HONDURAS NATIONAL TRADE ESTIMATE REPORT 2005

UNCLAS SECTION 01 OF 07 TEGUCIGALPA 002787

SIPDIS

STATE FOR EB/TPP/MTA/MST AND WHA/CEN
STATE PASS USTR FOR GBLUE
GUATEMALA FOR COMATT MLARSEN AND AGATT SHUETE
SAN SALVADOR FOR DTHOMPSON

E.O. 12958: N/A
TAGS: ETRD ECON EFIN HO
SUBJECT: HONDURAS NATIONAL TRADE ESTIMATE REPORT 2005

REF: SECSTATE 240980


1. The text of the 2005 National Trade Estimate report for
Honduras follows.

TRADE SUMMARY

(Note that the following paragraph is to be updated by Washington
with USDOC statistics.) In 2003, the U.S. trade deficit with
Honduras was $486.4 million, a decrease of $203.8 million from
deficit of $690.2 million in 2002. U.S. goods exports to
Honduras were $2.826 billion, an increase of $255 million from
$2.571 billion in 2002. Corresponding U.S. imports from Honduras
were $3.261 billion in 2003, up $135 million from 2002. Honduras
is currently the United States' 32nd largest export market.

(This paragraph will also be updated with USDOC statistics.) The
stock of U.S. foreign direct investment (FDI) in Honduras in 2002
amounted to $184 million, down 24 percent from 2001. U.S. FDI is
concentrated largely in the manufacturing sector.

IMPORT POLICIES

Free Trade Agreements

The United States and five Central American countries (Costa
Rica, El Salvador, Guatemala, Honduras, and Nicaragua) signed the
U.S.-Central American Free Trade Agreement (CAFTA) in May 2004.
The CAFTA will not only liberalize bilateral trade between the
United States and the region, but will also further integration
efforts among the countries of Central America, removing barriers
to trade and investment in the region by U.S. companies. The
CAFTA will also require the countries of Central America to
undertake needed reforms to alleviate many of the systemic
problems noted below in areas including customs administration;
protection of intellectual property rights; services, investment,
and financial services market access and protection; government
procurements; sanitary and phytosanitary (SPS) barriers; other
non-tariff barriers; and other areas.

Tariffs

In 1995, Honduras and other members of the Central American
Common Market (CACM) agreed to reduce and harmonize the common
external tariff (CET) at zero to 15 percent, but allowed each
member to determine the timing of the reductions. In 2002,
Honduras lifted tariffs on capital goods and raw materials
(including those used for manufacture of pharmaceutical products
and agricultural inputs) for those imports produced outside of
the CACM. Additionally, tariffs on most non-CACM intermediate
goods were reduced to 10 percent, and tariffs on final goods were
reduced to 15 percent. Per the tax reform law of 2002, import
tariffs on cars were reduced from 40 percent to 15 percent ad
valorem, and a tariff based on engine size was eliminated. Once
the CAFTA goes into effect, about 80 percent of U.S. industrial
and commercial goods will be immediately eligible to enter
Honduras duty free, with the remaining tariffs on such goods
being eliminated within ten years. Textiles and apparel will be
duty-free and quota-free immediately if they meet the agreement's
rule of origin, promoting new opportunities for U.S. and Central
American fiber, yarn, fabric and apparel manufacturing.

Honduras implements a combination price band and absorption
agreement for corn, grain sorghum, and corn meal. Under the
price band mechanism, duties can vary from 5 to 45 percent,
depending on the import price. The duty for these products drops
to 1 percent if the end users agree to first purchase a
predetermined amount of corn and sorghum from domestic farmers -
otherwise, the higher tariffs of the price band mechanism remain
in effect. The tariff reduction only takes place during non-
harvest season (March through August) and only end-users who have
previously signed the absorption agreement may apply for this
preferential treatment. A similar absorption agreement exists
for rough rice, where duties are 1 percent for signers of the
agreement and 45 percent for everyone else. The United States
has strongly opposed the Honduran policies on these grains as
limiting access for U.S. agricultural products.

When implemented, the CAFTA will lead to the elimination of this
system for all products but white corn. Tariffs on all other
agricultural products will be eliminated within 15 years after
the agreement takes effect, except for tariffs on rice, which
will be phased out over 18 years, and tariffs on some dairy
products, which will be phased out over 20 years.

The Agreement also requires transparency and efficiency in
administering customs procedures, including the CAFTA rules of
origin. Honduras committed to ensure procedural certainty and
fairness and all parties agree to share information to combat
illegal transshipment of goods.
Honduras implemented the WTO Customs Valuation Agreement in
February 2000.

