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Cablegate: Ecuador 2007 National Trade Estimate Report

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DE RUEHQT #2705/01 3121720
ZNR UUUUU ZZH
O 081720Z NOV 06
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5620
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6145
RUEHCV/AMEMBASSY CARACAS PRIORITY 2146
RUEHLP/AMEMBASSY LA PAZ NOV 0198
RUEHPE/AMEMBASSY LIMA PRIORITY 1127
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 1390
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 002705

SIPDIS

SIPDIS

USTR FOR GLORIA BLUE
STATE FOR EB/TPP/BTA

E.O. 12958: N/A
TAGS: ETRD ECON EFIN EC
SUBJECT: ECUADOR 2007 NATIONAL TRADE ESTIMATE REPORT
SUBMISSION

REF: STATE 136289

1. Below is Embassy Quito's submission for the 2007
National Trade Estimate Report. A copy of the report has
been provided to USTR's Michelle Carrillo via email. The
report was a collaborative effort between State, the
Commercial Service, the Foreign Agricultural Service, and AID.

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

The U.S. goods trade deficit with Ecuador is estimated to be
($4.5) billion in 2006, an increase of ($0.7) billion from
($3.8) billion in 2005. U.S. goods exports in 2006 are
estimated to be ($2.5) billion, up (25.8) percent from the
previous year. Corresponding U.S. imports from Ecuador are
estimated to be ($7.0) billion, up (20.1) percent. Ecuador is
currently the (46th) largest export market for U.S. goods.
(updated numbers to be provided by Washington)

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The stock of U.S. foreign direct investment (FDI) in Ecuador
in 2005 was $760 million, up from $720 million in 2004. U.S.
FDI in Ecuador is concentrated largely in the petroleum and
mining sector.

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

In May 2004, the United States initiated free trade
negotiations with Colombia, Ecuador, and Peru. To date, the
United States has concluded free trade agreements with Peru
and Colombia. The United States has significant economic
ties to the region. Total two-way goods trade with the
Andean countries of Peru, Colombia, and Ecuador was
approximately ($14) billion in 2005. The stock of U.S.
foreign direct investment in these countries in 2004 was $7.7
billion.

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

A. Tariffs

When Ecuador joined the World Trade Organization (WTO) in
January 1996, it bound most of its tariff rates at 30 percent
or less, except for agricultural products in the Andean Price
Band System (ABPS). Ecuador's average applied MFN tariff
rate is 11.9 percent. Ecuador applies a four-tiered
structure with levels of 5 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, agricultural
chemicals, and veterinary products are duty-free.

As a member of the Andean Community (CAN), Ecuador grants and
receives exemptions from tariffs (i.e., reduced ad valorem
tariffs and no application of the Andean Price Band System)
for products from the other CAN countries (Bolivia, Colombia,
and Peru). Currently, these countries have an Andean Free
Trade Zone and are soon expected to apply Common External
Tariffs (CET), as stated in CAN Decision 370. On January 31,
2006, the CAN trade ministers decided to postpone the entry
into force of a new CET with a four-tiered structure (percent
tariff levels of 0, 5, 10, and 20) for one year, until
January 31, 2007. Until then, Peru will apply its own tariff
schedule while Ecuador and Colombia will apply the structure
permitted by Decision 370.

Ecuador maintains the Andean Price Band System (APBS) on 153
agricultural products (13 "marker" and 140 "linked" products)
imported from outside the CAN. The 13 "marker" 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. The APBS works as a price
stabilization mechanism whereby the basic (ad-valorem) tariff
is adjusted (increased or decreased) using a variable levy.
The variable levy results from the relation between bi-weekly
reference prices and floor and ceiling prices established by
the CAN for each marker product. The price band works to
maintain protection for domestic industry by keeping tariffs
high when world prices fall, and drops tariffs when world
prices rise.


As part of its WTO accession, Ecuador committed to phase out
its 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. In turn, since Ecuador bound its
final tariffs for agricultural commodities between 31.5
percent and 85.5 percent (the same bindings as the ABPS),
Ecuador argues that the continuity of the APBS is
WTO-consistent and does not constitute a violation of its
agreements. The United States Government has sought
through the free trade negotiations to eliminate Ecuador's
tariffs and other barriers to trade in agricultural products,
while providing reasonable adjustment periods and safeguards
for producers of import-sensitive agricultural products.

