SALVADORAN FREE TRADE ZONE BENEFITS EXTENDED TO 2015

UNCLAS SAN SALVADOR 001423

SIPDIS

COMMERCE FOR MSIEGELMAN

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD KTEX ES
SUBJECT: SALVADORAN FREE TRADE ZONE BENEFITS EXTENDED TO 2015



1. SUMMARY: On July 17, President Saca announced that the WTO has
extended the phase out period to 2015 for non compliant benefits
granted to Salvadoran Free Trade Zones (FTZs). The extension will
benefit numerous companies that work inside Salvadoran FTZs, which
receive tax breaks and other benefits that would have been phased
out by 2009. Vice President Ana Vilma de Escobar said this
extension and the proposed International Services Law (Septel)
represent important opportunities to attract new investment and
guarantee legal certainty to current and future investors. At least
one U.S. company said it was expanding its Salvadoran FTZ
operations, due in part to the WTO extension. END SUMMARY.

WTO EXTENDS FTZ PERDIO TO 2015
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2. On July 17, President Saca announced that the World Trade
Organization (WTO) had extended the phase out period of non
compliant benefits utilized by Salvadoran Free Trade Zones (FTZs)
from 2009 to 2015. Enterprises working inside FTZs will continue
receiving income, municipal and value added tax (VAT) exemptions and
import duty breaks that would have been phased out by the end of

2009. In April 2006, El Salvador along with 14 other countries,
presented a proposal to the WTO requesting the extension of the FTZ
benefits phase out period to the year 2020. After a series of
negotiations with the WTO, they reached an agreement granting an
extension to the year 2015.

EXTENSION BENEFITS SALVADORAN ECONOMY AND EMPLOYMENT
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3. This extension is crucial for the Salvadoran economy which
depends on maquila activities for a substantial portion of its total
industrial production, exports and employment. Minister of Economy
Gavidia said the extension will benefit approximately 300 companies
and 81,000 employees, of whom 85% are women that currently work
inside the FTZs. Vice President Ana Vilma de Escobar sees this
extension as an opportunity to attract new investment and provide
legal certainty to current and future investors in El Salvador.
Vice President Escobar and Minister de Gavidia thanked the
Ambassador for the USG support in obtaining the extension.


4. For Roberto Bonilla, Vice President of the Garment Association
(CAMTEX) this extension gives the sector the time and opportunity
that they needed in order to compete against other regions for the
U.S. market, and allows them to maintain international
competitiveness. According to official data, maquila sales for the
first trimester of the year dropped 5.1% in relation to the same
period of last year. This continued a downward trend from 2006,
when 7,000 jobs were lost due to closure of at least 6 companies
that were not able to face competition from China. However, Fruit of
the Loom representative Lorenzo Guirola said the company would be
expanding their Salvadoran operations, in part because of the
extension of benefits. This should add 700 more jobs, putting the
company's total employment in El Salvador at 10,500 employees.


5. Edwin Escobar, Executive Director of American Park Free Trade
Zone, highlighted the need to start working on an incentive scheme
that is compliant under WTO regulations, and to update the Free
Trade Zone Law that was implemented 9 years ago. According to
Eduardo Ayala Grimaldi, Vice Minister of Economy, the Ministry is
working on a complementary incentive scheme for the industrial
sector that is WTO compliant which is expected to be ready by the
end of this year. Minister de Gavidia also stated that they are
working on an International Service Law (Septel) that will provide
investors with alternate incentives allowable under WTO guidelines,
in order to attract new investors in the logistics and services
sectors.

Comment
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6. The Ministry of Economy has made maintaining the textile and
apparel industry a large part of its economic strategy. With the
extension, the GOES has been given more time to develop alternative,
WTO compliant incentive schemes to attract more diversified
investments. Now the question is whether the GOES will take a
proactive approach to tackle these issues before the new deadline.
Their wait and see attitude about the extension created a lot of
uncertainty in the sector, along with hesitance on the part of
investors, something they will want to avoid now that they have some
breathing room.

Glazer