ECUADOR UPDATE FOR ATPA REPORT

UNCLAS SECTION 01 OF 07 QUITO 000719

SIPDIS

DEPT PASS TO USTR BENNETT HARMAN AND RUSSELL SMITH

E.O. 12958: N/A
TAGS: ETRD EINV ECON EAGR EC
SUBJECT: ECUADOR UPDATE FOR ATPA REPORT

REF: STATE 18743


1. Per reftel request, we provide the following information
for the update to the ATPA report for Ecuador. A Microsoft
word version of the information below has been sent
separately via email to USTR.


2. Ecuador Population: 13,027,000 (2004 est.)
National Product per capita: $1,447 (2004 est., using year
2000 USD)
Source: Central Bank of Ecuador


3. 2004 Trade Statistics (thousands $)
U.S. Imports from Ecuador: $4,284,667
U.S. Exports to Ecuador: $1,665,883
U.S. Trade Balance: -$2,618,784
Source: U.S. Department of Commerce (Tradestat)


4. Effect of the ATPA/ATPDEA: Despite the ATPA'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% exports to the United States. One of the most
economically significant nontraditional export products that
has benefited from duty-free treatment under ATPA is cut
flowers. In 2004, Ecuador exported $201.1 million in cut
flowers to the United States. Exports of nontraditional
products show a steady upward trend with exports to the
United States increasing considerably from $719.3 million in
2002 to $876 million in 2004. Some products, including
broccoli and pineapple, experienced double digit export
increases to the U.S. in 2004. Exports of some traditional
products have increased since 2000. Coffee exports to the
U.S. rose by 47% in 2004 reaching $8.7 million dollars.
Shrimp exports reached a peak of nearly $174 million dollars
in 2004. Cacao exports to the United States also increased
substantially in 2003, leveling off at $39 million in 2004.
On the other hand, banana exports have declined since 2002.
In 2004 banana exports reached 228.1 million to the U.S. --
down from $256.4 million in 2002. Ecuador expects to
significantly increase its exports of tuna in pouches due to
the inclusion of the product in the ATPDEA. Source: Central
Bank of Ecuador


5. Foreign direct investment (FDI) has risen moderately over
the last few years. Stock of U.S. FDI in Ecuador in 2003 was
1.4 billion, up from 1.28 billion in 2002. Most of the
increase is associated with the oil sector. FDI in other
sectors remains modest and is focused on financial services,
food processing, telecommunications, the chemical and
pharmaceutical industries, and machinery and vehicle
manufacturing. For Ecuador to take full advantage of the
possible investment benefits associated with the ATPA, it
will need to improve its investment climate through providing
greater transparency and certainty for foreign investors.


6. Expropriations: While cases of expropriation have been
infrequent, two foreign investors have outstanding claims
based on land and squatter disputes. Under Ecuadorian law,
individuals have the right to petition a judge to establish
the appropriate price for expropriated holdings. The
Agrarian Development Law restricts the grounds for
expropriation of agricultural land and provides for
adjudication of disputes in the courts. Though foreign and
domestic investors are treated equally under the law, the
extent to which investors and lenders receive prompt,
adequate and effective compensation varies from case to case.
Under Ecuador's Bilateral Investment Treaty with the United
States, expropriation can only be carried out for a public
purpose, in a nondiscriminatory manner, and upon payment of
prompt, adequate and effective compensation.


7. Arbitral Awards: The U.S.-Ecuador Bilateral Investment
Treaty (BIT) provides for international arbitration of
disputes at the investor's option. Ecuador is a member of
the International Center for the Settlement of Investment
Disputes (ICSID). A U.S. company received an arbitral award
in a dispute over the company,s eligibility for value-added
tax refunds in 2004. Shortly after the award was announced,
Ecuador,s Solicitor General (Procurador) launched an
investigation of the company. He subsequently declared there
were legal grounds to void the company,s contract and seize
its considerable assets in Ecuador. The Procurador does not
have the final word in the matter and the case is currently
being reviewed by other GOE entities. The Procurador has
also sought a judicial review of the award decision, which is
still pending. There are other high profile legal cases
brought by and against foreign companies. In early 2005,
Ecuador modified the Arbitration and Mediation Law to
prohibit international arbitration if the national interest
could be affected. This modification appears to conflict
with the terms of the BIT with the U.S., and at a minimum
will create confusion among investors regarding their right
to arbitration. It also contributes to investors, negative
impressions about the lack of legal due process in the
country.


8. Reverse Preferences: The U.S. Government has no
indication that Ecuador has granted such preferences to the
products of a developed nation. Furthermore, Ecuador is a
member of the World Trade Organization (WTO) and,
accordingly, is bound by the most-favored-nation provisions
in the WTO Agreements.


