Though the controversial Central American Free-Trade Agreement with the United States (CAFTA) is expected to have little effect on the prices of cars and other vehicles in Costa Rica, auto industry insiders fear the pact would limit the business that the nation’s 5,000 auto shops receive from the insurance sector.
Though CAFTA does include tariff reductions for vehicles, the reductions would have little effect on the prices of cars because the bulk of what is paid to import a car is paid on other taxes not affected by the U.S. trade agreement, explained former Costa Rican Trade Minister and CAFTA negotiator Alberto Trejos.
“In almost all cases, tariffs on vehicles are already very low,” Trejos said. CAFTA is essentially a reduction of barriers to trade, an agreement between the United States, Dominican Republic and five Central American countries to reduce tariffs, or import taxes on foreign goods.
The government charges about 52% of the value of a new car to bring it into Costa Rica, but only about 1% of that is a tariff. The rest is a combination of a selective consumption tax, an emergency tax, a value-added tax and sales tax, according to Fernando Vasques, technical director of the Customs Administration.
Of the approximately 30,000 vehicles imported into Costa Rica each year, there are, however, a few exceptions.
According to Trejos, the exceptions include vehicles that can fit more than 15 people (excluding buses), trucks, large vans, ambulances, vehicles with refrigerators, tow trucks and fire trucks, all of which have 15% tariffs, which in most cases would be dropped immediately with the implementation of CAFTA, Trejos said, if it is approved in the Oct. 7 referendum. Buses have a 6% tariff that would also be dropped.
But in the case of most cars, there is about a 1% tariff that would be dropped immediately with CAFTA implementation, a minor change consumers are unlikely to notice.
Suzuki representative in Costa Rica Joaquín González said the state maintains high taxes on imported cars because it’s a simple taxing process.
“It’s very easy for the state to take in those taxes. Car companies always pay the taxes, they’re large, consolidated companies that have been here a while,” he said, adding that the tax laws on vehicles are easily enforced since it’s difficult to smuggle a vehicle into the country.
If CAFTA were approved, there would also be a 1% tariff reduction on gasoline imported from the United States, according to Trejos. But since the United States isn’t a significant supplier of gasoline to Costa Rica, the tax would be almost irrelevant.
“CAFTA won’t affect gas, because the United States isn’t a relevant gas importer,” Trejos said, adding that such a minute tariff reduction wouldn’t give Costa Rica reason enough to begin importing more gasoline from the United States.
Auto Shops Worried
As part of massive reforms the United States demanded under CAFTA, the Legislative Assembly’s Economic Affairs Commission last October began debating legislation to open the country’s insurance monopoly.
Now, the National Insurance Institute (INS) runs the state insurance monopoly, providing everything from car to home to private medical insurance in Costa Rica.
Two pieces of reform legislation would create an agency that would regulate market competition, create an ombudsman office to investigate complaints against companies, require businesses trying to enter the market to prove that they have sufficient capital to cover themselves and modernize INS to be able to compete (TT, Jan 26).
Proponents of the reform say it will diversify the types of insurance services offered here, while opponents say INS won’t be able to survive against competition of multinational insurance companies.
Small and medium auto shops also fear the effects CAFTA, if approved, might have on their businesses.
Earlier this year, INS launched a pilot program to speed up accident repairs, according to INS Commercial Director Guillermo Vargas. Under the program, 20 qualifying auto shops have the benefit of receiving immediate damage evaluations when damaged insured vehicles are brought to their businesses, while evaluations at the rest of the country’s auto shops can take up to two weeks.
According to Vargas, those auto shops have to transport damaged vehicles to one of a handful of INS evaluation stations to obtain the evaluations necessary for work to be funded by the insurance company.
The problem that many of the nation’s 5,000 auto shops have with the program is that it has ended up favoring a select few, alleged auto mechanic José Manuel Alvarez, secretary general of the Federation of Auto Shops (FECADESA).
“All the work is being sent to a few businesses with political ties,” he said.
It’s a blow for shops that don’t receive immediate INS evaluations, since as much as 90% of the business they receive come from accidents that involve INS evaluations, Alvarez said.
FECADESA has filed an administrative complaint with INS that alleges the policy unfairly favors a few businesses. Alvarez said the Federation also plans to file a request for an injunction before the Constitutional Chamber of the Supreme Court (Sala IV) to block the policy.
Under CAFTA, auto shop workers fear that there might be more such “discriminatory” policies that favor the big repair shops that have close ties with multinational insurance companies, Alvarez explained.
The Insurance Institute’s Vargas told The Tico Times that the pilot program is to improve customer service and cut costs for consumers. He denied that the program favors a select few.
Though there was an open invitation for auto shops to apply to participate in the plan, only 40 shops applied and only 20 met the INS criteria and were accepted, he said.
Hundreds of other INS-authorized shops continue to work with the institute.
He said INS is considering what to do after the pilot plan ends next month.
“The most likely scenario is that we expand the plan,” he said. He said INS hasn’t decided on how exactly it could change its policy with auto shops if the insurance market is opened.
Though the Legislative Assembly won’t vote on any CAFTA-related legislation until after the Oct. 7 referendum to decide the pact’s fate in Costa Rica, National Union Party (PUN) legislator and commission secretary José Manuel Echandi said he wants to modify the INS legislation to stop discriminatory policies and guarantee insurance companies give auto shops fair treatment.
Aldo Masucci, director of Costa Rica’s National Automobile Sector Association (ANSEA), a group of 100 Costa Rican auto shop owners, says unless this happens, thousands of employees at small and medium repair shops could lose their jobs.
“An average of two people work in each auto shop – that’s about 10,000 direct employees” that could be affected, Masucci said.
Alfredo Espinoza, who has owned the Especialidades Automotrices S.A. in San Rafael de Heredia, north of San José, for 26 years, is one of them.
“If the CAFTA legislation is going to favor transnational companies, who is going to protect small businesses like us?” he wonders.
Trejos said he knows of no such requirement under CAFTA.
“There’s nothing in CAFTA or in the effects of CAFTA being discussed in the assembly that says that,” he said. “I don’t know if INS has talked about changing its policy with auto shops, but that’s something the institute could do with or without CAFTA. I imagine that if INS changes its policy, those who don’t like it would blame it on CAFTA.”
Importing a Car?
If you’re thinking about buying or importing a car, bear in mind you’ll have to pay he following in taxes and tariffs (percentage of the value of the car):
Automobiles less than three years old: 52.28%
Used cars that are four or five years old: 63.91%
Used cars more than six years old: 79.05%
These amounts include import tariffs, selective consumption tax, an emergency tax, a value-added tax and sales tax.
Source: Fernando Vasques, technical director of the Customs Administration