US embassy cable - 03TEGUCIGALPA2872

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002872 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EB 
STATE PASS TO USTR FOR ANDREA GASH DURKIN 
USDA FAS FOR ITP/AAD/GRUNENFELDER AND CMP/DLP/WETZEL 
GUATEMALA FOR AGATT STEVE HUETE 
 
E.O. 12958: N/A 
TAGS: EAGR, ETRD, PGOV, HO, WTRO 
SUBJECT: HONDURAS INCREASES TARIFFS ON DAIRY PRODUCTS 
 
REF: A) STATE 245422 
 
     B) TEGUCIGALPA 2049 
 
1. (U) SUMMARY:  In November, after several months of 
internal debate, the GOH increased tariffs on a range of 
dairy products.  The tariff increases apply to thirty 
specific products (8-digit tariff lines), going far beyond 
the initial focus on only nonfat powdered milk.  For most of 
the products, the tariff was raised from 15 percent to 35 
percent.  However, mindful of the risks of violating its WTO 
commitments, the GOH raised the tariffs only to the level of 
the bound rates that Honduras had previously agreed to under 
the WTO. 
 
2. (SBU) The tariff increases represent a victory for 
LACTHOSA, the Honduran dairy company that dominates the 
domestic market, and serves as an example of how influential 
businessmen can exercise control over markets in Honduras. 
Embassy has received one complaint to date from a U.S. ice 
cream manufacturer whose planned exports would be harmed by 
the tariff increase.  However, the GOH continues to believe 
that any specific concerns by U.S. exporters can be 
accommodated in the framework of the CAFTA negotiations. 
END SUMMARY. 
 
3. (U) On October 20, 2003, the GOH announced that it would 
raise tariffs on thirty specific dairy products (8-digit 
tariff lines), including milk and powdered milk, sour cream, 
yogurt, some cheeses, butter, and ice cream.  The new 
tariffs took effect in November, as soon as the Ministry of 
Finance and the Customs Agency were officially notified. 
(See paragraph 11 for a complete list of the old and new 
tariffs according to their 8-digit product codes.)  The 
announcement took the form of an agreement signed by 
LACTHOSA, a Honduran dairy company, and FENAGH, the Honduran 
National Federation of Cattle Farmers.  The agreement was 
also "witnessed" by the Minister of Trade and Industry, the 
Minister of Agriculture, the Minister of the Presidency, and 
the head of COHEP (a private sector umbrella organization). 
 
---------- 
Background 
---------- 
 
4. (SBU) LACTHOSA, owned by Honduran businessman Chucry 
Kafie, owns the Sula brand of milk and other dairy products, 
and holds the license to distribute products of the Costa 
Rican brand Dos Pinos in Honduras as well.  LACTHOSA is the 
largest purchaser of milk in Honduras, and is also reported 
to be negotiating the purchase of its largest competitor, 
the LEYDE milk company, which would grant LACTHOSA near- 
monopsony buying power (95 percent of the market).  Earlier 
this year, LACTHOSA built a milk dehydration plant in 
Honduras, and began to lobby the Honduran government for 
greater tariff protection of powdered milk, in order to 
raise the cost of imported powdered milk and make the 
dehydration plant economically viable.  Specifically, in 
August, LACHTOSA requested a increase in the tariff from 15 
percent to 60 percent. (See reftels A and B). 
 
5. (SBU) Officials in the Honduran Trade and Agriculture 
ministries privately expressed their frustration with the 
situation, caught between high-level political instructions 
to provide some kind of support to Honduran milk producers, 
the demands of an influential businessman, and the knowledge 
that raising the tariff above the WTO bound rate (which is 
15 percent for most categories of powdered milk) would 
invite legal action from the WTO.  Furthermore, the tariff 
in effect for one major category of powdered milk (tariff 
line 0402.10.00) was already at the WTO bound rate of 15 
percent, meaning that any increase whatsoever would violate 
WTO commitments. 
 
6. (U) To increase the pressure on the GOH, and taking 
advantage of the seasonal surplus production of milk, 
LACTHOSA stopped purchasing milk from producers in early 
October at the prices upon which they had previously agreed. 
This price decrease led the producers' organization FENAGH 
to bring further pressure on the GOH to increase import 
tariffs.  The result was the agreement of October 20th, in 
which the GOH announced the tariff increases and LACTHOSA 
promised to return to the previously set prices for milk 
producers.  By agreeing to raise tariffs on a whole range of 
products, not just nonfat powdered milk, the Ministry of 
Trade and Industry was able to keep the new tariffs within 
the WTO bound rates. 
7. (U) GOH officials have also stressed to EmbOffs that the 
new tariffs will apply only to countries with which Honduras 
has no other specific bilateral or multilateral trade 
agreements.  Hence, lower tariff rates are expected under 
CAFTA and FTAA, and are already in effect for Honduras' 
Central American neighbors.  (Of course, lower CAFTA rates 
for U.S. exporters would only apply when CAFTA comes into 
effect - until then, U.S. exporters will presumably be 
subject to the higher tariffs.)  New Zealand is often cited 
as the country that exports the most powdered milk to 
Honduras. 
 
