Cablegate: Usitc 2004 Annual Andean Investment and Drug Crop

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

UNCLAS SECTION 01 OF 04 QUITO 001621

SIPDIS

STATE FOR WHA/AND, EB/CIP
USITC FOR L.M. SCHLITT
TREASURY FOR OASIA/INL
COMMERCE FOR 4331/MAC/WH/MCAMERON
USTR FOR BHARMAN

E.O. 12958: N/A
TAGS: ETRD ECON OTRA ASEC PE
SUBJECT: USITC 2004 Annual Andean Investment and Drug Crop
Survey for Report on ATPA

REF: STATE 70739

1. Below is Post's response to the U.S. International Trade
Commission's request for information regarding Andean Trade
Promotion and Drug Eradication Act (ATPDEA) related
investment in Ecuador in 2004.

2. Summary. Ecuadorian investment in industries that
export to the United States has not grown significantly over
the last two years, despite the opportunities offered by the
ATPDEA or the prospect of an Andean FTA. Foreign direct
investment has slightly fallen, with oil, which does not
receive preferences under the ATPDEA or a prospective FTA,
continuing to receive the bulk of new investment. Other
industries have seen much less investment than might have
been expected, largely due to political instability and the
absence of broad political support for an FTA. The prospect
of ATPDEA expiration and concern that an FTA may not be
approved has dampened the Ecuadorian business community's
desire to invest for the future. Even the cut-flower
industry, Ecuador's principal beneficiary of ATPDEA benefits
with 17% sales growth from 2003 to 2004, saw only $4 million
of identifiable new investment last year.

3. There is considerable concern that Ecuador's competitive
position in most industries favored by ATPDEA would
significantly worsen if CAFTA were approved, unless Ecuador
joins an Andean FTA, as Central American economies compete
directly with Andean ones in many agricultural products.
The concern is much greater, however, that Colombia and Peru
could conclude an FTA with the U.S. without Ecuador, giving
them a significant trade advantage. Despite this fear,
continuing political volatility has convinced most
businesses to postpone investment until their options become
clearer. Ecuador's businesses traditionally plan no
further than three or six months into the future, having
learned repeatedly the virtue of caution in the face of
continuing political and economic uncertainty. End Summary.

Effect of the ATPA/ATPDEA on Exports
------------------------------------

4. Despite the ATPA/ATPDEA's provision of duty-free entry
to a wide range of Ecuadorian products, the country's
exports remain concentrated in petroleum and a handful of
other traditional products. Estimated figures for 2004
indicate that petroleum and its derivatives accounted for
67% of Ecuadorian exports to the United States. Exports of
some traditional products have increased since 2000. Coffee
exports to the U.S. rose 47% in 2004, totaling $8.7 million.
Shrimp exports reached a peak of nearly $185.6 million in
2004. Cacao exports to the United States also increased
substantially in 2004, totaling $39 million. On the other
hand, banana exports have declined since 2003. In 2004
banana exports reached $228.1 million to the U.S., down from
$241 million in 2003. Ecuador has significantly increased
its exports of tuna in pouches due to the inclusion of the
product in the ATPA/ATPDEA.

5. Cut roses are the most economically significant
nontraditional export product that has benefited from duty-
free treatment under ATPA/ATPDEA. In 2004, Ecuador exported
$168 million in cut roses to the United States. Exports of
nontraditional products show a steady upward trend with
exports to the United States increasing from $807.6 million
in 2003 to $876 million in 2004. Some products, including
broccoli and pineapple, experienced double digit export
increases to the U.S. in 2004, though from a small base.

Apparel Investment Projects and Prospects for Exports
--------------------------------------------- --------

6. Ecuador's well-organized (but small even by Andean
standards) textile industry has largely dedicated its
efforts to supplying fabric to Colombian exporters.
Virtually all Ecuadorian cotton fabrics are produced using
imported U.S. cotton fiber. Ecuador's textile industry is
benefiting from ATPDEA preferences by supplying fabrics to
Colombian garment producers, who in turn export to the U.S.
Ecuador appears not to be offering full-package apparel
programs, and its apparel industry remains small and under-
industrialized.

7. Total textile exports under the ATPA (as amended by the
ATPDEA Andean Trade Promotion and Drug Eradication Act) to
the U.S. in 2004 were $46.6 million, of which $14.5 million
was apparel. Total textile exports in 2004 were $84.4
million.

