Costa Rica 2018 | INDUSTRY | REVIEW

Costa Rica's industrial sector has differentiated itself through its high-tech manufacturing, becoming a regional leader in medical and electronic exports.

Years of social investment have helped Costa Rican industry rise from simple labor-intensive manufacturing to more high-skilled medical device and electronics manufacturing. The Costa Rican government has in recent years taken a more aggressive stance toward forming free trade agreements (FTAs) with major Asian markets drawn to Costa Rica's educated populace and easy access to key Western markets. These agreements have risen in concert with the growth of free trade zones (FTZs) that have offered tax breaks and other economic incentives to firms that establish export-based manufacturing businesses in designated industrial areas. Today, the sector is working to solidify its position as a regional and global leader in high-tech manufacturing and continue to forge new connections with foreign firms.

The development of Costa Rica's industrial sector came hand in hand with the heavy education and medical investment beginning in the 1970s that led to a generation with vastly improved skills, giving Costa Rica a unique position in Central America as a nation able to meet high-tech manufacturing needs. In the mid-1980s the country joined the US-backed Caribbean Basin Initiative and passed an Export Processing Law that laid the framework for FTZs on the Pacific and Caribbean coasts. The CBI gave Costa Rica and other Central American states preferential treatment in the US market, increasing bilateral flows between the two countries. Though Mexico replaced Central America as the primary source of Latin American trade in 1994 with the passage of NAFTA, the passage of the Caribbean Basin Trade Partnership Act in 2000 gave Costa Rica and a bloc of 24 other countries a new duty-free trade regime for hydrocarbons, textiles, footwear, and other manufacturing goods.
To take advantage of its beneficial position with the US, Costa Rica has established a robust free trade zone regime. Its 11 manufacturing and industrial FTZs have formed the core of the nation's industrial manufacturing base over the past few decades; as of 2015, FTZs accounted for more than 80,000 direct and another 43,000 indirect jobs and net benefits of more than USD3.1 billion. Studies by Costa Rica's Ministry of Foreign Trade and Foreign Trade Promotion agencies have indicated that for each dollar of incentives granted, the country has received 6.2 times that in benefits. The average wage for FTZ workers is 1.8 times that of non-FTZ private activity, and the continued growth of the sector—the number of foreign firms present has doubled since 2000—bodes well for the health of the industry.
That said, Costa Rica's FTZ regime hasn't been without its problems in recent years. The country faces a more crowded global production landscape than when it began attracting outside investment in the 1990s; over the last several years, some manufacturers have moved operations to Asian markets, which have lower labor costs. Intel, which arrived in Costa Rica in 1998 and helped start a new wave of high-tech manufacturing, closed its facility in 2014, laying off 1,500 workers. In response to new challenges from Asian markets, Costa Rican leaders have doubled down on the high-value added services that the nation is uniquely equipped to offer. High-tech products have gone from 4% of total manufacturing exports in 1996 to 43% as of 2016, and knowledge-intensive industrial exports have gone from 25% of total exports to 35% over the same time frame. Textiles and shoes have been replaced by medical devices and rocket propulsion research, as companies have used Costa Rica's political stability and well-educated population to conduct advanced operations not possible in Asian and other Central American markets.

This industrial strategy has served Costa Rica well, and plans are underway to further develop the sector. A delegation of Costa Rican trade officials traveled to Beijing in July 2017 to seek new opportunities in the Chinese market, meeting with a cohort of private and public Chinese trade officials to discuss the Joint Action Plan for Cooperation currently in place and a potential bilateral trade agreement. China has expressed interest in funding a special economic zone in Costa Rica to use as a hub for operations in the Western hemisphere; though plans are still in the preliminary stages, Costa Rica has expressed a desire to work closely with the world's second-largest economy.