NICARAGUA: CAFTA UPDATE

UNCLAS MANAGUA 000522

SIPDIS

SENSITIVE
SIPDIS

STATE PASS TO WHA/CEN, WHA/ESPC, EB/TPP, EB/CBA
CENTAM POSTS ALSO FOR FCS
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
AND FOR 3134/ITA/USFCS/OIO/WH/KESHISHIAN,BARTHUR

E.O. 12958: N/A
TAGS: ETRD EAGR EINV ECIN ECON BEXP NU
SUBJECT: NICARAGUA: CAFTA UPDATE

REF: MANAGUA 01990


1. (U) Summary: Nicaraguan exports to the United
States during the first year of CAFTA performed
extremely well. Total exports to the United States
increased 29.2%, growing from $1.18 billion in 2005 to
$1.53 billion in 2006. The Nicaraguan government
separates free trade zone exports and general exports,
which explains why its statistics are quite different
from those we report. Top Nicaraguan exports to the
United States fell into three product categories: knit
apparel, woven apparel, and automobile wiring
harnesses, all manufactured primarily in free trade
zones. Other Nicaraguan exports to the United States
showing the strongest performance on the year included
coffee, sugar, vegetables, tobacco products, and gold.
Reflecting changing patterns of trade, both the number
of products exported and number of Nicaraguan
companies engaged in export to the United States
increased.


2. (U) Nicaragua imported almost 21% more from the
United States in 2006 than it did in 2005. Leading
imports include machinery, cereals, electrical
machinery, vehicles, optical equipment, fats and oils,
and plastic products. Most of these imports are going
into production of some kind. According to the
Ministry of Trade, Industry and Development (MIFIC),
imports of capital goods accounted for 22% of total
imports from the United States in 2006, intermediate
goods almost 29%, and petroleum products 13%.


3. (U) At least $235 million in new investments have
been "highly influenced" by Nicaragua's membership in
CAFTA. Investments on another $233 million in this
same category are currently under consideration.
These "highly influenced" investments are
predominantly in textiles and apparel industries. End
Summary.

Exports to the United States
--------------


4. (U) Nicaraguan exports to the United States during
the first year of CAFTA performed extremely well.
Total exports to the United States increased 29.2%,
growing from $1.18 billion in 2005 to $1.53 billion in

2006. Since CAFTA entered into force on April 1,
2006, exports to the United States grew 28.5% compared
to the same period in 2005. Top exports to the United
States fell into three broad product categories: knit
apparel, woven apparel, and automobile wiring
harnesses, all manufactured primarily in free trade
zones. These three categories accounted for
approximately $1 billion in trade with the United
States, up 20% from 2005.


5. (U) Other exports to the United States showing
strong performances in 2006 were as follows:

-- coffee and spices, up 82% to $67 million, largely
because of high coffee prices;

-- sugar, up 62% to $26 million, largely because of a
second tariff rate quota afforded to Nicaragua
under CAFTA;

-- vegetables, up 55% to $11 million, largely
because of the export of new products to the
United States under CAFTA;

-- tobacco products, up 18% to $26 million, largely a
reflection of growing U.S. consumer demand for
Nicaraguan cigars; and

-- gold and precious stones registered an increase of
12% to $ $23 million, largely a reflection of high
gold prices in 2006.

Statistical Discrepancies
--------------


6. (U) We must note that for national income and
accounting purposes, the Government of Nicaragua draws
a clear distinction between free trade zone exports
and general exports, tracking the two as if they were
separate statistics. Additionally, there are other
discrepancies with the way Nicaragua collects data on
exports. As the following paragraph demonstrates,
U.S. officials should be careful to state that our
trade figures are based on U.S. Customs data, and
include free trade zone exports to the United States.


7. (U) The Ministry of Trade, Industry and Development
(MIFIC) reports trade statistics on the impact of
CAFTA that are quite different from those of the
United States International Trade Commission (USITC).
For example, since CAFTA entered into force on April
1, 2006, MIFIC reports that exports to the United
States rose 10.1%, to $239 million, while imports from
the United States rose 28.5%, to $498 million. For
MIFIC, these flows translate into a bilateral trade
deficit with the United States of $259 million, 52%
more than in 2005. The report notes that major
Nicaraguan exports to the United States include
coffee, seafood, beef, sugar, tobacco products, gold,
and vegetables. The difference between MIFIC and
USITC statistics is mostly, but not completely,
explained by MIFIC's exclusion of free trade zone
imports and exports.

A Look at CAFTA Quotas
--------------


8. (U) CAFTA established a series of tariff quotas for
Nicaragua for some strategic agricultural products,
including beef, sugar, peanuts, peanut oil, cheeses,
dairy products, ice-cream, milk and cream. Indeed,
these products are among Nicaragua leading exports
to the United States. Nicaragua fully utilized its
cheese and sugar quotas under CAFTA in 2006, but
underutilized its quotas on peanut butter, ice-cream,
milk and cream. Nicaragua did not utilize its CAFTA
beef quota because it had not first exhausted its
quota provided by the United States under the World
Trade Organization.


