Identifier
Created
Classification
Origin
04BOGOTA4326
2004-04-29 14:54:00
CONFIDENTIAL//NOFORN
Embassy Bogota
Cable title:  

ANDEAN FTA ANALYSIS: AGRICULTURE SECTOR IN COLOMBIA

Tags:  EAGR ECON ETRD CO FTA 
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C O N F I D E N T I A L SECTION 01 OF 04 BOGOTA 004326 

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR BENNETT HARMAN

E.O. 12958: DECL: 04/29/2014
TAGS: EAGR ECON ETRD CO FTA
SUBJECT: ANDEAN FTA ANALYSIS: AGRICULTURE SECTOR IN COLOMBIA


Classified By: Ambassador William B. Wood for reasons 1.5 (b and d)

C O N F I D E N T I A L SECTION 01 OF 04 BOGOTA 004326

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR BENNETT HARMAN

E.O. 12958: DECL: 04/29/2014
TAGS: EAGR ECON ETRD CO FTA
SUBJECT: ANDEAN FTA ANALYSIS: AGRICULTURE SECTOR IN COLOMBIA


Classified By: Ambassador William B. Wood for reasons 1.5 (b and d)


1. (C) SUMMARY: Agriculture will probably be one of
Colombia's most sensitive sectors in the FTA negotiations,
due to its historical role and the sector's high level of
government intervention. The U.S. has comparative advantage
in the products most protected by Colombia, particularly
wheat, corn and oilseeds. The GOC's negotiating strategy for
an FTA will most likely be to try to retain all ATPDEA
benefits while claiming that key crops should be protected to
underpin the fight against drugs and civil disorder. The GOC
will also most likely seek to offset U.S. domestic supports
for key products through safeguard mechanisms or long
transition times (up to 20 years). This is the first of a
series of sector briefs developed in preparation for the
Andean FTA. The summaries are based on in-depth studies
which are available from USAID Bogota. END SUMMARY.

Background


2. (SBU) While ATPA and ATPDEA have brought benefits to some
Colombian producers, an earlier market opening still haunts
farmers. When commercial reforms opened the market in 1990,
Colombian agricultural exports increased from US $2.7 billion
in 1991 to US$ 4.7 billion in 1997. But producers blame the
reform for the sector's anemic 1 percent GDP growth in recent
years, and claim that the resulting 9 percent rural job loss
fueled illicit drug production and violence.


3. (U) Current GOC agricultural policies tend to support
products with a strong political base. A recent USAID and
WB-sponsored study found that protected agricultural
commodities, especially basic grains, would be uncompetitive
even if world prices rose as much as 30 percent. The study
concluded Colombia is highly competitive in many
nontraditional agricultural products (flowers, fresh fruits
and vegetables, palm oil, cacao, and forestry products).
These have stronger direct and indirect employment-generation
effects than basic grain products favored by current
protections. The current system distorts agricultural
finance, with subsidies making protected products more
attractive than under a market-based system.



4. (U) The recent recovery of agriculture (4.5 percent growth
in 2003) was fueled largely by non-traditional exports. But
protectionists dismiss this as a "fragile" recovery that
could fail if traditional agricultural interests are not
protected from domestically-supported U.S. products. Though
the GOC worries about rural unemployment, cheap U.S. grain
exports would benefit Colombia's rural and urban consumers as
well as dairy, poultry and swine production.

A Variety of Trade Barriers


5. (U) The Andean Common External Tariff applies to most
products. It varies from 5 percent and 10 percent for inputs
and 15 percent and 20 percent for final products. Some
excepted products are tariff-free to encourage growth of
their productive chains. Finally, a group of sensitive
products are included in the price-band system.


6. (SBU) The Price-Band System includes the 14 most protected
Colombian products (including basic grains, soybeans and
chicken) and 150 substitutes and derivatives. It was
designed to stabilize prices of agricultural imports with
high price volatility in international markets, and to
counter export and production subsidies. When international
prices surpass the band ceiling, tariffs are reduced; when
prices drop below the band floor, tariffs are raised.
Tariffs are calculated using reference prices and not real
transaction values, a practice similar to setting a "minimum
price," violating WTO rules. Although the price-band has
succeeded in stabilizing prices, it also raises the cost of
key inputs for other products, lowering their competitiveness
and dampening consumption through higher local prices.
According to a USAID/WB study, it often raises the effective
protection on some products to over 200 percent. This system
is not compatible with the WTO and will need to be phased out.


7. (C) Voluntary Tariff-Rate Quotas (TRQs) protect six of the
most politically-sensitive agricultural products-- white and
yellow corn, grain sorghum, rice, soybeans and cotton. The
TRQs are set by historic import levels and then auctioned off
by the Agricultural Commodities Board. Importers offering to
purchase the most domestic production win the right to
purchase the imports bid at a reduced tariff rate. Imports
beyond the TRQ are allowed, but face the general tariff rate.
GOC sees TRQs as a way to decrease protection for sensitive
agriculture sectors while preparing them for free trade. FTA
talks will then provide the political cover and concessions
necessary to dismantle them.


8. (SBU) Stabilization Funds provide income support for
producers of sugar, palm oil, cocoa, beef and dairy products
by maintaining domestic prices above world prices. The cacao
and cotton funds are currently not operating due to funding
shortfalls. The Funds are financed by a levy on domestic
sales, with the resulting income used to subsidize exports of
surplus production. While the GOC and producers deny that
these are export subsidies, these are producer-financed
exports subsidies covered by WTO limits. Subsidized beef
exports are relatively small, but export subsidies for sugar,
palm oil and dairy products are in excess of WTO limits.
These programs should be removed.


