Identifier
Created
Classification
Origin
05SANSALVADOR3285
2005-11-22 22:44:00
UNCLASSIFIED
Embassy San Salvador
Cable title:  

DRAFT 2006 NATIONAL TRADE ESTIMATE REPORT

Tags:  ETRD ECON EFIN ES CAFTA 
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UNCLAS SECTION 01 OF 05 SAN SALVADOR 003285 

SIPDIS

STATE FOR EB/MTA
STATE PASS USTR FOR G. BLUE AND T. MENNEN

E.O. 12958: N/A
TAGS: ETRD ECON EFIN ES CAFTA
SUBJECT: DRAFT 2006 NATIONAL TRADE ESTIMATE REPORT

Ref: STATE 186328

UNCLAS SECTION 01 OF 05 SAN SALVADOR 003285

SIPDIS

STATE FOR EB/MTA
STATE PASS USTR FOR G. BLUE AND T. MENNEN

E.O. 12958: N/A
TAGS: ETRD ECON EFIN ES CAFTA
SUBJECT: DRAFT 2006 NATIONAL TRADE ESTIMATE REPORT

Ref: STATE 186328


1. Per reftel, following is Embassy San Salvador's
submission for the 2006 National Trade Estimate Report.


2. Begin Text.

EL SALVADOR

TRADE SUMMARY

[Note: This section to be prepared in Washington. End note.]

IMPORT POLICIES

Free Trade Agreement

The United States concluded free trade agreement
negotiations with El Salvador, Guatemala, Honduras, and
Nicaragua in December 2003 and with Costa Rica in January

2004. In May 2004, the six countries signed the United
States - Central America Free Trade Agreement. During 2004,
the United States and the Central American countries engaged
in negotiations with the Dominican Republic to integrate
that country into the free trade agreement. On August 5,
2004, the seven countries signed the - Central America -
Dominican Republic - United States Free Trade Agreement
(CAFTA-DR). El Salvador (December 2004),Honduras (March
2005),Guatemala (March 2005),the United States (July
2005),the Dominican Republic (September 2005),and
Nicaragua (October 2005) have ratified the [agreement.]
[agreement, which entered into force on January 1, 2006.]
[Note: Throughout, references to CAFTA-DR should be updated
depending on when the agreement goes into force, and it
should be noted that upon implementation, trade benefits
under the Caribbean Basin Economic Recovery Act will be
eliminated. End note.]

The CAFTA-DR will remove barriers to trade with and
investment in the region and will further regional economic
integration. The CAFTA-DR will also require the Central
American countries and the Dominican Republic to undertake
needed reforms to confront many of the problems noted below
in areas including: customs administration; protection of
intellectual property rights; services, investment, and
financial services market access and protection; government
procurement; sanitary and phytosanitary (SPS) barriers; and
other non-tariff barriers.

Tariffs

Most of El Salvador's tariffs do not exceed the maximum
common external tariff of 15 percent established by the
Central American Common Market (CACM),of which it is a
member. There are several exceptions, however. Among these,
tariffs on new and used finished clothing are generally 25

percent, while tariffs on fabrics that are not covered by
Caribbean Basin Initiative (CBI) benefits can run 20 percent
or more. Vehicles are assessed a 30 percent duty.
Agricultural products face the highest tariffs. Dairy, rice
and pork products are assessed a 40 percent duty, while the
poultry tariff is higher. Alcoholic beverages are subject to
a 20 to 40 percent duty, a specific tax based on alcoholic
content, an ad valorem 20 percent sales tax, and a Value-
Added Tax of 13 percent.

Under the CAFTA-DR, about 80 percent of U.S. industrial and
commercial goods will enter El Salvador duty-free
immediately, with the remaining tariffs being eliminated
within ten years. Nearly all textile and apparel goods that
meet the Agreement's rules of origin will be traded among
CAFTA-DR countries and the United States duty-free and quota-
free immediately, promoting new opportunities for U.S. and
regional fiber, yarn, fabric and apparel manufacturing
companies. The Agreement's tariff treatment for textile and
apparel goods are retroactive to January 1, 2004.

