U.S. eyes next step after Costa Rica backs trade pact

WASHINGTON (Reuters) - The Bush administration on Monday welcomed Costa Rica's narrow approval of a free trade agreement with the United States, after a national debate that split the tiny Central American democracy.

Costa Rican voters backed the U.S.-Central American Free Trade Agreement, or CAFTA, by the slim margin of 51.58 percent in favor to 48.42 percent against -- in an echo of the bitter debate in the U.S. Congress over the agreement two years ago.

"We are pleased that Costa Rica will be joining the other CAFTA-DR countries in reaping the benefits of greater regional economic integration and market opportunities," U.S. Trade Representative Susan Schwab said in a statement.

Costa Rica was the only country to hold a referendum on the pact, which also includes El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic and the United States.

The U.S. Congress narrowly approved the agreement in 2005 after a fierce battle that severely damaged relations between Republicans and Democrats on trade.

Schwab said the Bush administration would work with the Costa Rican government on additional steps it needs to take so the pact can go into force "as soon as possible."

"We believe, and history confirms, that countries that open their markets have greater success in generating economic growth and development," she said.

The free trade deal locks in Costa Rica's duty-free access to the U.S. market under the Caribbean Basin Initiative and phases out many trade barriers facing U.S. manufacturers, farmers and service industry companies in Costa Rica.

Critics fear it will mean a flood of cheap U.S. farm imports and damage state-run companies, endangering funding for Costa Rica's welfare state.

The pact exposes state-run sectors like telecommunications and insurance to competition from foreign firms.

The White House warned one day before Sunday's vote in Costa Rica that it would not renegotiate the pact if it was rejected.

"That nearly half the public in Latin America's richest free-market democracy opposed CAFTA despite the intensive campaign in favor of it should end the repeated claims that pushing more NAFTA-style free trade deals is critical to U.S. foreign policy interests in the region or helps the U.S. image," said Lori Wallach, director of Public Citizen's Global Trade Watch division and a longtime foe of the Bush administration's trade policies.

Congress appears set to approve a free trade agreement with Peru in coming weeks, after the Bush administration agreed to strengthen labor and environmental provisions of the pact to pick up support from Democrats.

But the outlook for an agreement with Panama is in doubt after that country's legislature chose as its leader a man wanted in the 1992 killing of a U.S. soldier.

Democrats also want Colombia to show much more progress in reducing violence against union leaders before Congress votes on a trade pact with that country.