Cablegate: Nicaragua: Input for the 2008 National Trade Estimate

DE RUEHMU #2497/01 3302213
P 262213Z NOV 07





E.O. 12958: N/A



1. The U.S. goods trade deficit with Nicaragua was $771 million in
2006, an increase of $215 million from $555 million in 2005. U.S.
goods exports in 2006 totaled $755 million, up 20.7 percent from the
previous year. In 2006, U.S. imports from Nicaragua were $1.5
billion, a 29.2 percent increase over 2005. Nicaragua is currently
the 73rd largest export market for U.S. goods.

2. The stock of U.S. foreign direct investment in Nicaragua in 2005
was valued at $245 million (latest data available), up from $215
million in 2004.


Free Trade Agreement

3. On August 5, 2004, Costa Rica, the Dominican Republic, El
Salvador, Guatemala, Honduras, Nicaragua, and the United States
signed the Dominican Republic-Central America-United States Free
Trade Agreement (CAFTA-DR). CAFTA-DR entered into force for
Nicaragua and the United States on April 1, 2006.

4. The agreement removes many barriers to trade and investment and
will further regional economic integration. CAFTA-DR requires
Central American countries and the Dominican Republic to undertake
the reforms needed to open markets and provide for greater
transparency and certainty in a number of trade-linked public policy
areas, including: customs administration, protection of intellectual
property rights, services, investment, financial services,
government procurement, and sanitary and phytosanitary measures.


5. Nicaragua is a member of the Central American Common Market
(CACM). Nicaragua imposes regular import duties of 10 or 15 percent
on many final consumer goods, a duty of 0 to 5 percent on most
primary products, and a duty of 5 to 10 percent on those
intermediate goods which compete with CACM products. Some
agricultural goods face tariffs higher than the CACM maximum common
external tariff of 15 percent. Duties are assessed on the cost,
insurance, and freight (CIF) value of goods.

6. Under CAFTA-DR, about 80 percent of U.S. industrial and consumer
goods may now enter Nicaragua duty-free. Remaining tariffs will be
phased-out by 2016. Nearly all textile and apparel goods which meet
the agreement's rules of origin are traded duty and quota free,
opening new markets for U.S. and regional fiber, yarn, fabric, and
apparel. The agreement's tariff treatment for textile and apparel
goods is retroactive to January 1, 2004.

7. More than half of U.S. agricultural exports enter Nicaragua
duty-free under CAFTA-DR. Nicaragua will eliminate remaining
tariffs on nearly all agricultural goods within 15 years, including
those on pork and yellow corn. Nicaragua will eliminate tariffs on
chicken leg quarters and rice by 2024 and on dairy products by 2026.
For the most sensitive products, tariff-rate quotas (TRQs) will
permit immediate duty-free access for specified quantities during
the tariff phase-out period, with the duty-free component expanding
over time. Nicaragua will liberalize trade in white corn through
expansion of a TRQ, rather than through a series of tariff

Non-Tariff Measures

8. The government levies a "selective consumption tax" on some
luxury items that is 15 percent or less, with a few exceptions. The
tax is not applied exclusively to imports; however, domestic goods
are taxed on the manufacturer's price while imports are taxed on the
CIF value. Alcoholic beverages and tobacco products are taxed on
the price charged to the retailer.

--------------------------------------------- -

9. On February 18, 2005, the executive issued a decree authorizing
the agriculture ministry to recognize the equivalency of foreign
meat and poultry inspection systems. After inspecting the U.S. meat
and poultry inspection system, the Government of Nicaragua indeed
recognized the equivalence of the U.S. food safety and inspection
system for meat and poultry, thereby eliminating the need for
further meat packing plant inspections in the United States.

