VENEZUELA 2005 NATIONAL TRADE ESTIMATE REPORT

UNCLAS CARACAS 003940

SIPDIS


STATE FOR WHA/AND
STATE FOR EB/MTA/MST
NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
USTR FOR G. BLUE
USTR FOR B. HARMON

E.O. 12958: N/A
TAGS: ECON EFIN ETRD VE
SUBJECT: VENEZUELA 2005 NATIONAL TRADE ESTIMATE REPORT
SUBMISSION

REF: STATE 240980


1. (U) Summary: The Following is Embassy Caracas' submission
for the 2005 National Trade Estimate Report. This document
was also submitted as a MS Word document to G. Blue and B.
Harmon at USTR by e-mail on December 23, 2004. End Summary

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TRADE SUMMARY
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2. (U) The estimated U.S. trade deficit with Venezuela for
2004 is projected at $19.5 billion, an increase of $5.2
billion from the trade deficit of $14.3 billion in 2003.
U.S. goods exports to Venezuela were approximately $4.5
billion, up $1.8 billion from 2003. U.S. imports from
Venezuela are estimated at about $24 billion in 2004, an
increase of $7 billion from the level of imports in 2003. The
large increase in imports is related primarily to the
increase the price of petroleum, which represents the vast
majority of U.S. imports.


3. (U) The stock of U.S. foreign direct investment (FDI) in
Venezuela in 2003 was $10.8 billion according to U.S.
Department of Commerce statistics. U.S. FDI in Venezuela is
concentrated largely in the petroleum, telecommunications,
manufacturing and finance sectors.

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IMPORT POLICIES
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Tariffs
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4. (U) Venezuela is part of the Andean Community. In 2002,
the five member countries of the Andean Community (Venezuela,
Peru, Ecuador, Colombia, and Bolivia) agreed to establish an
Andean free trade zone, a common external tariff (CET),and a
customs harmonization policy by January 2004. The CET
agreement established a unified tariff schedule that would
have come into effect at the end of 2003 (decision 535). In
October 2002 the member Ministers of the Andean Community met
and agreed upon tariff rates for 62 percent of import items.
In April 2003 all the Andean members except Peru reached
consensus on a CET for the remaining 38 percent.


5. (U) In December 2003, however, the members decided to
postpone implementation of the CET, previously set for
January 1, 2004, until May 10, 2004. In May members again
decided to postpone the implementation of the CET, this time
for a year until May 2005. The members have agreed to review
the CET,s effect on individual tariffs with the intention of
possibly modifying the rates. The CET has a four-tiered
tariff structure of zero, five percent, ten percent and
twenty percent.


6. (U) In December 2003 the Andean Community signed a free
trade agreement with MERCOSUR, the Southern Cone Common
Market. Key elements of the agreement such as the length of
phase-in periods for tariff removal require further
negotiation. In Mid-2004, Venezuela joined MERCOSUR as an
associate member, which does not provide access to the tariff
benefits of full membership. Venezuela was among the 12 South
American countries that signed the "Cuzco Declaration" on
December 8, 2004 announcing the formation of the South
American Community of Nations which would ultimately unite
and replace both the Andean Community and MERCOSUR. Work on
the mechanics of the new entity is slated to begin in 2005.


7. (U) Venezuela has been using the tariffs established under
the Andean Community,s price band system since 1995 for
certain agricultural products, including feed grains,
oilseeds, oilseed products, sugar, rice, wheat, milk, pork
and poultry. Yellow corn was added to the price band system
in 1996, and processed poultry was added in 2001. Ad valorem
rates for these products are adjusted according to the
relationship between commodity market reference prices and
established floor and ceiling prices. When the reference


price for a particular commodity falls below the established
floor price, the compensatory tariff for that commodity and
related products is adjusted upward. Conversely, when the
reference price exceeds the established ceiling, the
compensatory tariff is eliminated. Floor and ceiling prices
are set once a year based on average prices during the past
five years. Venezuela publishes these prices each April.


