US embassy cable - 03TEGUCIGALPA2932

UNCLAS SECTION 01 OF 05 TEGUCIGALPA 002932 
 
SIPDIS 
 
STATE FOR EB/TPP/MTA/MST AND WHA/CEN 
PLEASE PASS TO USTR FOR GBLUE 
GUATEMALA FOR COMATT MLARSEN AND AGATT SHUETE 
SAN SALVADOR FOR DTHOMPSON 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EFIN, HO 
SUBJECT:  HONDURAS NATIONAL TRADE ESTIMATE REPORT 2004 
 
REF:  SECSTATE 310954 
 
1.  The text of the 2004 National Trade Estimate report for 
Honduras follows. 
 
------------- 
TRADE SUMMARY 
------------- 
 
2.  (Note that the following paragraph is to be updated by 
Washington with USDOC statistics.)  In 2002, the U.S. trade 
deficit with Honduras was $699 million, an increase of $10 
million (1.5 percent) from the U.S. trade deficit of $689 million 
in 2001.  U.S. goods exports to Honduras were $2.6 billion, an 
increase of $128 million (5.3 percent) from the level of U.S. 
exports to Honduras in 2001.  Corresponding U.S. imports from 
Honduras were $3.3 billion in 2002, an increase of $138 million 
(4.4 percent) from the level of imports in 2001.  Honduras is 
currently the United States' 35th largest export market. 
 
3.  (We understand that this paragraph will also be updated with 
USDOC statistics.)  The stock of U.S. foreign direct investment 
(FDI) in Honduras in 2001 amounted to $249 million, down from 
$257 million in 2000.  U.S. FDI is concentrated largely in the 
manufacturing sector. 
 
------------------- 
(A) IMPORT POLICIES 
------------------- 
 
4.  In 1995, Honduras and other members of the Central American 
Common Market (CACM) agreed to reduce and harmonize the common 
external tariff (CET) at zero to 15 percent, but allowed each 
member to determine the timing of the reductions.  In 2002, 
Honduras lifted tariffs on capital goods and raw materials 
(including those used for manufacture of pharmaceutical products 
and agricultural inputs) for those imports produced outside of 
the CACM.  Additionally, tariffs on most non-CACM intermediate 
goods were reduced to 10 percent, and final goods were reduced to 
15 percent.  Per the tax reform law of 2002, import tariffs on 
cars were reduced from 40 percent to 15 percent ad valorem, and a 
tariff based on engine size was eliminated. 
 
5.  Partially in response to remaining differences in Central 
American external tariffs, in October 2003 the GOH increased 
tariffs on thirty specific dairy products, including milk and 
powdered milk, sour cream, yogurt, some cheeses, butter, and ice 
cream.  For most of the products, the tariff was raised from 15 
percent to 35 percent, the maximum allowable tariff rate under 
Honduras' WTO commitments. 
 
6.  Honduras implements a price band mechanism for imports of 
yellow corn, sorghum, and corn meal.  This price band is 
calculated from a time series of international prices on a given 
product for the prior 60 months.  The 15 highest and lowest 
monthly prices are eliminated, with the remaining highs and lows 
establishing the price band.  Imports entering with values within 
the defined band are assessed a 20 percent tariff.  Imports 
entering with prices above the band are assessed duties at a rate 
lower than 20 percent, according to a predetermined schedule; 
those imports priced below the band are assessed a tariff higher 
than 20 percent.  The government also maintains a seasonal 
restriction on the price band.  From September to January the 
minimum allowable duty is 20 percent for corn and 15 percent for 
cornmeal and sorghum.  From February to August, duties are 
allowed to fluctuate according to the predetermined duty tables 
for each commodity.  This seasonal restriction has been added to 
provide additional protection to local grain farmers during the 
main harvest season. 
 
7.  In addition to the above, the Government of Honduras, farm 
groups, and importers have agreed to a quasi-tariff-rate quota in 
which the price band remains in effect until local grain supplies 
are exhausted, after which a one percent duty is applied to 
imports.  A similar quasi-tariff-rate quota system is in place 
for imports of rice.  The United States has strongly opposed the 
Honduran policies on these grains as limiting access for U.S. 
agricultural products, and revision or elimination of the system 
is a possible outcome of the U.S.-Central American Free Trade 
Agreement (CAFTA), currently under negotiation. 
 
8.  Honduras implemented the WTO Customs Valuation Agreement in 
February 2000.  WTO records show that Honduras has not yet 
notified its legislation nor the Customs Valuation Checklist to 
the WTO Committee on Customs Valuation. 
 