STANDARDS, TESTING, LABELING, AND CERTIFICATION

Application of sanitary and phytosanitary requirements is
sometimes lacking in transparency, resulting in uncertainty among
U.S. suppliers and Honduran importers. Honduras committed during
the CAFTA negotiations to resolve these issues (see below).

In both 2002 and 2003, Honduran importers had initial difficulty
in receiving permission to import turkey into Honduras, though in
each year permission was eventually granted. The Honduran
government has also cited SPS concerns in periodically denying
applications for the importation of pork and dairy products.

Since 2002, Honduras has imposed a ban on poultry products from a
number of states in the U.S., due to concerns over low-pathogenic
avian influenza (LPAI). The ban was revised and renewed in March
2004 in spite of World Organization for Animal Health (OIE)
guidelines that the presence of LPAI does not justify trade
restrictions, and despite information provided to GOH officials
by USDA indicating the dates on which depopulation and
surveillance testing were completed in the affected states. The
U.S. Department of Agriculture estimates that if Honduran
restrictions on U.S. raw poultry and poultry parts were lifted,
U.S. producers could export an additional $10 million of poultry
products to Honduras annually.

In December 2003, Honduras imposed a ban on the import of U.S.
beef and its derivatives, in response to the detection by USDA of
a case of Bovine Spongiform Encephalopathy (BSE, commonly known
as "mad cow" disease) in Washington state. The ban was applied
in accordance with guidelines issued by the OIE (World
Organization for Animal Health),and did not include dairy
products or other products considered to carry no risk of BSE.
On June 2, 2004, the Honduran government lifted the ban in
response to increased safety measures taken by the U.S.
authorities.

In January 2004, U.S. rice exporters complained that they were
being to forced to fumigate with methyl bromide shipments of U.S.
rice that had false smut present before the shipment would be
allowed into Honduras. This restriction added costs and delays
to the shipping, and is not justifiable on food safety grounds.
(The presence of false smut is a quality issue, but the GOH
imposed restrictions as if it were a health issue.) In September
2004, the GOH authorities stopped requiring fumigation in
response to information provided by APHIS on the practice.

The Honduran government requires that sanitary permits be
obtained from the Ministry of Health for all imported foodstuffs,
and that all processed food products be labeled in Spanish and
registered with the Division of Food Control (DFC) of the
Ministry of Health. During 2003, a U.S. supermarket chain
complained that delays in the process of granting these permits
were hampering the company's ability to import its products into
Honduras. The Ministry of Health agreed to accelerate the
process by focusing most closely on products considered to be at
high risk for sanitary concerns (such as raw meat) and
simplifying the procedures for low-risk products. However,
during 2004, the company complained that these regulations were
not being strictly enforced for many of its Honduran competitors,
a complaint that post finds credible. This lack of enforcement
on the part of the Honduran government places any U.S. company
which does comply with the regulations at a disadvantage.

The embassy has also received complaints from a regional
supermarket chain which, in 2003, imported more than $40 million
worth of U.S. goods into the region, and believes the amount of
its imports into Honduras could grow significantly, given a more
transparent and efficient process of granting sanitary permits.
Specifically, the company has complained that the length of time
required for a sanitary permit to be granted (usually 2 to 3
months) is too long, that the cost of a permit ($500 - $600) is
excessive, and that the application requires information that is
difficult to obtain and has little to do with the safety of the
product in question.

Under the CAFTA, Honduras agreed to apply the science-based
disciplines of the WTO Agreement on Sanitary and Phytosanitary
Measures, and will move toward recognizing export eligibility for
all plants inspected under the U.S. food safety and inspection
system. Presently, Honduras may import meat products only from
individual U.S. plants that have been pre-certified by Honduran
food safety authorities.

When the United States and Central America launched the CAFTA
negotiations, they initiated an active working group dialogue on
SPS barriers to agricultural trade that met alongside the
negotiations to facilitate market access. The objective was to
leverage the impetus of active trade negotiations to seek
difficult changes to the countries' SPS regimes. The SPS Working
Group remains committed to continue working on the resolution of
outstanding issues even after the negotiations concluded.
Through the work of this group, additional commitments to resolve
specific unjustified measures restricting trade between Honduras
and the United States have also been agreed.

GOVERNMENT PROCUREMENT

Honduras is not a party to the WTO Government Procurement
Agreement. Under the Government Contracting Law, which entered
into force in October 2001, all public works contracts over one
million lempiras (approximately $53,850 as of December 2004) must
be offered through public competitive bidding. Public contracts
between 500,000 and one million lempiras ($26,925 and $53,850)
can be offered through a private bid, and contracts less than
500,000 lempiras ($26,925) are exempt from the bidding process.
Currently, to participate in public tenders, foreign firms are
required to act through a local agent (at least 51 percent
Honduran-owned). The CAFTA eliminates this requirement.