9. Intellectual Property:

a. Ecuador's intellectual property regime is governed by the
"Law on Intellectual Property" adopted in 1998. The law
provides criminal and administrative relief to right holders.
Ecuador has ratified the Berne Convention for the protection
of literary and artistic works, the Geneva Phonogram
Convention, and the Patent Cooperation Treaty. Ecuador is
also bound by the Andean Community Decision 345 (Common
Regimen for the Protection of Rights of Vegetable Varieties
Holders),Decision 351 (Common Regimen Regarding Author
Royalties and Related Rights) and Decision 486 (Common
Regimen Regarding Industrial Property). Decision 486
improves intellectual property protection by expanding the
definition of patentability and strengthening data
exclusivity. In April 2001, the U.S. Trade Representative
(USTR) removed Ecuador from its Special 301 Watch list to
reflect improvements in Ecuador's intellectual property
regime. However, weakened enforcement (particularly in the
area of pharmaceuticals) led to Ecuador's re-listing in 2003.
Ecuador made a public commitment to apply the WTO TRIPS
agreement from the date of its accession to the WTO.

b. In 2004, the Andean Community confirmed the legality of a
Colombian decree reinforcing data exclusivity rules and
intellectual property rights. This decision removed key
conflicts between Andean Community rules and Ecuador,s WTO
commitments, theoretically reinforcing the legal protections
for intellectual property rights. However, Ecuador continues
to issue sanitary registrations to illegal copies of patented
products, violate data confidentiality, and ignore violations
of its WTO commitments and its own intellectual property law.

c. Enforcement against intellectual property infringement
remains a serious problem in Ecuador. The national police and
the Customs Corporation of Ecuador (CAE, by its Spanish
initials) are responsible for carrying out IPR enforcement
orders, but it has sometimes been difficult to have court
orders enforced. There is a widespread local trade in pirated
audio and video recordings, computer software and counterfeit
activity regarding brand name apparel. On the other hand,
local registration of unauthorized copies of well-known
trademarks has been reduced. Some local pharmaceutical
companies, who produce or import pirated drugs, have
successfully blocked improvements in patent protection and
enforcement of data protection.

d. The IPR law extends patent protection for 20 years from
the date of filing. Patenting of pharmaceutical products is
permitted. Compulsory licensing is relatively limited. In
infringement cases, the burden of proof lies with the alleged
infringer. The law also provides patent protection for new
drugs. Although Andean Community Decision 486, issued in
late 2000, represents a significant improvement over Decision
344, it still does not provide adequate protection for
"second use" patents.

e. Producers of branded pharmaceuticals are concerned that
the "Law on Generic Drugs", which was passed in 2000,
enshrines discrimination against branded pharmaceuticals into
law. The law mandates that Government entities buy only
generic drugs. The law also lowers drugstore gross profit
margins on branded medicines to 20%, while maintaining the
margins for generic drugs at 25%. Under the law, drugstores
are also required to devote a certain percentage of shelf
space to generic pharmaceuticals. The GOE is proposing to
further reduce allowable profit margins on pharmaceutical
sales.

f. Printed and recorded works are in theory protected under
the IPR law for the life of the author plus 70 years.
Computer programs and software are also protected. However,
pirated CDs, DVDs and computer software (at prices beginning
at $1) are widely sold, with apparent impunity. Ecuador's
Education Law appears to allow educational institutions to
copy software without regard to such protections. The
Government has taken no action to correct this problem.

g. Trademark registration is permitted for renewable 10-year
periods, but registration may be canceled if the mark is not
used in the Andean region for a period of three years. The
IPR law provides protections for well-known trademarks. A
trademark registration cannot be voluntarily surrendered
without the consent of the licensee.

h. The IPR law provides protection for industrial designs
and extends protection to industrial secrets and geographical
indicators. Semiconductor chip layouts are protected. Plant
varieties and other biotechnology products are also, in
theory, protected. In 2004, U.S. Customs seized and
destroyed cut-flower exports to the United States by
Ecuadorian companies that were not paying royalties to
holders of plant variety rights.

i. The Ecuadorian Intellectual Property Institute (known by
its Spanish acronym IEPI) was established in January 1999 to
handle patent, trademark and copyright registrations on the
Ecuadorian Government's behalf. IPR enforcement has
improved, although piracy remains. The Ecuadorian National
Police and the CAE are responsible for carrying out IPR
enforcement orders, but they often do not recognize the
authority of, or enforce IEPI orders. Some foreign companies
have complained that authorities have been increasingly
reluctant to issue and carry out IPR enforcement orders.
IEPI has reduced its enforcement efforts due to funding and
staffing constraints and an apparent reduction in the
Ecuadorian government's emphasis on IPR protection. Industry
sources have also expressed concern about the premature
dismissal of the former president of IEPI and the possible
politicization of the institution.


