Cablegate: Nicaragua: Input for the 2009 National Trade Estimate

DE RUEHMU #1390/01 3231724
P 181724Z NOV 08




E.O. 12958: N/A

REF: STATE 88447


1. The U.S. goods trade deficit with Nicaragua was $713 million in
2007, a decrease of $61 million from $774 million in 2006. U.S.
goods exports in 2007 were $890 million, up 18.5 percent from the
previous year. U.S. imports from Nicaragua were $1.6 billion, up
5.1 percent over the corresponding period. Nicaragua is currently
the 72nd largest export market for U.S. goods.

2. The stock of U.S. foreign direct investment in Nicaragua was
$261 million in 2006 (latest data available), up from $245 million
in 2005.

3. Note: Data in paragraphs 1 and 2 are based on the 2008 National
Trade Estimate and are to be updated by Commerce Department. End


Free Trade Agreement

4. On August 5, 2004, the United States signed the Dominican
Republic-United States-Central America Free Trade Agreement
(CAFTA-DR or Agreement) with five Central American countries (Costa
Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the
Dominican Republic.

5. During 2006, the Agreement entered into force for the United
States, El Salvador, Guatemala, Honduras, and Nicaragua. The
CAFTA-DR entered into force for the Dominican Republic on March 1,
2007. Costa Rica approved the CAFTA-DR through a national
referendum on October 7, 2007, but the Agreement has not entered
into force, as Costa Rica has not yet completed the process of
adopting implementing legislation and regulations.

6. In 2008, the Parties implemented amendments to several
textile-related provisions of the CAFTA-DR, including, in
particular, changes the rules of origin to require the use of U.S.
or regional pocket bag fabric in originating apparel.

7. Under the Agreement, the Parties remove barriers to trade and
investment in the region, which will strengthen regional economic
integration. The CAFTA-DR also includes important disciplines
relating to customs administration and trade facilitation, technical
barriers to trade, government procurement, investment,
telecommunications, electronic commerce, intellectual property
rights (IPR), transparency, and labor and environmental protection.


8. As a member of the Central American Common Market (CACM),
Nicaragua agreed in 1995 to reduce its common tariff to a maximum of
15 percent. In response to rising prices, Nicaragua has
unilaterally eliminated tariffs on many basic foodstuffs and
consumer goods for the duration of 2008.

9. Under the CAFTA-DR, approximately 80 percent of U.S. industrial
and consumer goods now enter Nicaragua duty free, with remaining
tariffs phased out over 10 years, starting in 2006. Nearly all
textile and apparel goods that meet the Agreement's rules of origin
now enter duty free and quota free, promoting new opportunities for
U.S. and regional fiber, yarn, fabric, and apparel manufacturing

10. Under the CAFTA-DR, more than half of U.S. agricultural exports
now enter Nicaragua duty free. Nicaragua will eliminate its
remaining tariffs on nearly all agricultural goods over 15 to 20
years, including those on pork, rice, and yellow corn. Nicaragua
will eliminate its tariffs on chicken leg quarters and rice within
18 years and on dairy products within 20 years. For certain
products, tariff-rate quotas (TRQs) will permit some duty free
access for specified quantities during the tariff phase out period,
with the duty free amount expanding during that period. Nicaragua
will liberalize trade in white corn through expansion of a TRQ,
rather than by tariff reductions.

11. Nicaragua and the other Parties have agreed to improve
transparency and efficiency in administering customs procedures,
including the CAFTA-DR rules of origin. Under the CAFTA-DR,
Nicaragua committed to ensuring greater procedural certainty and
fairness in the administration of these procedures, and all the
CAFTA-DR countries agreed to share information to combat illegal
transshipment of goods.

Nontariff Measures

12. 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 cost, insurance, and freight value. Alcoholic beverages and
tobacco products are taxed on the price charged to the retailer.

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

13. On February 18, 2005, the government of Nicaragua issued a
decree authorizing the Ministry of Agriculture to recognize the
equivalency of foreign meat and poultry sanitary measures. After
auditing the U.S. meat and poultry inspection system, the government
of Nicaragua recognized the equivalence of the U.S. food safety and
inspection systems for meat and poultry, thereby eliminating the
need for plant-by-plant inspections in the United States.

14. The U.S. Department of Agriculture's Animal and Plant Health
Inspection Service entered into a protocol with Nicaragua in 2008
for the export of U.S. seed and table potatoes. Importations of
rice, wheat, and yellow corn, previously conducted according to
APHIS-negotiated protocols, now enter Nicaragua according to
standards defined in Law 291, the General Animal and Plant Health

15. 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 phytosanitary or sanitary
certificate is required from the country of origin and the
Nicaraguan Ministry of Health. Such certificates issued by
Nicaragua are not required for products packaged in the United
States. However, Nicaragua continues to maintain bans on U.S.
boneless beef from animals over 30 months of age, bone-in-beef, and
live cattle, which are inconsistent with the World Organization for
Animal Health (OIE) guidelines.

16. Under the CAFTA-DR, Nicaragua reaffirmed its commitment to
abide by the terms of the World Trade Organization's (WTO) Import
Licensing Agreement. The Ministry of Health must provide a permit,
renewable every five years, for the importation of any alcoholic
beverage. U.S. industry has expressed concern about Nicaragua's
proposed standards for alcoholic beverages distilled from sugarcane.
However, Nicaragua and the other Central American countries are
developing common standards for the importation of several key
products, including distilled spirits, an effort that may eventually
facilitate trade.