While foreign firms are granted national treatment for public
bids, some still complain of mismanagement and lack of
transparency in the bid processes. In 2004, a U.S. insurance
company participated in a bid to provide insurance to the state-
run electricity company, ENEE. The U.S. company was eliminated
from consideration on grounds that it considers to be
unreasonable. Every other company that participated except one
was also eliminated for various technical reasons, leaving only
one company to "compete" on price. All of the eliminated
companies, including the U.S. company and several Honduran
companies, have together denounced the management of the bidding
process as having been contrary to the Government Contracting
Law, and they have submitted a complaint to the Supreme Court of
Accounts (Tribunal Superior de Cuentas),the GOH's general
accounting and public ethics office. That case remains pending.

One way that the GOH has tried to improve transparency and
fairness in government procurement is by hiring the United
Nations Development Program (UNDP) to manage procurement for an
increasing number of ministries and state-owned entities.
However, U.S. companies have still expressed concerns about the
way that UNDP has managed major procurements for the government.
Specifically, during 2004, two U.S. companies, participating in
two separate bid processes, complained that the bid requirements
were written so narrowly that they favored a particular company
from the outset. One of these companies also complained that,
while a process for the participating companies to provide
feedback did exist, their concerns about the unreasonable terms
of reference did not seem to be taken into account. A third U.S.
company complained about UNDP management of an invitation-only,
limited-bid process, saying that the criteria for being invited
to bid were not transparent.

Under the CAFTA, U.S. suppliers will be granted non-
discriminatory rights to bid on contracts from most Central
American government entities, including key ministries and state-
owned enterprises. The CAFTA requires fair and transparent
procurement procedures, such as advance notice of purchases and
timely and effective bid review procedures. The CAFTA's anti-
corruption provisions ensure that bribery in trade-related
matters, including in government procurement, is specified as a
criminal offense under Central American and U.S. laws.

EXPORT SUBSIDIES

Honduras does not have export subsidies or export-promotion
schemes other than the tax exemptions given to firms in free
trade zones. The CAFTA will require the elimination of WTO-
illegal export subsidies.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

Honduras largely complied with the Trade Related Aspects of
Intellectual Property Rights (TRIPs) Agreement by the January 1,
2000, deadline. In December 1999, the Honduran Congress passed
two laws to reform previous legislation concerning copyrights,
patents, and trademarks. However, the Honduran Congress must
still pass laws governing the design of integrated circuits and
plant variety protection to be in complete TRIPs compliance. In
the CAFTA, Honduras agrees to ratify or accede to the
International Convention for the Protection of New Varieties of
Plants by January 1, 2006, or provide effective patent protection
for plants by the date of entry into force of the agreement.

Honduras has been a member of the World Intellectual Property
Organization (WIPO) since 1983. Honduras and the U.S. initialed
a Bilateral Intellectual Property Rights (IPR) Agreement in March
1999, but both parties decided to fold the provisions into the
CAFTA, which, once implemented, will strengthen intellectual
property rights protection in all areas. Honduras became party
to the WIPO Copyright Treaty (WCT) and the WIPO Performances and
Phonogram Treaty (WPPT) in May 2002.

CAFTA provisions will strengthen Honduras' IPR protection regimes
to conform with, and in many areas exceed, WTO norms and will
criminalize end-user piracy, providing a strong deterrence
against piracy and counterfeiting. The CAFTA will require all
member countries to authorize the seizure, forfeiture, and
destruction of counterfeit and pirated goods and the equipment
used to produce them. It will also mandate both statutory and
actual damages for copyright infringement and trademark piracy.
This serves as a deterrent against piracy, and ensures that
monetary damages can be awarded, even when it is difficult to
assign a monetary value to the violation.

Copyrights

Honduras' copyright law, updated in 1999, added more than twenty
different criminal offenses related to copyright infringement and
established fines and suspension of services that can be levied
against offenders. However, the piracy of books, sound and video
recordings, compact discs, and computer software is still
widespread in Honduras, due to limited enforcement capacity. A
spot survey by an industry-sponsored IPR advocacy group found
that nearly 75 percent of all compact discs for sale in Honduras'
markets were pirated. The Public Ministry, which is responsible
for prosecuting crimes, assigns just one prosecutor half-time to
intellectual property crimes. As a result, U.S. companies which
have tried to pursue software infringement cases have received
little co-operation from the Honduran authorities. U.S. software
companies are also pushing for ministries and state-owned
entities to legalize the pirated software that many currently
use. A major U.S. software company has estimated that it loses
$5 million annually due to software piracy in Honduras. The
CAFTA enforcement provisions are designed to help reduce
copyright piracy.

