CAFTA SUCCESS STORIES: "NICARAGUA'S ON TOP"

UNCLAS MANAGUA 001990

SIPDIS

SIPDIS

DEPT FOR WHA/CEN, WHA/EPSC, AND EB/TPP
COMMERCE FOR ITA/OLA MSIEGELMAN, JGEHR
SAN JOSE FOR JMCCARTHY
PLEASE PASS TO USAID AND USTR

E.O. 12958: N/A
TAGS: ETRD EAGR EINV ECIN ECON NU
SUBJECT: CAFTA SUCCESS STORIES: "NICARAGUA'S ON TOP"

REF: MANAGUA 12958


1. (U) Trade statistics and investor interest support the
view that CAFTA-DR is having an immediate and positive
effect on the Nicaraguan economy since coming into effect
on April 1. Dramatic increases in exports have been
logged, though one has to take the seasonal nature of
agriculture into account in the case of Nicaragua. Most
successes fall into two categories: agricultural products
and apparel. ProNicaragua reports that investor interest
is very strong. The ability of Nicaragua to quickly take
advantage of CAFTA created opportunities is in large due to
the effort of the Nicaraguan government and industry to
improve the business climate in the country. Indeed, a
recent World Bank study moved Nicaragua up five places, on
top of its CAFTA neighbors with a ranking of 67, in terms
of doing business. In the future, the government will need
to find ways in which Nicaragua can diversify its export
base to take even greater advantage of free trade. End
Summary.

Export Performance
--------------


2. (U) Trade statistics and investor interest support the
view that CAFTA-DR is having an immediate and positive
effect on the Nicaraguan economy since coming into effect
on April 1. U.S. exports to Nicaragua in the second
quarter 2006 exceeded first quarter exports by 10%. From a
year-on-year perspective, U.S. exports to Nicaragua in the
second quarter 2006 exceeded exports in second quarter 2005
by 14.2%. In addition, post can report that Nicaraguans
are showing increasing interest in U.S. products, as
reflected by an additional 20-25 commercial inquiries a
month, many related to food and agricultural products.


3. (U) Dramatic increases have also been logged on the
Nicaraguan side, though one has to take into account the
seasonal nature of agricultural exports. While exports to
the United States during the second quarter 2006 fell 8%
from first quarter exports, this decline is traditional.
The truth of the matter is that second quarter exports to
the United States were 28.9% more than during same period
in 2005. Exports for the first seven months of 2006
exceeded those in 2005 by 24%.


4. (U) Most of the increase in exports to the United States
fall into two categories: agricultural products and
apparel. In particular, Nicaraguan sugar producers quickly
took advantage of additional U.S. tariff rate quota (TRQ)
under CAFTA. NicaraguaQs TRQ doubled, from 22,114 MT in
2005 to 44,114 MT in 2006. Nicaraguan producers look
forward to the TRQ increasing 2% a year over the next 15
years. New on the trade horizon was watermelon, which
nearly quadrupled from $243,000 in first quarter 2006 to
$1,022,000 in second quarter 2006, after the tariff dropped
from 17% to 0% under CAFTA. Similarly, the value of cigars
exported to the U.S. nearly doubled from $468,000 to
$808,000, after CAFTA eliminated the $1.89 per kilogram
tariff.


5. (U) NicaExport, the Nicaraguan export promotion agency,
reports increasing U.S. supermarket interest in Nicaraguan
agricultural products, especially ethnic and organic
foods. After a recent buyersQ mission to the country,
Fiesta Supermarkets of Texas and Grand Mart Supermarkets of
Washington, D.C. are now import Nicaraguan cheese, meat,
beans, cream, ice cream, and vegetables (e.g., malanga and
quisquisque) to the serve the Hispanic market in the United
States. The visit benefited local companies such as
Lactosam, a cheese company in Jinotega and Nuevo Carnica, a
meat company in Leon, both of which are now exporting to
the United States for the first time. Smaller companies
and farmerQs cooperatives are also benefiting. APROTRUNG,
an association of farmers that grow roots and tubers in
Nueva Guinea on the Atlantic coast, is exporting malanga
and other products to the United States for the first
time. The Associacion Pueblo de Ayuda en Accion is
exporting six types of oriental vegetables, including okra
and bitter melon, to the United States.


6. (U) Equally important have been exports from the textile
and apparel sector. While second quarter 2006 textile and
apparel exports to the United States were level with first
quarter exports, second quarter exports were 12% more than
the same period in 2005. The important point here is that,
even in the face of increased competition from China after
the expiration of the Agreement on Textiles and Clothing,
Nicaragua has been able to maintain its level of exports to
the United States. In NicaraguaQs favor is proximity to
the large U.S. market and the most inexpensive labor in
Central America. NicaraguaQs textile and apparel
industries are also benefiting from having ratified CAFTA
more quickly than most of its neighbors, and for not having
been tied to existing regional supply chains that were
disrupted until all supplying countries had ratified
CAFTA.


7. (U) While Nicaragua still ranks below its neighbors when
it comes to textile and apparel exports, this may not be
the case going forward. U.S. and other foreign investors
are queuing up to take advantage of CAFTA and what
Nicaragua has to offer. Cupid Foundations recently
invested $3.2 million more in their assembly plant, adding
800 jobs. Anvil Knitwear invested $6 million in an
assembly plant in Carazo, creating 1,500 jobs. ITG Coen
Denim recently broke ground on a $100 million textile plant
in Managua, promising to create 750 new jobs. Taiwanese
and Korean investors are also expanding investments here.
While Nicaragua appears to be poised for more growth in
this sector, the government will need to find ways for
Nicaragua to diversify its export base so that the country
can take even greater advantage of CAFTA over the medium
term.

Investor Interest
--------------


8. (U) ProNicaragua, the governmentQs investment agency,
confirms that thirteen companies have invested or announced
investments in Nicaragua since CAFTA-DR entered into
force. These investors could bring $240 million in
additional capital to the country and create 13,350 new
jobs. The agency reports that another eleven companies are
looking at investing up to $200 million in projects that
could create an additional 11,600 permanent jobs. While
textiles and apparel leads the list, some investors are
also looking at building plants to manufacture footwear and
medical products. In addition, WalMart recently purchased
a 51% stake in La Colonia, the largest high-end supermarket
chain in Managua. (Note: WalMart already owns a majority
stake in the mid-range La Union supermarket and low-end
Pali supermarket chains.)

Conclusion
--------------


9. (U) Starting from a lower base, the increases in CAFTA
stimulated exports may be more dramatic in the beginning
for Nicaragua than some of its Central American neighbors.
However, the ability of Nicaragua to better take advantage
of CAFTA created trade opportunities is also due to the
effort of the Nicaraguan government and industry to improve
the countryQs business climate. Indeed, a recent World
Bank study moved Nicaragua up five places, on top of its
CAFTA neighbors with a ranking of 67, in terms of doing
business (El Salvador ranks 71 while the others rank in the
100's). Taking some pride in the accomplishment, La Prensa
trumpeted this year's ranking in an upper right front page
headline: QNicaragua on Top.
TRIVELLI