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Cablegate: Nicaragua: Commerce U/S Padilla Highlights Cafta-Dr

VZCZCXRO2789
RR RUEHLMC
DE RUEHMU #0338/01 0841329
ZNR UUUUU ZZH
R 241329Z MAR 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2295
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC

UNCLAS SECTION 01 OF 03 MANAGUA 000338

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON EINV PGOV NU
SUBJECT: NICARAGUA: COMMERCE U/S PADILLA HIGHLIGHTS CAFTA-DR

REFS: A. MANAGUA 0254, B. MANAGUA 0225, C. 07 MANAGUA 1865

Summary and Introduction
------------------------

1. (SBU) During his February 28, 2008, visit to Nicaragua,
Undersecretary of Commerce for International Trade Christopher A.
Padilla emphasized the importance of the United States - Central
America - Dominican Republic Free Trade Agreement (CAFTA-DR) to our
bilateral relationship. U/S Padilla toured a U.S.-owned textile
mill that takes advantage of CAFTA-DR to weave denim from U.S.-grown
cotton, and he heard from other U.S. businesses on challenges in the
apparel sector. U/S Padilla and Nicaraguan Minister of Trade,
Industry, and Development (MIFIC) Orlando Solorzano participated in
several media events that marked the only instances since Ortega
took office where a senior Nicaraguan official has provided public
support for the agreement. With Nicaraguan business leaders, U/S
Padilla exchanged views on competitiveness and on private sector
efforts to strengthen democracy (Ref A). In meetings with MIFIC and
President Ortega, U/S Padilla discussed a number of trade issues.
U/S Padilla also cautioned Ortega that his harsh rhetoric has a
negative impact on the perception of Nicaragua in the minds of U.S.
investors. However, Ortega's strong ideological beliefs and desire
to play to domestic and international audiences with criticism of
the United States make it likely that his rhetoric will continue, to
the detriment of the investment climate.

Promoting CAFTA-DR
------------------

2. (SBU) During his visit, U/S Padilla publicly described CAFTA-DR
as the core of our bilateral economic relationship. He noted that
since the agreement went into effect on April 1, 2006, Nicaragua has
benefited more than any other CAFTA-DR country. Nicaraguan exports
to the United States have increased from $1.18 billion in 2005 to
$1.61 billion in 2007, a 36% increase according to USITC data. Some
industries have seen even higher growth. For example, exports of
fruits and vegetables are up 59% from 2005 to 2007, and exports of
meat are up 42%.

3. (U) Minister Solorzano joined U/S Padilla to tour an exhibition
of Nicaraguan businesses and agricultural producers that are
benefiting from CAFTA-DR. Among those represented were an organic
coffee grower and an exporter of high quality seafood. Producers
told U/S Padilla and Minister Solorzano about rising sales of sesame
seeds, cassava, okra, and melons thanks to CAFTA-DR. Companies
exhibiting jellies, jams, and processed fruit pulp demonstrated the
potential Nicaragua has to add value to its agricultural exports.
Extensive press coverage of the exhibition, press conference, and
subsequent remarks at a lunch hosted by AmCham highlighted
Nicaragua's success in creating jobs, thanks to increased trade with
the United States.

4. (SBU) In a late-evening meeting, President Ortega complained that
CAFTA-DR has not really resulted in free trade, citing as evidence
the safeguard measure the United States may implement for Honduran
socks. In trade agreements between developed and less-developed
countries, "the developed country can impose its will whenever it
pleases," according to Ortega. He asserted these asymmetries can
only be resolved through agreements that focus on "fair trade."
Ortega suggested that we need to maintain an open dialogue on trade
issues "to make changes to CAFTA-DR as needed." In response, U/S
Padilla cautioned Ortega that U.S. domestic politics would likely
complicate any renegotiation of CAFTA-DR.

5. (SBU) Comment: The Ortega administration focuses on the
Venezuelan-sponsored Bolivarian Alternative for the Americas (ALBA)
to the exclusion of CAFTA-DR, despite the fact that trade with ALBA
countries is almost negligible and trade with the United States
totals nearly $2.5 billion in 2007. At least for a few days, U/S
Padilla's visit helped to focus attention on the benefits of
CAFTA-DR and private-sector-led growth. Minister Solorzano's
participation in our trade exhibition, press conference, and further
remarks at AmCham's lunch are the only instances since Ortega took
office where a senior Nicaraguan official has provided public
support for CAFTA-DR. Ortega appears to have accepted U/S Padilla's
counsel on renegotiating CAFTA-DR; in a March 3 meeting with
representatives of the dairy industry, he repeated U/S Padilla's
description of U.S. trade politics point for point. End comment.

Textiles and Apparel Trade Issues
---------------------------------

6. (U) Nicaraguan exports of textiles and apparel have increased by
35% since CAFTA-DR was implemented, from $716 million in 2005 to
$968 million in 2007. Emblematic of the growth of this industry is
International Textile Group's (ITG) $100 million investment in a
state-of-the-art textile mill, which will produce denim fabric from
cotton grown in the United States. U/S Padilla toured the plant,
which employs 850 Nicaraguans and is already producing denim fabric
for apparel manufacturers in Nicaragua and throughout Central
America.