8. (U) In addition to the traditionally high import tariffs
of the Andean Community,s price band system, Venezuela also
protects its agricultural producers through a non-legislated
system of guaranteed minimum prices and the restrictive use
of import licenses and permits. Management of tariff-rate
quota commitments by the Government of Venezuela has been
arbitrary and nontransparent and has negatively affected
trade in basic agricultural commodities as well as processed
products. The Venezuelan Government has denied import
licenses for both in-quota and over-quota quantities, even
though importers are willing to pay the over-quota tariff for
additional quantities of products.


9. (U) U.S. agricultural exporters advise that the Venezuelan
Government also routinely fails to open the quotas in a
timely manner, and for some products, such as pork, has
refused to "activate" the quota at all. Venezuela announced
in 2001 that it would not grant import licenses for corn
until all domestic white corn had been marketed, resulting in
an effective import ban. Venezuela also has restricted the
issuance of import licenses for sorghum, soybean meal, yellow
grease, pork, poultry, oilseeds, and some dairy products.
The government no longer publishes information and statistics
on license requests or license issuance.


10. (U) Under the Andean Community,s Common Automotive
Policy (CAP),assembled passenger vehicles constitute an
exception to the 20 percent maximum tariff and are subject to
35 percent import duties.


Non-Tariff Measures
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11. (U) In response to the rapid decline in the value of the
national currency, the Bolivar, following a two-month general
strike that brought oil production to a near standstill, the
Central Bank of Venezuela halted trade in Bolivars on January
22, 2003. President Chavez announced the creation of an
Exchange Administration Board (CADIVI) on February 5, 2003 to
regulate the purchase and sale of foreign currency. During
much of 2003, CADIVI was unable to process requests for
authorization of foreign exchange in an efficient and timely
manner and only supplied $3.6 billion or approximately two
months worth of transactions. There has been significant
improvement over time. The supply of foreign currency
reached a level of approximately $15 billion in 2004, or 55
percent of approved authorizations. A number of goods have
also been added to the list of imports eligible for foreign
exchange including intangibles such as services and the
repatriation of capital, which totaled $1.5 billion at the
end of the third quarter. A new resolution allows importers
to ship products without pre-approval by the government.
There continue to be delays with pre-inspection companies
thereby increasing storage costs. Although the number of
currency certificate approvals has increased steeply,
operating with a 50 percent backlog in liquidations puts
significant constraints on imports which accounted for 68.5
percent of requests, followed by private foreign debt with
12.5 percent and foreign investments with 8.6 percent.
Exchange control authorities have repeatedly said that the
exchange control system will be eased but will remain a
permanent long-term mechanism.


12. (U) Agricultural products have received the majority of
dollars under the CADIVI system, since most basic food
products are on the import list. Even so, the problems with
coordinating the timing of access to dollars, approval of
import permits and licenses, and contracting the shipments
have led to numerous delays and cancelled shipments. Trade
in higher value products, such as apples, pears, grapes,


nectarines and other fruits and nuts, has been dramatically
reduced as they are not included among the list of high
priority products for which foreign exchange is available
under the current currency control regime.


13. (U) Venezuela also requires that importers obtain
sanitary and phytosanitary (SPS) permits from the Ministries
of Health and Agriculture for most pharmaceutical and
agricultural imports. The government increasingly has
appeared to use this requirement to restrict agricultural and
food imports without providing evidence of a scientific
basis, raising concerns about the consistency of these
practices with World Trade Organization (WTO) requirements.
The Venezuelan Government continues to issue SPS permits in
an arbitrary manner without citing specific phytosanitary
concerns. This restriction in particular affects trade in
pork, poultry, beef, apples, grapes, pears, nuts, onions and
potatoes.


14. (U) Though the GOV has not published requirements on
absorption agreements, it has been common practice for years
to require the purchase of domestic production before issuing
import licenses or permits. Imports of yellow corn are
dependent upon the purchase of local sorghum and/or white
corn. Soybean imports are dependent upon the purchase of
"locally produced" soybean meal, and permits for grape and
black bean imports have been tied to the purchase of local
product. The use of absorption requirements is extremely
subjective, since Venezuela lacks a good statistical system
to track levels of domestic crop production.