B. Tariff Rate Quotas

During the Uruguay Round, Ecuador agreed to establish tariff
rate quotas (TRQs) for a number of agricultural imports. In
May of 2000, Ecuador created a TRQ Committee to administer
and manage TRQs, which have remained constant and in line
with WTO commitments since 2001. However, TRQs are not
always requested by importers because the tariffs under the
APBS are sometimes lower than the in-quota TRQ tariffs. At
the same time, the TRQ committee is highly politicized and
sometimes does not approve TRQ requests for certain products
in order to protect local production (this is common with
products such as poultry and powdered milk).

Products subject to TRQs include wheat, corn, sorghum,
barely, barely malt, soybean meal, powder milk, frozen
turkeys, and frozen chicken parts.

C. 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
import licenses for all products. Ecuador requires prior
authorization from the Ministry of Agriculture (MAG) for the
importation of most agricultural products. For certain
sensitive products such as corn, soybean meal, dairy and
poultry, the Minister himself or a designee must sign the
authorization. The MAG argues that the authorization is to
ensure sanitary standards and tax rules are followed. In
reality, authorizations are granted in a discretionary manner
based on pressures for protection of domestic production.

Another administrative hurdle agricultural importers must
overcome is the MAG's use of "Consultative Committees."
These 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. If
these barriers were removed, it is estimated that U.S. corn
and soybean meal exports could increase by $10-25 million
each. The Ministry of Health is required to provide prior
authorization for processed, canned and packaged products in
the form of a Sanitary Registration. In general, the
bureaucratic procedures that importers must follow in order
to obtain authorizations continue to be cumbersome,
protectionist and non-transparent.

Ecuador assesses a special consumption tax (ICE) of 32
percent on imported and domestic spirits. However, the
taxable base upon which Ecuador assesses the ICE is arbitrary
and complicated and differs for domestic and imported
spirits. For imported spirits, the ICE is applied to the
ex-Customs value, which is then marked-up 25 percent (i.e.,
taxable base = (c.i.f. value tariff VAT) marked up by 25
percent); the ICE is assessed on this inflated value. In
contrast, for domestic spirits, the ICE is assessed on the
ex-factory price, and the 25 percent mark-up, although
legally required, is not generally applied (i.e., taxable
base = (ex-factory value VAT)). In both cases, the excise
tax is based on arbitrary values and not on actual
transaction values. The U.S. has been addressing Ecuador's
discriminatory tax policies for imported distilled spirits in
the free trade negotiations.

Ecuador also continues to maintain a pre-shipment inspection
(PSI) regime for imports with an f.o.b. value of more than

$4,000. Pre-shipment 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 perform random spot-checks,
causing further delays. These practices generally add
between six and eight weeks to shipping times. In the free
trade negotiations with Ecuador, the U.S. government has
sought to establish transparent and efficient custom
procedures and specific commitments to expedite the release
of goods.

Ecuador maintains bans on the import of used motor vehicles,
tires, and clothing.

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. This requirement was never enforced in
practice, but created a playing field for further debate on
the issue of biotechnology. In November 2002, the President
issued Executive Decree 3399 creating the National Commission
for Biosafety as an office of the Ministry of Environment,
which was in charge of developing technical regulations on
biosafety and biotechnology.

In April 2005, the commission proposed a draft "Law of
Conservation and Sustainable Management of the Biodiversity"
(Biodiversity Law) that would have served as a framework for
Ecuador's regulations on biosafety and biotechnology. The
legislation aimed at providing technical standards and a
comprehensive regulatory system that would have ensured
proper control without blocking trade. Congress debated the
bill twice without consensus, shelved the proposal, and
approved a controversial Food and Nutrition Security law in
April 2006. This bill invoked the precautionary principle and
in practice prohibited the use, handling, trade or import of
any food products that may have contained organisms derived
from biotechnology, since Ecuador did not possess appropriate
institutions to provide proof of their safety. The
prohibition stopped large imports of several commodities in
high demand by the animal feed and cooking oil industry
(soybean meal and oil) for several weeks. However, due to
pressure from local industry, Ecuador's Attorney General
declared this law unenforceable due to technical errors in
the text. A health code bill under discussion in Congress in
November 2006 could reintroduce these provisions.

The United States is seeking the removal of Ecuador's
non-tariff measures that impede U.S. exports through the free
trade negotiations. The U.S. Embassy has also been working
closely with local industry and U.S. exporters to remove
non-tariff barriers.

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

Ecuador's Animal and Plant Health Inspection Service (SESA)
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 is
bound by 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 advice.

