RESPONSE TO USITC REQUEST: ECUADOR 2006-2007 ATPA

UNCLAS QUITO 000601 SENSITIVE SIPDIS TREASURY FOR MEWENS STATE PASS USITC FOR L.M. SCHLITT E.O. 12958: N/A TAGS: ECON ETRD EC SUBJECT: RESPONSE TO USITC REQUEST: ECUADOR 2006-2007 ATPA INVESTMENT REFTEL A: State 59051 B: Quito 2417 ¶1. (U) Following is Post's response to the USITC request for information regarding ATPA related investment activity in Ecuador in 2006 and 2007 (ref a). Effect of the ATPA/ATPDEA on Exports -------------- ¶2. (U) Under ATPA, U.S. imports from Ecuador were $5.3 billion in 2006 and $4.6 billion in 2007. Over 75% of Ecuador's total exports to the U.S. in 2006 and 2007 were under ATPA. While ATPA's provision of duty-free entry to a wide range of Ecuadorian products has led to diversification of exports, the country's overall export figures in dollar terms remain concentrated in petroleum (92% of total ATPA exports). After petroleum, exports of cut flowers represent the largest export from Ecuador under ATPA: $141 million in 2006 and over $143 million in 2007. Following flowers, seafood, largely pouched tuna, represents the third largest ATPA export. Some less significant products, including broccoli and mangoes, experienced significant growth in exports to the U.S. under ATPA during 2006 and 2007. Under ATPA, broccoli exports went from $12 million in 2005 to $17 million in 2006 and $22 million in 2007; mango exports went from $10 million in 2005 to $14.7 million in 2006 and $15.6 million in 2007. Textiles and Apparel -------------- ¶3. (U) Textile and apparel exports under ATPA are very small, but grew in 2007. According to the Ecuadorian Textile Association (AITE),the Ecuadorian textile sector grew for the first time in a decade by 6.7% in 2007. AITE claims that some of the growth can be attributed to its work in partnership with customs officials to reduce the number of contraband and under-priced textiles entering the country, estimated at over $200 million a year. ¶4. (U) Ecuador's well-organized (but small) textile industry has largely dedicated its efforts to supplying fabric to Colombian exporters (ref b). Virtually all Ecuadorian cotton fabrics are produced using imported U.S. cotton fiber. Ecuador's textile industry is benefiting from ATPA preferences by supplying fabrics to Colombian garment producers, who in turn export to the U.S. The President of AITE noted that Ecuador's textile sector, in the absence of ATPA preferences, could be significantly hurt when the FTA with Colombia goes into effect. Tuna -------------- ¶5. (U) Ecuadorian exports of pouched tuna to the U.S. under ATPA have been increasing, but fell in 2007; overall ATPA tuna exports continued to grow. Companies are concerned about the termination of ATPA preferences. ¶6. (SBU) Starkist's Empresa Pesquera Ecuatoriana (EMPESEC) exports pouched tuna to the U.S. under ATPA. The investment amounts below represent general investments to maintain business operations and facilities. The last expansion investment of $2 million was made in 2005, before the reporting period. EMPESEC S.A. owns facilities in Manta and Guayaquil. Name of company: EMPESEC S.A. 2006 and/or 2007 investment amount: An average of 800,000 in each year New or expansion investment: Neither Located in free trade zone? No Type of product to be exported: Tuna (canned and pouched) Estimated value of exports to the United States: $100 million over the last three years Would project have been launched in the absence of ATPA/ATPDEA preferences? No Does firm use inputs of U.S., U.S. Virgin Islands, Puerto Rico, Caribbean (CBERA),or other ATPA beneficiary origin as inputs for ATPA eligible goods? No Flowers -------------- ¶7. (U) Ecuadorian flower exports to the U.S. under ATPA have had a steady upward trend for many years, with an increase of 107% over the last ten years. According to the Association of Flower Producers and Exporters of Ecuador (EXPOFLORES),investment and production in the flower sector increased by 10% in 2006. ¶8. (U) The primary market for Ecuadorian flower exports is the United States. According to companies within the sector, exports of flowers to the U.S. account for 57% of their total flower exports, the majority of which are under ATPA. Roses are the primary ATPA flower export to the U.S. Exports of other cut flowers and fresh Gypsophilia under ATPA are small but are growing significantly. However, the U.S. share of Ecuador's flower export market is falling, and companies in the sector anticipate a further decline. According to a major flower exporter in Ecuador, the lack of long-term certainty for trade preferences with the U.S. and the stronger euro, which has more than compensated for higher European transportation costs, has led many Ecuadorian growers to redirect their exports to Europe. ¶9. (U) Many rose growers within the sector are growing varieties especially for the European and Russian markets. Businesses within Ecuador's flower sector participated in the 2006 and 2007 International Flower Exhibition in Moscow, which is often touted as the "Road to the Russian Market." The International Flower Exhibition in Moscow is visited annually by over 50,000 individuals and 15,000 businesses from Eastern Europe. ¶10. (U) In 2006, Dole Fresh Flowers, a subsidiary of the U.S.