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Cablegate: Ecuador 2005 National Trade Estimate Report

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 QUITO 003289

SIPDIS

FOR USTR G. BLUE AND BENNETT HARMAN AND FOR STATE EB/MTA/MST

E.O. 12958: N/A
TAGS: ETRD ECON EFIN EC
SUBJECT: ECUADOR 2005 NATIONAL TRADE ESTIMATE REPORT
SUBMISSION

REF: STATE 240980

1. Below is Embassy Quito's submission for the 2005 National
Trade Estimate Report. A copy of the report has been
provided to USTR Bennett Harman via email. The report was a
collaborative effort between State, the Commercial Service
and the Foreign Agricultural Service.


TRADE SUMMARY
-------------

According to US Bureau of Census statistics, the United
States, trade deficit with Ecuador was $1.3 billion in 2003
(agricultural trade accounted for $850 million of the
deficit). That was an increase of $762 million from the $538
million deficit in 2002. U.S. goods exports in 2003 were
$1.4 billion, down 9.9 percent from the previous year ($1.6
billion). Corresponding U.S. imports from Ecuador in 2003
were $2.7 billion, up 27 percent. U.S. agricultural imports
from Ecuador in 2003 were $1.09 billion, a 4% increase from
2002 ($970 million). Ecuador is currently the 51st largest
export market for U.S. goods.

Ecuadorian Central Bank statistics estimate the stock of
foreign direct investment (FDI) in Ecuador in 2003 was $1.5
billion. U.S. FDI in Ecuador in 2003 is estimated at $204
million, primarily in the oil sector.

Free Trade Area Negotiations
----------------------------

In November 2003, the United States announced its intention
to begin free trade negotiations with Colombia, Peru, Ecuador
and Bolivia, the four Andean Trade Preference Act beneficiary
countries. The negotiations began on May 18, 2004 with
Colombia, Ecuador and Peru. The Andeans collectively
represent a market of about $7.1 billion for U.S. exports in
2003, and are home to about $4.2 billion in U.S. FDI. The
negotiation will complement the goal of completing a Free
Trade Area of the Americas (FTAA).

IMPORT POLICIES
---------------

A. Tariffs

When Ecuador joined the WTO in January 1996, it bound most of
its tariff rates at 30 percent or less. Ecuador's average
applied tariff rate is 13 percent. Ecuador applies a
four-tiered structure with levels of five percent for most
raw materials and capital goods, 10 percent or 15 percent for
intermediate goods, and 20 percent for most consumer goods.
A small number of products, including planting seeds, are
subject to a tariff rate of zero. Some agricultural products
(193), most of which are chemicals and veterinary products,
are imported duty free.

As a member of the Andean Community of Nations (CAN), Ecuador
grants and receives exemptions on tariffs (e.g., reduced ad
valorem tariffs and no application of the Andean Price Band
System) for products from the CAN countries (Bolivia,
Colombia, Ecuador, Peru and Venezuela). Currently, these
countries have an Andean Free Trade Zone and apply Common
External Tariffs (CET), as stated in CAN Decision 370. There
is a proposal for a new CET, with a three-tiered structure,
with levels of 5, 10 and 20 percent tariffs for agricultural
products. The proposed structure has not been approved by
the CAN.

Ecuador maintains the Andean Price Band System (APBS) on 153
agricultural products (13 &marker8 and 140 &linked8
products) imported from outside the CAN. The 13 &marker8
products are wheat, rice, sugar, barley, white and yellow
corn, soybean, soybean meal, African palm oil, soy oil,
chicken meat, pork meat and powder milk. Under this system,
the ad valorem CET are adjusted (increased or reduced)
according to the relationship between international reference
prices, established floor and ceiling prices and the
importation price of the commodity. Upon accession to the
WTO, Ecuador bound its ad valorem tariffs (including the
additional levy from the APBS) for these commodities between
31.5 and 85.5%.

As part of its WTO accession, Ecuador committed to phase out
its WTO-authorized price band system, starting in January
1996 with a total phase out by December 2001. No steps have
been taken to comply with this commitment. Instead, Ecuador
adopted the APBS, which applies the reduced CET to the CAN
and increased tariffs to other WTO members. This decision
did not comply with Ecuador,s commitments to the WTO.
However, Ecuador maintains that, as the highest rate under
the APBS us beneath the bound tariff rate, Ecuador,s
participation in the APBS is WTO-consistent.