10. The U.S. Animal and Plant Health Inspection Service maintains
protocols with Nicaragua for the export of U.S. rice, wheat, yellow
corn, and seed potatoes. All packaged food products must be
registered with the Ministry of Trade, Industry, and Development.
If a product is imported in bulk and packaged in Nicaragua, a
phyto/zoosanitary certificate is required from the country of origin
and the Nicaraguan Ministry of Health. A phyto/zoosanitary
certificate issued by Nicaragua is not required for products
packaged in the United States.

11. Under CAFTA-DR, Nicaragua reaffirmed its commitment to abide by
the terms of the World Trade Organization's (WTO) Import Licensing
Agreement. Import licenses are required to import alcoholic
beverages; all brands of alcoholic beverages must be registered
annually with the Ministry of Health. U.S. industry has expressed
concern about Nicaragua's proposed standards for alcoholic beverages
distilled from sugarcane. The five Central American countries,
including Nicaragua, are developing common standards for the import
of several key products, including distilled spirits, an effort
which should eventually facilitate trade.

12. Law 291, approved in 1998, regulates the import of products of
agricultural biotechnology. The law was modified in 2003 to
establish the Commission on Risk Analysis for Genetically Modified
Organisms (CONARGEN), a panel composed of representatives from
government and the academic community. According to the law, the
Minister of Agriculture and Forestry, taking into consideration risk
analysis conducted by CONAGREN, makes a final decision on
biotechnology imports. Through this process, Nicaragua has allowed
the entry of yellow corn for animal feed. Law 291 also addresses
the field-testing of biotechnology crops.

13. Two bills that would regulate the import of products of
agricultural biotechnology are pending in the National Assembly.
The former Bolanos administration submitted a science-based bill to
the National Assembly in 2005, the Law on the Prevention of Risks
from Living Organisms Modified through Molecular Biotechnology.
This bill comprehensively defines the technical criteria and
procedures needed to conduct risk analysis currently required by Law
291. The Ortega Administration has submitted a competing bill on
Sovereignty, Food Security, and Nutrition that would prohibit the
government from accepting food aid containing agricultural
biotechnology products. The proposal would also establish a
National Commission headed by the President to regulate all food aid
donations and draft, implement, and evaluate food security

14. Nicaragua is a signatory of the Cartagena Protocol on
Biosafety. As mandated by the protocol, Nicaragua requires that
agricultural goods containing living modified organisms (LMOs)--
unless they include 95 percent or greater non-LMO content--be
labeled to indicate that they "may contain" LMOs.


15. CAFTA-DR requires the use of fair and transparent government
procurement procedures, including advance notice of purchases and
timely and effective bid review procedures. U.S. suppliers may
therefore bid on procurements sought by most Nicaraguan Government
entities, including key ministries and state-owned enterprises, on
the same basis as Nicaraguan suppliers. To make its bidding process
more transparent and efficient, Nicaragua launched a computer-based
procurement system in November 2006. The anti-corruption provisions
of CAFTA-DR require each government to ensure under its domestic law
that bribery in matters affecting trade and investment, including
government procurement, is treated as a criminal offense, or is
subject to comparable penalties. Nicaragua is not a signatory to
the WTO Agreement on Government Procurement. Procurement by
government entities not covered by CAFTA-DR, as is the case for the
National Electricity Company, remains characterized by
nontransparent and irregular procurement practices.


16. Nicaragua does not provide export financing. However, all
exporters receive tax benefit certificates equivalent to 1.5 percent
of the free on board value of the exported goods. Under CAFTA-DR,
Nicaragua may not adopt new duty waivers or expand existing duty
waivers conditioned on the fulfillment of a performance requirement
(e.g., the export of a given level or percentage of goods).
Nicaragua may maintain existing duty waiver measures for such time
as it remains an Annex VII country for the purposes of the WTO
Agreement on Subsidies and Countervailing Measures (SCM).
Thereafter, Nicaragua shall maintain any such measures in accordance
with Article 27.4 of the SCM Agreement.