-based Dole Foods, closed its cut flower operations in Ecuador as a result of "worldwide restructuring decisions, the highly fragmented and competitive market, and growing competition from African and Asian countries." Other Agriculture -------------- ¶11. (U) Broccoli exports under ATPA increased significantly in 2006 and 2007. In FY2007, USAID/Ecuador provided grants and training in the amount of $1 million to eight small farming enterprises in Ecuador's northern border provinces. As a result, 1,000 Ecuadorian farmers were trained in agricultural and post-harvest best practices, contributing to their productivity and improved product quality. Participant farmers currently export 100% of their production, which includes cacao, coffee, and broccoli. However, a major broccoli exporter has said that without ATPA broccoli exports would not be competitive in the U.S. market. Foreign Direct Investment -------------- ¶12. (U) According to the Central Bank of Ecuador, the net flow of foreign direct investment (FDI) into Ecuador was $270.7 million in 2006 and $178.5 million in 2007. (Note: the Ecuadorian Central Bank recently changed its FDI methodology; current data lists FDI inflow net of outflows while past data was gross inflows. Therefore, this information is not compatible with reported FDI data from previous cables.) The principal sectors to benefit from FDI were the petroleum, manufacturing and services sectors. The flow of U.S. direct investment into Ecuador was negative $160 million in 2006 and $79 million in 2007. Ecuador's FDI inflow from Europe totaled $83.8 million in 2006 and $211.5 million in 2007, from the Andean Community totaled $13.7 million in 2006 and $35.5 million in 2007, and from China totaled $12 million in 2006 and $60.5 million in 2007. Below is a breakdown by sector of FDI inflows for 2006 and ¶2007. Net Flows of Foreign Direct Investment by Sector, 2006 and 2007 (In Thousands of Dollars) Sector 2006 2007 Agriculture, Forestry, Hunting, Fishing 47,314 21,864 Oil, Mining, Quarrying 116,618 -128,121 Manufacturing Industry 90,163 79,066 Electricity, Gas and Water 6,930 15,685 Construction 8,449 -5,974 Commerce 32,303 71,652 Transport, Warehousing, Communications 83,324 -28,666 Company Services 89,360 139,120 Community, Social, Personal Services 29,495 13,835 Total 270,720 178,462 Source: Central Bank of Ecuador Industry Concerns about Trade Issues -------------- ¶13. (SBU) The various short-term ATPA extensions during 2006-2008 had an effect on ATPA-related investment in Ecuador. Starkist's Empresa Pesquera Ecuatoriana S.A. noted that investment would have likely been greater than the $800,000 annual maintenance investment in 2006 and 2007 if ATPA preferences were secured for a period of three to four years at a time. Some tuna processing companies in Ecuador have discussed moving their operations from Ecuador to Peru when the FTA with Peru goes into effect. Within the flower sector, Europe's share of Ecuador's exports continued to rise in 2006 and 2007, while the U.S. share continued to decline. There is a concern among companies in the flower sector that a ratified FTA with Colombia will have a negative impact on ATPA-related investment in Ecuador. Furthermore, an FTA with Colombia could position Ecuador's textile sector even further behind its Andean neighbors in terms of growth and development. The Ecuadorian textile industry has expressed concern that if Colombia has an FTA with the U.S., Ecuadorian inputs into Colombian products for export to the U.S. would not count toward accumulation for origin purposes and this significant market for Ecuador would likely disappear. Domestic Programs that support ATPA/ATPDEA -------------- ¶14. (U) CORPEI manages the following programs and associations designed to promote investment and exports: a. Association of Coastal Horticulture Producers (ASHOFRUCO): This association was created with the help of CORPEI to reactivate melon exports to the U.S., an ATPA-eligible product. Approved by Ecuador's Ministry of Agriculture in July 2007 and in compliance with the U.S. Animal and Plant Health Inspection Service (APHIS), one of the first goals of the association is to reach agreement on the cultivation, harvesting, and export of melons to the U.S. A $2.5 million dollar agreement between CORPEI and APHIS would ensure compliance with export requirements in this sector. b. Identifying successful investment and promotion programs in concert with the United Nations Industrial Development Organization (UNIDO): CORPEI, in collaboration with UNIDO, created an Investment Promotion Department and an evaluation system for investment projects. In 2006, the software tool COMFAR was used to generate a portfolio of investment projects to be promoted through CORPEI's offices. c. Expoecuador Program: Expoecuador is a cooperation program between Ecuador and the European Community to promote small industries with export potential. In 2007, the European Union through the Expoecuador Program donated equipment and materials to Ecuador's National Fishing Institute. d. Sustainable BioTrade National Programme-Ecuador (PNBSE): This is a program of Ecuador's Ministry of the Environment in coordination with CORPEI and the non-governmental organization EcoCiencia. Its objectives are to combine poverty alleviation with biodiversity conservation. Initiatives supported by PNBSE include technical assistance and capacity building for cocoa and cereal projects (some cocoa products are ATPA-eligible). Impact of ATPA on alternative development -------------- ¶15. (U) The ATPA has played an important role in providing Ecuadorians with jobs, through the growth of licit agricultural industries, thus deterring them from becoming involved in growing narcotics crops. According to the Ecuadorian government, ATPA has generated approximately 350,000 jobs in Ecuador. A study by CORPEI maintains that the ATPA has led to 70,000 direct jobs in the cut flower industry, 50,000 direct jobs in the tuna industry, and 20,000 direct jobs in the broccoli sector. There are over 50,000 employees in the Ecuadorian textile industry, and a majority of textile workers within the sector have employment as a result of the ATPA. USAID/Ecuador has invested over $18 million in activities geared toward the northern and southern borders of Ecuador to create business opportunities for families to obtain jobs in the legal sectors of the local economy. JEWELL