8. There is no information available on the effects of
ATPA/ATPDEA benefits on the Ecuadorian textile industry.
According to industry sources, it is not possible to
quantify the effects because a great deal of the fabric,
thread and knits produced in Ecuador is now being exported
to Colombia to be used in the manufacture of apparel, some
of which, in turn, is exported to the U.S as Colombian
exports. Therefore, Ecuadorian textiles benefit indirectly
from the ATPA/ATPDEA via Colombia. This is likely to
continue given Colombia's demand for fabric.

9. According to the Ecuadorian Textile Association, capital
goods imported from the U.S. for the textile industry during
2003 were $977,814. No imports of capital goods from the
U.S. for the textile industry were registered during 2004.
Imports of capital goods for the apparel industry from the
U.S. during 2004 were reported at $4.4 million, a slight
decrease from $5 million imported during 2003. 99% of cotton
used in the textile industry was imported from the U.S.
during 2004. Local cotton production has declined due to
climactic conditions, low productivity, and lack of credit.

Footwear Investment Projects and Prospects for Exports
--------------------------------------------- ---------

10. The footwear and leather industries have not taken
advantage of ATPA/ATPDEA benefits to any significant extent.
The industry is fragmented and the existing production
capacity cannot meet the demand of the U.S. market.
Approximately eight leather-processing companies have closed
down operations; only two of the large firms have renovated
their equipment and upgraded their technology to meet local
demand. Most production is handicraft.

Tuna Investment Projects and Prospects for Exports
--------------------------------------------- ----------

11. In 2004, the tuna fish industry (canned and pouched
tuna) generated $185.6 million in total Ecuadorian export
sales, declining 12% relative to 2003's $211 million. The
U.S. market share of Ecuador's tuna exports slipped from 52%
in 2003 to 31.54% in 2004. Ecuador has diversified its
export markets to other countries such as the United
Kingdom, Spain and Germany.

12. One example of the increase in investment in this
sector due to inclusion of tuna in pouches in the
ATPA/ATPDEA is Empresa Pesquera Ecuatoriana (Ecuadorian
Fishing Company), which invested $12 million to expand its
activities in 2004.

A. Name of Company: EMPRESA PESQUERA ECUATORIANA
B. 2004 investment amount: USD 12 million (production
capacity: 200 Tons per day)
C. New or expansion investment: Expansion
D. Located in free trade zone: No
E. Type of product to be exported: Tuna in pouch
F. FOB value of 2004 exports to the U.S.: $108,156
G. Would project have been launched in the absence of
ATPA/ATPDEA preferences? No
H. Does firm use inputs of U.S., U.S. Virgin Islands,
Puerto Rico? No

Flower Investment Projects and Prospects for Exports
--------------------------------------------- -------

13. Ecuadorian flower exports have had a steady upward
trend for many years, growing by 80% since 2000. Total
exports reached $348 million in 2004, a 17% increase from
2003.

14. The primary market for Ecuador's flower industry is the
United States, which purchases 64% of total flower exports.
This represents more than $223 million in exports to the
U.S. in 2004. Ecuador is diversifying its export market to
other countries. The U.S. accounted for more than 70% of
total Ecuadorian flower exports in year 2000, a decrease
from 76% in 2004.

15. The cut roses sub-sector has been the main beneficiary
of the ATPA/ATPDEA program, with $168 million in exports to
the U.S. in 2004, accounting for more than 75% of total
flower exports. Gypsophila is also growing significantly.
It reached a $17 million export record to the U.S. in 2004,
compared with almost no production in 2001.

Other Agriculture Investment Projects and Prospects --------
--------------------------------------------- ----

16. In 2004, total Ecuadorian exports of asparagus were
$289,280 -- an increase of 283% in comparison to 2003 when
Ecuador exported only $75,000. The U.S. became almost the
only market for Ecuadorian asparagus exports in 2004. The
U.S. market took 61% of Ecuador's production in 2003 and 95%
in 2004, while other markets such as the United Kingdom were
abandoned. This market reorientation may be a consequence
of ATPA/ATPDEA benefits.

17. In 2004, total Ecuadorian exports of broccoli were
$26.4 million, increasing 67% from $15.7 million in 2003.
The U.S. market took 34%.