17. CAFTA-DR provides improved standards for the protection and
enforcement of a broad range of intellectual property rights,
consistent with U.S. intellectual property standards and emerging
international standards. To implement the agreement, Niaragua has
strengthened its legal framework for the protection of intellectual
property rights by passing several new laws which provide
state-of-the-art protections for digital products such as software,
music, text and videos; stronger protection for patents, trademarks
and test data, including an electronic system for the registration
and maintenance of trademarks; and greater deterrence of piracy and

18. Nicaraguan efforts to enforce intellectual property law remain
limited. During the first ten months of 2007, the Nicaraguan
Government conducted 20 raids and the police seized 58,547 pirated
DVDs, 21,629 CDs, 13 computers, 3 multi-purpose copiers, and other
audiovisual equipment worth approximately $123,000. In 2006, the
government successfully prosecuted a case against a vendor selling
pirated DVDs, but that conviction was later overturned. In July
2007, the Nicaraguan Government again successfully prosecuted a case
in a local court against a Nicaraguan citizen selling pirated music
CDs. The offender was sentenced to two years in prison--later
reduced to parole--and fined 5,000 cordobas ($267). The Prosecutor
General and National Police are currently investigating 28
intellectual property cases for possible prosecution.


Financial Services

19. Nicaragua has ratified its commitments under the 1997 WTO
Financial Services Agreement. Those commitments cover most banking
services, including the acceptance of deposits, lending, leasing,
the issuing of guarantees and foreign exchange transactions.
However, these rules do not cover the management of assets or
securities. Nicaragua allows foreign banks to operate either as 100
percent-owned subsidiaries or as branches. CAFTA-DR ensures U.S.
financial services companies have full rights to establish
subsidiaries, joint ventures, or bank branches.

20. The country's banking system is now stable following a severe
restructuring in 2001-02. In 2005, Nicaragua further strengthened
the financial sector through banking law reform, the implementation
of improved regulations governing the Superintendent of Banks and
other Financial Institutions, and the creation of a deposit
guarantee fund. In recent years, large U.S. and foreign banks have
invested directly in Nicaragua's financial sector.

21. The insurance sector is open to private sector participation.
Several private insurance companies compete with the
government-owned firm, INISER. Under CAFTA-DR, U.S. insurance
suppliers enjoy full rights to establish subsidiaries and joint
ventures, with a phase-in provision for branches. Nicaragua allows
U.S.-based firms to supply insurance on a cross-border basis,
including reinsurance, reinsurance brokerage, as well as marine,
aviation, and transport insurance, in addition to other insurance
services. Furthermore, Nicaragua accords substantial market access
across its entire services regime, subject to very few exceptions.

Other Services Issues

22. The Law on Promotion of National Artistic Expression and on
Protection of Nicaraguan Artists (Law 215, 1996) requires that
foreign production companies contribute 5 percent of total
production costs to a national cultural fund. In addition, the law
requires that 10 percent of the technical, creative, and/or artistic
staff be locally hired. Under CAFTA-DR, Nicaragua does not require
U.S. film productions to contribute to the cultural fund or hire
locally. Under CAFTA-DR, Nicaragua opened its telecommunications
sector to U.S. investors, service providers, and suppliers. U.S.
exports of telecommunications equipment receive duty-free treatment.
The telecommunications sector is fully privatized and open to
competition. Enitel, the former state telephone company, is now 99
percent owned by a Mexican telecommunications company. The mobile
telephone industry in Nicaragua is served by two nationwide
operators. Enitel controls switching for all cellular service and,
therefore, may exercise leverage over companies seeking
interconnection. The telecommunications regulator TELCOR has
generally encouraged competition in its licensing and regulatory
practices. However, a legal dispute between the executive and
legislative branches over the country's public regulatory framework
has resulted in a leadership stalemate at TELCOR.