15. (U) This discretionary use of import licensing and permit
procedures to curtail agricultural imports has become a major
problem for the United States and other countries. Various
countries have notified Venezuelan government officials that
these and other licensing practices appear to violate their
WTO commitments. In 2002, the United States Trade
Representative initiated formal WTO consultations with
Venezuela on its agricultural import license procedures for a
wide-range of products. Canada, the EU, Chile, Argentina,
and New Zealand participated in the first round of
consultations and posed questions to the government of
Venezuela.


16. (U) Venezuela prohibits the importation of used cars,
used buses, used trucks, used tires and used clothing. No
other quantitative import restrictions exist for industrial
products. Some products such as cigarette paper, bank notes,
weapons of war and certain explosives can only be imported by
government agencies, (tax authorities calculate the cigarette
tax on the volume of cigarette paper imported by the
manufacturers). The government can delegate authority to
import on its behalf, and can place orders for such products
with the local sales agents of the foreign manufacturers.


17. (U) Venezuelan officials continue to discuss plans to
improve customs procedures to better control the entry of
illicit merchandise. The Venezuelan Commission on
Antidumping and Safeguards has started investigations on the
importation of steel and paper products as well as clothing
and footwear. It appears that deficient customs procedures
and the proliferation of contraband were contributing factors
in those industries, calls for protection.

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STANDARDS, TESTING, LABELING AND CERTIFICATION
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18. (U) Some Venezuelan importers of U.S. products have
alleged that the Venezuela applies product standards more
strictly to imports than to domestic products. The
certification process is expensive, increasing the cost of
U.S. exports relative to domestic products. The Venezuelan
Commission for Industrial Standards normally requires
certification from independent laboratories located in
Venezuela but at times accepts a certificate from established
standards institutes abroad.


19. (U) In 2003 the Government of Venezuela passed Decree


2444, which requires importers of goods to Venezuela to
obtain pre-shipment inspections of all imports. Four
companies are certified to do these inspections: Bivac
Venezuela (Veritas Group),SGS Trade Assurance Services,
COTECNA, and Intertek Foreign Trade Standards.


20. (U) With regard to labeling, U.S. industries have raised
concerns regarding Venezuela,s labeling regulation for
clothing and footwear. The regulations as proposed by
Venezuela,s Autonomous National Service for Standardization,
Quality, Metrology and Technical Regulations (SENCAMER) were
notified to the WTO Technical Barriers Trade Committee in
July 2002 and the notice was published in the Official
Gazette of Venezuela in August 2002. The regulations, which
became effective in December 2002, establish the register of
domestic manufacturers and importers of clothing and footwear
and minimum labeling requirements for all clothing and
footwear products marketed in Venezuela. Of primary concern
to U.S. manufacturers is the requirement that labels must be
customized to include detailed information about the importer
of the goods.

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GOVERNMENT PROCUREMENT
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21. (U) Venezuela,s government procurement law covers
purchases by government, national universities, and
autonomous state and municipal institutions. The law
requires a contracting agency to prepare a budget estimate
for a given purchase based on reference prices maintained by
the Ministry of Production and Commerce. This estimate is to
be used in the bidding process. The law forbids
discrimination against tenders based on whether they are
national or international. However, the law also states that
the President can mandate temporary changes in the bidding
process "under exceptional circumstances" or in accordance
with "economic development plans" to promote national
development, or to offset adverse conditions for national
tenders. These measures can include margins of domestic
price preference; reservation of contracts for nationals;
requirements for domestic content, technology transfer and/or
the use of human resources; and other incentives to purchase
from companies domiciled in Venezuela. For example,
government decree 1892 establishes a 5 percent preference for
bids from companies with over 20 percent local content. In
addition, half of that 20 percent of content must be from
small to medium sized domestic enterprises.


