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
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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.

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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.)

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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.

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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