17. Law 291 regulates the importation 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.

18. Two bills that would regulate the importation of products of
agricultural biotechnology are pending in the National Assembly. A
bill on the Prevention of Risks from Living Organisms Modified
through Molecular Biotechnology comprehensively defines
science-based technical criteria and procedures to conduct the risk
analysis 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 to draft, implement, and
evaluate food security policies.

19. 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.


20. The CAFTA-DR requires the use of fair and transparent
government procurement procedures, including advance notice of
purchases and timely and effective bid review procedures for
procurement covered by the Agreement. Under the CAFTA-DR, U.S.
suppliers may bid on procurements of 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 2006. The anti-corruption provisions of the
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. Procurement by government entities
not covered by the CAFTA-DR, such as the National Electricity
Company, remains subject to nontransparent and irregular practices.

21. Nicaragua is not a signatory to the WTO Agreement on Government


22. 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 the
CAFTA-DR, Nicaragua is not permitted to adopt new duty waivers or
expand existing duty waivers that are conditioned on the fulfillment
of a performance requirement (e.g., the export of a given level or
percentage of goods). However, Nicaragua may maintain such duty
waiver measures for such time as it is an Annex VII country for the
purposes of the WTO Agreement on Subsidies and Countervailing
Measures (SCM Agreement). Thereafter, Nicaragua must maintain any
such measures in accordance with Article 27.4 of the SCM Agreement.


23. The CAFTA-DR provides improved standards for the protection and
enforcement of a broad range of IPR, which are consistent with U.S.
and international intellectual property standards, as well as with
emerging international standards of protection and enforcement.
Such improvements include state-of-the-art protections for digital
copyrighted 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 further deterrence of piracy and counterfeiting.

24. However, Nicaraguan efforts to enforce intellectual property
law remain limited. In 2008, the National Police implemented a
strategy to improve IPR enforcement that included a public awareness
program, training on the detection of pirated goods and the
application of IPR law, as well as the coordination of raids and
seizures of pirated goods and equipment for their production.
During the first eight months of the 2008, the police seized 350,000
pirated and 80,000 blank DVDs and CDs and audiovisual equipment
worth approximately $803,000. However, the Nicaraguan Government
did not arrest or convict a single IPR offender during the first
eight months of 2008.


Financial Services

25. The CAFTA-DR ensures that U.S. financial services companies
have full rights to establish subsidiaries, joint ventures, or bank
branches, and U.S. insurance suppliers enjoy full rights to
establish subsidiaries and joint ventures, with a phase-in provision
for branches of financial services companies. Nicaragua allows U.S.
based firms to supply insurance on a cross-border basis, including
reinsurance; reinsurance brokerage; marine, aviation, and transport
insurance; in addition to other insurance services.

Other Services Issues

26. Nicaragua accords substantial market access across its entire
services regime, including financial services, subject to very few
exceptions. 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 the CAFTA-DR, Nicaragua does not
require U.S. film productions to contribute to the cultural fund or
hire locally.

27. Under the 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, though some television and radio stations have refused
to air programs critical of government policy for fear that
political factors will be taken into consideration for the renewal
of broadcast licenses. 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 protracted legal dispute between the
executive and legislative branches over the country's public
regulatory framework has resulted in a leadership stalemate at


28. The CAFTA-DR establishes a more 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 to
U.S. investors are due process protections and the right to receive
fair market value for property in the event of an expropriation.
Investor rights are protected under the CAFTA-DR by an impartial
procedure for dispute settlement that is fully transparent and open
to the public. Submissions to dispute panels and dispute panel
hearings will be open to the public, and interested parties will
have the opportunity to submit their views.

29. During the 1980s, the Sandinista government confiscated some
28,000 real properties. Since 1990, thousands of individuals have
filed claims for the properties' return or for compensation.
Compensation is most commonly granted via low-interest bonds issued
by the government. As of October 2008, the Nicaraguan government
had settled more than 4,500 U.S. citizen claims. A total of 617
Embassy registered U.S. claims remain outstanding. The United
States continues to press the Nicaraguan government to resolve
outstanding claims.

30. In August 2007, the Nicaraguan government seized, via judicial
order, several petroleum storage tanks owned by a U.S. company,
claiming that the company had not paid value added taxes associated
with the importation of crude oil, even though crude oil is not
subject to this tax. The government subsequently purchased the
storage tanks from the company and paid for the use of the tanks
during the seizure. In a separate instance, the courts declared oil
exploration concessions invalid, forcing companies to effectively
renegotiate some of the terms of concession agreements that had been
tendered transparently by the previous administration.


31. The CAFTA-DR includes provisions on electronic commerce that
reflect its importance to global trade. Under the CAFTA-DR,
Nicaragua has committed to provide nondiscriminatory treatment to
U.S. digital products, and not to impose customs duties on digital
products transmitted electronically.


32. The anti-corruption provisions in the 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. 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 can be erratic and frequently subject to nonjudicial
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 may find
themselves at a disadvantage in any dispute with Nicaraguan

Law 364

33. 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 liability 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 nonrefundable 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). 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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