Under the CAFTA-DR, El Salvador will eliminate its tariffs
on nearly all agricultural products within 15 years (18
years for rice and chicken leg quarters and 20 years for
dairy products). For the most sensitive products, tariff
rate quotas will permit some immediate zero-duty access for
specified quantities during the tariff phase-out period,
which will expand over time. El Salvador will liberalize
trade in white corn through expansion of a TRQ, rather than
by tariff reductions.

The Agreement also requires transparency and efficiency in
administering customs procedures, including the CAFTA-DR
rules of origin. El Salvador committed to ensure greater
procedural certainty and fairness and all Parties agreed to
share information to combat illegal transshipment of goods.
El Salvador also has free trade agreements with Chile, the
Dominican Republic, Mexico, and Panama.
Non-Tariff Measures
Rice and pork are both subject to import quota systems in
addition to 40 percent duties. Rice millers are required to
buy rice locally. When there is insufficient local supply,
the Ministry of Agriculture allows imports under the quota,
and if after the import quota has been exhausted, there is
still a need for imported rice, rough or milled rice can be
imported without limit, subject to a 40 percent duty. Pork
importers face similar requirements to first buy locally and
only import if a shortage remains after domestic supplies
are exhausted, subject to a 40 percent duty. In addition,
substantial tariff-rate quotas, which grow over time, were
established under the CAFTA-DR for rice and pork to provide
duty-free access for U.S. exports while the out-of-quota
duties are phased-out.

STANDARDS, TESTING, LABELING AND CERTIFICATION

Although sanitary standards have generally not been a
barrier in El Salvador, practices with respect to raw
poultry are a notable exception. Since 1992, the Ministry of
Agriculture has imposed arbitrary sanitary measures on U.S.
poultry imports. The Salvadoran government applies these
standards in a discriminatory manner since domestic
production is not subject to the same requirements as
imports. As a result of these measures, the United States
has been unable to export poultry to El Salvador. The
industry estimates the value of lost U.S. poultry exports at
$5 million to $10 million per year. Resolution of this issue
has been a priority for U.S. agencies, which continue to
work with the Government of El Salvador.

In addition, the Salvadoran government requires that rice
shipments be fumigated at importers' cost unless they are
accompanied by a U.S. Department of Agriculture certificate
stating that the rice is free of Tilletia barclayana.
However, since there is no chemical treatment that is both
practical and effective against Tilletia barclayana, USDA
cannot issue these certificates. El Salvador failed to
notify the WTO under the Agreement on the Application of
Sanitary and Phytosanitary Measures when it imposed this
requirement. Importers must deliver samples of all foods for
laboratory testing to the Ministry of Public Health, which,
upon approval, issues the product registration numbers that
allow them to be sold at retail outlets. Some U.S. processed
foods that were approved in the United States were rejected
after analysis in El Salvador, thereby barring their sale.
The United States and the Ministry of Public Health
initiated discussions on this issue in 2002. The U.S.
Embassy has been able to obtain access for U.S. products
rejected by the Ministry of Public Health testing on a case-
by-case basis. At present, there is not yet a standard
regulation allowing entry of U.S.- approved products. The
CAFTA-DR provides an opportunity for the United States to
engage El Salvador in several venues, including the SPS and
Trade Capacity Working Groups established under the
Agreement, and fosters significant movement toward the
establishment of standard regulations for the import of
foreign food products. A prime example is the work being
done on the recognition of the equivalence of the U.S.
inspection system for meat, dairy and poultry (see below).

All imports of fresh food, agricultural commodities, and
live animals must have a sanitary certificate from the
Ministry of Agriculture and the Ministry of Public Health.
Basic grains must have import licenses from the Ministry of
Agriculture, while dairy products require import licenses
from the Ministry of Public Health. Consumer products
require a certificate showing approval by U.S. health
authorities for public sale.