10. Extradition: An extradition treaty was signed in Quito
on June 28, 1872, and entered into force on November 12,

1873. A supplementary extradition treaty was signed in Quito
on September 22, 1939, and entered into force on May 29,

1941. The treaties permit the extradition of U.S. citizens.
A more modern extradition treaty would benefit both countries.


11. Workers, Rights:

a. The Labor Code provides for a 40-hour work week, 15
calendar days of annual paid vacation, restrictions on child
labor, general protection of worker health and safety,
minimum wages and bonuses, maternity leave, and
employer-provided benefits. By law, companies must
distribute at least 15% of pre-tax profits to their
employees. Many employers rely on short-term outsourcing
contracts since job tenure rules make it difficult to lay off
permanent workers. New regulations restricting use of such
contracts were issued in 2004.

b. Legal changes to modernize the country's Labor Code were
passed by Congress in 2000 as part of omnibus economic reform
legislation. However, the Constitutional Tribunal declared
virtually all of the changes unconstitutional. Since then,
efforts to reform Ecuador's antiquated labor laws have
stalled.

c. Most workers in the private and parastatal sectors have
the constitutional right to form trade unions and local law
allows for unionization of any company with more than 30
employees. Private employers are required to engage in
collective bargaining with recognized unions. The Labor Code
provides for resolution of conflicts through a tripartite
arbitration and conciliation board process. The Code also
prohibits discrimination against unions and requires that
employers provide space for union activities.

d. Some companies have taken advantage of the law that
prohibits unions from organizing at companies that have less
than 30 employees by sub-contracting with several shell
companies, each of which has less than 30 workers. Under the
Labor Code, these subcontracted workers have no legal right
to freedom of association or right to bargain collectively
with the companies that ultimately benefit from their labor,
nor do they have legal protection against anti-union
discrimination. New regulations restricting use of such
contracts were issued in 2004.

e. Except for public servants and workers in some
parastatals, workers by law have the right to strike.
Legally striking employees are entitled to full pay and
benefits and may occupy the premises under police protection,
although there are restrictions on solidarity strikes. Most
public sector employees are technically prevented from
joining unions, but most are members of a labor organization
and most labor actions are in fact illegal strikes by public
employees. Although trade union political influence has
declined in recent years, labor groups occasionally attempt
to stage national strikes to protest economic reform
measures.

f. In practice, employers that violate worker rights are
seldom punished. Labor rights activists allege that violent
tactics, which resulted in serious injury to workers, were
employed to break a strike on a large banana plantation in

2002. In each of the last three years, at least 30 Members
of the US Congress have signed a letter expressing
Congressional concern about labor rights protections in
Ecuador.

g. The Constitution and the labor code prohibit forced
labor. The law also prohibits the employment of persons
under the age of fifteen years old, except in special
circumstances such as an apprenticeship. Enforcement of this
provision is uneven, especially in rural communities. In
the cities, many children under fifteen years old work in
family businesses in the informal sector. The International
Labor Organization estimated that 69,000 children ages 10 to
14, and an additional 325,000 young people ages 15 to 19,
were working on plantations in 1999. These figures have
dropped since 1999, but remain high according to the
International Labor Organization,s report for 2004. Child
labor is still common on plantations, large and small. In
2004, Ecuador hired child labor inspectors in an effort to
combat the child labor problem.

h. Only a significant increase in wages, at best a distant
prospect in a country where the average worker earns $5.74 a
day, will keep families from sending their children out into
the fields, labor advocates in Ecuador and in the United
States say. But while rights activists regard such labor as
unacceptable, many parents see it as a necessity.

i. The minimum wage appears inadequate to provide a decent
standard of living for a worker and his or her family. Most
organized workers in state industries and in the formal
sector (private enterprises) earn more than the minimum wage
and are provided other significant benefits through
collective bargaining. The majority of workers work in the
large informal sector, without recourse to the minimum wage
or legally mandated benefits.


