its quality, and there is potential for further growth as Chinese consumers become more discerning about premium coffee products under the Costa Rica-China FTA.
Nicaragua’s Direct Maritime Route: A Potential Opportunity?
Launching a direct maritime route between Nicaragua and China in early 2024 has sparked interest among Costa Rican exporters. Nicaragua’s route is expected to bring three ships per month to the port of Corinto on the Pacific coast, providing a new channel for trade with China.
Salas and Velia Govaere, foreign trade law specialists, see potential in this development but stress the importance of viewing it from a regional perspective. Given the volume of cargo required to sustain regular maritime routes, they suggest that a coordinated approach among Central American nations—including Costa Rica, Nicaragua, and Honduras—could be the key to making the Nicaraguan route viable.
Past Attempts at Direct Trade Routes
Costa Rica has experimented with direct trade routes to China, most notably with the Moín-Shanghai route launched in 2019. Unfortunately, the service was suspended after two months due to insufficient cargo volumes. While this was a setback, Govaere suggests that lessons can be learned from this experience, and the potential for regional collaboration could provide a more sustainable solution under the Costa Rica-China Free Trade Agreement.
Exploring Regional Solutions for Trade Expansion
The idea of regional collaboration is gaining traction. Govaere suggests that combining the export efforts of multiple Central American countries could help consolidate cargo volumes, making direct trade routes more feasible. This approach could also strengthen the region’s bargaining power and position Central America as a more competitive player in global trade.
Air vs. Sea Transport for Costa Rican Exports
In 2023, 68% of Costa Rican exports to China were transported by air, with the remaining 32% shipped by sea. While air transport is faster, it is also more expensive, making it less viable for bulk goods like agricultural products. For Costa Rica to scale up its exports to China, developing more cost-effective shipping options will be critical for fully leveraging the Costa Rica-China Free Trade Agreement.
Addressing Non-Tariff Barriers
Non-tariff barriers remain a significant challenge for Costa Rican exporters. These include technical standards, sanitary regulations, and phytosanitary requirements that can complicate entering the Chinese market. Salas stresses the need for Costa Rican businesses to invest in understanding and meeting these standards to unlock the full potential of the Costa Rica-China Free Trade Agreement.
Efforts to Strengthen Trade Relations with China
In 2023, three members of the Costa Rican Exporters Chamber (Cadexco) traveled to China to strengthen trade relations and expand opportunities. They aimed to advocate for easing export procedures and building relationships with Chinese businesses and government officials. These efforts reflect the commitment of Costa Rican exporters to overcoming the challenges posed by the trade imbalance and capitalizing on the Costa Rica-China Free Trade Agreement’s potential for growth.
Conclusion: The Path Forward for Costa Rica-China Trade
Thirteen years after the Costa Rica-China FTA came into effect, Costa Rica finds itself at a crossroads. While the agreement has led to significant growth in exports, the widening trade deficit highlights the challenges that remain. Overcoming logistical barriers, addressing non-tariff obstacles, and finding ways to capitalize on regional cooperation will ensure that Costa Rica can fully benefit from its trade relationship with China. As exporters continue to explore new opportunities, the Costa Rica-China Free Trade Agreement remains a vital tool for expanding Costa Rica’s presence in the global economy.