22. (U) In an effort to move away from proprietary software
products, the Government of Venezuela in 2004 introduced a
law mandating the use of open-source software in government
and public institutions. This is expected to reduce the
demand for U.S. software products somewhat, though much
software currently in use is unlicensed or pirated.


23. (U) In the international arena, Venezuela has
reinstituted state controlled purchases of basic food
products for its new internal distribution system, Mercal, a
network of state-owned stores aimed at low-income
Venezuelans. The state-trading entity, CASA, has to date
purchased sugar, rice, wheat flour, black beans, milk powder,
edible oil, margarines, poultry and eggs from a variety of
countries. The private sector has complained that CASA has
an unfair advantage in that its access to dollars is assured,
as is its access to import licenses and permits. Furthermore,
CASA, as a government entity, brings in products without
tariffs and customs duties.


24. (U) A new ministry has been created called the Ministry
of Food. The new ministry is now responsible for a large
number of activities formerly under the Ministries of
Agriculture and Lands, Health and Social Development, and
Production and Commerce. Among the duties taken away from
the Ministry of Agriculture and Lands are the issuances of
sanitary permits and import licenses. Price setting for all
food and feed products has been moved from the Ministry of
Production and Commerce into the Ministry of Food. In
addition, the government is working to move food registration


from the Ministry of Heath and Social Development into the
new food ministry.


25. (U) Venezuela is not a signatory to the WTO Agreement on
Government Procurement.

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EXPORT SUBSIDIES
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26. (U) Exporters of selected agricultural products - coffee,
cocoa, some fruits and certain seafood products - are
eligible to receive a tax credit equal to 10 percent of the
export,s value.

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INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION
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27. (U) Venezuela is a member of the World Intellectual
Property Organization (WIPO). It is also a signatory to the
Berne Convention for the Protection of Literary and Artistic
Works, the Geneva Phonograms Convention, the Universal
Copyright Convention, and the Paris Convention for the
Protection of Industrial Property. Through Andean Community
Decision 486, Venezuela has ratified the provisions of the
WTO Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS).


28. (U) The Venezuelan Industrial Property Office (SAPI)
leaves much room for improvement, and its actions and
occasional publicly stated antagonism towards IPR often draw
criticism from IPR advocates and rights holders. Protection
of IPR is also hindered by the lack of adequate resources for
the Venezuelan copyright and trademark enforcement police
(COMANPI) and for the special IPR prosecutor,s office.
Venezuela's tax agency SENIAT is promoting several measures
to fight piracy in an effort to reduce tax evasion, including
a new anti-piracy law and the introduction of a tax on street
vendors. According to industry representatives, SENIAT seems
to be a promising enforcement entity due to its better
technical and financial capabilities.


29. (U) Unfortunately, pirated software, music and movies
remain readily available throughout the country. In the 2003
Annual Review, Venezuela remained on USTR's Special 301 Watch
List.

Patents and Trademarks
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30. (U) Venezuela provides the legal framework for patent and
trademark protection through Andean Community Decision 486
and the 1955 National Industrial Property Law. Andean
Community Decision 486 takes major steps towards bringing
Venezuela into WTO TRIPS compliance. However, without
corresponding local laws, Venezuela is not completely TRIPS
compliant. Andean Community Decision 345 covers patent
protection for plant varieties.


31. (U) U.S. companies remain concerned about the impact of
the Andean Tribunal's 2002 interpretation of Articles 14 and
21 of Decision 486, which do not allow for the patenting of
"second-use" products. Under pressure from the Andean
Community and in line with some changes in leadership at
SAPI, Venezuela has revoked previously issued patents. Very
few patents were awarded in 2004. Since 2002, Venezuela's
food and drug regulatory agency (INH) began approving the
commercialization of new drugs, which were the bioequivalents
of already patented drugs, thereby denying the patent-holding
companies protection of their test data. In effect, the
government now allows the test data of patented drugs or
those for which patents have been requested, most of which
required lengthy and expensive development, to be used by
others seeking approval for their own unlicensed versions of
the same products.

