Chile Wants Free Trade Commission Meeting To Review Pulp

UNCLAS SANTIAGO 000442

STATE PLEASE PASS TO USTR KATE DUCKWORTH
STATE FOR WHA/EPSC, EEB/TPP/BTA/EWH, EEB/TPP/MTA/IPC
TREASURY FOR BLINDQUIST
COMMERCE FOR KMANN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD KIPR EFTA CI

SUBJECT: Chile Wants Free Trade Commission Meeting To Review Pulp
Tax-Break


1. (SBU) SUMMARY: Chile's wood and pulp industry association
(CORMA),one of the nation's leading export industries, is
pressuring the GOC to address a tax credit received by U.S. pulp and
paper companies for use of alternative fuels. In response, the GOC
on April 29 sent a letter to USTR requesting a special session of
the U.S.-Chile Free Trade Commission in order to review the tax
credit. CORMA claims the tax credit is a subsidy that provides an
unfair competitive advantage to U.S. companies. The GOC is
discussing next steps with USTR. The American Chamber of Commerce
in Chile has supported CORMA's position. END SUMMARY.

Chilean Wood/Pulp Industry Demands Action
--------------


2. (SBU) Chile's wood and pulp industry association (CORMA) met with
the Direccion General de Relaciones Economicas Internacionales
(DIRECON) -- the Chilean equivalent of USTR -- during the week of
April 20. The press and Embassy contacts at DIRECON report that
CORMA demanded GOC action in response to what they perceive as a
subsidy for U.S. pulp and paper companies. Because of recent
changes to a U.S. tax program intended to promote alternative fuels,
companies that use a mix of fossil and alternative fuels can receive
tax credits. Reportedly, U.S. pulp and paper companies could
receive up to $6 billion in credits, which CORMA alleges creates an
unfair competitive advantage for those U.S. companies.


3. (U) Many U.S. pulp and paper companies use a mixture of "black
liquor" (a pulp byproduct) with diesel, which reportedly qualifies
them for a tax credit of 50 cents per gallon of fuel used. Chilean
press quoted Charles Kimber, the corporate manager of a leading
Chilean pulp company, who estimated that the credit could account
for up to 50% of the cost to produce one ton of wood pulp. He noted
"no company can compete with that kind of subsidy."

DIRECON Writes Letter to USTR
--------------


4. (SBU) In response to the pressure from CORMA, DIRECON contacted
USTR and the Embassy to formally object to the U.S. tax credit on
April 24. DIRECON Director for Bilateral Economic Affairs Andres
Rebolledo subsequently wrote a letter to USTR on April 29. The
letter requests an extraordinary session of the U.S.-Chile Free
Trade Commission to review the tax-credit. Finland and Canada have
made similar complaints to the USG regarding the tax credit.


5. (U) USTR and DIRECON are currently working on next steps. Press
reports on May 5 quoted CORMA's President Jose Rafael Campino as
saying the GOC and USG would create a bilateral committee in May to
review the issue. Also in the press, the American Chamber of
Commerce in Chile (AmCham) has endorsed CORMA's position that U.S.
companies are unfairly advantaged by the tax break.


6. (U) This cable has been cleared by USTR.
SIMONS