23. CAFTA-DR establishes a secure and predictable legal framework
for U.S. investors operating in Nicaragua. Under the agreement, all
forms of investment are protected, including enterprises, debt,
concessions, contracts, and intellectual property. U.S. investors
enjoy, in almost all circumstances, the right to establish, acquire,
and operate investments in Nicaragua on an equal footing with local
investors. Among the rights afforded U.S. investors are due process
protections and the opportunity to receive a fair market value for
property in the event of an expropriation. CAFTA-DR protects
investor rights through an effective, impartial procedure for
dispute settlement that is fully transparent. The Nicaraguan
Chamber of Commerce and the American Chamber of Commerce of
Nicaragua operate separate mediation and arbitration centers.

24. During the 1980s, the Sandinista government confiscated some
28,000 real properties. Since 1990, thousands of individuals have
filed claims for the properties' return of real property or
compensation. Compensation is most commonly granted via
low-interest bonds issued by the government. As of September 2007,
the Nicaraguan Government had settled more than 4,500 U.S. citizen
claims. A total of 677 Embassy-registered U.S. claims remain
outstanding. The United States continues to press the Nicaraguan
Government to resolve outstanding claims.

25. In August 2007, the Nicaraguan Government seized, via judicial
order, several petroleum storage tanks owned by a U.S. company on
the pretext that the company had not paid value-added taxes
associated with the import of crude oil, despite the fact that
unrefined petroleum is not subject to this tax and no mechanism
exists to collect it. The government then used the tanks to store
petroleum products received from Venezuela under the terms of a
state-to-state financing agreement. In a separate instance, the
courts ignored due process to declare oil exploration concessions
invalid, forcing companies, including some U.S. companies, to
renegotiate the terms of their concession agreements that had been
tendered in a transparent manner by the previous administration.


26. CAFTA-DR includes provisions on electronic commerce that
reflect its importance in global trade. Under CAFTA-DR, Nicaragua
must provide nondiscriminatory treatment of U.S. digital products,
not impose customs duties on digital products transmitted
electronically, and work together with the United States in policy
areas related to electronic commerce.


27. The anti-corruption provisions of CAFTA-DR require each
government to ensure under its domestic law that bribery in matters
affecting trade and investment is treated as a criminal offense, or
is subject to comparable penalties. However, voices within and
outside Nicaragua have raised concerns that Nicaragua's legal system
is weak, cumbersome, and lacks independence. Many members of the
judiciary, including those at high levels, are widely believed to be
corrupt or subject to outside political pressures. Enforcement of
court orders is uncertain and sometimes subject to non-judicial
considerations. Courts have granted orders (called an "amparo") to
protect criminal suspects of white collar crime by enjoining
official investigatory and enforcement actions almost indefinitely.
Foreign investors are not specifically targeted, but find themselves
at a disadvantage in any dispute with politically connected

Law 364

28. U.S. companies and the U.S. Chamber of Commerce have voiced
concern that Nicaraguan Law 364, enacted in 2000 and implemented in
2001, retroactively imposes liabilities on foreign companies that
manufactured or used the chemical pesticide DBCP in Nicaragua. DBCP
was banned in the United States after the Environmental Protection
Agency cancelled its certificate for use (with exceptions) in 1979.
U.S. companies have expressed concern that the law and its
application under Nicaragua's judicial system lack due process,
transparency and fundamental fairness. In particular, the law
allows for retroactive application of no-fault liability related to
a specific product, waiver of the statute of limitations,
irrefutable presumption of causality, truncated judicial
proceedings, imposition of a $100,000 non-refundable bond per
defendant as a condition for firms to mount a defense in court, and
escrow requirements of approximately $20 million earmarked for
payment of awards and minimum liabilities as liquidated damages
(ranging from $25,000 to $100,000). A November 2006 court order
lifted a January 2006 embargo placed by the National Assembly on the
trademark rights of a U.S. company allegedly involved in the
distribution and use of this pesticide. Some plaintiffs seek to lay
claim to U.S. company assets in other countries. The U.S.
Government has been working with the affected companies and the
Nicaraguan government to facilitate resolution of this issue.


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