Copyrights
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32. (U) Andean Pact Decision 351 and Venezuela's 1993
Copyright Law provide the legal framework for the protection
of copyrights. The 1993 Copyright Law is modern and
comprehensive and extends copyright protection to all
creative works, including computer software. A National
Copyright Office was established in October 1995 and given
responsibility for registering copyrights, as well as for
controlling, overseeing and ensuring compliance with the
rights of authors and other copyright holders. Industry
experts are concerned about a proposed new copyright law
proposal, which would require the mandatory registry of
works, reduce protection terms, hamper distribution
agreements and increase royalties.


33. (U) The Venezuelan copyright and trademark enforcement
branch of the police (COMANPI) continues to provide copyright
enforcement support with a small staff of permanent
investigators. A lack of personnel, coupled with a very
limited budget and inadequate storage facilities for seized
goods, has forced COMANPI to work with the National Guard and
private industry to improve enforcement of copyrighted
material. COMANPI can only act based on a complaint by a
copyright holder; it cannot carry out an arrest or seizure on
its own initiative, which leads to weaker enforcement.

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SERVICES BARRIERS
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34. (U) Venezuela maintains restrictions on a number of
service sectors. Professions subject to national licensing
legislation (e.g., engineers, architects, economists,
business consultants, accountants, lawyers, doctors,
veterinarians and journalists) are reserved for those
individuals who meet Venezuelan certification requirements.
In addition, only Venezuelan nationals may be licensed as
architects. Some (particularly government-related)
accounting and auditing functions require Venezuelan
citizenship, and only Venezuelan nationals may act as
accountants for companies with public stock greater than 25
percent. Also, foreign professionals wishing to work in
Venezuela must revalidate their credentials at a Venezuelan
university on the condition of reciprocity. A foreign lawyer
cannot provide legal advice on foreign or international law
without being licensed in the practice of Venezuelan law.


35. (U) Foreigners are required to establish a commercial
presence for the provision of engineering services. Foreign
consulting engineers must work through local firms or employ
Venezuelan engineers. There is a law for public tenders,
which gives preferential treatment to Venezuelan companies if
they have the capability to carry out the work and if the
project is financed by public funds. Foreign capital is
restricted to a maximum of 19.9 percent in professional
associations.


36. (U) Venezuela limits foreign equity participation (except
from other Andean Community countries) to 20 percent in
enterprises engaged in television and radio broadcasting,
Spanish language newspapers, and professional services whose
practice is regulated by national laws. Finally, in any
enterprise with more than 10 workers, foreign employees are
restricted to 10 percent of the work force, and Venezuelan
law limits foreign employee salaries to 20 percent of the
payroll.


37. (U) The government enforces a "one-for-one" policy that
requires foreign musical performers giving concerts in
Venezuela to share stage time with national entertainers.
There is also an annual quota regarding the distribution and
exhibition of Venezuelan films. At least half of the
television programming must be dedicated to national
programs, and at least half of FM radio broadcasting must be
dedicated to Venezuelan music.

Financial Services
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38. (U) By signing the 1997 WTO Financial Services Agreement,
Venezuela made certain commitments to provide market access
for banking, securities, life and non-life insurance,
reinsurance and brokerage activities. Venezuela did not make
commitments on pensions, or on maritime, aviation and
transportation insurance, and it reserved the right to apply
an economic needs test as part of the licensing process.
Only local insurers may insure imports that receive
government-approved tariff reductions or government financing.


39. (U) New rules governing civil aviation, maritime
activities and transportation insurance also have been issued
in the package of 49 laws passed under enabling powers by
President Chavez. Many of the laws still need implementing
regulations. The impact of the legislation is, therefore,
still unclear.

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INVESTMENT BARRIERS
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40. (U) The government continues to control key sectors of
the economy, including oil, petrochemicals and much of the
mining and aluminum industries. Venezuela began an ambitious
program of privatization under the Caldera administration,
but under President Chavez further privatization has been
halted.