9.  Under the tax reform law of June 2002, cars older than seven 
years and passenger buses older than ten years are not allowed to 
enter Honduras, with the exception of ambulances. 
 
--------------------------------------------- ----- 
(B) STANDARDS, TESTING, LABELING AND CERTIFICATION 
--------------------------------------------- ----- 
 
10.  Honduras maintains a ban on some U.S. raw poultry imports, 
based on sanitary and phyto-sanitary concerns.  Local importers 
charge that Honduran officials are using these sanitary and phyto- 
sanitary measures to block U.S. imports to protect local 
producers and, in some cases, to promote diversion of trade to 
other Central American countries.  USDA FAS estimates that if 
Honduran restrictions on U.S. raw poultry and poultry parts were 
lifted, U.S. producers could export an additional $10 million of 
poultry products to Honduras, annually. 
 
11.  The Honduran government has also cited sanitary and phyto- 
sanitary concerns in periodically denying applications for the 
importation of pork and dairy products.  Application of sanitary 
and phyto-sanitary requirements is lacking in transparency, and 
changes in sanitary and phyto-sanitary requirements are seldom 
reported to the WTO as required.  This results in uncertainty 
among U.S. suppliers and Honduran importers.  In both 2002 and 
2003, Honduran importers had initial difficulty in receiving 
permission to import turkey into Honduras, though in each year 
permission was eventually granted.  Administration of sanitary 
and phyto-sanitary systems is under discussion in the CAFTA 
negotiations. 
 
12.  The Honduran government requires that sanitary permits be 
obtained for all imported foodstuffs.  These permits are granted 
by the Ministry of Health.  During 2003, a U.S. supermarket chain 
complained that delays in the process of granting these permits 
were hampering the company's ability to import its products into 
Honduras.  The Ministry of Health agreed to accelerate the 
process by focusing most closely on products considered to be at 
high risk for sanitary concerns (such as raw meat) and 
simplifying the procedures for low-risk products. 
 
13.  Labeling requirements for food products are very specific. 
Honduran law requires that all processed food products be labeled 
in Spanish and registered with the Division of Food Control (DFC) 
of the Ministry of Public Health.  In general, labels of all 
consumer-oriented products are required to include the following 
basic information: name of the product, name of the manufacturer, 
country of origin, sales price, expiration date, content, list of 
ingredients and any applicable health warnings. 
 
-------------------------- 
(C) GOVERNMENT PROCUREMENT 
-------------------------- 
 
14.  Under the Government Contracting Law which entered into 
force in October 2001, all public works contracts over one 
million lempiras ($55,690) must be offered through public 
competitive bidding.  Public contracts between 500,000 and one 
million lempiras ($27,845 and $55,690) can be offered through a 
private bid, and contracts less than 500,000 lempiras ($27,845) 
are exempt from the bidding process.  To participate in public 
tenders, foreign firms are required to act through a local agent. 
Local agency firms must be at least 51 percent Honduran-owned, 
unless the procurement is linked to a national emergency. 
Government purchases and project acquisitions are generally 
exempted from import duties. 
 
15.  While foreign firms are granted national treatment for 
public bids, some still complain of mismanagement and lack of 
transparency in the bid processes.  The GOH has tried to improve 
transparency and fairness in government procurement by hiring the 
United Nations Development Program (UNDP) to manage procurement 
for an increasing number of ministries and state-owned entities. 
 
16.  Honduras is not a signatory of the WTO Government 
Procurement Agreement.  In the past, the United States has raised 
concerns regarding Honduras' lack of cooperation in the WTO 
Working Party on Transparency in Government Procurement.  In 
recognition of increased cooperation in the WTO Working Party on 
Transparency in Government Procurement, the United States 
reinstated a waiver of "Buy America Act" provisions in 2002, 
which had previously been suspended for Honduras. 
 
-------------------- 
(D) EXPORT SUBSIDIES 
-------------------- 
 
17.  Honduras does not have export subsidies or export-promotion 
schemes other than the tax exemptions given to firms in free 
trade zones.  A company located in a free trade zone, industrial 
park or export processing zone is exempt from paying import 
duties on goods and capital equipment, charges, surcharges, 
selective consumption taxes, and sales taxes.  In addition, the 
production and sale of goods within these areas are exempt from 
Honduran municipal taxes for 10 years, and from federal taxes for 
20 years. 
 