The piracy of cable television signals is also a problem in
Honduras. During 2004, two different U.S. companies claimed that
their competitors were broadcasting pirated cable television
signals from the United States, and complained that the Honduran
authorities do not vigorously investigate and prosecute these
activities.

Patents and Trademarks

Honduras ratified the Paris Convention for the Protection of
Industrial Property in 1994. The Honduran Congress enacted a
1999 Law of Industrial Property to provide improved protection
for both trademarks and patents. To be protected under Honduran
law, patents and trademarks currently must be registered with the
Ministry of Industry and Trade. The CAFTA will eliminate
cumbersome registration requirements.

Modifications to the Patent Law of 1993 included patent
protection for pharmaceuticals, and extension of the term of
protection for a patent from seventeen to twenty years from the
date of filing, to meet WTO standards. The term for cancellation
of a trademark for lack of use was extended from one year to
three years. Trademarks are valid for up to ten years from the
registration date. The illegitimate registration of well-known
trademarks has, however, been a persistent problem in Honduras.
The CAFTA enforcement provisions are designed to help reduce
trademark piracy.

U.S. pharmaceutical companies have complained that the Ministry
of Health, in approving competing companies' pharmaceutical
products, has often failed to respect data exclusivity rights as
guaranteed under article 39 of the WTO TRIPs agreement and
article 77 of Honduras' Industrial Property Law. (Honduran law
provides five-year exclusive use of data provided in support of
registering pharmaceutical products.) The CAFTA obligations
clarify that test data and trade secrets submitted to a
government for the purpose of product approval will be protected
against unfair commercial use for a period of 5 years for
pharmaceuticals and 10 years for agricultural chemicals.
SERVICES BARRIERS

Currently, special government authorization must be obtained to
invest in the tourism, hotel, and banking services sectors.
Foreigners may neither hold a seat on nor provide direct
brokerage services in Honduras' stock exchange. Honduran
professional bodies heavily regulate the licensing of foreigners
to practice law, medicine, engineering, accounting, and other
professions.

Under the CAFTA, Honduras will accord substantial market access
in services across their entire services regime, subject to very
few exceptions. In addition, U.S. financial service suppliers
would have full rights to establish subsidiaries, joint ventures
or branches for banks and insurance companies. Honduras will
allow U.S.-based firms to offer cross-border services in areas
such as financial information and data processing, and financial
advisory services. In addition, Central American mutual funds
will be able to use foreign-based portfolio managers. The
commitments in services cover both cross-border supply of
services as well as the right to invest and establish a local
services presence (such as in tourism or securities). Market
access to services is supplemented by requirements for regulatory
transparency. Regulatory authorities must use open and
transparent administrative procedures, consult with interested
parties before issuing regulations, provide advance notice and
comment periods for proposed rules, and publish all regulations.
The right to provide professional services will be granted on a
reciprocal basis depending on the requirements in individual U.S.
states.

INVESTMENT BARRIERS

The Constitution of Honduras requires that all foreign investment
complement, but not substitute for, national investment.
Currently, the Government of Honduras must approve any foreign
investment in sectors including telecommunications, basic health,
air transport, insurance and financial services, private
education, and most sectors related to natural resources and
farming. Foreigners are barred from small-scale commercial and
industrial activities with an investment less than 150,000
lempiras (about $8,078). Foreign ownership of land within 40 km
of the coastlines and national boundaries is constitutionally
prohibited, though tourism investment laws allow for certain
exceptions. Inadequate land title procedures, including
overlapping claims and a weak judiciary, have led to numerous
investment disputes involving U.S.-citizen landowners. Under the
CAFTA, U.S. investors will enjoy in almost all circumstances the
right to establish, acquire and operate investments in Honduras
on an equal footing with local investors.

In 2001, a Bilateral Investment Treaty (BIT) between the U.S. and
Honduras entered into force. The treaty provides for equal
protection under the law for U.S. investors in Honduras and
permits expropriation only in accordance with international legal
standards and accompanied by adequate compensation. U.S.
investors in Honduras also have the right to submit an investment
dispute to binding international arbitration.

Honduras has taken the following limited exceptions to its BIT
national treatment obligation: properties on cays, reefs, rocks,
shoals or sandbanks or on islands or on any property located
within 40 km of the coastline or land borders of Honduras, small
scale industry and commerce with total invested capital of no
more than $40,000 or its equivalent in national currency,
ownership, operation and editorial control of broadcast radio and
television, ownership, operation and editorial control of general
interest periodicals and newspapers published in Honduras.

