HONDURAS NATIONAL TRADE ESTIMATE REPORT 2006

UNCLAS SECTION 01 OF 06 TEGUCIGALPA 002383

SIPDIS

STATE FOR EB/TPP/MTA/MST AND WHA/CEN
STATE PASS USTR FOR TMENNEN
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 2006

REF: SECSTATE 186328


1. The following is in response to reftel request for update to
the 2006 National Trade Estimate Report.

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TRADE SUMMARY
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2. The U.S. trade deficit with Honduras was $565 million in
2004, an increase of $78 million from $486 million in 2003. U.S.
goods exports in 2004 were $3.1 billion, up 8.9 percent from the
previous year. Corresponding U.S. imports from Honduras were $3.6
billion, up 9.9 percent. Honduras is currently the 37th largest
export market for U.S. goods.


3. The stock of U.S. foreign direct investment (FDI) in Honduras
in 2003 was $270 million, up from $181 million in 2002. U.S. FDI
in Honduras is concentrated largely in the manufacturing and
telecommunications sectors.

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IMPORT POLICIES
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4. The United States engaged in free trade agreement negotiations
with five Central American countries (Costa Rica, El Salvador,
Guatemala, Honduras, and Nicaragua) in 2003. The United States
concluded 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
Dominican Republic - Central America - United States Free Trade
Agreement (CAFTA-DR). Honduras ratified the agreement in March

2005.


5. 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 correct
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.


6. Honduras' tariffs on most goods from outside the Central
American Common Market (CACM) are currently within the zero to 15
percent range. Once the CAFTA-DR goes into effect, about 80
percent of U.S. industrial and commercial goods will enter the
region duty-free, with the remaining tariffs phased out over ten
years. Nearly all textile and apparel goods that meet the
Agreement's rules of origin will be duty-free and quota-free
immediately, promoting new opportunities for U.S. and regional
fiber, yarn, fabric, and apparel manufacturing. (The Agreement's
tariff treatment for textile and apparel goods may be made
retroactive to January 1, 2004.)


7. Honduras maintains a combination price band and absorption
agreement for corn, grain sorghum, and corn meal. Under the
price band mechanism, import duties can vary from 5 percent 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 the 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, with duties of 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.


8. Under the CAFTA-DR, Honduras 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.
Honduras will liberalize trade in white corn through expansion of
a Tariff-rate Quota (TRQ). Accordingly, when implemented, the
CAFTA-DR will lead to the elimination of market access barriers,
including the price band and absorption agreement system, for all
products other than white corn.


9. The Agreement also requires transparency and efficiency in
administering customs procedures, including the CAFTA-DR rules of
origin. Honduras committed to ensure greater procedural
certainty and fairness in the administration of these procedures
and all Parties agreed to share information to combat illegal
trans-shipment of goods.


10. Honduras implemented the WTO Customs Valuation Agreement in
February 2000.

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STANDARDS, TESTING, LABELING, AND CERTIFICATION
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11. Food imports into Honduras could grow significantly with a
more transparent and efficient process of granting sanitary
permits. 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. The Ministry of Health agreed to
expedite this surveillance 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, concerns remain that regulations are not
being strictly enforced for Honduran competitors. The Honduran
Government has also cited SPS concerns in periodically denying
applications for the importation of pork, poultry, and dairy
products.


12. Since 2002, Honduras has imposed a ban on poultry products
from a number of U.S. states, 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 Honduran
officials by the U.S. Department of Agriculture (USDA) indicating
the dates on which testing was completed in the affected states.
The USDA 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 response to Mexico's October 2005 decision to lift
its ban on poultry from nine U.S. states that had previously had
LPIA, the Honduran Ministry of Agriculture has agreed to lift
Honduras' ban as well. However, no date has yet been announced
for lifting the ban.


13. 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 make difficult changes to the Central American
countries' SPS regimes. Through the work of this group, Honduras
has committed to resolve specific measures affecting U.S. exports
to Honduras. In particular, for meat, dairy, and poultry, under
CAFTA-DR, Honduras will move toward recognizing import
eligibility for all meat plants inspected under the U.S. food
safety and inspection system. Honduras' SPS equivalency
legislation is currently before Congress; passage is expected
before the end of 2005.

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GOVERNMENT PROCUREMENT
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14. 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).


15. While foreign firms are granted national treatment for
public bids, some still complain of mismanagement and lack of
transparency in the bid processes. One way that the Government
of Honduras has tried to improve transparency and fairness in
government procurement is by contracting with the United Nations
Development Program (UNDP) to manage procurement for a number of
ministries and state-owned entities. However, in some cases,
U.S. companies have expressed concerns about the way UNDP has
managed major procurements for the government, such as complaints
that bid requirements were written so narrowly that they favored
a particular company from the outset and that UNDP management of
invitation-only, limited-bid process, was not transparent.

16. 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 Honduran government entities, including key
ministries and state-owned enterprises on the same basis as
suppliers. The anti-corruption provisions in the Agreement
require each government to ensure that bribery in matters
affecting trade and investment, including in government
procurement, is treated as a criminal offense, or is subject to
comparable penalties, under its law. In addition, the CAFTA-DR
would eliminate the local agent requirement for participation in
public tenders.

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EXPORT SUBSIDIES
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17. Honduras does not have export subsidies or export-promotion
schemes other than the tax exemptions given to firms in free
trade zones. Under the CAFTA-DR, Honduras 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). Honduras may maintain
existing duty waiver measures provided such measures are
consistent with its WTO obligations.

