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Cablegate: Proposed U.S. Tobacco Tax Would Jeopardize Jobs

VZCZCXYZ0007
PP RUEHWEB

DE RUEHMU #1865/01 2201617
ZNR UUUUU ZZH
P 081617Z AUG 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC PRIORITY 0952
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHDG/AMEMBASSY SANTO DOMINGO 0538
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS MANAGUA 001865

SIPDIS

SENSITIVE
SIPDIS

USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

E.O. 12958: N/A
TAGS: ETRD ECON PREL NU
SUBJECT: PROPOSED U.S. TOBACCO TAX WOULD JEOPARDIZE JOBS
IN NICARAGUAN CIGAR SECTOR

REF: STATE 6604

Summary
-------

1. (SBU) In an August 2 meeting with he Ambassador, representatives
of the Nicaraguan cigar industry voiced concern that a proposal to
increase cigar taxes in the United States will snuff out growth in
their sector. They warned that the tax would jeopardize the jobs of
15,000 direct employees and another 15,000 indirect employees.
Industry representatives are seeking support on this issue from the
Nicaraguan government, claiming the tax may be inconsistent with
U.S. CAFTA-DR commitments. They also plan to contact members of the
U.S. Congress directly on the issue. If passed, the tax may provide
President Ortega with an example of "U.S. duplicity" in offering
market access through CAFTA-DR only to cut it through an excise tax.
End Summary.

Social and Economic Impact
--------------------------

2. (U) Representatives of the Nicaraguan Cigar Guilders Association,
which includes several U.S. companies, met with the Ambassador on
August 2, 2007, to discuss a bill the U.S. Congress is debating to
fund child healthcare with an increase in excise taxes on tobacco
products. During the meeting, the association's membership voiced
concern with both the Senate version, which would tax cigars at
53.13%, with a $10 cap per cigar, and a House version, which would
tax cigars at 44.63%, with a $1 cap. Either version, they said,
would cripple the cigar industry in Nicaragua. In 2006, Nicaragua
exported $33.8 million dollars in cigars to the United States.

3. (U) According to Alejandro Martinez Cuenca, owner of the Joya de
Nicaragua cigar company and a noted Sandanista economist, demand for
premium, hand-rolled cigars is elastic, so any increase in price
produces a corresponding decrease in sales. He also suggested that
premium, hand-rolled cigars are a luxury item and are less likely
than cigarettes and machine-rolled cigars to be abused in their use.


4. (U) Martinez Cuenca claimed the proposed cigar tax would
jeopardize the jobs of 15,000 cigar workers. He added that some
15,000 indirect employees could also lose their jobs in the sector.
Martinez Cuenca said that the average salary for a worker in a cigar
manufacturing company is $160 - $200 dollars a month. [Note: The
minimum wage for the manufacturing sector is approximately $77 a
month. End Note.] Meanwhile, Omar Ortez of Nicaraguan American
Tobacco (NATSA) reported that 95% of the those employed by the
Nicaraguan cigar industry are between the ages of 18 and 25 and that
more than 60% are women.

5. (U) In most cases, said Martinez Cuenca, these employees are the
only wage earners in a family of five, meaning that 150,000
Nicaraguans, of a regional population of 500,000, would be affected
by the measure in the northern departments of Esteli, Madriz, and
Nueva Segovia where tobacco cultivation and cigar manufacturing is
concentrated. Absent jobs in the tobacco sector, he suggested that
most workers would return to subsistence agriculture or other
seasonal work that would pay much less. Representatives of the
association also claimed that many in the region would likely
immigrate to the United States were they to lose their jobs in the
tobacco sector.

Industry Response
-----------------

6. (U) Cigar industry representatives have met with Nicaraguan
government officials to seek their support. Minister of Trade,
Industry, and Development Orlando Solorzano told the Ambassador in
their July 26 meeting that he believes the tax would be inconsistent
with CAFTA-DR obligations, if implemented (septel). Martinez Cuenca
later suggested to the Ambassador that although it might be
difficult to show that the tax were inconsistent with CAFTA-DR, it
would clearly violate the spirit of the agreement. He said market
access for cigars, which now enter duty free under CAFTA-DR, would
become meaningless. The Ambassador--both in his meeting with MIFIC
Minister Solorzano and with cigar industry representative--replied
that President Bush has already threatened to veto the bill, which
may make a trade complaint unnecessary.

7. (U) Nonetheless, representatives of the cigar industry in
Nicaragua suggested they would seek to communicate with members of
the U.S. Congress to inform them of the negative economic and social
consequences the tobacco tax increase would have in Nicaragua. They
said they would coordinate their efforts with cigar industry
representatives in Honduras and the Dominican Republic. Nestor
Plasencia, president of the association, has already written to U.S.
Secretary of Commerce Carlos Gutierrez on the issue. [Note: Post
faxed this letter to Commerce/ITA/MAC on August 3. End Note.]


Comment
-------

8. (SBU) Although industry representatives emphasized the social and
economic wellbeing of their workers in their meeting with the
Ambassador, they are no doubt clearly also concerned the tax would
harm their bottom line. We have been careful to emphasize that we
are limited by U.S. law from providing support for the tobacco
sector (Reftel). While we cannot independently confirm the
employment information provided by the sector, a tax increase would
likely dampen demand for cigars in the United States and threaten
the livelihoods of many in the impoverished northern part of
Nicaragua. President Ortega may also seize on the tax as an example
of "U.S. duplicity" in offering market access through CAFTA-DR only
to cut it off after a trading partner begins to export. End
Comment.

TRIVELLI

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