USITC 2004 Annual Andean Investment and Drug Crop

UNCLAS SECTION 01 OF 04 QUITO 001621 SIPDIS STATE FOR WHA/AND, EB/CIP USITC FOR L.M. SCHLITT TREASURY FOR OASIA/INL COMMERCE FOR 4331/MAC/WH/MCAMERON USTR FOR BHARMAN E.O. 12958: N/A TAGS: ETRD ECON OTRA ASEC PE SUBJECT: USITC 2004 Annual Andean Investment and Drug Crop Survey for Report on ATPA REF: STATE 70739 ¶1. Below is Post's response to the U.S. International Trade Commission's request for information regarding Andean Trade Promotion and Drug Eradication Act (ATPDEA) related investment in Ecuador in 2004. ¶2. Summary. Ecuadorian investment in industries that export to the United States has not grown significantly over the last two years, despite the opportunities offered by the ATPDEA or the prospect of an Andean FTA. Foreign direct investment has slightly fallen, with oil, which does not receive preferences under the ATPDEA or a prospective FTA, continuing to receive the bulk of new investment. Other industries have seen much less investment than might have been expected, largely due to political instability and the absence of broad political support for an FTA. The prospect of ATPDEA expiration and concern that an FTA may not be approved has dampened the Ecuadorian business community's desire to invest for the future. Even the cut-flower industry, Ecuador's principal beneficiary of ATPDEA benefits with 17% sales growth from 2003 to 2004, saw only $4 million of identifiable new investment last year. ¶3. There is considerable concern that Ecuador's competitive position in most industries favored by ATPDEA would significantly worsen if CAFTA were approved, unless Ecuador joins an Andean FTA, as Central American economies compete directly with Andean ones in many agricultural products. The concern is much greater, however, that Colombia and Peru could conclude an FTA with the U.S. without Ecuador, giving them a significant trade advantage. Despite this fear, continuing political volatility has convinced most businesses to postpone investment until their options become clearer. Ecuador's businesses traditionally plan no further than three or six months into the future, having learned repeatedly the virtue of caution in the face of continuing political and economic uncertainty. End Summary. Effect of the ATPA/ATPDEA on Exports -------------- ¶4. Despite the ATPA/ATPDEA's provision of duty-free entry to a wide range of Ecuadorian products, the country's exports remain concentrated in petroleum and a handful of other traditional products. Estimated figures for 2004 indicate that petroleum and its derivatives accounted for 67% of Ecuadorian exports to the United States. Exports of some traditional products have increased since 2000. Coffee exports to the U.S. rose 47% in 2004, totaling $8.7 million. Shrimp exports reached a peak of nearly $185.6 million in ¶2004. Cacao exports to the United States also increased substantially in 2004, totaling $39 million. On the other hand, banana exports have declined since 2003. In 2004 banana exports reached $228.1 million to the U.S., down from $241 million in 2003. Ecuador has significantly increased its exports of tuna in pouches due to the inclusion of the product in the ATPA/ATPDEA. ¶5. Cut roses are the most economically significant nontraditional export product that has benefited from duty- free treatment under ATPA/ATPDEA. In 2004, Ecuador exported $168 million in cut roses to the United States. Exports of nontraditional products show a steady upward trend with exports to the United States increasing from $807.6 million in 2003 to $876 million in 2004. Some products, including broccoli and pineapple, experienced double digit export increases to the U.S. in 2004, though from a small base. Apparel Investment Projects and Prospects for Exports -------------- -------------- ¶6. Ecuador's well-organized (but small even by Andean standards) textile industry has largely dedicated its efforts to supplying fabric to Colombian exporters. Virtually all Ecuadorian cotton fabrics are produced using imported U.S. cotton fiber. Ecuador's textile industry is benefiting from ATPDEA preferences by supplying fabrics to Colombian garment producers, who in turn export to the U.S. Ecuador appears not to be offering full-package apparel programs, and its apparel industry remains small and under- industrialized. ¶7. Total textile exports under the ATPA (as amended by the ATPDEA Andean Trade Promotion and Drug Eradication Act) to the U.S. in 2004 were $46.6 million, of which $14.5 