HONDURAS INCREASES TARIFFS ON DAIRY PRODUCTS

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002872 SIPDIS SENSITIVE STATE FOR WHA/CEN, WHA/EPSC, AND EB STATE PASS TO USTR FOR ANDREA GASH DURKIN USDA FAS FOR ITP/AAD/GRUNENFELDER AND CMP/DLP/WETZEL GUATEMALA FOR AGATT STEVE HUETE E.O. 12958: N/A TAGS: EAGR ETRD PGOV HO WTRO SUBJECT: HONDURAS INCREASES TARIFFS ON DAIRY PRODUCTS REF: A) STATE 245422 B) TEGUCIGALPA 2049 ¶1. (U) SUMMARY: In November, after several months of internal debate, the GOH increased tariffs on a range of dairy products. The tariff increases apply to thirty specific products (8-digit tariff lines),going far beyond the initial focus on only nonfat powdered milk. For most of the products, the tariff was raised from 15 percent to 35 percent. However, mindful of the risks of violating its WTO commitments, the GOH raised the tariffs only to the level of the bound rates that Honduras had previously agreed to under the WTO. ¶2. (SBU) The tariff increases represent a victory for LACTHOSA, the Honduran dairy company that dominates the domestic market, and serves as an example of how influential businessmen can exercise control over markets in Honduras. Embassy has received one complaint to date from a U.S. ice cream manufacturer whose planned exports would be harmed by the tariff increase. However, the GOH continues to believe that any specific concerns by U.S. exporters can be accommodated in the framework of the CAFTA negotiations. END SUMMARY. ¶3. (U) On October 20, 2003, the GOH announced that it would raise tariffs on thirty specific dairy products (8-digit tariff lines),including milk and powdered milk, sour cream, yogurt, some cheeses, butter, and ice cream. The new tariffs took effect in November, as soon as the Ministry of Finance and the Customs Agency were officially notified. (See paragraph 11 for a complete list of the old and new tariffs according to their 8-digit product codes.) The announcement took the form of an agreement signed by LACTHOSA, a Honduran dairy company, and FENAGH, the Honduran National Federation of Cattle Farmers. The agreement was also "witnessed" by the Minister of Trade and Industry, the Minister of Agriculture, the Minister of the Presidency, and the head of COHEP (a private sector umbrella organization). -------------- Background -------------- ¶4. (SBU) LACTHOSA, owned by Honduran businessman Chucry Kafie, owns the Sula brand of milk and other dairy products, and holds the license to distribute products of the Costa Rican brand Dos Pinos in Honduras as well. LACTHOSA is the largest purchaser of milk in Honduras, and is also reported to be negotiating the purchase of its largest competitor, the LEYDE milk company, which would grant LACTHOSA near- monopsony buying power (95 percent of the market). Earlier this year, LACTHOSA built a milk dehydration plant in Honduras, and began to lobby the Honduran government for greater tariff protection of powdered milk, in order to raise the cost of imported powdered milk and make the dehydration plant economically viable. Specifically, in August, LACHTOSA requested a increase in the tariff from 15 percent to 60 percent. (See reftels A and B). ¶5. (SBU) Officials in the Honduran Trade and Agriculture ministries privately expressed their frustration with the situation, caught between high-level political instructions to provide some kind of support to Honduran milk producers, the demands of an influential businessman, and the knowledge that raising the tariff above the WTO bound rate (which is 15 percent for most categories of powdered milk) would invite legal action from the WTO. Furthermore, the tariff in effect for one major category of powdered milk (tariff line 0402.10.00) was already at the WTO bound rate of 15 percent, meaning that any increase whatsoever would violate WTO commitments. ¶6. (U) To increase the pressure on the GOH, and taking advantage of the seasonal surplus production of milk, LACTHOSA stopped purchasing milk from producers in early October at the prices upon which they had previously agreed. This price decrease led the producers' organization FENAGH to bring further pressure on the GOH to increase import tariffs. The result was the agreement of October 20th, in which the GOH announced the tariff increases and LACTHOSA promised to return to the previously set prices for milk producers. By agreeing to raise tariffs on a whole range of products, not