-------------------------------------------- 
Other Measures to Support the Dairy Industry 
-------------------------------------------- 
 
8. (U) The October 20th agreement also lists several vague 
"commitments" that the GOH makes to support the national 
dairy industry.  For example, the government promises to 
take steps (presumably in addition to the tariff increase, 
but unspecified) to encourage importers of powdered milk to 
purchase nationally produced powdered milk instead.  The 
government also pledges to place the income derived from the 
increased tariffs into a fund, which will be used to 
implement mechanisms to increase milk consumption among 
children and to support measures to increase the 
competitiveness of milk production nationally.  (Officials 
at the Ministry of Agriculture have estimated that the 
tariff increases will generate roughly USD 6 million 
annually, which would amount to an 8 percent increase in the 
Ministry of Agriculture's annual budget.  Their methodology, 
however, assumes that imports continue at their pre-tariff 
levels, which is probably unrealistic; hence the real amount 
raised will likely be considerably lower.) 
 
9. (SBU) In addition, the government commits to "establish 
guidelines for donations of milk, so that such donations 
will not create unfair competition with national 
production".  While no details are given (and officials at 
the Ministry of Agriculture were unable to elaborate, saying 
that not even a draft of such guidelines exists at the 
moment), the statement is indicative of the political 
sensitivity of the dairy sector, and of concerns that 
donated goods may be disrupting local markets.  (Note: In 
November, USDA donated 500 metric tons of nonfat dry milk to 
the U.S. NGO Project Concern International (PCI), which is 
planning to sell the milk in Honduras and use the proceeds 
for HIV/AIDS programs.  PCI's initial import application for 
the donated milk was refused by the Ministry of Agriculture 
for reasons that were unclear; however, the NGO was later 
able to get the import application approved by working 
through an intermediary.  End note.) 
 
---------------------- 
Impact on U.S. Exports 
---------------------- 
 
10. (SBU) One U.S. company has already contacted the embassy 
for advocacy regarding this issue.  Allied Domestic QSR, 
parent company of Baskin-Robbins ice cream, signed a 
licensing agreement earlier in 2003 with a Honduran company, 
intending to introduce its products into Honduras by early 
2004.  However, their business plan was based upon the 15 
percent tariff then in effect, and it is not clear that they 
will be able to continue under the new tariff of 35 percent. 
When Econ officers raised this company's concern with GOH 
officials, the response was that specific U.S. exporters can 
be accommodated through lower tariff offers in the CAFTA 
negotiations. 
 
------------------------- 
Appendix: The new tariffs 
------------------------- 
 
11. (U) Below are the old and new tariff rates, in percent, 
for the thirty products affected.  In each case, the new 
tariff rate is equal to Honduras' WTO bound rate. 
 
General         8-digit        Previous      New 
Category      Tariff line       Tariff      Tariff 
--------      -----------      --------     ------ 
Fluid Milk    0401.10.00          15          35 
              0401.20.00          15          35 
              0401.30.00          15          35 
 
Powdered      0402.21.11          15          20 
 Milk         0402.21.12          15          20 
              0402.21.21           5          15 
              0402.21.22           5          15 
              0402.29.00          15          25 
 
Evaporated    0402.91.10          10          20 
 Milk         0402.91.20          15          20 
              0402.91.90          15          20 
Condensed     0402.99.10          10          20 
 Milk         0402.99.90          15          20 
 
Yogurt and    0403.10.00          15          35 
 Cream        0403.90.10          15          35 
              0403.90.90          15          35 
              0404.90.00          10          35 
 
Butter        0405.10.00          15          20 
              0405.20.00          15          20 
              0405.90.10           5           8 
              0405.90.90          15          20 
 
Cheese        0406.10.00          15          20 
              0406.20.90          15          35 
              0406.30.00          15          35 
              0406.40.00          15          35 
              0406.90.20          15          35 
              0406.90.90          15          35 
 
Malt extract  1901.90.20           0          15 
 
Ice Cream     2105.00.00          15          35 
 
Milk drinks   2202.90.90          15          35 
 
Pierce