12. Economic Conditions: Ecuador adopted the U.S. dollar as
its national currency in 2000 in response to the most serious
economic crisis in its history. Dollarization, combined with
recent responsible fiscal policies, has helped to tame
inflation and bring the country back to positive growth.
However, to sustain dollarization in the medium term Ecuador
must enact structural economic reforms and improve its
ability to compete in the global marketplace. Ecuador,s
GDP grew an estimated 2.7 percent in 2003, and 6.6 percent,
largely a result of increased oil exports and record high oil
prices. (Source: Central Bank of Ecuador)


13. Market Access: Ecuador's accession to the WTO in 1996
was an important step in improving access to Ecuador's
market. However, a number of trade barriers remain. For
example, despite recent improvements, bureaucratic procedures
required to obtain clearance for imports from the
Government,s standards-setting body still appear to
discriminate against foreign products. Also, corruption and
inefficiency in the sanitary registration process have
delayed and even blocked the entry of some agricultural
imports from the United States.

a. Ecuador requires prior authorization from various
government agencies, e.g., the Ministry of Agriculture (MAG)
for importation of most commodities, seeds, animals, and
plants. Also, the Ministry of Health must give its prior
authorization (i.e., sanitary registration) before the
importation of processed, canned, and packed foods as well as
food ingredients and beverages, cosmetics and pharmaceutical
products. Another administrative hurdle agricultural
importers must overcome is the MAG,s use of &Consultative
Committees8 (Committees). The Committees, mainly composed
of local producers, often advise the MAG against granting
import permits to foreign suppliers. The MAG often requires
that all local production be purchased at high prices before
authorizing imports.

b. Ecuador also continues to maintain a preshipment
inspection (PSI) regime. Preshipment inspection by an
authorized inspection company (both before shipment and after
specific export documentation has been completed at the
intended destination) results in delays far exceeding the
time saved in customs clearance. Customs authorities
sometimes perform spot-checks, causing further delays. These
practices generally add six to eight weeks to shipping times.


c. When it joined WTO in January 1996, Ecuador bound most of
its tariff rates at 30 percent or less. Ecuador,s average
applied tariff rate is about 13 percent ad valorem. Since
February 1995, Ecuador has applied a common external tariff
(CET) with two of its Andean Community partners, Colombia and
Venezuela. Although Ecuador has harmonized its tariff
schedule with the CET, it took numerous exceptions in order
to maintain lower tariff rates on capital goods and
industrial inputs. Agricultural inputs and equipment are
imported duty-free.

d. Ecuador,s foreign investment policy is governed largely
by the national implementing legislation for Andean Community
Decisions 291 and 292 of 1991 and 1993. Foreign investors
are accorded the same rights of entry as Ecuadorian private
investors, may own up to 100 percent of enterprises in most
sectors without prior government approval, and face the same
tax regime. There are no controls or limits on transfers of
profits or capital. There are no performance requirements,
with the exception of the auto regime. A Bilateral
Investment Treaty with the United States that guarantees
access to binding international arbitration entered into
force in May 1997.

e. Certain sectors of the economy are reserved to the state,
although the scope for private sector participation, both
foreign and domestic, is increasing. All foreign investment
in petroleum exploration and development in Ecuador must be
carried out under a contract with the state oil company.
Ecuadorian law permits the sales of 51 percent of the
state,s electrical sector facilities and telephone
companies. Foreign investment in domestic fishing
operations, with exceptions, is limited to 49 percent of
equity. Foreign companies cannot own more than 25 percent
equity in broadcast stations and are not permitted to obtain
broadcast concessions. Foreign investors must obtain approval
from the President and the National Security Council to
obtain mining rights in zones adjacent to international
boundaries.


14. WTO Agreements: Ecuador acceded to the WTO in January

1996. Ecuador has failed to meet deadlines for fulfilling
some of its WTO obligations related to the elimination of
non-tariff barriers. These include requirements for prior
authorization for certain goods before the central bank can
issue an import license, and Ministry of Agriculture denial
of import permits for certain agricultural products in order
to protect local producers. Ecuador is not complying with
its commitments under the WTO,s Technical Barriers to Trade
Agreement (TBT).

15. FTAA Participation: Ecuador chaired the FTAA
negotiations process until the Quito Ministerial, held in
November 2002, and continues to participate in the process.
Ecuador,s FTAA negotiating positions are usually developed
jointly with its Andean Community partners Ecuador, Peru, and
Colombia are currently negotiating an FTA with the United
States.


16. Subsidies or Other Requirements that Distort
International Trade: Ecuador does not use export subsidies.
It does maintain a drawback system to reimburse the cost of
duties and taxes paid on raw materials and other inputs
incorporated in products that are subsequently exported.


17. Trade Policies that Revitalize the Region: Ecuador
acceded to the Andean Community in early 1993. Ecuador,s
trade is gradually reorienting toward the Community. In
2003, the Andean Community absorbed 17.47 percent of
Ecuador,s exports and provided 22.8 percent of its imports
(Source: Central Bank of Ecuador).


