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Journal of Commerce
The Dawn Of A New Day
By ALAN M. FIELD
June 1, 2003
There was a time not long ago when Puerto Rico's economic viability depended on low-wage textile manufacturers. Those days are gone.
Lured by rock-bottom corporate income taxes that max out at 7 percent and economic incentives for research and development and job training, Fortune 500 companies have turned the island into a paradise of high-margin, high-tech manufacturing. Consider these examples: Exports of pharmaceuticals tripled from $8.3 billion in fiscal 1997 to $28.6 billion in fiscal 2001. Sixteen of the top 20 pharmaceutical products are now made on the island, as are half of all U.S.-made pacemakers and defibrillators.
"Lots of low-wage companies left Puerto Rico and moved to the Dominican Republic," said David E. Lewis, vice president of Manchester Trade Ltd., a trade advisory firm in Washington. "But the high-end, high-value manufacturers of pharmaceuticals and high-tech stayed."
For William Riefkohl, executive vice president of the Puerto Rico Manufacturers Association, the rea-son is simple. "Many American companies find Puerto Rico a very profitable location: good human resources; good tax incentives; and qualified information technology staff," he said.
The island's strengths as an industrial center have buoyed exports, even as the global economy has slowed. Puerto Rico's shipments to the U.S. mainland in December 2002 grew by 14.8 percent to $4 billion, compared with a year earlier. Its exports to the rest of the world grew by 12.9 percent to $568 million.
Now, however, Puerto Rico's leaders are striving to leverage the island's unique biculturalism in a new way - and reinvent the island's role for the coming age of expanded free trade. A decade ago, Puerto Rican industry failed to have its views represented in negotiations that led to the North American Free Trade Agreement. The island's leadership isn't about to have history repeat itself with the Free Trade Agreement of the Americas (FTAA) and the Central American Free Trade Agreement (Cafta).
"Puerto Rican local companies see a market in the Caribbean, and they want to make sure that Puerto Rico plays an important role in Central America," Lewis said. "However, very few local Puerto Rican companies are involved in international trade. Now they must get ready to compete with companies from all the countries that (will) have free-trade agreements with the U.S."
In the negotiations that preceded Nafta, Puerto Rico never participated in the Industrial Sector Advisory Councils that consult with the U.S. Trade Representative, "because Puerto Rico has fiscal autonomy; it pays no federal taxes," Lewis said. Moreover, the pro-statehood government that ran Puerto Rico in those days naively assumed that the interests of Puerto Rico's industrial sectors would be automatically taken care of by Washington. This time around, they are getting representatives from Puerto Rican industrial sectors involved.
To that end, Puerto Rican industrialists and bureaucrats have engaged in a series of talks with officials of the USTR, the U.S. Department of Commerce and members of Congress. "The Puerto Ricans are saying, 'These free-trade agreements will affect us just like it affects New York or California, so we need to make sure that whatever you do, you consult with our sectors as well,' " Lewis said. "Puerto Rico has its own needs and agenda. In some areas, they complement the mainland, and in some areas they don't."
Puerto Rican officials and executives also are expanding the island's profile outside the U.S. Puerto Rican agents are opening offices in Spain, the Caribbean and South America. The government recently signed collaborative agreements with the Dominican Republic and Costa Rica. It recently hosted a visit from Costa Rican Pres-ident Abel Pacheco, during which Antonio Fas Alzamora, president of the island's Senate, sought Pacheco's support in making Puerto Rico a site for next year's Cafta talks. Not to be outdone, the Puerto Rico Manufacturers Association is planning a series of overseas trade missions, Riefkohl said.
Still, the longstanding issue of Puerto Rico's political future could make it difficult for the island's leadership to act as one. "Forty-eight percent of the people are still pro-statehood, and they fear this (independent promotion of Puerto Rico) is heretical," Lewis said. "My position is, regardless of whether Puerto Rico is a state, a commonwealth or independent, there are things that Puerto Rico has to do."