9. (SBU) Special Safeguard Measures are applied to 56
products listed with the WTO. Here an additional tariff is
applied when the volume of imports increases or when the
price of imports decreases against a set reference price.
Special safeguard measures also apply to 85 products listed
under the Andean Community. Many of these safeguards are not
being applied because of other protectionist measures in
place such as price bands and tariff rate quotas. The GOC
says the measures are permitted by the WTO, but they may not
comply with the most-favored nation principle.


10. (U) Promotion Fund Quotas (PFQs) are tariffs collected on
certain imported goods to help fund scientific research,
development, and technological transfer projects to promote
domestic exports. Such levies are applied on products such
as malt, cacao, almonds, cotton, cottonseeds, and tobacco
among others, raising the cost of imports.


11. (SBU) Discretionary Import Licensing requirements were
removed for corn, rice and poultry with the expiration of a
WTO waiver January 1, 2004. However, requirements remain for
dry beans, beef and milk powder, the latter two instituted in
2003 in violation of WTO rules. The FTA will need to
eliminate these requirements and the legislative authority of
the Ministry of Agriculture to implement such restrictions in
the future.


12. (SBU) Sanitary and Phytosanitary Measures (SPS) have not
been a major problem. U.S. beef and poultry are currently
banned due to BSE and Avian Influenza concerns, but
restrictions may be lifted prior to FTA negotiations.
Salmonella requirements on poultry were previously a problem
and could be used again to block imports. SPS restrictions
could increase as the FTA removes the GOC's discretionary
authority to protect sensitive products through import
licensing and high tariffs.


13. (U) Technical Barriers to Trade have generally been in
the form of restrictive registration requirements. While
these requirements have not been used to keep products out,
the long and complicated process significantly delays the
entry of new products. Biotechnology restrictions have not
been a problem, but stricter enforcement of biotech
regulations related to international agreements could be a
problem in the future.


14. (C) Getting to the Table: What the GOC Needs to Do


A. Develop an export promotion strategy that eliminates
protectionist barriers.


B. Implement key policy and institutional reforms to improve
land market access and allocation and public infrastructure
planning to reinforce comparative advantages in highly
labor-intensive export sectors.


C. Review protection for less-competitive products that serve
as inputs for other agricultural goods, negatively affecting
their competitiveness.


D. Develop more market-based approaches for integrating the
agricultural and agro-business sectors into the formal
financial system.


E. Resolve the ongoing battle between the ministries of Trade
and Agriculture fro control of agricultural trade policy.


15. (C) Overall GOC Demands in Agriculture


A. U.S. domestic subsidies should betaken into account in FTA
negotiations. GOC will leverage this issue to push the U.S.
to examine alternative financial mechanisms (such as
compensation or reconversion funds) and extended phase-out
periods for protectionist mechanisms (eg. price-bands) to
"counter" U.S. subsidies.


B. U.S. phytosanitary standards should be negotiated or
modified to give Colombia rapid market access to dairy, beef,
poultry, fruit and horticultural exports. GOC should agree
to establish a harmonization or equivalence strategy for
improved registration, control, inspection and certification
procedures and intensive technical and institution-building
assistance to achieve international standards.


C. Retain current ATPDEA benefits on all agriculture
products.


16. (C) GOC Positions on Key Agricultural Products


A. Basic crops (rice, sorghum, corn and cotton) should enjoy
special consideration in the FTA. The GOC argues these crops
play a critical role in providing rural jobs that enhance
social stability and keep farmers from illicit drugs and
conflict. While seemingly valid, this argument is false.
Basic grains offer a minor source of employment and
subsistence farmers most likely to switch to illegal crops
are not grain producers. The GOC and alternative development
donors are shifting their focus from grains to more
financially viable crops as better substitutes for drug
crops. The GOC will seek long-phase-in periods, technical
assistance and crop substitution financing for dismantling of
protection for basic grains.


B. Keep out U.S. corn and soybean oil to protect Colombian
corn and palm oil. The GOC wants import substitution
opportunities for Colombian corn & soybeans and will try to
ensure a lengthy transition period for tariff reductions in
these areas. The GOC may be willing to eliminate export
subsidies for palm oil more rapidly.


C. Keep out high fructose corn syrup to protect high domestic
sugar prices and provide a large sugar quota for Colombia
(over 100,000 MT).


D. Keep U.S. poultry leg quarters out of Colombia for as long
as possible. Colombians prefer leg quarters while U.S.
consumers prefer breast meat.


E. Emphasize market access for exotic fruits and vegetables.



F. Gain greater access for Colombian beef (including removal
of foot-and-mouth related restrictions) and dairy products
into the U.S. market.


17. (C) Overall GOC Negotiating Strategy for Agriculture


A. Plan A will be to argue that Colombian agriculture must be
protected in order to underpin the fight against
narcoterrorism. Plan B will be to demand long phase-in
periods for sensitive crops. The GOC is likely to assume a
hard line for an extended period of time, until they sense
that the success of the FTA is imperiled.


B. Agriculture Minister Cano, a hard-line protectionist, is
seen as reflecting President Uribe's policy instincts on
agriculture, and is pitted against Trade Minister Botero on
the FTA. Final decisions on tough issues will be taken by
President Uribe.
WOOD