-------------------------------------------- 
(E) LACK OF INTELLECTUAL PROPERTY PROTECTION 
-------------------------------------------- 
 
18.  Honduras has largely complied with the WTO Agreement on 
Trade-Related Aspects of Intellectual Property Rights (TRIPs), 
through legal revisions enacted in December 1999.  To be in full 
TRIPs compliance, the Honduran Congress must still pass laws 
governing the design of integrated circuits and plant variety 
protection.  Current expectations are that no action will be 
taken on these two laws until early 2004, but that the laws will 
then be included in a larger bill that is likely to be approved 
without controversy. 
 
19.  Honduras became a member of the World Intellectual Property 
Organization (WIPO) in 1983.  Honduras and the U.S. initialed a 
Bilateral Intellectual Property Rights (IPR) Agreement in March 
1999, but both parties decided to fold the provisions into CAFTA, 
currently under negotiation.  Honduras became party to the WIPO 
Copyright Treaty (WCT) and the WIPO Performances and Phonogram 
Treaty (WPPT) in May 2002. 
 
Copyrights 
 
20.  Honduras' copyright law, updated in 1999, added more than 
twenty different criminal offenses related to copyright 
infringement and established fines and suspension of services 
that can be levied against offenders.  However, the piracy of 
books, sound and video recordings, compact discs, and computer 
software is still widespread in Honduras, due in part to limited 
enforcement capacity.  U.S. companies are concerned that recent 
attempts to prosecute computer software infringement cases have 
been met with resistance by officials in the Ministry of Industry 
and Trade's IPR Division and the Attorney General's office. 
 
21.  U.S. software companies are currently focusing on 
legalization of pirated software used in some ministries and 
state-owned entities.  A major U.S. software company estimates 
that it loses $5 million annually due to software piracy in 
Honduras. 
 
Patents and Trademarks 
 
22.  Honduras ratified the Paris Convention for the Protection of 
Industrial Property in 1994.  The Honduran Congress enacted a 
1999 Law of Industrial Property to provide improved protection 
for both trademarks and patents.  To be protected under Honduran 
law, patents and trademarks must be registered with the Ministry 
of Industry and Trade. 
 
23.  Recent modifications to the Patent Law of 1993 include 
patent protection for pharmaceuticals, and extend the term of 
protection for a patent from seventeen to twenty years from the 
date of filing to meet WTO standards.  The term for cancellation 
of a trademark for lack of use has been extended from one year to 
three years.  Trademarks are valid for up to ten years from the 
registration date.  The illegitimate registration of well-known 
trademarks has, however, been a persistent problem in Honduras. 
 
24.  In 2002, a U.S. pharmaceutical company complained that the 
Ministry of Health, in approving a competing company's 
pharmaceutical product, did not respect their data exclusivity 
rights as guaranteed under article 39 of the WTO TRIPs agreement 
and article 77 of Honduras' Industrial Property Law.  (Honduran 
law provides five-year exclusive use of data provided in support 
of registering pharmaceutical products.)  The Ministry of Health 
approved the competing pharmaceutical product despite 
communication from Honduras' IPR Division that the U.S. company's 
research and data were protected under Honduran law.  The U.S. 
company argues that in order for the competing product to be 
legally registered with the Ministry of Health, the company needs 
to provide the research and data to support their application. 
When a similar situation arose with a separate application in 
2003, the Ministry of Health recognized that the competing 
company's product was a copy of the U.S. company's protected 
product, and did not approve the competing company's application. 
However, the GOH's uneven history in protection of intellectual 
property rights leads to uncertainty for U.S. investors. 
 
---------------------- 
(F)  SERVICES BARRIERS 
---------------------- 
 
25.  Special government authorization must be obtained to invest 
in the tourism, hotel and banking services sectors.  Foreigners 
may not hold a seat in Honduras' two stock exchanges or provide 
direct brokerage services in these exchanges.  Honduran 
professional bodies heavily regulate the licensing of foreigners 
to practice law, medicine, engineering, accounting, and other 
professions. 
 
------------------------ 
(G)  INVESTMENT BARRIERS 
------------------------ 
26.  The Constitution of Honduras requires that all foreign 
investment complement, but not substitute for, national 
investment.  Companies that wish to take advantage of the 
Agrarian Reform Law, engage in commercial fishing, forestry, or 
local transportation activities, serve as representatives, 
agents, or distributors for foreign companies, or operate radio 
and television stations must be majority-owned by Hondurans. 
Government authorization is required for both foreign and 
domestic investors in basic health services, telecommunications, 
generation, transmission, and distribution of electricity, air 
transport, and mining. 
 
