HONDURAS' TRADE PRIORITIES: CAFTA-DR

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 000741 SIPDIS SENSITIVE STATE FOR WHA/CEN, WHA/EPSC, EB/TPP, DRL/IL, AND INR/IAA STATE PASS USTR STATE PASS AID FOR LAC/CAM DOL FOR ILAB GUATEMALA FOR AGATT SHUETE TREASURY FOR DDOUGLASS E.O. 12958: N/A TAGS: ETRD ECON PGOV ELAB HO SUBJECT: HONDURAS' TRADE PRIORITIES: CAFTA-DR IMPLEMENTATION, TCB TAKE PRIORITY OVER FTAA, NEW INTERNATIONAL AGREEMENTS REF: A) Tegucigalpa 493 B) State 44480 C) Tegucigalpa 730 D) Tegucigalpa 708 ¶1. (SBU) With CAFTA-DR approved by the Honduran Congress, Honduran trade officials are turning their focus to the job of implementing the agreement and channeling Trade Capacity Building (TCB) support to the vulnerable groups who will need assistance adjusting to a climate of freer trade. A second priority is the Central American customs union and handling various technical issues related to its implementation. With the main focus on these two areas, little attention or effort is being given to the negotiation of other bilateral or plurilateral trade agreements, including the FTAA (Free Trade Area of the Americas). END summary. ¶2. (SBU) EconOffs met with Vice Minister of External Trade Irving Guerrero on March 29, in our first meeting with him since the Honduran Congress approved CAFTA-DR on March 3 (ref A). EconOffs delivered ref B talking points on the progress of the FTAA negotiations, and Guerrero responded with a long discussion questioning the actual value that the FTAA can provide for Honduras (ref C). In addition, Guerrero outlined the GOH's top trade priorities for the year ahead, which are dominated primarily by effective implementation of CAFTA-DR and of the Central American customs union. -------------- Top Priority: CAFTA-DR Implementation and TCB -------------- ¶3. (SBU) Though the battle for CAFTA-DR ratification in the Honduran Congress was won on March 3, the job of CAFTA-DR implementation is still the top priority for the Honduran Trade Ministry in the months ahead. When asked about the Ministry's major goals, Guerrero immediately responded by referring to Honduras' updated National Action Plan for Trade Capacity Building (TCB),a draft of which was completed on March 15. According to Guerrero, the plan identifies three major areas of importance: first, institutional capacity on the part of GOH officials to implement CAFTA-DR ("which we currently don't have"), second, outreach to small and medium enterprises, and third, rural development. ¶4. (SBU) Some of the implementation issues are purely technical in nature. For example, CAFTA-DR establishes tariff-rate quotas (TRQs) for imports of various sensitive products, and the management and allocation of such quotas is a new task for the GOH. The Ministers of Trade and of Agriculture are currently working on the issue of how to allocate these quotas in a fair and transparent manner: whether by auction, on a first-come, first-served basis, based on historical market share, or some combination of these methods. ¶5. (SBU) Discussion is also underway regarding institutional changes within certain government ministries. There are plans under discussion to separate the Trade Policy Division of the Ministry of Industry and Trade from the Ministry and establish it as a separate autonomous institution, to be known as the Trade Institute. The Trade Policy Division has been strengthened over the past two years (with technical assistance from USAID and the IDB (Inter-American Development Bank)) for the purpose of preparing for the CAFTA-DR negotiations and is headed by the GOH's chief CAFTA- DR negotiator Melvin Redondo and by Vice Minister Guerrero. The goal of the Trade Institute would be to preserve the technical expertise that currently exists in the Trade Policy Division by paying the technical experts higher salaries than the Ministry can and also to insulate them somewhat from political influences of the Ministry - an especially important goal in light of the approaching change in administration. In addition, the Ministry of Natural Resources and the Environment is also discussing the creation of a special unit within the Ministry (or possibly within the Trade Institute, if established) dedicated to CAFTA-DR implementation issues. ¶6. (SBU) The larger task, however, is that of preparing Hondurans, especially vulnerable groups, for life under CAFTA-DR. In part, this task is one of information and education. In this vein, the same Trade Ministry officials who, for the past year, have been working to persuade the Honduran public of the benefits of CAFTA-DR are now shifting to the task of teaching Hondurans how to realize those benefits. (In a separate meeting, the head of the Ministry's Communications Department, Rebeca Reyes, outlined to EconOffs some of the Ministry's plans for the near future, including a seminar to be held on April 15 with small and medium enterprises.) Turning to rural development, Guerrero highlighted the success of agricultural diversification and market-outreach projects, such as the USAID-supported program managed by FINTRAC, but stated that much more needs to be done. (Comment: The agricultural components of Honduras' Millennium Challenge