In Latin America, one of the stable economy is Costa Rica. The economy continues to be benefitted from a higher economic growth and associated higher commodity price. The economy engages in tradition agricultural export such as coffee, sugar, beef and bananas. Export is a vital source of income within the economy. There are two popular views of designing economy policy in a nation. One is economic nationalists that support government or state intervention in an economy. The other one is liberal perspective that supports free market functioning and hence, welcome free trade policy. The paper analyzes trade pattern in Costa Rica. Both the view of economic nationalist and liberal perspective are evaluated in terms of designing economic policy of Costa Rica.
In the world market, Costa Rica holds the position of 77th largest economy in terms of export. Nearly a period of three decades ago, trade policy of Costa Rica has undergone a significant change through the adaption of export-oriented model of economic development. The basis of economic development model in Costa Rica is based on open up to new markets through trade and attraction of foreign capital.
The system of foreign trade in Costa Rica is based upon four pillars – a system of multilateral trade through membership of World Trade Organization, the system of economic integration through Central American Economic Integration System (SIECA), agreement on bilateral free trade and agreement on bilateral investment. All these together make it possible for a small country like Costa Rica to attain an important position in the world economy.
The main export of Costa Rica includes bananas, needles, catheters, cannulae and others, Pineapples (fresh or dried), instrument and appliance, different artificial body parts. The major import of Costa Rica includes Petroleum oil, medicament of mixed and unmixed product, Automobiles, Transmission apparatus, different articles of plastics. United State, Netherland, Panama, Belgium and Nicaragua are the top five export partners of Costa Rica. The top import partners of Costa Rica are United State, China, Mexico, Guatemala and others.
The figure above shows the trend of the export in Costa Rica in the past few years. As shown from the figure, there is an increasing trend in exported good. In the August of 2018, Costa Rica’s export declined to 852 USD million from 929.90 USD million in the previous month. The volume of export reached to the highest level in May 2018 with value of export being 1064.30 USD Million. The export value was the lowest in 1995 having a value of export of 235.50 USD Million.
In addition to export, import of Costa Rica also shows an increasing trend. Volume of import declined to 1110.50 USD Million in the month of September from a value of 1408.40 USD Million in August. This helps to lower the trade deficit. The import volume was highest in November 2017. The lowest volume of import was recorded in the year 1995.
Because of faster growth of import compared to export, there is a continuous decline in trade balance. The nation in recent years suffer from a deficit in trade balance.
The advocates of economic nationalism are in favor of government intervention in an economy. In view of growing trade deficit of Costa Rica, the perspective of economist nationalism might suggest government intervention in form of trade restrictive measures. For a small nation like Costa Rica, trade restriction protects the domestic producer from foreign competition. Government of Costa Rica should restrict high volume of import in the nation. One important import of Costa Rica is Rice. Government can restrict the free exchange of rice by imposing a tariff on rice import. There is already a tariff of 35% on imported rice. Government should tighten the trade policy measure by increasing the tariff rate. The increased trade protection would help to reduce the import volume and trade deficit would reduce accordingly. This would also help to increase competitiveness of domestic agricultural sector.
In recent years, Costa Rica has accounted a decline in the availability of agricultural product for domestic reason. One primary reason for this is the large volume of export of agricultural good to its trading partners. Government thus should intervene in the domestic market and monitor production of grains, cereals, oil seeds, pulses and other necessary agricultural product to ensure sufficient availability in Domestic consumption. Further protection should also be restored for some industrial product such as steel rod. Steel rod is an important input in construction sector. To safeguard domestic manufacturer of steel, protection should be given in form of a significant import tariff on steel rod.
The advocates of liberalism on favors economic openness. From a liberal perspective, Costa Rica should facilitate free trade policy. According to economic liberalism, reduction in tariff barriers results in creation of trade. Free trade helps the nation to switch to low cost producers from high cost one. Instead of restricting import, Costa Rica should focus on specialization in line of its comparative advantage and increasing integration with global economy. The higher export can increase export earnings and help to narrow down trade deficit. The main competitive advantage for export sector of Costa Rica is labor productivity and high training and education level. The labor force in Costa Rica thus is highly skilled and is able to produce high-end products.
Production and export in line with specialization benefits a nation in various ways. From bulk production of exported goods, the country can enjoy benefits of economies of scale. The scale benefits are particularly applicable for industries that involves a very high fixed cost. This in turn results in a lower price for consumers and increases efficiency of domestic sellers. With increasing trade volume, producers face competition from abroad. This induces producers to adapt cost efficient production technology for efficiently competing with their foreign counterpart.
Few year ago, Costa Rica restricted avocado import by imposing a high import tariff on Mexican import. Now with expansion of export of different types of fruit, the local market no suffers from a shortage of these fruits. Elimination of trade restriction helps to resolve this issue. Free trade also offers access to cheap raw materials, which result in expansion of different industries.
Conclusion:
Costa Rica despite being a small nation has made significant progress in international trade. The past year trend in export and import have revealed that both import and export have increased continuously. However, because of faster growth of import compared to export the nation experiences a trade deficit. Depending on current position of trade policy recommendation can be made using different economic theories. Following economic nationalist theory Costa Rica need some state intervention to improve its trade balance. In contrast, from liberal perspective Costa Rica should opt for free trade regime. In an integrated world, nation need to adapt a combination of both policies. That is the nation should adapt a free trade policy to achieve a smooth path of economic growth. The government however should intervene only in circumstances where international openness hampers national welfare.
References:
Centralamericadata.com. “Protectionism In Costa Rica – Centralamericadata :: The Regional Business Portal.” Centralamericadata.com. N.p., 2018. Web. 26 Oct. 2018.
Intracen.org. “Costa Rica.” Intracen.org. N.p., 2018. Web. 26 Oct. 2018.
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Lovett, John, and Grant Ferguson. “An Economic Analysis of the 1st Nationalist Movement of 1783.” Public Choice Analyses of American Economic History. Springer, Cham, 2018. 1-26.
O’brien, Robert, and Marc Williams. Global political economy: Evolution and dynamics. Macmillan International Higher Education, 2016.
Tradingeconomics.com. “Costa Rica Balance Of Trade | 1995-2018 | Data | Chart | Calendar.” Tradingeconomics.com. N.p., 2018. Web. 26 Oct. 2018.
Tradingeconomics.com. “Costa Rica Exports | 1995-2018 | Data | Chart | Calendar | Forecast | News.” Tradingeconomics.com. N.p., 2018. Web. 26 Oct. 2018.
Tradingeconomics.com. “Costa Rica Imports | 1995-2018 | Data | Chart | Calendar | Forecast | News.” Tradingeconomics.com. N.p., 2018. Web. 26 Oct. 2018.
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