27.  In addition, special government authorization is required 
for foreign investment in the following sectors: forestry, 
telecommunications, basic health, air transport, fishing and 
aquaculture, mining, insurance and financial services, private 
education, and those agricultural and agro-industrial activities 
exceeding land tenancy limits established by law. 
 
28.  Small-scale commercial and industrial activities with an 
investment less than 150,000 lempiras (about $8,353), excluding 
land, buildings, and vehicles, are reserved exclusively for 
Honduran nationals.  For all investments, at least 90 percent of 
a company's labor force must be Honduran, and at least 80 percent 
of the payroll must be paid to Hondurans. 
 
29.  Foreign ownership of land within 40 km of the coastlines and 
national boundaries is constitutionally prohibited, though 
tourism investment laws allow for certain exceptions.  Inadequate 
land title procedures have led to numerous investment disputes 
involving U.S.-citizen landowners. 
 
30.  In 2001, a Bilateral Investment Treaty (BIT) between the 
U.S. and Honduras entered into force.  The treaty provides for 
equal protection under the law for U.S. investors in Honduras and 
permits expropriation only in accordance with international legal 
standards and accompanied by adequate compensation.  U.S. 
investors in Honduras also have the right to submit an investment 
dispute to binding international arbitration. 
 
31.  Honduras has taken the following limited exceptions to its 
BIT national treatment obligation: properties on cays, reefs, 
rocks, shoals or sandbanks or on islands or on any property 
located within 40 km of the coastline or land borders of 
Honduras, small scale industry and commerce with total invested 
capital of no more than $40,000 or its equivalent in national 
currency, ownership, operation and editorial control of broadcast 
radio and television, ownership, operation and editorial control 
of general interest periodicals and newspapers published in 
Honduras. 
 
--------------------------------------------- -------------------- 
(H)  LACK OF GOVERNMENT ACTION AGAINST ANTI-COMPETITIVE PRACTICES 
     OF STATE-OWNED AND PRIVATE FIRMS THAT RESTRICT THE SALE OF 
     U.S. PRODUCTS AND SERVICES 
--------------------------------------------- -------------------- 
 
32.  U.S. companies occasionally encounter anti-competitive 
practices by private firms, especially in the case of large 
investments in sectors with one or two national players.  The GOH 
hopes to address these problems more systematically with the 
drafting and approval in 2004 of a Competition Law.  The World 
Bank is assisting with this project. 
 
--------------------------------------------- -------- 
(I)  TRADE RESTRICTIONS AFFECTING ELECTRONIC COMMERCE 
--------------------------------------------- -------- 
33.  There is currently no domestic legislation concerning 
electronic commerce in Honduras.  The Electronic Commerce System 
Directorate (DISELCO), a project of the Chamber of Commerce and 
Industry of Tegucigalpa (CCIT), the Chamber of Commerce and 
Industry of Cortes (CCIC) and the National Industry Association 
(ANDI), is the institution in charge of establishing the policies 
and norms pertaining to electronic commerce in Honduras. 
 
34.  Electronic commerce is still not developed in the Honduran 
market.  Although improving, the country still lacks adequate 
basic telecom infrastructure and internet bandwidth capacity to 
effectively support significant electronic commerce at the 
present time.  Except for web page promotional material, 
companies are not yet utilizing computer sales as an additional 
distribution channel in Honduras.  Twenty-five private ISPs 
compete for an estimated 30,000 Internet users.  Internet dial-up 
fees are fairly significant, and comparable to those in other 
Central American countries. 
 
------------------- 
(J)  OTHER BARRIERS 
------------------- 
 
35.  Historically, U.S. firms and private citizens have found 
corruption to be a problem which seriously complicates doing 
business in Honduras, and thus a constraint on foreign direct 
investment.  Corruption appears to be most pervasive in the 
following areas: government procurement, performance 
requirements, the regulatory system, and the buying and selling 
of real estate, particularly land title transfers.  Honduras' 
judicial system is easily influenced; investment and business 
disputes involving foreigners have rarely been resolved in a 
transparent manner.  The administration of justice is a key 
challenge to domestic and foreign companies.  With considerable 
U.S. help, the government is reforming Honduras' judicial system 
and fighting corruption, though serious problems remain in these 
areas. 
 
Palmer