just nonfat powdered milk, the Ministry of Trade and Industry was able to keep the new tariffs within the WTO bound rates. ¶7. (U) GOH officials have also stressed to EmbOffs that the new tariffs will apply only to countries with which Honduras has no other specific bilateral or multilateral trade agreements. Hence, lower tariff rates are expected under CAFTA and FTAA, and are already in effect for Honduras' Central American neighbors. (Of course, lower CAFTA rates for U.S. exporters would only apply when CAFTA comes into effect - until then, U.S. exporters will presumably be subject to the higher tariffs.) New Zealand is often cited as the country that exports the most powdered milk to Honduras. -------------- Other Measures to Support the Dairy Industry -------------- ¶8. (U) The October 20th agreement also lists several vague "commitments" that the GOH makes to support the national dairy industry. For example, the government promises to take steps (presumably in addition to the tariff increase, but unspecified) to encourage importers of powdered milk to purchase nationally produced powdered milk instead. The government also pledges to place the income derived from the increased tariffs into a fund, which will be used to implement mechanisms to increase milk consumption among children and to support measures to increase the competitiveness of milk production nationally. (Officials at the Ministry of Agriculture have estimated that the tariff increases will generate roughly USD 6 million annually, which would amount to an 8 percent increase in the Ministry of Agriculture's annual budget. Their methodology, however, assumes that imports continue at their pre-tariff levels, which is probably unrealistic; hence the real amount raised will likely be considerably lower.) ¶9. (SBU) In addition, the government commits to "establish guidelines for donations of milk, so that such donations will not create unfair competition with national production". While no details are given (and officials at the Ministry of Agriculture were unable to elaborate, saying that not even a draft of such guidelines exists at the moment),the statement is indicative of the political sensitivity of the dairy sector, and of concerns that donated goods may be disrupting local markets. (Note: In November, USDA donated 500 metric tons of nonfat dry milk to the U.S. NGO Project Concern International (PCI),which is planning to sell the milk in Honduras and use the proceeds for HIV/AIDS programs. PCI's initial import application for the donated milk was refused by the Ministry of Agriculture for reasons that were unclear; however, the NGO was later able to get the import application approved by working through an intermediary. End note.) -------------- Impact on U.S. Exports -------------- ¶10. (SBU) One U.S. company has already contacted the embassy for advocacy regarding this issue. Allied Domestic QSR, parent company of Baskin-Robbins ice cream, signed a licensing agreement earlier in 2003 with a Honduran company, intending to introduce its products into Honduras by early ¶2004. However, their business plan was based upon the 15 percent tariff then in effect, and it is not clear that they will be able to continue under the new tariff of 35 percent. When Econ officers raised this company's concern with GOH officials, the response was that specific U.S. exporters can be accommodated through lower tariff offers in the CAFTA negotiations. -------------- Appendix: The new tariffs -------------- ¶11. (U) Below are the old and new tariff rates, in percent, for the thirty products affected. In each case, the new tariff rate is equal to Honduras' WTO bound rate. General 8-digit Previous New Category Tariff line Tariff Tariff -------------- -------------- -------------- -------------- Fluid Milk 0401.10.00 15 35 0401.20.00 15 35 0401.30.00 15 35 Powdered 0402.21.11 15 20 Milk 0402.21.12 15 20 0402.21.21 5 15 0402.21.22 5 15 0402.29.00 15 25 Evaporated 0402.91.10 10 20 Milk 0402.91.20 15 20 0402.91.90 15 20 Condensed 0402.99.10 10 20 Milk 0402.99.90 15 20 Yogurt and 0403.10.00 15 35 Cream 0403.90.10 15 35 0403.90.90 15 35 0404.90.00 10 35 Butter 0405.10.00 15 20 0405.20.00 15 20 0405.90.10 5 8 0405.90.90 15 20 Cheese 0406.10.00 15 20 0406.20.90 15 35 0406.30.00 15 35 0406.40.00 15 35 0406.90.20 15 35 0406.90.90 15 35 Malt extract 1901.90.20 0 15 Ice Cream 2105.00.00 15 35 Milk drinks 2202.90.90 15 35 Pierce