million was apparel. Total textile exports in 2004 were $84.4 million. ¶8. There is no information available on the effects of ATPA/ATPDEA benefits on the Ecuadorian textile industry. According to industry sources, it is not possible to quantify the effects because a great deal of the fabric, thread and knits produced in Ecuador is now being exported to Colombia to be used in the manufacture of apparel, some of which, in turn, is exported to the U.S as Colombian exports. Therefore, Ecuadorian textiles benefit indirectly from the ATPA/ATPDEA via Colombia. This is likely to continue given Colombia's demand for fabric. ¶9. According to the Ecuadorian Textile Association, capital goods imported from the U.S. for the textile industry during 2003 were $977,814. No imports of capital goods from the U.S. for the textile industry were registered during 2004. Imports of capital goods for the apparel industry from the U.S. during 2004 were reported at $4.4 million, a slight decrease from $5 million imported during 2003. 99% of cotton used in the textile industry was imported from the U.S. during 2004. Local cotton production has declined due to climactic conditions, low productivity, and lack of credit. Footwear Investment Projects and Prospects for Exports -------------- -------------- ¶10. The footwear and leather industries have not taken advantage of ATPA/ATPDEA benefits to any significant extent. The industry is fragmented and the existing production capacity cannot meet the demand of the U.S. market. Approximately eight leather-processing companies have closed down operations; only two of the large firms have renovated their equipment and upgraded their technology to meet local demand. Most production is handicraft. Tuna Investment Projects and Prospects for Exports -------------- -------------- ¶11. In 2004, the tuna fish industry (canned and pouched tuna) generated $185.6 million in total Ecuadorian export sales, declining 12% relative to 2003's $211 million. The U.S. market share of Ecuador's tuna exports slipped from 52% in 2003 to 31.54% in 2004. Ecuador has diversified its export markets to other countries such as the United Kingdom, Spain and Germany. ¶12. One example of the increase in investment in this sector due to inclusion of tuna in pouches in the ATPA/ATPDEA is Empresa Pesquera Ecuatoriana (Ecuadorian Fishing Company),which invested $12 million to expand its activities in 2004. ¶A. Name of Company: EMPRESA PESQUERA ECUATORIANA ¶B. 2004 investment amount: USD 12 million (production capacity: 200 Tons per day) ¶C. New or expansion investment: Expansion ¶D. Located in free trade zone: No ¶E. Type of product to be exported: Tuna in pouch ¶F. FOB value of 2004 exports to the U.S.: $108,156 ¶G. Would project have been launched in the absence of ATPA/ATPDEA preferences? No ¶H. Does firm use inputs of U.S., U.S. Virgin Islands, Puerto Rico? No Flower Investment Projects and Prospects for Exports -------------- -------------- ¶13. Ecuadorian flower exports have had a steady upward trend for many years, growing by 80% since 2000. Total exports reached $348 million in 2004, a 17% increase from ¶2003. ¶14. The primary market for Ecuador's flower industry is the United States, which purchases 64% of total flower exports. This represents more than $223 million in exports to the U.S. in 2004. Ecuador is diversifying its export market to other countries. The U.S. accounted for more than 70% of total Ecuadorian flower exports in year 2000, a decrease from 76% in 2004. ¶15. The cut roses sub-sector has been the main beneficiary of the ATPA/ATPDEA program, with $168 million in exports to the U.S. in 2004, accounting for more than 75% of total flower exports. Gypsophila is also growing significantly. It reached a $17 million export record to the U.S. in 2004, compared with almost no production in 2001. Other Agriculture Investment Projects and Prospects -------------- -------------- -------------- ¶16. In 2004, total Ecuadorian exports of asparagus were $289,280 -- an increase of 283% in comparison to 2003 when Ecuador exported only $75,000. The U.S. became almost the only market for Ecuadorian asparagus exports in 2004. The U.S. market took 61% of Ecuador's production in 2003 and 95% in 2004, while other markets such as the United Kingdom were abandoned. This market reorientation may be a consequence of ATPA/ATPDEA benefits. ¶17. In 2004, total Ecuadorian exports of broccoli were $26.4 million, increasing 67% from $15.7 million in 2003. The U.S. market took 