Under current Honduran law, the government-owned telephone
company Hondutel maintains monopoly rights over all fixed-line
telephony services. However, in 2003 the government began to
allow foreign investors to participate in fixed-line telephony
services as "sub-operators" in partnership with Hondutel. At
present, approximately 40 firms have entered into "sub-operator"
contracts with Hondutel, of which five firms are already
providing services to the public. By law, Hondutel's monopoly
expires in December 2005, and the government of Honduras has
announced plans for full privatization of Hondutel thereafter.
Both foreign and domestic firms already enjoy full rights to
invest in cellular telephony services.

In July 2004, the Minister of Natural Resources and the
Environment issued a decree calling for a new national policy on
mining, and ordering the government agency responsible for
granting mining permits and concessions, DEFOMIN, to stop
granting any new mining concessions. This decision affected a
U.S. company that already operates in Honduras and was planning
to expand its operations, which had applied for additional
concessions in late 2003. The same company has also been waiting
for over a year for the environmental permit to operate a
separate mine, and as of December 2004 has received neither
permission, nor denial, nor an explanation of the status of the
application. Other U.S. companies also complained during 2004
that the GOH seems to no longer welcome foreign investment in the
mining sector.

In the investment chapter of the CAFTA, Honduras will commit to
provide a higher level of protection for U.S. investors than
under the existing BIT. The CAFTA requires that all forms of
investment be protected, including enterprises, debt,
concessions, contracts and intellectual property. Among the
rights afforded to U.S. investors are due process protections and
the right to receive a fair market value for property in the
event of an expropriation. Investor rights will be backed by an
effective, impartial procedure for dispute settlement that is
fully transparent. Submissions to dispute panels and panel
hearings will be open to the public, and interested parties will
have the opportunity to submit their views.

TRADE RESTRICTIONS AFFECTING ELECTRONIC COMMERCE

Honduras currently has no domestic legislation concerning
electronic commerce, as the sector is still not developed in the
Honduran market. The Electronic Commerce System Directorate
(DISELCO),a joint project of the Chamber of Commerce and
Industry of Tegucigalpa (CCIT),the Chamber of Commerce and
Industry of Cortes (CCIC),and the National Industry Association
(ANDI),is the institution in charge of establishing the policies
and norms pertaining to electronic commerce in Honduras.

Although improving, the country still lacks adequate basic
telecom infrastructure and Internet bandwidth capacity to
effectively support significant electronic commerce. Except for
web page promotional material, companies are not utilizing
computer-based sales as a substantial distribution channel in
Honduras.

Under the CAFTA, Central America and the United States agreed to
provisions on e-commerce that reflect the issue's importance in
global trade and the importance of supplying services by
electronic means as a key part of a vibrant e-commerce
environment. As it develops its electronic commerce sector,
Honduras joined other parties in committing to non-discriminatory
treatment of digital products and agreeing not to impose customs
duties on such products and to cooperate in numerous policy areas
related to e-commerce.

OTHER BARRIERS

Anti-Competitive Practices

U.S. investors who set up businesses in Honduras at times find
themselves subject to forms of competition that, in the U.S.,
would be considered unfair business practices. In 2003, a U.S.-
Japanese joint venture established a cement company in Honduras,
challenging the duopoly enjoyed by the two Honduran companies in
the market. The two established companies engaged in a campaign
of predatory pricing that brought cement prices below the cost of
production. After the U.S.-Japanese venture dropped out of the
market, prices returned to their earlier level. While such
actions might be illegal in the U.S., there is currently no law
against predatory pricing in Honduras, although a draft
competition law, which would address certain types of anti-
competitive behavior, is currently before a congressional
committee.

Corruption

Historically, U.S. firms and private citizens have found
corruption to be a problem which seriously complicates doing
business in Honduras, thus creating a constraint on foreign
direct investment. Corruption appears to be most pervasive in
the areas of government procurement, performance requirements,
the regulatory system, and the buying and selling of real estate,
particularly land title transfers. Honduras' judicial system is
easily influenced; investment and business disputes involving
foreigners have rarely been resolved in a transparent manner.
The administration of justice is a key challenge to domestic and
foreign companies. With considerable U.S. help, the government
is reforming Honduras' judicial system and fighting corruption,
though progress has been extremely slow and serious problems
remain in these areas. Anti-corruption provisions in the CAFTA
aim to help alleviate these problems, particularly by
criminalizing the bribery of a public official in any area
related to trade and investment.

Palmer