The United States has raised concerns regarding the
potentially discriminatory effects of a proposed Salvadoran
technical standard for distilled spirits. U.S. industry has
expressed concern with El Salvador's proposed standards for
rum and aguardiente. However, the five Central American
countries, including El Salvador, are in the process of
developing common standards for several products, including
distilled spirits, which could serve to increase market
access and facilitate trade. U.S. industry also welcomes El
Salvador's commitment under CAFTA-DR to explicitly recognize
Bourbon and Tennessee whiskey as distinctive products of the
United States.

When the United States and Central America launched the free
trade agreement 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 Central
American countries' SPS regimes. Through the work of this
group, El Salvador has committed to resolve specific
measures restricting trade between El Salvador and the
United States. In particular, for meat and poultry, El
Salvador will move toward recognizing import eligibility for
all plants inspected under the U.S. food safety and
inspection system. [Note: Dairy imports are still approved
on a plant-by-plant basis. End Note.]

GOVERNMENT PROCUREMENT

El Salvador is not a party to the WTO Agreement on
Government Procurement. However, government purchases and
construction contracts are usually open to foreign bidders.
The Legislative Assembly passed a new, more transparent
procurement law in April 2000 that applies to the central
government structure as well as to autonomous agencies and
municipalities. The CAFTA-DR requires fair and transparent
procurement procedures, including advance notice of
purchases and timely and effective bid review procedures.
Under the CAFTA-DR, U.S. suppliers will be permitted to bid
on procurements covered by the Agreement for most Salvadoran
government entities, including key ministries and state-
owned enterprises on the same basis as Salvadoran suppliers.
The anti-corruption provisions in the Agreement require each
government to ensure that bribery in trade-related matters,
including in government procurement, is treated as a
criminal offense, or is subject to comparable penalties,
under its law.

EXPORT SUBSIDIES

El Salvador gives a six percent tax rebate on exports
shipped outside the Central American area based on the
F.O.B. port of exit value of the goods. The rebate is not
granted to exports of coffee, sugar, or cotton unless these
products have undergone a transformation process that adds
at least 30 percent to the original value. Assembly plants
outside of free trade zones (maquilas) are eligible if they
meet the criteria for adding 30 percent Salvadoran value in
the production process. Firms operating in free trade zones
are not eligible to receive rebates as they already enjoy a
10-year exemption from income tax and duty-free privileges.
Under the CAFTA-DR, El Salvador may not adopt new duty
waivers or expand existing duty waivers conditioned on the
fulfillment of a performance requirement (e.g., the
exportation of a given level or percentage of goods). El
Salvador may maintain existing duty waiver measures through
2009 provided such measures are consistent with its WTO
obligations.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

Criminal enforcement of IPR laws at the Attorney General's
office is handled by the Crimes Against Private Property and
Intellectual Property Unit, where 5 of the approximately 25
prosecutors are assigned to IPR cases, but not necessarily
full time. The National Police established an IPR unit that
supports the Attorney General's office, but also conducts
its own investigations and raids. The National Health
Council has administrative enforcement authority for cases
involving pharmaceuticals and other intellectual property
issues related to public health.

In January 2005, El Salvador created a government-wide
commission including the Attorney General, National Civilian
Police, and the National Registry Center to coordinate
efforts to protect intellectual property rights. Through
this commission, the Ministry of Economy has prepared
legislative reforms to bring domestic IPR law into
compliance with CAFTA obligations and strengthen El
Salvador's IPR protection regime to conform with, and in
many areas exceed, WTO norms. CAFTA-DR obligations would
also provide stronger deterrence against piracy and
counterfeiting by criminalizing end user piracy and
requiring El Salvador to authorize the seizure, forfeiture,
and destruction of counterfeit and pirated goods and the
equipment used to produce them. The CAFTA-DR text also
mandates both statutory and actual damages for copyright and
trademark infringement, which would ensure that monetary
damages can be awarded even when it is difficult to assign a
monetary value to the violation.