Foreign Direct Investment Drops in Non-Oil Sector
--------------------------------------------- ----

18. Foreign Direct Investment in Ecuador has declined
overall, with the non-oil sector taking the biggest hit.
Investment in non-oil industries declined by $469.5 million
in 2004.

Table 1
Foreign Direct Investment by Sector, 2003 & 2004
(In Thousands of Dollars)
--------------------------------------------- --------------
Sector 2003 2004
--------------------------------------------- --------------
Agriculture, Hunting, Forestry, Fishing 48,388.0 41,241.3
Oil, Mining, Quarrying 828,050.7 984,243.3
Manufacturing 70,992.7 36,891.9
Electricity, Gas, Water 281.4 6,045.9
Construction 441,684.3 30,954.1
Commerce 50,381.5 49,705.0
Transport, Warehousing, Communications 24,815.4 52,218.9
Company Services 89,239.7 39,691.3
Community, Social, Personal Services 903.5 469.1
--------------------------------------------- --------------
Total 1,554,737.2 1,241,460.9
--------------------------------------------- --------------
Non-Oil 726,686.6 257,217.6
Oil 828,050.6 984,243.3
--------------------------------------------- --------------
Source: Central Bank of Ecuador

Industry Concerns about Trade Issues
------------------------------------

19. Ecuador's businesses are concerned about the impact of
other U.S. trade agreements (Cafta, Nafta, etc.). The
concern is much greater, however, that Colombia and Peru
could conclude an FTA with the U.S. without Ecuador. This
concern is in fact the most convincing argument within
Ecuador for approving an FTA with the United States.
Colombia's cut flower industry would quickly displace
Ecuador's; Peru (or Costa Rica) would likely be able to
supplant Ecuador's strong tuna processing industry; and both
Colombia and Peru's much stronger textile industries would
permanently relegate Ecuador to supplier status, at best.
Ecuador's businesses are transfixed by the specter of
Colombia and Peru's economies growing much stronger while
Ecuador's withers. Ecuador will have to be more competitive
in order to expand its export base. The ATPA has played an
important role in providing trade opportunities in the agro-
industrial sector. This has created many jobs with the
rapid growth of flowers, fresh fruits, vegetables and
cereals.

20. The Ecuadorian textile industry believes that the
elimination of global textile and apparel quotas could
displace their production entirely from the U.S. market.
If, however, quotas or barriers are partially reinstated,
Ecuador believes that the Andean industry could find a niche
based on rules of origin because of their reliance on U.S.
cotton fiber or by fashioning garments from Asian fabric.

Domestic Programs that support ATPA/ATPDEA
------------------------------------------

21. The Export and Investment Promotion Corporation of
Ecuador (CORPEI), has the following programs, which are
designed to promote ATPA/ATPDEA-related investment and
exports:

a. Identifying successful investment promotion programs:
The Ecuadorian Government and the UNIDO (United Nations
Industrial Development Organization) are creating an
evaluation system for investment projects. CORPEI will use
this system to attract investors and identify potential
local investment opportunities.

b. Business Center for Development and Investment
Evaluation (CEEDI): Established in 2004, the Center assists
potential exporters in evaluating projects and finding
financing.

c. The "Expoecuador" Program: A cooperation program
between Ecuador and the European Community, to promote small
industries with export potential.

d. Bio-Commerce 2004: Established in 2004, the program
promotes sustainable growth and biodiversity preservation
through specialized export programs. The pilot programs in
course are: scented oils, scallops cultivation, alpaca
fiber, shells and crabs.

Impact of ATPA on drug crop eradication and alternative
development
--------------------------------------------- ----------

22. The successful development of more profitable
agricultural industries in Ecuador will help prevent Ecuador
from becoming a major coca-producing country. Ecuador's
proximity to Colombia and Peru, the world's leading coca
leaf and cocaine hydrochloride suppliers, warrants continued
vigilance to prevent illicit crop cultivation in Ecuador.

23. The ATPA/ATPDEA has played an important role in
providing Ecuadorians with jobs, through the growth of
agricultural industries, thus deterring them from becoming
involved in growing narcotics crops and helping prevent the
entrenchment of narcotics trafficking in Ecuador.
ATPA/ATPDEA's contribution to the rapid growth of Ecuador's
cut flower industry has been particularly important, as well
as the cultivation of fresh fruits, vegetables and cereals
in the highlands.

HERBERT

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