18. Narcotics Cooperation: Ecuador has received full
certification for its cooperation through 2002 with the
United States on counter-narcotics issues under the Foreign
Assistance Act, as described in the International Narcotics
Control Strategy Report of March 2003. With the support of
the U.S. Government, Ecuador maintains an active drug
detection and interdiction program. Its programs focus on
demand reduction, interdiction, training in police
investigations and drug detection, information sharing and
control of money laundering. A program initiated in 1996
targets modernizing the judicial system. However, Ecuador,s
current money laundering law is largely ineffective and needs
to be reformed. A proposal to reform the money laundering
law was presented to the Ecuadorian Congress in 2004, but
little progress has been made in getting it enacted.

a. The Government of Ecuador continues to work with the U.S.
Government to reduce trafficking through Ecuador. Ecuador
has criminalized the production, transport and sale of
controlled narcotic substances. Although smuggling of
precursor chemicals through Ecuador remains a problem, the
Government of Ecuador is making efforts to monitor and
control these chemicals. Nonetheless, it appears that,
despite Ecuadorian efforts, transshipment of narcotics
through Ecuadorian maritime and land routes to the United
States is widespread.

b. The ATPA has played an important role in providing trade
opportunities in agricultural industries in Ecuador. Such
opportunities have provided the citizenry with jobs, thus
deterring them from becoming involved in growing narcotics
crops and, consequently, preventing the entrenchment of
narcotics trafficking in Ecuador. ATPA's contribution to the
rapid growth of Ecuador,s cut flower industry has been
particularly important. Cultivation of fresh fruits,
vegetables and cereals in the highlands is also growing and
offering similarly promising export and employment
opportunities. Ecuador,s beneficiary status under the ATPA
helps to create the conditions for such opportunities.

c. 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 in preventing illicit crop cultivation in Ecuador.


19. Anti-Corruption: In international rankings, Ecuador has
been reported to suffer from high levels of corruption.
Judicial insecurity, impunity and lack of transparency in
regulatory bodies and GOE-related entities are frequently
cited as the root causes of corruption in Ecuador. Efforts
at reform have had mixed results to date. There is an
independent anti-corruption agency, but it is under funded
and without legal teeth. There are few non-governmental
institutions that fight corruption.


20. Government Procurement:

a. Ecuador is not a signatory to the WTO Agreement on
Government Procurement. The Public Contracting Law, issued
in 2001, regulates government procurement of goods,
equipment, and services. Purchases made by the State-owned
telephone and electric power distributors, and by
military-owned companies are not required to follow this law.
Foreign bidders must be legally represented in Ecuador.
Ecuadorian companies and those of the foreign country
sponsoring the bid may participate in public bids financed by
government-to-government credits. Association with an
Ecuadorian company is only required for the execution of
government-to-government public works contracts and those
that are carried out with direct or supplier credits. It is
only for these types of contracts that the foreign company
needs to retain at least double the capital of its Ecuadorian
associate. Foreign contractors may not use national credit
for the execution of their contracts.

b. Procurement by public invitation involves various steps.
The government agency usually inserts announcements in
newspapers and trade journals inviting potential suppliers to
present bids for specific types of equipment or services
desired. The interested party must purchase bid documents
containing detailed information. The bids must be completed
in Spanish, using the format specified by the inviting
agency, and be delivered to the contracting agency in person.

c. Bidding for government contracts can be cumbersome, and
competitors from other countries do not operate under the
restrictions of the U.S. Foreign Corrupt Practices Act.
There is no formal discrimination against U.S. suppliers.

d. Under the Public Contracting Law, the government requires
either a bank-issued guarantee or an insurance guarantee to
cover 5 percent of the contract, to ensure execution of the
contract. (Military contracts, however, permit only
bank-issued guarantees.) A guarantee of money advances made
by the Government is also required from the supplier. Before
a Government contract is approved, it must have authorization
from both the Comptroller and Attorney General.

e. The Public Contracting Law prohibits government
institutions from purchasing used equipment.


21. Counter-Terrorism: As did most Latin American nations
in the wake of the September 11 attacks in the United States,
Ecuador voiced strong support for U.S., Organization of
American States and United Nations antiterrorism declarations
and initiatives put forth in various international fora.
During President Gutierrez,s February 2003 visit to
Washington, he publicly proclaimed his desire to make Ecuador
a strong ally in the fight against terrorism. Ecuador is
making efforts to improve control of its borders. Other
issues of concern include Ecuador,s weak financial controls,
widespread document fraud and reputation as a strategic
corridor for arms, ammunition and explosives destined for
Colombian terrorist groups.
KENNEY