34%. Foreign Direct Investment Drops in Non-Oil Sector -------------- -------------- ¶18. Foreign Direct Investment in Ecuador has declined overall, with the non-oil sector taking the biggest hit. Investment in non-oil industries declined by $469.5 million in 2004. Table 1 Foreign Direct Investment by Sector, 2003 & 2004 (In Thousands of Dollars) -------------- -------------- Sector 2003 2004 -------------- -------------- Agriculture, Hunting, Forestry, Fishing 48,388.0 41,241.3 Oil, Mining, Quarrying 828,050.7 984,243.3 Manufacturing 70,992.7 36,891.9 Electricity, Gas, Water 281.4 6,045.9 Construction 441,684.3 30,954.1 Commerce 50,381.5 49,705.0 Transport, Warehousing, Communications 24,815.4 52,218.9 Company Services 89,239.7 39,691.3 Community, Social, Personal Services 903.5 469.1 -------------- -------------- Total 1,554,737.2 1,241,460.9 -------------- -------------- Non-Oil 726,686.6 257,217.6 Oil 828,050.6 984,243.3 -------------- -------------- Source: Central Bank of Ecuador Industry Concerns about Trade Issues -------------- ¶19. Ecuador's businesses are concerned about the impact of other U.S. trade agreements (Cafta, Nafta, etc.). The concern is much greater, however, that Colombia and Peru could conclude an FTA with the U.S. without Ecuador. This concern is in fact the most convincing argument within Ecuador for approving an FTA with the United States. Colombia's cut flower industry would quickly displace Ecuador's; Peru (or Costa Rica) would likely be able to supplant Ecuador's strong tuna processing industry; and both Colombia and Peru's much stronger textile industries would permanently relegate Ecuador to supplier status, at best. Ecuador's businesses are transfixed by the specter of Colombia and Peru's economies growing much stronger while Ecuador's withers. Ecuador will have to be more competitive in order to expand its export base. The ATPA has played an important role in providing trade opportunities in the agro- industrial sector. This has created many jobs with the rapid growth of flowers, fresh fruits, vegetables and cereals. ¶20. The Ecuadorian textile industry believes that the elimination of global textile and apparel quotas could displace their production entirely from the U.S. market. If, however, quotas or barriers are partially reinstated, Ecuador believes that the Andean industry could find a niche based on rules of origin because of their reliance on U.S. cotton fiber or by fashioning garments from Asian fabric. Domestic Programs that support ATPA/ATPDEA -------------- ¶21. The Export and Investment Promotion Corporation of Ecuador (CORPEI),has the following programs, which are designed to promote ATPA/ATPDEA-related investment and exports: a. Identifying successful investment promotion programs: The Ecuadorian Government and the UNIDO (United Nations Industrial Development Organization) are creating an evaluation system for investment projects. CORPEI will use this system to attract investors and identify potential local investment opportunities. b. Business Center for Development and Investment Evaluation (CEEDI): Established in 2004, the Center assists potential exporters in evaluating projects and finding financing. c. The "Expoecuador" Program: A cooperation program between Ecuador and the European Community, to promote small industries with export potential. d. Bio-Commerce 2004: Established in 2004, the program promotes sustainable growth and biodiversity preservation through specialized export programs. The pilot programs in course are: scented oils, scallops cultivation, alpaca fiber, shells and crabs. Impact of ATPA on drug crop eradication and alternative development -------------- -------------- ¶22. The successful development of more profitable agricultural industries in Ecuador will help prevent Ecuador from becoming a major coca-producing country. Ecuador's proximity to Colombia and Peru, the world's leading coca leaf and cocaine hydrochloride suppliers, warrants continued vigilance to prevent illicit crop cultivation in Ecuador. ¶23. The ATPA/ATPDEA has played an important role in providing Ecuadorians with jobs, through the growth of agricultural industries, thus deterring them from becoming involved in growing narcotics crops and helping prevent the entrenchment of narcotics trafficking in Ecuador. ATPA/ATPDEA's contribution to the rapid growth of Ecuador's cut flower industry has been particularly important, as well as the cultivation of fresh fruits, vegetables and cereals in the highlands. HERBERT