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Cablegate: Response to Usitc Request: Ecuador 2006-2007 Atpa

VZCZCXYZ0000
RR RUEHWEB

DE RUEHQT #0601/01 1891326
ZNR UUUUU ZZH
R 071326Z JUL 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 9087
INFO RUEHBO/AMEMBASSY BOGOTA 7637
RUEHCV/AMEMBASSY CARACAS 3095
RUEHLP/AMEMBASSY LA PAZ JUL LIMA 2685
RUEHGL/AMCONSUL GUAYAQUIL 3662
RUEATRS/DEPT OF TREASURY WASHDC

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

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