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Cablegate: Nicaragua: Input for the 2010 National Trade Estimate

VZCZCXYZ0000
RR RUEHWEB

DE RUEHMU #1084/01 3031824
ZNR UUUUU ZZH
R 301823Z OCT 09
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 0043
INFO WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAUSA/DEPT OF HHS WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC

UNCLAS MANAGUA 001084

SIPDIS
STATE FOR WHA/CEN AND EB/TPP/BTA
USTR/GBLUE

E.O. 12958: N/A
TAGS: ECON EINV ETRD EAGR EFIN ECPS SOCI TBIO NU
SUBJECT: NICARAGUA: INPUT FOR THE 2010 NATIONAL TRADE ESTIMATE

REF: 09 STATE 105824

TRADE SUMMARY

1. The U.S. goods trade deficit with Nicaragua was $611 million in
2008, a decrease of $103 million from $714 million in 2007. U.S.
goods exports in 2008 were $1.1 billion, up 22.8 percent from the
previous year. Corresponding U.S. imports from Nicaragua were $1.7
billion, up 6.3 percent. Nicaragua is currently the 73rd largest
export market for U.S. goods.

2. The stock of U.S. foreign direct investment (FDI) in Nicaragua
was $203 million in 2007 (latest data available), up from $145
million in 2006.

3. Note: Data in paragraphs 1 and 2 are based on the 2009 National
Trade Estimate and are to be updated by Commerce Department. End
note.

IMPORT POLICIES

Free Trade Agreement

4. On August 5, 2004, the United States signed the Dominican
Republic-Central America-United States Free Trade Agreement
(CAFTA-DR or Agreement) with five Central American countries (Costa
Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the
Dominican Republic (the Parties). Under the Agreement, the Parties
are significantly liberalizing trade in goods and services. 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, transparency, and labor and
environmental protection.

5. The Agreement entered into force for the United States, El Salvador, Guatemala, Honduras, and Nicaragua in 2006. The CAFTA-DR entered into force for the Dominican Republic on March 1, 2007, and for Costa Rica on January 1, 2009.

6. In 2008, the Parties implemented amendments to several
textile-related provisions of the CAFTA-DR, including, changing the
rules of origin to require the use of U.S. or regional pocket bag
fabric in originating apparel. The Parties also implemented a
reciprocal textile inputs sourcing rule with Mexico. Under this
rule, Mexico provides duty-free treatment on certain apparel goods
produced in a Central American country or the Dominican Republic
with U.S. inputs, and the United States provides reciprocal
duty-free treatment under the CAFTA-DR on certain apparel goods
produced in a Central American country or the Dominican Republic
with Mexican inputs. These changes will further strengthen and
integrate regional textile and apparel manufacturing and create new
economic opportunities in the United States and the region.

Tariffs

7. As a member of the Central American Common Market, Nicaragua
agreed in 1995 to reduce its common tariff to a maximum of 15
percent. In response to rising prices, Nicaragua issued a series of
decrees in 2007 to unilaterally eliminate, or reduce to 5 percent,
tariffs on many basic foodstuffs and consumer goods. These decrees
have been extended every six months and are currently in effect
through December of 2009.

8. Under the CAFTA-DR, approximately 80 percent of U.S. industrial
and consumer goods now enter Nicaragua duty-free, with remaining
tariffs phased out by 2015. Nearly all textile and apparel goods
that meet the Agreement's rules of origin now enter Nicaragua
duty-free and quota-free, promoting new opportunities for U.S. and
regional fiber, yarn, fabric, and apparel manufacturing companies.

9. 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 by 2025,
including those on pork, rice, and yellow corn. Nicaragua will
eliminate its tariffs on chicken leg quarters and rice by 2023 and
on dairy products by 2025. For certain products, tariff-rate quotas
(TRQs) will permit 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.

Nontariff Measures

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

11. 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 billed to the retailer.

TECHNICAL BARRIER TO TRADE (STANDARDS, TESTING, LABELING, AND CERTIFICATION)

12. Nicaragua and the other four Central American Parties to the
CAFTA-DR are in the process of developing common standards for the
importation of several products, including distilled spirits, which
may facilitate trade.

13. Under the CAFTA-DR, Nicaragua reaffirmed its commitment to
abide by the terms of the 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.

Sanitary and Phytosanitary Measures

14. During the CAFTA-DR negotiations, the governments created an
intergovernmental working group to discuss sanitary and
phytosanitary (SPS) barriers to agricultural trade. Through the
work of this group, Nicaragua committed to resolving specific
measures affecting U.S. exports to Nicaragua. For example,
Nicaragua now recognizes the equivalence of the U.S. food safety
and inspection systems for beef, pork, and poultry, thereby
eliminating the need for plant-by-plant inspections of U.S.
producers.

15. In February 2009, Nicaragua fully opened its market to all
U.S. beef and beef products in line with the World Organization for
Animal Health (OIE) guidelines for "controlled risk" countries for
Bovine Spongiform Encephalopathy (BSE). The OIE categorized the
United States as "controlled risk" for BSE in May 2007. Prior to
February 2009, Nicaragua prohibited imports of U.S. deboned beef
from cattle 30 months of age and older and bone-in beef from cattle
of any age. Nicaragua based its import prohibition on the 2003
discovery of a BSE positive animal in the United States. Nicaragua
and the United States are negotiating a protocol for the export of
U.S. horses, goats, and sheep to Nicaragua.