B. Non-Tariff Measures


Ecuador has failed to eliminate several non-tariff barriers
since its WTO accession. Importers must register with the
Central Bank, through approved banking institutions to obtain
an import license. In order to get this license, an importer
must first obtain, inter alia, a tax registration number from
Ecuador,s Internal Revenue Service (SRI). Ecuador requires
prior authorization from various government agencies, e.g.,
the Ministry of Agriculture (MAG) for importation of most
commodities, seeds, animals, and plants. Also, the Ministry
of Health must give its prior authorization (i.e., sanitary
registration) before the importation of processed, canned,
and packed foods as well as food ingredients and beverages,
cosmetics and pharmaceutical products. Another
administrative hurdle agricultural importers must overcome is
the MAG,s use of &Consultative Committees8 (Committees).
The Committees, mainly composed of local producers, often
advise the MAG against granting import permits to foreign
suppliers. The MAG often requires that all local production
be purchased at high prices before authorizing imports.

Ecuador also continues to maintain a preshipment inspection
(PSI) regime. Preshipment inspection by an authorized
inspection company (both before shipment and after specific
export documentation has been completed at the intended
destination) results in delays far exceeding the time saved
in customs clearance. Customs authorities sometimes perform
spot-checks, causing further delays. These practices
generally add six to eight weeks to shipping times. The
following imports are exempt from verification: imports below
FOB $4000, arms and defense materials, newspapers and printed
material, traveler,s personal effects, donation to the
public sector, imports by diplomatic missions, imports by the
public sector that are financed by international loans,
imports of gas, fuel, equipment made by the state oil
company, imports destined for temporary entry, coffins and
samples with no commercial value.

Ecuador maintains bans on the import of used motor vehicles,
tires, and clothing. Ecuador applies a 27 percent markup on
imported distilled spirits for excise tax purposes. As
excise taxes on imports are calculated on CIF value plus
import duties, the effective rate is higher for imports than
domestic products. Ecuador has not equalized the application
of excise taxes between imported and domestic products.

In December 1999, the MAG, through the Ecuadorian Animal and
Plant Health Inspection Service (SESA), issued a requirement
that all importers must present a certificate stating that
imported agricultural products (plants, animals, their
products or byproducts) have not been produced using modern
biotechnology. In November 2002, the President issued
Executive Decree 3399 creating the National Commission for
Biosafety as an office of the Ministry of Environment. It
will be responsible for biotechnology-related products and
regulations issues. However, no rules have yet been enacted.

STANDARDS, TESTING, LABELING AND CERTIFICATION
--------------------------------------------- -

National standards are set by the Ecuadorian Norms Institute
(INEN) of the Ministry of Commerce and generally follow
international standards. SESA (an agency of the Ministry of
Agriculture) is responsible for administering Ecuador's
sanitary and phytosanitary controls. According to Ecuadorian
importers, bureaucratic procedures required to obtain
clearance still appear to discriminate against foreign
products. Ecuador must comply with the WTO Agreement on the
Application of Sanitary and Phytosanitary (SPS) Measures, yet
denials of SPS certification often appear to lack a
scientific basis and to have been used in a discriminatory
fashion to block the import of U.S. products that compete
with Ecuadorian production. This occurs most often with
poultry, turkey and pork meats, beef, dairy products and
fresh fruit. The ability to import some products, such as
rice, corn, soybeans, and soybean meal depends entirely on
the discretion of the MAG, which will often look to the
Consultative Committees for direction.
SESA follows the &Andean Sanitary Standards8 established
under the Andean Community of Nations (CAN). Some standards
applicable for third countries are different from those
applied to CAN members. For example, there can be
differences in the requirements for CAN and third countries
for the importation of live animals, animal products, and
plants and plant by-products. SESA also requires
certifications for each product stating that the product
complies with risk analysis and that the country of origin or
the area of production is free from certain exotic plant or
animal diseases.