Patents

The 1993 Intellectual Property Protection Law and El
Salvador's acceptance of the disciplines in the TRIPS
Agreement addressed several deficiencies in the patent
regime. The 1993 law lengthened patent terms to 20 years
from the application filing date. Although pharmaceutical
patent terms were kept at 15 years, the Salvadoran
government's Registry for Intellectual Property issues 20
year patents for pharmaceutical products in practice, which
start on the filing date of the application. A major concern
for U.S. pharmaceutical and agricultural chemical companies
is the lack of data protection in El Salvador for
undisclosed test data submitted for the marketing approval
of a pharmaceutical or agricultural chemical product.
Implementation of CAFTA-DR obligations will ensure adequate
and effective protection of such data from disclosure and
unfair commercial use.

Copyrights

The piracy of optical media, both music and video, remains a
concern in El Salvador. Optical media imported from the
United States by pirates are being used as duplication
masters. The Business Software Alliance estimates that the
rate of software piracy is 79 percent. There has also been
concern expressed about inadequate enforcement of cable
broadcast rights and the competitive disadvantage it places
on legitimate providers of this service. The police and
Attorney General's Office seized 430,346 optical media in
2005; however, there have been no successful prosecutions of
pirates. CAFTA IPR provisions will provide law enforcement
with expanded authority to prosecute violators.

Trademarks

In 2002, El Salvador's Legislative Assembly passed the Law
of Trademarks and Other Distinctive Signs. The law provides
for new protections against bad-faith registration of famous
marks. Under the law, the National Registry of Intellectual
Property requires that applicants show that they either own
or have permission to register the famous mark. During 2003,
there was progress in a significant intellectual property
dispute involving trademark and copyright infringement by an
ex-franchisee. The case, however, is still not fully
resolved. Judicial enforcement continues to be the weakest
pillar of intellectual property protection in El Salvador,
but CAFTA-DR IPR enforcement provisions are expected to help
reduce trademark infringement.

SERVICES BARRIERS

El Salvador maintains few barriers to services trade. El
Salvador has accepted the Fifth Protocol to the WTO General
Agreement on Trade in Services, which was necessary to bring
its commitments on financial services into effect. Foreign
investors are limited to 49 percent of equity in free
reception television and AM/FM radio broadcasting. There are
no such restrictions on cable television ownership. Notaries
must be Salvadoran citizens. Under the CAFTA-DR, El Salvador
will accord substantial market access in services across its
entire services regime, subject to very few exceptions. In
addition, U.S. financial service suppliers will have full
rights to establish subsidiaries, joint ventures or branches
for banks and insurance companies.

INVESTMENT BARRIERS

There are few formal investment barriers in El Salvador.
However, U.S. investors complain that judicial and
regulatory weaknesses limit their investment in El Salvador.
The United States has raised concerns about the impact of re-
regulation of the electric power sector and regulatory
decision-making processes on U.S. electric energy investors
in El Salvador. A U.S. long distance telephone service
provider complained that the dominant fixed-line telephone
company refuses to sign an interconnection agreement with it
on terms already extended to another market entrant, as
required by Salvadoran law.

The first case of commercial arbitration in El Salvador
involved a U.S. firm and the parastatal water company. The
arbitration panel ruled in favor of the U.S-owned firm, but
a legal challenge by the water company relating to the
bidding process led the Supreme Court to suspend the
proceedings in August 2004 pending a review of the case.
Judicial delays are common in El Salvador, and the Supreme
Court has yet to review the case.

The United States and El Salvador signed a Bilateral
Investment Treaty (BIT) in 1999. The United States and El
Salvador each ratified the BIT in 2001 but did not exchange
the instruments of ratification necessary to bring the
treaty into force. When CAFTA-DR enters into effect, the
investment chapter will provide for protection of U.S.
investors comparable to those that were included in the 1999
BIT. Under the CAFTA-DR, all forms of investment will be
protected, including enterprises, debt, concessions,
contracts and intellectual property. U.S. investors will
enjoy, in almost all circumstances, the right to establish,
acquire and operate investments in El Salvador on an equal
footing with local investors. 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 protected 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.

End Text.
Barclay