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INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION
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18. 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 has yet
to pass laws governing the protection of integrated circuit
designs and plant varieties. In the CAFTA-DR, Honduras agreed to
ratify or accede to the International Convention for the
Protection of New Varieties of Plants by January 1, 2006.


19. CAFTA-DR obligations will also strengthen Honduras' IPR
protection regime to conform with, and in many areas exceed, WTO
norms. CAFTA-DR obligations would also provide stronger
deterrence to piracy and counterfeiting by criminalizing end-user
piracy and requiring Honduras 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. Finally, under current laws the IP
prosecutor can only confiscate pirated goods when the affected
company files a complaint. After CAFTA-DR is implemented,
prosecutors will be able to confiscate pirated goods and file IP
cases "ex-oficio", or on their own initiative.

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Copyrights
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20. 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. U.S. software
companies are also pushing for ministries and state-owned
entities to ensure their own use of only authorized licensed
software. A major U.S. software company has estimated that it
loses $5 million annually due to software piracy in Honduras.

The piracy of cable television signals has also been 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 that the Honduran authorities
were not vigorously investigating and prosecuting these
activities. The CAFTA-DR enforcement provisions are designed to
help reduce copyright piracy.

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SERVICES BARRIERS
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21. 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 associations heavily regulate the licensing of
foreigners to practice law, medicine, engineering, accounting,
and other professions.


22. Under the CAFTA-DR, Honduras will allow substantial market
access in services across their 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. Also,
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,
Honduran mutual funds will be able to use foreign-based portfolio
managers. The right to provide professional services will be
granted on a reciprocal basis depending on the requirements in
individual U.S. states.

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INVESTMENT BARRIERS
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23. 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, although 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.


24. In 2001, a Bilateral Investment Treaty (BIT) between the
United States and Honduras entered into force. The treaty
provides, among other things, for equal protection under the law
for U.S. investors, with limited exceptions, 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.


25. 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.


26. The Ministry of Natural Resources and Environment at times
delays the issuance of environmental permits for U.S. and
domestic investors, despite continued pressure from the U.S.
Government to decide on these permits in a transparent and timely
manner. In July 2004, the Minister of Natural Resources and the
Environment issued a decree calling for a new national policy on
mining and ordered the government agency responsible for granting
mining permits and concessions, DEFOMIN, to stop granting any new
mining concessions. This review is ongoing and has blocked plans
of some U.S. investors, including the expansion plans of a U.S.
company operating in Honduras, which has cancelled an $8 million
investment in the mining sector due to this delay. The U.S.
government is aware of other investment delays in the mining,
housing, and renewable energy sectors, due to ongoing reviews and
non-issuance of their environmental permits. Environmental
permits often take more than a year for issuance, after the
submission of a complete application.

27. Under the CAFTA-DR, 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.


28. In the investment chapter of the CAFTA-DR, Honduras will
commit to provide a higher level of protection for U.S. investors
than under the existing BIT. 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. The CAFTA-DR requires that all forms of
investment be protected, including enterprises, debt,
concessions, contracts, and intellectual property. Upon entry
into FORCE of the CAFTA-DR, the BIT will be suspended. For a
period of 10 years, however, current U.S. investors may choose
either dispute settlement under the BIT or the FTA.

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ELECTRONIC COMMERCE
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29. 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 Corts (CCIC),and the National Industry Association
(ANDI),is the institution in charge of establishing the policies
and norms pertaining to electronic commerce in Honduras.


30. Although improving, Honduras still lacks adequate basic
telecommunications 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.


31. The CAFTA-DR includes provisions on electronic commerce that
reflect its importance in global trade and for supplying services
by electronic means as a key part of a vibrant electronic
commerce environment. Under the Agreement, Honduras has
committed to provide non-discriminatory treatment of digital
products and not to impose customs duties on such products and to
cooperate in numerous policy areas related to electronic
commerce.

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OTHER BARRIERS
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32. Historically, U.S. firms and private citizens have found
corruption to be a problem which seriously complicates doing
business in Honduras. Corruption appears to be most prevalent in
the areas of government procurement, the buying and selling of
real estate (particularly land title transfers),performance
requirements, and the regulatory system. Honduras' judicial
system is subject to influence, and the resolution of investment
and business disputes involving foreigners is largely non-
transparent. Currently, with considerable U.S. help, the
government is reforming Honduras' judicial system and fighting
corruption; however, progress has been very slow and serious
problems remain. In April 2004, Honduras was chosen as eligible
to apply for Millennium Challenge Account (MCA) assistance. In
June 2005, the Government of Honduras and the Millennium
Challenge Corporation signed a program compact for $215 million.
MCA countries are deemed to have shown a commitment to ruling
justly (including by tackling corruption),investing in their
people, and encouraging economic freedom. The anti-corruption
provisions in the CAFTA-DR require each government to ensure that
bribery in matters affecting trade and investment is treated as a
criminal offense, or is subject to comparable penalties, under
its law.

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Anti-Competitive Practices
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33. U.S. industry has expressed concern that investors who set up
business in Honduras have at times found themselves subject to
forms of competition that, in the United States, would be
considered anticompetitive. For example, 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 new joint venture investment accused the two
established companies of predatory pricing that brought local
cement prices below the cost of production. After the U.S.-
Japanese venture dropped out of the market, prices leapt up to
well above their previous level, until they were subsequently
regulated by GOH action. Steel prices are also fixed in
Honduras, and on a regional basis there are reports of price
collusion by the major steel producers. In fall of this year,
the Competition Law was passed which regulates against predatory
pricing and other monopolistic practices in Honduras, but it will
take some time for this law (and the GOH institutions that
support it) to come fully into effect.

Ford