Sanitary registrations are required for imported as well as
domestic processed food, cosmetics, pesticides,
pharmaceuticals, and syringes, as well as some other consumer
goods. However, in a side agreement to its WTO Accession
Agreement, Ecuador committed to accept the U.S. Certificate
of Free Sale authorized by the U.S. Food and Drug
Administration, instead of the Government of Ecuador,s
Sanitary Registration. In August 2000, the Government of
Ecuador passed a law (Ley de Promocion Social y Participacion
Ciudadana, Segunda Parte ) also known as Troley II) followed
by application rules issued in June 2001 to reform the
issuance of sanitary permits for food products. This is a
step towards modernizing the issuance of sanitary
registrations with new regulations that allow the acceptance
of free sale certificates, require that the government issue
sanitary permits within 30 days of the receipt of the
request, and reduce the number of documents required to
obtain a permit. However, these regulations are not being
applied consistently. U.S. firms report that the Izquieta
Perez National Hygiene Institute (INHIP - the agency
responsible for registering imported processed food products)
office in Guayaquil has refused to accept U.S. Certificates
of Free Sale and continues to apply the old regime for
sanitary permits. In addition, non-transparent bureaucratic
procedures and inefficiency have delayed issuance beyond 30
days and in some cases blocked the entry of some imported
products from the United States.

U.S. companies have expressed concerns regarding regulations
issued by Ecuador,s public health ministry requiring foreign
food manufacturers to disclose confidential information such
as formulas of imported food and pharmaceutical products.
This requirement appears to go beyond the requirements of the
Codex Alimentarius Commission on Internationals Standards and
Labeling.

GOVERNMENT PROCUREMENT
----------------------

Government procurement is regulated by the 1990 public
contracting law. Foreign bidders must be legally represented
in Ecuador. There is no legal requirement to discriminate
against U.S. or other foreign suppliers. Bidding for
government contracts can be cumbersome and insufficiently
transparent. Ecuador is not a signatory to the WTO Agreement
on Government Procurement.

EXPORT SUBSIDIES
----------------

Ecuador has created a semi-independent agency, the
Corporation for the Promotion of Exports and Investments
(Corpei), to promote Ecuadorian exports. Using a European
Union loan, Corpei offers matching grants to exporters to
help fund certain expenses, including international
promotional events and export certifications. The individual
grant amount varies according to the project.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION
---------------------------------------------

In 1998, Ecuador enacted a comprehensive law that
significantly improved the legal basis for protecting
intellectual property, including patents, trademarks, and
copyrights. The intellectual property law provides greater
protection for intellectual property; however, it is
deficient in a number of areas and the law is not being
adequately enforced. Enforcement of copyrights remains a
significant problem, especially concerning sound recordings,
computer software, and motion pictures.
Ecuador's current intellectual property regime is provided
for under its intellectual property rights (IPR) law and
Andean Pact Decisions 486, 345, and 351. Ecuador is a member
of the World Intellectual Property Organization (WIPO) and is
a member of the WIPO Copyright Treaty and the WIPO
Performances and Phonograms Treaty. Furthermore, Ecuador has
ratified the Berne Convention for the Protection of Literary
and Artistic Works, the Geneva Phonograms Convention, the
Paris Convention for the Protection of Industrial Property,
and the WIPO Patent Cooperation Treaty.

A. Copyrights

The Government of Ecuador, through the National Copyright
Office,s Strategic Plan against Piracy, has committed to
take action to reduce the levels of copyright piracy,
including implementation and enforcement of its 1998
Copyright Law. Article 78 of the 1999 Law on Higher
Education appears to permit software copyright violations by
educational institutions.

B. Patents and Trademarks

Ecuador's 1998 IPR law provided an improved legal basis for
protecting patents, trademarks, and trade secrets. However,
concerns remain regarding several provisions, including a
working requirement for patents, compulsory licensing, and
the lack of enforcement in the protection of test data.

Government of Ecuador health authorities continued to approve
the commercialization of new drugs which were the
bioequivalents of already approved drugs, thereby denying the
originator companies the exclusive use of their data. In
effect, the Government of Ecuador is allowing the test data
of registered drugs from originator companies to be used by
others seeking approval for their own pirate version of the
same product. Also, U.S. companies are concerned that the
Government of Ecuador is implementing a policy that a company
that had patented a compound for one use cannot subsequently
patent a second use of that compound. This puts Ecuador at
odds with international norms.