Some Puerto Rican business leaders see an opportunity for their relationship with the U.S. to push for concessions from U.S. trading partners in the Caribbean when those partners negotiate free-trade pacts with the U.S. For example, "We are the most important trading partner with the Dominican Republic, but they have enormous customs barriers that keep away foreign goods," Riefkohl said. While Dominican goods flood the Puerto Rican market, Puerto Rican foodstuffs such as flour dough face stiff tariffs entering the Dominican market. Given that the Dominicans want to join Cafta, "we could put in a good word for them as a gesture" in return for their concessions, Riefkohl said.
Although the FTAA will create opportunities for local companies, it also will open Puerto Rico's domestic market to competitors that many small companies are not prepared to confront. "The FTAA will open our local industries to enormous challenges," Riefkohl said. "Our local companies have never looked outside Puerto Rico. More than 95 percent of their sales are local."
Despite the island's transformation into a major manufacturing center - major exporters include Eli Lilly, Pfizer, Merck & Co., Bristol-Myers Squibb, Johnson and Johnson, GlaxoSmithKline, Hewlett-Packard, Microsoft, Northrop Grumman and Siemens AG - Riefkohl acknowledged a series of challenges that are confounding to business. "The government can be bureaucratic at times. It has a very lax payment system; people deliver goods and they don't get paid." Local authorities are also notoriously slow about processing permits. "The problem comes from many sides," he said. "A lot of regulations were passed when Puerto Rico was a small agricultural society. The government is reluctant to make changes."
Although the island's infrastructure has come a long way - roads are good, and the airports are adequate - power regulation remains a problem. "There are ups and downs in power supply; it is not very consistent," Riefkohl said. Manufacturers in sectors such as plastics suffer the consequences.
But it is Puerto Rico's container ports that need upgrading more than any other component of the island's infrastructure. Although the Port of San Juan is the fourth-largest port in the Americas, with 2001 throughput of 1.7 million TEUs - only Los Angeles, Long Beach and New York-New Jersey are larger - it will exceed its 2.1 million-TEU capacity by 2010, said Edgardo Torres-Caballero, assistant secretary for strategic projects at the Department of Economic Development and Com-merce. Torres-Caballero's agency is working closely with the Port of the Americas Authority to build a much larger, more-advanced facility in Ponce, on the southern coast of the island.
In the first phase of the project, capacity at Ponce will be enlarged to 300,000 TEUs from 60,000 now. "By the end of 2004, the terminals will be rehabilitated, and it will be dredged," Torres-Caballero said. Capacity will be increased, because his agency's analysis shows a potential demand of 6.8 million TEUs.
"The port will be a vehicle for economic development in the South, Torres-Caballero said. "It will create jobs in value-added areas, such as light manufacturing." Authorities have already identified more than 1,000 acres that are suitable for industrial development near the new port. "It will provide a place for logistics and development of other, value-added activities," Torres-Caballero said. He added that there already had been a strong response from the private sector. "The big players are interested," he said.
But Riefkohl said he doubts that the new port will be a panacea. "The real impact will be on indigenous business" on the island, he said.
Lewis raised another concern. "The debate is whether Puerto Rico can compete on a port level with other areas that have lower costs and don't pay U.S. wages," he said. The impact of the Jones Act, which requires that ships in the U.S.-Puerto Rico trade fly the U.S. flag and be owned, built and crewed by Americans also could limit its growth.
Nevertheless, Torres-Caballero said he is confident the Port of the Americas will hold its own against competition from other upgraded ports in the region. He argues, for example, that the Port of Freeport, Bahamas, will not be able to compete because it lacks the manufacturing base. "The human capital is al-ready here," he said. "Forty-two percent of our GDP comes from manufacturing. We have a stable economy, and we are linked to the U.S. As for Venezuela, it is very volatile. Puerto Rico gives you safety, a strong market and experience in value-added manufacturing."
In the long run, Puerto Rico's unique relationship with the U.S. may prove its trump card once more - despite all the efforts to play a more assertive, independent role.
And in an age when supply-chain security is paramount, Puerto Rico offers shippers the security of the emerging standards mandated by the Department of Homeland Security long before they are fully implemented elsewhere in the region. "Some people say that these security concerns (placed on Puerto Rican industry) are more constraints" than benefits, Torres-Caballero said. "And they may be in the beginning. In the long run, there may be a benefit for Puerto Rico, having to align itself to U.S. standards" before the rest of the region. "That is a great chance and opportunity."