Costa Rica at Crossroads in Courtship with Beijing

In few other countries in Latin America and the Caribbean have the strategic objectives of China been as clear as in its relationship with Costa Rica. Yet in few other countries has the PRC experienced so many difficulties compared to the level of effort invested. When secret negotiations with Costa Rican president Oscar Arias and his foreign minister Bruno Stagno led Costa Rica to diplomatically recognize the PRC on June 1, 2007, it was seen as a catalyst that could lead the five other Central American nations recognizing Taiwan to change their diplomatic posture. The PRC was correspondingly generous in rewarding Costa Rica for its action, building the country a new $90 million sports stadium and purchasing $300 million of its government bonds (Razon, March 27, 2011). While both sides have tried to develop a close economic relationship, major Chinese investment projects have suffered repeated setbacks amid a political environment skeptical of the potential for corruption and declining Chinese interest in the relationship. The recent election of President Luis Guillermo Solis is likely to reinforce both trends, making major new deals considerably more challenging.

Strong First Impressions

If the PRC’s long-sought recognition by Costa Rica appeared to be the beginning of the end for Taiwan’s diplomatic position in Central America, such consequences were averted with the January 2008 election of Ma Yeng-jeou, which led to a process of reapproachment with the PRC, in which both sides committed to suspend efforts to change the diplomatic posture of states recognizing the other.

While the PRC-Taiwan “diplomatic truce” prevented Beijing from acting upon the interest expressed by other Central American leaders in changing their own diplomatic posture, it did not stop it from seeking to expand its relationship with Costa Rica as an example to other states of the fruits of friendship with the PRC. Both Chinese Presidents Hu Jintao and his successor Xi Jinping visited the country, as well as receiving both Costa Rican president Oscar Arias and his successor Laura Chinchilla in China on multiple occasions. With the support of agreements signed during such visits, Chinese companies entered into negotiations for various major infrastructure projects funded by loans from Chinese banks, including a $1.3 billion expansion of the nation’s aging refinery in Moin (Bloomberg, June 20, 2013) and a $465 million improvement of the highway linking the capital, San Jose, to the country’s principal Caribbean port in Limon (Costa Rica Hoy, March 15).

The PRC also offered a $101 million loan for Costa Rica to replace its aging transportation fleet with new Chinese Higer-brand buses, plus an additional $30 million for the purchase of solar panels to power homes, including a 10 MW solar energy facility being constructed in Guanacaste by the Chinese firm Guoxin (Reuters, June 3, 2013).

In the final days of the Chinchilla administration, the China Development Bank (CDB), in combination with Costa Rican national and local officials, began to look beyond loans to Chinese investment in the country, presenting a feasibility study advocating for the establishment of six new territorially-defined free trade zones in different parts of the country, with designated focuses ranging from high-tech manufacturing to agriculture to tourism, presumably to be occupied by Chinese companies, with the backing of Chinese banks (El Financiero, May 13).

Beyond commercial projects, the PRC has also provided assistance in other areas, including an offer to construct a $25 million police academy in the Caribbean city of Pococí (Costa Rica Hoy, June 5, 2013). In November 2011, its new hospital ship “Peace Ark” made a port call in Limon, where it provided medical service to poor Costa Ricans (Nación, November 23, 2011). In education, the Chinese cultural promotion organization, Hanban funded the establishment of Central America’s first Confucius Institute, for Chinese-language and culture education at the University of Costa Rica (China.org, November 19, 2008), in addition to providing personnel and resources for non-Confucius Institute language training and cultural programs with Costa Rica’s Universidad Nacional and the private Centro Cultural China-Costa Rica, among others. Between the Confucius institute and other programs, the Chinese government has offered almost 90 scholarships per year for Costa Ricans to study in the PRC.

But a Rough Morning After

Despite such largesse, from the beginning of the relationship, Chinese initiatives in Costa Rica have been mired in controversy, and blocked by a combination of bureaucratic obstacles and resistance in the National Assembly. The Assembly held hearings to determine if there were improprieties related to the PRC’s purchase of $300 million in Costa Rican government bonds (Nación, September 4, 2008). AFECC, the Chinese company that built the donated Costa Rican stadium in record time, was condemned when it diverted machines and equipment to support a commercial construction operation that it was trying to set up in the country (Nación, March 7, 2010). In 2013, the refinery project was halted when it emerged that the principal Chinese contractor, China National Petroleum Corporation, had created a conflict of interest by using one of its own affiliates, HQCEC, to do the feasibility study (Bloomberg, June 20, 2013), and on two additional occasions, the Costa Rican comptroller’s office rejected re-worked versions of the study submitted by Soresco, the Chinese-Costa Rican joint venture leading the project.

With respect to the improvement of the roadway Ruta 32, amidst a national election campaign, the National Assembly balked at approving the project over allegations that the project costs were inflated, the interest rate was too high, the clause for resolving contract disputes through a PRC-based arbitration body was unacceptable and the parent of the company doing the work had been barred from World Bank projects over corruption charges (Nación, April 21, 2013; Costa Rica Hoy, November 19, 2013). In 2013, Costa Rica’s Instituto Costarricense de Electricidad (ICE) halted implementation of a $583 million contract awarded to the Chinese firm Huawei to build a nationwide 3G cellular communications infrastructure, due to alleged procedural improprieties, although the matter was later resolved (Nación, August 30, 2013).