C. Enforcement

There continues to be an active local trade in pirated audio
and video recordings, computer software, and counterfeit
brand name apparel. The International Intellectual Property
Alliance estimates that piracy levels in Ecuador for both
motion pictures and recorded music has reached 95 percent,
with estimated damage due to music piracy of $50-60 million.
At times, judges in IPR cases, before issuing a preliminary
injunction, demand a guaranty and evidentiary requirements
that exceed legal requirements and in effect limit the
ability of rights holders to enforce their rights. The
national police and the customs service are responsible for
carrying out IPR enforcement but do not always enforce court
orders. Some local pharmaceutical companies produce or
import pirated drugs and have sought to block improvements in
patent protection. U.S. industry estimates damage due to the
failure to provide data exclusivity is at least $5 million.

SERVICES BARRIERS
-----------------

Ecuador has ratified the WTO Agreement on Financial Services.
The 1993 Equity Markets Law and the 1994 General Financial
Institutions Law significantly opened markets in financial
services and provided for national treatment. Foreign
professionals are subject to national licensing legislation,
and the Superintendent of Banks must certify accountants.

In the area of basic telecommunications, Ecuador only
subscribed to WTO commitments for domestic cellular services.
It did not make market access or national treatment
commitments for a range of other domestic and international
telecommunications services, such as voice telephony and
data. In addition, Ecuador did not adhere to the
pro-competitive regulatory commitments of the WTO Reference
Paper. Several U.S. telecommunications companies have had
their international circuits disconnected without proper
notice of alleged infractions. The Government has also used
Ecuadorian courts to delay implementation of an arbitral
award in favor of a U.S. company.
INVESTMENT BARRIERS
-------------------

Ecuador's foreign investment policy is governed largely by
the national implementing legislation for Andean Pact
Decisions 291 of 1991 and 292 of 1993. Foreign investors are
accorded the same rights of establishment as Ecuadorian
private investors, may own up to 100 percent of enterprises
in most sectors without prior government approval, and face
the same tax regime. There are no controls or limits on
transfers of profits or capital. The U.S.-Ecuador Bilateral
Investment Treaty (BIT) entered into force in May 1997 and
includes guarantees regarding national and
most-favored-nation treatment, prompt, adequate and effective
compensation for expropriation, freedom to make financial
transfers, and access to international arbitration. U.S.
companies are sometimes reluctant to resolve commercial
disputes through the Ecuadorian legal system, fearing a
prolonged process and a lack of impartiality.

Certain sectors of Ecuador's economy are reserved to the
state. All foreign investment in petroleum exploration and
development in Ecuador must be carried out under contract
with the state oil company. U.S. and other foreign oil
companies produce oil in Ecuador under such contracts.
Several of these companies are involved in a dispute with the
government of Ecuador regarding the refund of value-added tax
rebates. In 2004, one U.S. company won a $75 million
international arbitration award against the government of
Ecuador regarding this dispute. The Government has requested
a judicial review of the arbitration award. After notice of
the award, Ecuador,s Solicitor General (Procurador General)
initiated an investigation of the company and has since
advocated the nullification of the company,s contract and
seizure of the company,s considerable assets in Ecuador.

Foreign investment in domestic fishing operations, with
exceptions, is limited to 49 percent of equity. Foreign
companies cannot own more than 25 percent equity in broadcast
stations. Foreigners are prohibited from owning land on the
frontier or coast.

Appropriate compensation for expropriation is provided for in
Ecuadorian law but is often difficult to obtain. The extent
to which foreign and domestic investors receive prompt,
adequate, and effective compensation varies widely. It can
be difficult to enforce property and concession rights,
particularly in the agriculture, oil and mining sectors.
Foreign oil, energy, and telecommunications companies, among
others, have often had difficulties resolving contract issues
with state or local partners. Several U.S. companies have
also raised concerns about the lack of transparency,
predictability, and stability in Ecuador,s legal and
regulatory regime, which increases the risks and adds to the
cost of doing business in Ecuador.

ELECTRONIC COMMERCE
-------------------

Ecuador passed an electronic commerce law in April 2002 that
makes the use of electronic signatures in business
transactions on the Internet legally binding and makes
digital theft a crime. Ecuador has initiated a program for
e-government services and universal access to information
technology through funding from international financial
institutions.
KENNEY

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