Corporation (MCC) proposal expand upon this strategy of support for agricultural diversification and rural development. END comment.) -------------- --- 2nd Priority: Customs Union and Technical Issues -------------- --- ¶7. (SBU) After CAFTA-DR, Guerrero cited the implementation of the Central American customs union as the second most important area of focus (ref D). This largely involves working through certain difficulties that exist as a result of the non-harmonized external tariff schedules of the various Central American countries. As an example, Guerrero cited the agreement between El Salvador and Chile, which allows Chilean wine to enter El Salvador duty free. Enterprising traders then ship Chilean wine from El Salvador to Honduras, with the result that Honduran wine distributors, who import wine directly from Chile and pay the required duty, are unable to compete. Ideally, Honduran border officials would impose the duty at the Honduran- Salvadoran border, but in reality, according to Guerrero, this rarely happens. A similar state of affairs exists in the opposite direction with Colombian-made farm tools, which enter Honduras duty-free and are then shipped to El Salvador to escape the Salvadoran duty. Ultimately, said Guerrero, the only solution to such problems is to completely harmonize tariff schedules in the region and to negotiate only as a region in any future agreements. -------------- -------------- Low Priority: FTAA, Other International Agreements -------------- -------------- ¶8. (SBU) Much less important than CAFTA-DR implementation or regional integration, in Guerrero's view, are moves to reach out to other international partners for new free trade agreements (FTAs). Guerrero spoke at length about the limited value that the FTAA seems to present for Honduras (ref C),but also spoke disparagingly of other possible bilateral and plurilateral FTAs as well. ¶9. (SBU) The one new trade agreement that Honduras is taking seriously at the moment is between the so-called CA-4 (Guatemala, Honduras, El Salvador, and Nicaragua) and the European Union (EU). The CA-4 countries are currently in a "pre-negotiation" phase with the EU, with the prospect of actual negotiations to begin in 2006. Guerrero says that one early point to come out of these preliminary discussions is that the Europeans strongly prefer to negotiate one unified agreement with one common market, rather than an agreement (such as CAFTA-DR) with separate tariff schedules for the different countries. For this reason, the talks with the EU are having the effect of reinforcing the development of the Central American customs union. He also noted his surprise that the U.S., in negotiating CAFTA-DR, had not pressed the Central American countries harder to adopt regional integration measures such as mutual recognition of sanitary registrations, which is a priority for the Europeans. Such recognition would facilitate a more streamlined transfer of imported goods subject to sanitary registration across Central American boundaries, as each country would accept the others' product certifications, and exporters to Central America would be able to access area regionally, rather than country by country. ¶10. (SBU) Others who have reached out to Honduras for trade talks in recent months include Taiwan and the Mercosur countries. In each case, Guerrero dismissed the prospect as being "not worth our time." Taiwan is apparently seeking bilateral trade agreements with several Central American countries. Pointing out that trade between Honduras and Taiwan is minimal, Guerrero asked "What would we gain from a deal with them?" Only if the Taiwanese offered a significant Trade Capacity Building program or significant technology transfer, said Guerrero, would an agreement be attractive to Honduras. (In other words, it would not be the trade, but the associated aid, which would be worthwhile.) A delegation from the Mercosur countries also visited Honduras in March to discuss a possible trade agreement, but again Guerrero was dismissive, citing the very low level of trade that Honduras has with these countries and the lack of any obvious complementary relationship in the products that the countries produce. The free trade negotiations between the CA-4 and Canada, meanwhile, seem to have been put on a back burner indefinitely. -------------- -------------- Comment: A Welcome Focus on CAFTA-DR Implementation -------------- -------------- ¶11. (SBU) Comment: It is encouraging to see that the Honduran Trade Ministry is keeping its eye on the ball of CAFTA-DR implementation, rather than rushing off to new games. During the CAFTA-DR negotiations, a great deal of institutional capacity was built up within the Trade Ministry, in the form of both technical experts and a public outreach team. Post is pleased to see that this capacity, developed in part with assistance from USAID (as well as the TDA (Trade and Development Agency) and the IDB),is not being dispersed now that CAFTA-DR has been approved but instead is being concentrated and dedicated to the job of ensuring that CAFTA-DR's benefits are extended to those that will need the most assistance in making the transition to free trade. END comment. Palmer