Ecuador has yet to fulfill its notification obligations under
the WTO SPS Agreement. The impact of removing this barrier
would mean an increase of U.S. exports of up to $10 million.

SESA follows the CAN's "Andean Sanitary Standards." 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 is
safe for human consumption or, in the case of live animals,
that the animal is healthy and that the country of origin or
the area of production is free from certain exotic plant or
animal disease. Industry sources assert that this process
has been used unreasonably by SESA to prevent entry of animal
products - especially poultry - that compete with local
producers.

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 regulations 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 receipt of a request, and
reduce the number of documents required to obtain a permit.
However, it does not appear that these regulations are being
applied consistently and export losses are estimated to be
around $5 million.

U.S. firms report that the Izquieta Perez National Hygiene
Institute (INHIP - the Ministry of Health's executive arm
responsible for granting the sanitary registration
certificate) office in Guayaquil accepts the U.S.
Certificates of Free Sale, but 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 have reportedly
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 International Standards and
Labeling. Pharmaceutical and agrichemical industry sources
estimate that lost exports due to this problem amount to $10
million to $25 million.

The U.S. Foreign Agricultural Service has been facilitating
SPS training for Ecuadorian officials by providing SPS
experts for seminars and other training forums.

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

Government procurement is regulated by the 2001 public
contracting law. Foreign bidders must be legally represented
in Ecuador in order to participate in government
procurements. The law does not discriminate against U.S. or
foreign suppliers. However, bidding for government contracts
can be cumbersome and relatively non-transparent. A large
number of government controlled companies are construed to be
"private" companies (e.g. fixed-line telephony providers,
electric power generators and distributors, hospitals,
clinics, and regional development funds), and are not subject
to Ecuador's rules on government procurement. This lack of
transparency can lead to multiple cancellations of bid
solicitations, unnecessarily adding to the costs of
submitting bids and opening the process to possible
manipulation by contracting authorities.

Ecuador is not a signatory to the WTO Agreement on Government
Procurement. In the free trade negotiations with Ecuador,
the U.S. Government has been seeking reciprocal opportunities

for U.S. companies to bid on Ecuadorian government
procurement. If the government procurement process was made
more transparent and less cumbersome, exports by U.S.
companies could increase by $50 million to $100 million.

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

Ecuador has created a semi-independent agency, the
Corporation for the Promotion of Exports and Investments
(Corpei), to promote Ecuadorian exports. The agency is
funded in part by fees on imports and exports, as well as
grants from multilateral and bilateral organizations. Corpei
supports promotional export-related activities such as market
studies, international promotional events, and feasibility
studies.

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.

Ecuador's current intellectual property regime is provided
for under its IPR law and Andean Pact Decisions 345, 351, and
486. Ecuador is a member of the World Intellectual Property
Organization (WIPO), 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.

The United States has been negotiating IPR provisions in the
free trade negotiations with Ecuador to improve protection
and strengthen enforcement of IPR. The U.S. Government is
seeking to address specific U.S. industry concerns related to
the protection and enforcement of copyrights and related
rights, patents, proprietary data for pharmaceutical and
agricultural products, trademarks and geographical
indications. In addition, the U.S. Embassy is working with
Ecuadorian counterparts to resolve issues in the IPR arena
and to facilitate IPR enforcement training for local
officials.

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.
However, enforcement of copyrights remains a significant
problem, especially concerning sound recordings, computer
software, and motion pictures. The Government of Ecuador has
taken no action to clarify Article 78 of the 1999 Law on
Higher Education, which could be interpreted 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. U.S.
companies are also concerned that the Ecuadorian government
does not provide patent protection to new uses of previously
known or patented products.

Government of Ecuador health authorities continue to approve
the commercialization of new drugs that are the bioequivalent
of patented drugs, thereby denying the originator companies
protection against unfair competition for their
pharmaceutical test 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.

Confidential chemical formulae and descriptions of

SIPDIS
manufacturing processes have illegally found their way into
the hands of competitor companies. The right of patent
holders to defend their patents is threatened in a case
before an appellate court as of November 2006, where
asserting patent rights is alleged to constitute an illegal
competitive practice. In the context of an FTA or through
separate legislation, the U.S. Government supports Ecuadorian
efforts to strengthen data confidentiality and the ability to
defend a patent, as well as against such reliance by another
on an innovator's test data.