9. (U) While Nicaraguan peanut production has rapidly
grown in recent years, local producers managed to fill
only 14.9% of their quota under CAFTA. Nicaraguan
officials have told us that this is because U.S.
producers of peanuts are very competitive in their
home market. The Government of Nicaragua believes
that its producers can compete with U.S. producers in
third country markets, particularly Mexico, but that
U.S. credit guarantees give U.S. peanut exporters an
unfair advantage. For this reason, Nicaragua joined
Canada, Argentina, Australia and others in a recent
request for WTO consultations on the application of
U.S. agricultural subsidies.

Changing Trade Patterns
--------------


10. (U) One of the most important CAFTA developments
may at first seem insignificant because the export
quantities are so small. MIFIC reports that since
CAFTA entered into force, Nicaragua exported 274
products to the United States for the first time,
including cotton underwear and nightgowns, chili
peppers, billiard accessories, razor blades,
ornamental fish, papaya, and plantains. Some of these
products, or groups of products, promise to become
significant export categories for Nicaragua in the
future and, thus, greatly diversify Nicaraguan exports
to the United States and the rest of the World.


11. (U) A look at which companies are exporting also
reflects changing trade patterns. MIFIC reported that
372 Nicaraguan companies exported during April-
December of 2006, the nine-month period after which
CAFTA took effect. While 10 leading companies
accounted for slightly more than 46% of total exports
to the United States, 235 companies exported less than
$100,000. The number of companies exporting more than
$100,000 grew 15%, to 126. The total number of
companies exporting to the United States grew by 4%
over that of 2005, while the average exported by each
company grew by 6%. In short, more companies are
exporting more product, and more types of products, to
the United States than before CAFTA. Again, while
these movements are small, they point to changing
trade patterns for Nicaragua.

Imports from the United States
--------------


12. (U) Using USITC statistics, Nicaragua imported
almost 21% more from the United States in 2006 than it
did in 2005, growing to $755 million from $625
million. Since CAFTA entered into force, Nicaraguan
imports from the United States increased almost 17%
when compared to same period in 2005. Leading imports
from the United States include machinery, cereals,
electrical machinery, vehicles, optical equipment,
fats and oils, and plastic products. Most of these
imports are going into production of some kind. MIFIC
trade statistics for 2006 show that imports of capital
goods accounted for 22% of total imports from the
United States in 2006, intermediate goods almost 29%,
and petroleum products 13%. Consumer goods accounted
for 35% of total imports from the United States in

2006. Reflecting the depth of the U.S. economy,
imports are more evenly distributed over a wider range
of products than are Nicaraguan exports to the United
States.

Investment
--------------


13. (U) ProNicaragua, the government investment
promotion agency, reports that at least $235 million
in new and active investments were highly influenced
by Nicaragua's membership in CAFTA. The largest of
these is U.S.-based ITG Cone Denim new $100 million
textile plant currently under construction in Ciudad
Sandino. Half of the fifteen enterprises involved are
already operating -- all but one are manufacturers of
textiles or apparel. Together, these companies will
directly employ more than 13,000 Nicaraguans. Another
sixteen enterprises, mostly in textiles and apparel,
are considering investing another $233 million as a
result of Nicaragua's membership in CAFTA. If these
new investments materialize, they would directly
employ another 9500 Nicaraguans. Nicaragua
membership in CAFTA has also inspired a number of
companies to re-invest in existing operations and the
expansion production.

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


14. (SBU) Though still early days, Nicaragua is
clearly benefiting from CAFTA. Exports are up and
more companies are trading a growing variety of goods.
Once companies begin to export, they become more
confident in their abilities to do business in new
markets and with new products. Anecdotal evidence
suggests that a growing number of small- and medium-
sized businesses are borrowing to invest in the
manufacture of components and other items for export.


15. (SBU) USITC trade statistics reveal that no
country has benefited more from CAFTA at this early
juncture than Nicaragua. This partially reflects the
fact that Nicaragua started from a lower base than its
Central American neighbors, with fewer industries
enjoying effective tariff protection. It partially
reflects the fact that Nicaragua clothing and
apparel industry was not well integrated into regional
supply chains that experienced disruption when fellow
countries implemented CAFTA on different dates. It
also may reflect certain competitive advantages for
Nicaragua. For example, the country has plenty of
arable land and water for agriculture. Nicaragua
offers textile and apparel manufacturers the lowest
labor wages in Central America. Nicaragua has the
only Trade Preference Level (TPL) among CAFTA
countries, allowing it to import low cost third
country fabric for the manufacture and export of
apparel to the United States. Nicaragua also has the
lowest crime rate in Central America. Despite the
lack of infrastructure and irregularities in the legal
system, these factors make the country a relatively
attractive place to invest, particularly in
agriculture and light manufacturing.


16. (SBU) Equally significant is that the
administration of former President Enrique Bolanos
worked hard to improve customs, tax collections, and
reduce red tape for investors. Bolanos stabilized
inflation, reduced foreign debt, grew foreign exchange
reserves, and stabilized foreign exchange rates. In
addition, his administration successfully marketed the
country to investors, providing tax and investment
incentives when necessary. On January 10, Bolanos
handed power over to newly elected President Daniel
Ortega, and left the job of promoting Nicaragua to a
new administration with a very different approach to
government. The jury is out as to how hard Ortega
administration will work to fulfill the promise of
private sector-led growth and development that
membership in CAFTA holds for Nicaragua.
TRIVELLI