7. (SBU) After the tour, U/S Padilla and Deputy Assistant Secretary
for Textiles and Apparel Matthew Priest met with ITG's general
manager and representatives of U.S. apparel manufacturers. They
discussed issues facing the sector, including difficulties with
tariff preference levels (TPLs) of 100 million square meter
equivalents (SMEs) for the use of third-party fabric. Apparel
manufacturers noted that the one-for-one agreement, requiring the
use of U.S. fabric to qualify for TPLs, is problematic, because U.S.
sources are dwindling and the cost of their fabric is rising. They
suggested that counting fabric made in Nicaragua from U.S. cotton as
U.S. sourced fabric may be a solution. They also noted that recent
wage increases -- the Ortega administration raised textile workers'
minimum wages by 36% in a six-month span -- are having a negative
impact on Nicaraguan competitiveness in this price sensitive
industry.

8. (SBU) At a separate meeting with Nicaraguan officials led by
MIFIC, Executive Director of the Free Trade Zone Commission (FTZC)
Alfredo Colonel echoed the concerns of the private sector on meeting
the one-for-one requirement. In both meetings, U/S Padilla and DAS
Priest agreed to carefully evaluate any one-for-one shortfall for
2007 and consider the proposal that fabric made from U.S. cotton in
Nicaragua count toward the one-for-one requirement. They were
careful to note that current domestic political considerations made
it difficult to renegotiate the agreement to address this political
issue.

Trade Agreement Implementation
------------------------------

9. (SBU) U/S Padilla discussed a number of other trade issues with
Minister Solorzano, Executive Director of the FTZC Alfredo Colonel,
and ProNicaragua Executive Director Javier Chamorro. Solorzano
voiced concern with U.S. legislation to raise the excise on tobacco
products, a measure that President Bush vetoed for unrelated reasons
in September 2007. For cigars in particular, MIFIC officials view
the excise as a potential trade barrier, because nearly all
hand-made cigars are imported into the United States; they believe
such a tax violates CAFTA-DR (Ref C). Solorzano complained that
Nicaraguans are unable to sell "rosquillas" (Central American
biscuits) in New York State because a Salvadoran firm has
trademarked the term "rosquillas." Finally, Solorzano noted
Nicaragua's interest in meeting its IPR commitments under CAFTA-DR,
particularly those related to test data protection and patent
linkage (Ref B). On all of these issues, U/S Padilla indicated that
the United States will work closely with Nicaragua to ensure that
CAFTA-DR works for both Nicaragua and the United States.

Delivering the Message on Harsh Rhetoric
----------------------------------------

10. (SBU) In his meetings throughout the day, U/S Padilla recognized
Nicaragua's efforts to attract $617 in foreign investment since
implementing CAFTA-DR. U/S Padilla made clear the importance of
additional investment to build on this early success. He cautioned
his Nicaraguan interlocutors, including President Ortega, that
potential investors have a negative perception of Nicaragua because
of the president's harsh rhetoric concerning "global capitalism" and
the United States. He suggested that the government deliver a
consistent, supportive message to foreign investors emphasizing
Nicaragua's respect for democracy and free markets. Padilla also
explained the importance that investors place on a predictable
political environment so they may make informed investment
decisions.

11. (SBU) President Ortega voiced his belief that inexpensive labor
is what foreign investors want. Nicaragua has cheap labor, and
that, in addition to a low crime rate, is why investors are
interested in locating here, according to Ortega. Padilla countered
that investors seek more than low wages; they look for a stable
political climate and strong rule of law, and these factors would be
important for Nicaragua's efforts to attract investment. But
Ortega dismissed U/S Padilla's warning that harsh rhetoric may be
scaring away investors, claiming that rhetoric among politicians in
the U.S. Congress is worse. We note that just before his meeting
with U/S Padilla, in an event with the National Police, Ortega
accused foreign investors in free trade zones of exploiting
Nicaraguan labor and plundering the Nicaraguan economy. He again
railed against capitalism and neoliberalism for making the poor
poorer and the rich richer and called the current capitalist
economic system unsustainable.

12. (SBU) Comment: U/S Padilla's message to Ortega on the
consequences of harsh rhetoric toward the United States and "global
capitalism" appears to have had little immediate impact; for
example, on March 7, Ortega labeled the United States a supporter of
state-sponsored terrorism. We doubt that Ortega will jettison his
strong ideological beliefs when it comes to capitalism. For
example, in October 2007, Ortega cited Lenin extensively on the
floor of the National Assembly simply to make a point on government
debt. This mindset, together with his desire to play to domestic
and international audiences by criticizing the United States, means
that Ortega's rhetoric will likely continue. Nonetheless, it
remains important for us to continue to reinforce U/S Padilla
message on the damaging consequences of this rhetoric to the
investment climate. End comment.

13. (U) U/S Padilla cleared this cable.

TRIVELLI

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