41. (U) Foreign investment continues to be restricted in the
petroleum sector. The exploration, production, refining,
transportation, storage, and foreign and domestic sale of
hydrocarbons are reserved to the state. However, private
companies may engage in hydrocarbons-related activities
through operating contracts or through equity joint ventures
with state owned PDVSA. The Venezuelan constitution reserves
ownership of the state oil company (PDVSA) to the Venezuelan
government. It does allow the sale of subsidiaries and
affiliates of PDVSA to foreign investors. In the early
1990's, the Venezuelan government partially opened the sector
to private investment in order to promote new petrochemical
joint ventures and to bring inactive oil fields back into
production. Almost 60 foreign companies, representing 14
different countries, participated in this process. PDVSA and
foreign oil companies signed 33 operating contracts for
marginal fields after three rounds of bidding.


42. (U) The Hydrocarbons Law of 2001 has raised concerns in
the industry as it mandates a minimum 50 percent national
participation in future projects and increases most royalties
from 16.67 percent to 30 percent. No projects have yet been
negotiated under this law. The Gaseous Hydrocarbons Law
offers more liberal terms, and Venezuela's government has
sought foreign investment to develop offshore natural gas
deposits near the Orinoco delta. The Venezuelan Government
recently unilaterally eliminated a royalty holiday ceded to
joint venture projects devoted to the development of
Venezuela's extra heavy crude. These projects created as
strategic associations during the partial opening of the
sector enjoyed 35 year contracts endorsed by the National
Congress.


43. (U) The government passed legislation in 1998 aimed at
introducing domestic and foreign competition into the
domestic gasoline market. The law allows foreign and
non-governmental Venezuelan investors to own and operate
service stations, though the government retains the right to
set product prices. Government controlled gasoline prices
have not risen in several years and a number of currency
devaluations and a high inflation rate have eliminated profit
margins.


44. (U) Hydroelectric power generation in Venezuela is
reserved to the state, although private sector participation
is permitted in transmission and distribution. In early
2000, the U.S. power generating company, AES Corporation,
successfully took control, by means of a stock swap, of
Electricidad de Caracas (EDC),the local electrical company
that provides power to the Caracas metropolitan area.



45. (U) A range of other natural resources - including iron
ore, coal, bauxite, gold, nickel and diamonds - is gradually
being opened to greater private investment by means of
strategic alliances. In 1996, CVG, the state-owned mining
firm, announced its first joint venture with a foreign
company to develop the Las Cristinas gold mine. President
Chavez personally announced the beginning of operations in
May 1999. Low gold prices, however, forced CVG and its
partners to suspend the project. In 2001, the concession
was revoked on grounds of the concessionaire's alleged
inability to comply with the contract by not developing the
reserves as stipulated, and the concession has been granted
to another firm. In April 1999, the Venezuelan Government
updated the 1945 Mining Law in order to encourage greater
private sector participation in mineral extraction. However,
in 2003 in line with a policy to centralize mining rights
under the Ministry of Energy and Mines (MEM),the government
ratified a 1996 decree requiring CVG to turn over to the
Ministry the original files on concessions granted by CVG.
In September 2003 the Ministry acted unilaterally to
terminate some concession areas of a private diamond mining
company in southern Venezuela alleging failure to comply with
the terms of the concession.


46. (U) Under the Andean Community Common Automotive Policy,
Venezuela, Colombia and Ecuador impose local content
requirements as a condition for reduced duties on imports.
The local content requirement for passenger vehicles was 32
percent in 1997. It was raised to 33 percent for 1998, and
was then lowered to 24 percent for 2000. Under the WTO
Agreement on Trade-Related Investment Measures (TRIMS
Agreement),the three countries were obligated to eliminate
local content requirements by the year 2000. However, in
December 1999, the Andean Automotive Policy Council
determined that it would not eliminate the local content
requirement as it had initially indicated, but instead
decided to increase it gradually to 34 percent by the year

2009. This automotive policy may be inconsistent with
Venezuela's WTO obligations under the TRIMS Agreement.
Brownfield


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2004CARACA03940 - UNCLASSIFIED