In cultural affairs, by one estimate, almost half of the scholarships offered by the PRC government for study in China have gone unused due to a lack of candidates meeting the rigorous qualifications of the programs.

Dealing With a New President

If the aforementioned examples show that Costa Rica’s pluralistic politics and dedication to procedure has created difficulties for the Chinese, the new political phase that it has entered with the election of Luis Guillermo Solis portends an even more fundamental re-evaluation of that relationship.

The current phase was defined by the unorthodox national elections of February 2 and April 6, in which the establishment candidate of the Partido Liberación Nacional (PLN), Jhonny Araya, unexpectedly withdrew from the race after winning a plurality, but not majority in the first round, allowing a dark-horse candidate who had come from virtual obscurity, Luis Guillermo Solis, to win the presidency.

A key focus of Solis’s appeal was his commitment to move away from the type of improper activities that many in the country felt characterized the previous governments of the Partido de Liberación Nacional (PLN) and their relationship with the PRC Persons who have worked with Solis characterize him as a principled pragmatist who, while not anti-Chinese, is distrustful of the Chinese approach to doing business. Beyond Luis Guillermo Solis, a key voice in the party that he rode to power, the Partido Acción Ciudadaña (PAC), also reflects the strong influence of its founder, Ottón Solís (no relationship), who has been a vocal critic of projects involving the Chinese (Nación, June 21, 2013).

The way in which such skepticism toward the PRC could play out is made unpredictable by the fragility of the new government, both in parliament and in the executive branch. The PAC, controls only 12 of the 57 seats in the unicameral National Assembly—a weakness illustrated on the opening day of the assembly, when the first official motion was to call a recess because the newly elected legislators had not yet finalized inter-party alliance negotiations, determining whether the PAC, or a PLN-led opposition alliance, would control the body. With respect to the executive, few of those named as ministers have senior-level government experience. This lack of experience plus the new government’s weak position in the National Assembly, suggest likely problems in successfully “shepherding” programs through legislative and administrative processes, with the result that those Chinese projects taken forward under a Solis administration, could face even more hurdles than those under the PLN governments of Oscar Arias and Laura Chinchilla.

Controversy over the relationship with the PRC is also likely to be bolstered by an expanding deficit in Costa Rica’s trade with the country, with the country’s $1.4 billion imports from the PRC in 2012 already more than four times its $331 million in exports (Direction of Trade Statistics Yearbook, International Monetary Fund 2013). More problematically, 78 percent of Costa Rica’s exports to China are tied to the production of semiconductor chips by the Intel Corporation; the company’s announced shutdown of its production line in Costa Rica will greatly increase Costa Rica’s trade deficit with the PRC, and associated negative attention to the relationship. Nor will attempts to expand exports of coffee, banana, pineapple or ornamental flowers adequately compensate for the loss of chip exports, since Costa Rica’s limited production of such traditional products is already absorbed by the U.S. and European markets, and faces strong competition in China from closer suppliers such as Thailand and the Philippines.

Sources of tension on the Costa Rican side are also likely to be reinforced by decreasing generosity by the PRC. From China’s perspective, each successive government following that of Oscar Arias (who took the political risk of changing the country’s diplomatic posture), is seen to deserve progressively less special treatment for merely continuing the relationship. China’s decreasing disposition to woo Costa Rica is reinforced by the continuing PRC rapprochement with Taiwan, which reduces incentives to provide gifts merely to maintain Costa Rica’s diplomatic recognition.

The decrease in China’s special treatment of Costa Rica is seen not only in the shift from gifts, such as the national stadium, to loan-based projects such as the refinery and the San Jose-Limon highway, but also in diplomatic assignments. Whereas China’s first two ambassadors to Costa Rica, Wang Xiaoyuan and Li Changhua, each had extensive prior experience in the region, spoke fluent Spanish and actively sought relations with key actors in the country, its latest representative, Song Yanbin, arrived in Costa Rica with little Spanish ability, no previous experience in the region and is seen by many Costa Ricans as much less effective than his predecessors in building local relationships.

Conclusion

While such factors are likely to expand problems between China and Costa Rica, the relationship could nonetheless take an unexpectedly positive turn due, ironically, to economic necessity. Most pressingly, Intel’s withdrawal of semiconductor manufacturing from Costa Rica over the coming year is likely to negatively affect the economy far beyond the 1,500 positions to be directly eliminated, since other companies who have based their own presence in Costa Rica around Intel’s chip production, including both component suppliers and service providers, may also cease operations or transfer jobs out of the country.

Costa Rica could further suffer capital flight if the more left-of-center actors in the governing coalition assume a high-profile role in economic policymaking. In the National Assembly, these include the neo-socialist Frente Amplio party, which constitutes almost half of the governing coalition, as well as Dr. Henry Mora, president of the new parliament and an economics professor whose strongly leftist economic ideology was showcased through his outspoken opposition to the Central America Free Trade Agreement during its consideration by the National Assembly in 2008.

Such factors could push the new Costa Rican government toward greater cooperation with the PRC, making initiatives such as the free trade zones proposed by China Development Bank more attractive as a way to replace lost Costa Rican jobs or compensate for swelling trade deficits with the PRC.

However events unfold, it is likely that the impact of Luis Guillermo Solis’s administration on Costa Rica’s relationship with the PRC is likely to be as significant and unexpected as his arrival in the presidency.