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 recorded
music have reached 90 percent, with total estimated damage
due to piracy of $37.8 million in 2005. 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. Ecuador has made no
progress in establishing the specialized IPR courts required
by Ecuador's 1998 IPR law. 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 compliance with Ecuador's
Intellectual Property law and improvements in patent
protection. U.S. industry estimates damage due to the
failure to provide data exclusivity is at least $5 million.
The U.S. Government has been supporting provisions to enhance
enforcement of IPR in Ecuador in the free trade negotiations.


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 of foreign
suppliers. Foreign professionals are subject to national
licensing requirements. 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 does 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 U.S. Government has been seeking in the free trade
negotiations with Ecuador greater access for U.S. providers
of cross-border services to the Ecuadorian market, including
in the areas of financial and telecommunications services.

INVESTMENT BARRIERS
-------------------

Ecuador's foreign investment policy is governed largely by
the national implementing legislation for Andean Pact
Decisions 291 and 292 of 1991. Under Ecuadorian law, 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. In
disputes, U.S. companies have resorted to local courts or
alternate dispute resolution mechanisms such as the Chambers
of Commerce; others have pursued international commercial
dispute resolution mechanisms as provided for in their
contracts or under the U.S.-Ecuador Bilateral Investment
Treaty (BIT) as a way to gain maximum impartiality.

The U.S.-Ecuador Bilateral Investment Treaty (BIT), which
entered into force in May 1997, includes obligations relating
to national and most-favored-nation treatment; prompt,
adequate and effective compensation for expropriation; the
freedom to make investment-related transfers; and access to
binding international arbitration of investment disputes.
These and other core provisions of the BIT would also be
included in the investment chapter of a free trade agreement
between the U.S. and Ecuador.

In early 2005, Ecuador's Congress modified the Arbitration
and Mediation Law to prohibit international arbitration of
investment disputes if the national interest could be
affected. Depending on how it is interpreted and applied,
this modification of Ecuador's law could conflict with
Ecuador's standing consent to binding arbitration under the
U.S.-Ecuador BIT and under the investment chapter of a free
trade agreement. At a minimum, the new law could create
confusion among investors regarding their arbitration rights
and may also reinforce negative impressions among investors
of Ecuador's commitment to international arbitration.

Certain sectors of Ecuador's economy are reserved to the
state. All foreign investment in petroleum exploration and
development 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. 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, and foreigners are
prohibited from owning land on the borders or the coast.

Several oil companies are involved in a dispute with the
government of Ecuador relating to the refund of value-added
taxes. In 2004, one of the disputing U.S. companies won a
$75 million international arbitration award against the
government of Ecuador. 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 for allegedly
transferring assets to another foreign company without
obtaining the required government authorization. The
Ecuadorian government has since nullified the company's
contract and seized the company's considerable assets in
Ecuador. The U.S. company has initiated arbitration
proceedings under the BIT.

In 2006 Ecuador amended its hydrocarbons law, unilaterally
modifying the terms of oil production sharing contracts in a
manner that appears to violate the BIT. As a result, at
least one U.S. company faces bankruptcy and is attempting to
negotiate a change to their concession contract that would
permit them to continue operating and investing in Ecuador
(they have also initiated arbitration proceedings as allowed
by their contract).

U.S. investors in the electricity sector face problems of
chronic underpayment, due in part to government-regulated
prices and the inability to cut off consumers that do not pay
their bills; government subsidies only partially offset these
losses and are not available to all firms. A 2006
electricity reform law attempts to address some of the
problems plaguing the sector but the problem of underpayment
has not been resolved. U.S. firms in this sector are also
pursuing international arbitration, although simultaneously
attempting to negotiate settlements with the Government of
Ecuador.

Effective 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 for expropriations
varies widely. It can be difficult to enforce property and
concession rights, particularly in the real property,
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. The transparency and stability
of the country's investment regime are significantly weakened
by the existence of numerous investment-related laws that
overlap or that appear to have mutually inconsistent

provisions. This judicial complexity increases the risks and
costs of doing business in Ecuador.

The U.S. Government has worked with the Government of Ecuador
both before and in parallel with the free trade negotiations
to ensure a fair resolution of U.S. investor disputes,
consistent with Ecuadorian law.

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 to promote public access to
information technology through funding from international
financial institutions. The U.S. has been seeking in the
free trade negotiations with Ecuador to include rules
prohibiting duties on and discrimination against digital
products, such as computer programs, videos, images, and
sound recordings, based on where they are made or the
nationality of the firms or persons making them.
JEWELL

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