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Cablegate: Madrid Weekly Econ/Ag/Commercial Update Report -

VZCZCXRO4300
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0907/01 1341300
ZNR UUUUU ZZH
R 141300Z MAY 07 ZDK
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 2509
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2696

UNCLAS SECTION 01 OF 02 MADRID 000907

SIPDIS

SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: BEXP EAGR EAIR ECON EFIN EIND ETRD TBIO SP
EINV, UK
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -
MAY 7


MADRID 00000907 001.4 OF 002


EINV: American Business Council lunch with Ambassador and Min
of Industry
EINV: Macroeconomic risks in Spain
EINV/ECON: US Cautions against investing in Spain - According
to ABC
EINV/ETRD: Deal or no deal - Research money in exchange for
patent protection
EAGR/TBIO: Biodiesel production and renewable fuel guidelines

1. (U) MINISTER OF INDUSTRY CLOS HOSTS AMBASSADOR AND
AMERICAN BUSINESS COUNCIL FOR WORKING LUNCH

Minister of Industry, Trade and Tourism Joan Clos hosted the
Ambassador and an executive group from the American Business
Council (ABC) for lunch May 10. The ABC groups the largest
U.S. investors in Spain, including Ford, GM, General
Electric, American Express, EDS, IBM, and Deloitte. The
lunch is the result of a business dialogue launched by the
Ambassador earlier this year, and the ABC had prepared a
discussion paper outlining the members' concerns about the
investment and business climate in Spain. ABC
representatives raised a number of issues. They are very
concerned about the change in interpretation by the Spanish
tax authority concerning holding companies established by
multinationals in Spain. The previous government had passed
very favorable tax legislation encouraging multinationals to
group their international subsidiaries into holding companies
based in Spain. The tax authority has, within the past year,
changed its interpretation of this law in a way much less
advantageous to the firms, and it is seeking retroactive
payments. A second issue raised was IPR protection, with the
ABC making a strong pitch for Spain to establish an effective
notice and takedown regime to fight against illegal
downloads. The ABC also requested increased efforts to
prevent pirated DVD and CD sales and recommended that bars
and restaurants post anti-piracy posters. (Note: These
requests track very closely with Embassy's own efforts with
the GOS.) The Ford representative raised the costs of rail
and road transportation to port for finished industrial
goods. The American Express representative raised a fairly
technical issue related to the margins that financial
services companies can charge users and the payments
mechanisms. The Ambassador was accompanied by the DCM, Econ
Counselor, and the Deputy Commercial Counselor. Clos was
accompanied by Secretary General for Trade Alfredo Bonet,
officials from the INVES (Invest in Spain) office and the
Office for Trade and Investment. He followed the
presentations closely and promised responses. He and the
Ambassador agreed to continue the dialogue, with the
Ambassador scheduled to host the next working lunch, probably
in November.

BANK OF SPAIN POINTS TO MACROECONOMIC RISKS IN ITS MAY 3
ECONOMIC BULLETIN

2. (U) The Bank of Spain is somewhat less bullish than it
has been in the past on Spanish macroeconomic prospects. The
Central Bank's language is of course couched in tortured
language, but although the Bank does not forecast difficult
conditions in the short-term, it does focus more on the
Spanish economy's well-known weaknesses. It notes that
productivity has not gone up, despite higher capital good
investment. Interest rate hikes are "exposing the private
sector to adverse changes." In perhaps the most exquisitely
phrased statement, the Bank says that "there has been a pause
in the rebalancing of national demand and net exports as a
percentage of GDP", i.e. the current account deficit is still
a very high nine percent of GDP. (Comment: Given that the
head of the Spanish Central Bank, Miguel Angel Fernandez
Ordonez, is a PSOE loyalist and was appointed to the position
by the government, the Bank's warnings, albeit put in gentle
terms, are a subtle change. This has been noticed by
commentators and adds to speculation that maybe the Spanish
economy is in for a slowdown.) (Expansion, May 4)

ROSALINI INVESTMENT DISPUTE PROMPTS EDITORIAL

3. (U) ABC Says "United States Asks its Big Companies to take
Precautions in Investing in Spain": This May 2 front-page
headline with an accompanying editorial was prompted by AmCit
Dugan Rosalini's complaints that the Barcelona Forum has not
yet complied with a Cook County, Illinois judgment. Using
language from this year's Investment Climate Statement,
Rosalini and his partner got a naturally willing ABC to take
potshots against the government on its economic policies,
although ABC framed this in the context of generally bad
U.S.-Spain relations. The Investment Climate Statement
includes a reference to Rosalini's dispute and then advises

MADRID 00000907 002.2 OF 002


that in the event American businesses sign a contract
stipulating a U.S. court as the venue for resolving disputes,
the U.S. business should find in advance an expeditious way
to execute a possible U.S. judgment in Spain as there is not
treaty between the U.S. and Spain recognizing judgments in
the other country. In a prototypical example of how the
print media work in Spain, ABC spun this in to something
bigger even though towards the end of the article it concedes
that the Barcelona Forum case is an "exception." (ABC, May 2)


FARMAINDUSTRIA OFFERS 300 MILLION FOR RESEARCH

4. (U) Research & Development-based Pharmaceutical Industry
offers Euros 300 million for more research in rare diseases
over five years if GOS agrees to provide product patent
protection for drugs that benefited from process patent
protection prior to 1992: Farmaindustria, which represents
Spanish and the major American R&D pharmaceutical companies
in Spain made this offer public on May 7. The industry has
already floated the idea in private meetings with the
government. The Ambassador has also mentioned it in meetings
with President Zapatero's former Economic Adviser, Miguel
Sebastian. This is the first time the drug companies have
made the offer public, and the first time the industry has
proposed a specific number. There are a number of
blockbuster drugs, particularly medicines dealing with
cholesterol, that will lose patent protection shortly unless
patent policy is changed (the companies say this can be done
without legislation). The R&D-based industry uses the
argument that this would "harmonize" Spanish patent practice
with most other major EU countries. The companies also say
that TRIPS obliges Spain to provide this additional
protection, although USG lawyers do not agree with this
argument. The Embassy has been supportive of the R&D-based
pharmaceutical industry on public policy grounds. (Comment:
It is interesting that the industry has now tabled a concrete
offer. We wonder though whether the government will have the
appetite to stave off lawsuits from the generics
manufacturers even if significant additional research in rare
diseases is presumably attractive.) (Expansion, May 8, 2000)

BIODIESEL PRODUCTION FUTURE LOOKS PROMISING

5. (U) If Spanish biodiesel producers were to bring on-line
all of the production capacity that is currently indicated
(on the books) for production by 2010, Spain would become one
of the leading producers of renewable fuels in Europe. By
January 2008, production capacity will likely be at about two
million tons, and by January 2011 that capacity is indicated
at almost nine million tons.

6. (U) However, most analysts here in Spain doubt that the
biodiesel projects currently on the books for 2008 and beyond
will become reality. On the positive side of the equation
are the EU renewable fuels guidelines, a new Spanish law (to
be announced this year) that will require renewable fuels
mixing, and a new generation of oilseeds crushing plants that
can refine and direct the renewable oil to a variety of uses,
including biodiesel, human consumption, import, export, etc.

7. (U) On the unknown, but very important side of the
equation is biodiesel-production profitability. For the many
small-scale production plants, currently operating and
planned, that are dedicated to producing only biodiesel
(single-outlet market), commodities markets can be especially
pernicious as evidenced by the recent run-up in cereals
commodity prices and a sharp drop in crude oil prices.
Aguirre

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