Volume 10 | Issue 3 | Year 2007

China Rising, Industry Today

Costa Rica’s president made a historic move last week. After months of denying the rumors, Nobel-prize winner Oscar Arias sat at a press conference with a few members of his cabinet and made the bombshell announcement that Costa Rica was switching diplomatic recognition from Taiwan to China.

After 63 years of the cozy and – for Costa Rica – lucrative relationship, Taiwan was out on its ear.

It was, in a way, a formal recognition of what has been happening in the world for the last two decades: China’s economic might is no longer possible to ignore. The little Central American country of Costa Rica is living proof of this, as last year China completed a rapid six-year climb to become Costa Rica’s number two trading partner, second only to the U.S.

Costa Rican exports to China crossed the $1 billion mark last year, and imports have been skyrocketing as well. With the newly formed diplomatic relations, trade isn’t the only thing made easier: The door is opened wide for Chinese direct investment.
Costa Rica saw where its advantage lay. The question now is, will the rest of Central America follow?

Export economy
Costa Rica, known most popularly for its beautiful beaches and rich biodiversity, is also somewhat advanced in its position in the global market, especially in comparison with its Central American neighbors to the north.

In 2006, Costa Rica exported $8.2 billion in goods to the rest of the world, which doesn’t include the service industry businesses – like call centers, office outsourcing, and technical support – that take advantage of the country’s high levels of education and every day become a more important part of the economy.

Costa Rica’s principal customer has always been the United States, and multinational companies like medical supplies company Baxter and computer chip manufacturer Intel (which alone accounts for 85 to 90 percent of the country’s exports) have settled in the country.

In the last decade, however, China has jumped from trading very little with Costa Rica to being in second place. Last year, Costa Rica sold $1.086 billion worth of goods to China, and bought $618 million worth. As the Chinese market has grown and become hungrier for goods and bursting with exports, Costa Rica’s potential to do business with the Asian giant has become even greater. Yet one thing always stood in the way.

Costa Rica’s Old Friend
After a civil war wracked the country in 1949, China was split between the Communist mainland government and the little democratic island of Taiwan.

Both claimed the title of legitimate government of China, and mainland China won out in most of the countries and international bodies of the world, including the United Nations.

Taiwan, however, has remained feisty and independent, and through generous aid offerings and other overtures, had managed to keep a handful of allies, mostly in Central America and the Caribbean. These 25 countries maintained diplomatic relations with Taiwan instead of mainland China.

Over the years, the relationship benefited Costa Rica to the tune of hundreds of millions of dollars worth of aid and public works projects from Taiwan. The most visible example is a bridge in the northern part of the country called the Costa Rica-Taiwan Friendship Bridge, which came with a price tag of $27 million, but was paid for entirely by Taiwan.

As China grew, however, and as Costa Rica came increasingly to be an export-based economy, the arrangement got in the way. In 2000, when Costa Rican trade groups began traveling to China to make business connections, they found it cumbersome.

Business could be done, but visas were at the mercy of a torturous process, and the lack of diplomatic relations also meant a lack of arbitration and support. Trade grew nevertheless, and by this year trade with China had clearly become more important than Taiwanese funding of public works projects. That seems to have been the root of President Arias’ decision.

The full effect of forming diplomatic relations with China is still a matter of speculation in Costa Rica. Trade between the two countries was already robust, but the potential for Chinese investment is now much higher. Pending changes in the requirements for Chinese visas, there also exists the possibility that Costa Rica will become a popular tourist destination for the emerging Chinese middle class.

The interesting question for the moment, however, is what does this mean for the rest of the region? Costa Rica is generally at the political vanguard of Central America. After Costa Rica announced the switch in diplomatic relations, all the other Central American countries immediately released statements to the effect that they would maintain relations with Taiwan.

Still, rumors are already flying that Nicaragua is wavering. With its low labor costs and privileged access to U.S. markets thanks to the Central American Free Trade Agreement (CAFTA), Nicaragua would be a target for Chinese investment in the textile industry.

Indeed, some analysts say it is only a matter of time before the rest of Central America follows in Costa Rica’s footsteps Given China’s booming economy, the stakes are just too high.

Domino Effect?
“I think China is going to invest,” says Alberto Güell, president of trade group China Ya (in English “China Now”) which leads trade delegations to China and represents chambers of commerce in all five Central American countries (not including Panama). Güell is sanguine about the possibility of China entering strongly into the Central American market with a force heretofore unimaginable in this part of the world.

“We haven’t satisfactorily defined the impact that China has in the world,” he said.

Güell added that, like Costa Rica, the rest of the region will soon recognize China diplomatically, opening the region even further to a flood of Chinese goods and investment.

Nicaragua has denied the rumors that it will switch diplomatic recognition, but Costa Rica did the same until the very hour of the announcement. China, with its billion-plus population, waits in the wings.

Impact to Come
The meaning of diplomatic relations between China and Central America as far as trade is concerned is still unclear. Certain food products will be welcomed in China, which still has trouble feeding itself. However, the long trip across the Pacific means that fresh fruits and vegetables will continue to be shipped primarily to the northern markets.

The big question-mark rests over manufacturing and Chinese investment. As Chinese goods and business practices continue to change the world, Central America could be set for an enormous economic and cultural shift.

And it could happen sooner than any-one thinks.

Peter Krupa is the business reporter for the Tico Times, Central America’s leading English-language newspaper. He is based in San José, Costa Rica.

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