16. In 2008, Nicaragua and the four other Central American Parties
to the CAFTA-DR notified to the WTO a set of microbiological
criteria for all raw and processed food products imported into any
of these countries. The United States had some concerns with these
criteria and in May 2008 submitted comments to the five countries.
In March 2009, the Central American countries amended the proposed
microbiological criteria to exclude the regulations applied to raw
poultry.

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. U.S. rice is tested for living modified organisms (LMOs) before shipment to Nicaragua and after arrival. Rice from other countries is not subject to these tests. Law 291 also addresses the field testing of biotechnology crops. However, these provisions have not been used.

18. A bill on the "Prevention of Risks from Living Modified
Organisms through Molecular Biotechnology" has been passed by the
National Assembly but not yet signed into law. It would strengthen
science-based principles in the analysis conducted by CONAGREN.

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.

GOVERNMENT PROCUREMENT

20. Under the CAFTA-DR, procuring entities must use 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 anticorruption 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, the National Assembly, the National Basic Foods Company, the Ministry of Tourism, the Supreme Court, the Ministry of Energy and Mines, and some public universities, remains subject to highly nontransparent and irregular practices.

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

EXPORT SUBSIDIES

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 may not 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.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

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 standards, as well as with emerging
international standards of protection and enforcement of IPR. Such
improvements include state-of-the-art protections for patents,
trademarks, undisclosed test and other data submitted to obtain
marketing approval for pharmaceuticals and agricultural chemicals,
and digital copyrighted products such as software, music, text, and
videos as well as further deterrence of piracy and counterfeiting.

24. In 2009, the Nicaraguan Government focused on improving
interagency cooperation on IPR enforcement against copyright and
trademark infringement. The Nicaraguan Government also improved its
cooperation with private industry to combat IPR crimes in some
areas, such as identifying vendors of pirated goods and offering
training to Nicaraguan police officers. During the first seven
months of 2009, the Nicaraguan police reported having seized 4,327
backpacks that included designs infringing on a U.S. company's
trademark rights. The police also seized 6,464 blank CDs. The
monetary value of the seized goods is approximately $232,406.
Despite these improvements, Nicaraguan efforts to enforce IP law
remain limited. For example, the Nicaraguan government did not make
any IPR-related arrests or convictions in 2009.

SERVICES BARRIERS

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. Under the CAFTA-DR, Nicaragua granted U.S. services suppliers substantial access to its services market, 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 is committed to opening its
telecommunications sector to U.S. investors, service providers, and
suppliers. In practice, the sector lacks a regulatory framework
that would encourage free competition. Enitel, the former state
telephone company now owned by a Mexican investor, operates all
fixed lines and splits the mobile phone market with a Spanish firm.
In 2006, the Supreme Court blocked an effort by TELCOR, the
telecommunications regulator, to make switching infrastructure
owned by Enitel available to other fixed and mobile phone
operators. In widely criticized process, TELCOR awarded spectrum in
September 2009 to a company with ties to senior government
officials. The executive branch has proposed legislation that would
strengthen TELCOR's regulatory capacity and improve competition
among telephone companies. However, some have expressed concern
that it would allow the government to introduce political factors
in the renewal of broadcast licenses.

INVESTMENT BARRIERS

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 return of their property or to receive
compensation. Compensation is most commonly granted via
low-interest bonds issued by the government. As of October 2009,
the Nicaraguan government had settled more than 4,600 U.S. citizen
claims. A total of 563 Embassy registered U.S. claims remain
outstanding. The United States continues to press the Nicaraguan
government to resolve outstanding claims.

In 2009, the government cancelled a provisional license for
electricity generation granted to a wind energy consortium that
included a U.S. partner. The government claimed the consortium had
violated the terms of its license by beginning construction. After
a six-week delay, the government granted a permanent license, and
the consortium resumed construction. In 2008, the government
restored four oil exploration concessions to two U.S. companies.
These companies renegotiated some of the terms of concession
agreements, which had been tendered in an otherwise transparent
manner, after the government ruled they were invalid in 2007
because autonomous regional governments had not been properly
consulted. In 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. In a negotiated settlement, the government
subsequently purchased the storage tanks from the company and paid
for the use of the tanks during the seizure.

ELECTRONIC COMMERCE

30. 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.

OTHER BARRIERS

31. U.S. companies have raised concerns that Nicaragua's legal
system is weak, cumbersome, and subject to political influence and
that many members of the judiciary, including those at high levels,
are believed to be corrupt. Enforcement of court orders can be
erratic and 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 indefinitely. Foreign investors are not
specifically targeted but often find themselves at a disadvantage
in any dispute with Nicaraguan nationals.

Law 364

32. U.S. companies and the U.S. Chamber of Commerce have concerns 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, the 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.

CALLAHAN

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