US embassy cable - 03SANTODOMINGO7458

UNCLAS SECTION 01 OF 05 SANTO DOMINGO 007458 
 
SIPDIS 
 
STATE FOR EB/MTA/MST 
STATE PASS TO USTR FOR G. BLUE 
 
E.O. 12958: N/A 
TAGS: EFIN, ETRD, EINV 
SUBJECT: DOMINICAN REPUBLIC 2004 NATIONAL TRADE ESTIMATE 
REPORT 
 
REF: STATE 310954 
 
1. The following updates the National Trade Estimate Report 
for the Dominican Republic as requested by Reftel for 2004. 
 
TRADE SUMMARY 
 
For January through September of 2003, the United States had 
a trade deficit with the Dominican Republic of $112 million, 
a deterioration of $263 million from the $151 million surplus 
for the same period of 2002.  U.S. goods exports to the 
Dominican Republic were $3.2 billion, a decrease of $39 
million from the same period last year.  Corresponding U.S. 
imports from the Dominican Republic were $3.3 billion, an 
increase of $224 million.  The shift in the trade balance is 
primarily the result of the depreciation of the peso, which 
lost half of its value against the dollar in 2003.  The 
Dominican Republic is currently the fifth largest export 
market for U.S. goods in the Western Hemisphere. 
 
The United States has announced its intent to launch 
negotiations with the Dominican Republic in January 2004. 
The objective of those negotiations is to integrate the 
Dominican Republic into the Central American Free Trade 
Agreement (CAFTA) that is expected to conclude by the end of 
2003. 
 
According to the Dominican Central Bank statistics, the stock 
of U.S. foreign direct investment (FDI) in the Dominican 
Republic in 2002 amounted to $1.5 billion, an increase of 
$748 million over U.S. FDI in 2001, $752 million.  For 
January through September of 2003, Dominican Central Bank 
figures show U.S. FDI increased at $245 million.  U.S. FDI in 
the Dominican Republic is concentrated largely in the 
manufacturing, energy, and banking sectors. 
 
Much of the U.S. investment in the manufacturing sector is 
located in export processing zones, called Free Trade Zones 
(FTZ), where apparel, footwear, electronic products and 
medical goods are assembled from U.S. components and 
materials and then exported back to the United States. 
 
IMPORT POLICIES 
 
Tariffs 
 
As a result of a progressive deterioration in the Dominican 
economy during the second half of 2003, the Dominican 
government has requested assistance from the International 
Monetary Fund (IMF).  As part of the initial agreement 
reached with the IMF, the Dominican Government ordered the 
application of a two-percent surcharge on the CIF value of 
all imports.  Decree 646-03 establishes that goods that have 
been exempt from taxes and surcharge under free trade 
agreements will not pay the new surcharge.  The decree does 
not mention if FTZ items are exempt, although previous 
statements from the government indicate the surcharge would 
affect free zone imports.  (The government is also seeking to 
implement a 5 percent export tax as part of a revised IMF 
agreement under negotiation. 
 
Non-tariff Measures 
 
The government of the Dominican Republic imposes a selective 
consumption tax ranging from 15 percent to 60 percent on 
&nonessential8 products such as home appliances, alcohol, 
perfumes, jewelry, automobiles and auto parts.  The United 
States has raised concerns about the possible discriminatory 
effect of the application of this tax on distilled spirits, 
because the tax on cane-based spirits (nearly all of which is 
domestically produced) is 35 percent, while the tax assessed 
on non-cane based spirits (much of which is imported) is 45 
percent.  Additionally, U.S. companies have complained that 
the Dominican Republic applies a differential &adjustment 
factor,8 depending on the category of spirit, upon which the 
ad valorem consumption tax is levied. 
 
Bringing goods through Dominican Customs can often be a slow 
and arduous process.  Customs Department interpretations 
often provoke complaints by businesspersons, and arbitrary 
clearance procedures sometimes delay the importation of 
merchandise for lengthy periods.  Furthermore, the Dominican 
government continues to require importers to obtain from a 
Dominican Consulate in the United States a consular invoice 
and &legalization8 of documents, with attendant fees and 
delays.  The use of &negotiated fee8 practices to gain 
faster customs clearance continues to put some U.S. firms at 
a competitive disadvantage in the Dominican market. 
In anticipation of the signing of a second IMF stand-by 
agreement, and in an effort to raise badly needed revenue, 
the Dominican government increased the exchange surcharge 
(Recargo Cambiario) from 4.75 percent to 10 percent. 
Dominican Customs collects the Cambiario, which is a tax 
imposed on the invoice dollar amounts of all imports into the 
Dominican Republic.  The Cambiario was initially supposed to 
be gradually phased down according to the Monetary and 
Financial Law No. 183-02 (Nov. 21, 2002).  On October 23, 
2003, the Central Bank issued a resolution increasing the 
Cambiario to 10 percent and delaying the phase out until 
February 2004 or when macroeconomic conditions were stable. 
This resolution was implemented on November 3, 2003. 
 
The Dominican government implemented the WTO Agreement on 
Customs Valuation in July 2001 following a 16-month extension 
granted by the WTO Committee on Customs Valuation. It has 
notified its implementing legislation to the WTO. In October 
2001, the Dominican Republic was granted a waiver that 
permits continued use of reference prices on over two-dozen 
categories of goods that expired on July 1, 2003.  A new 
waiver has not been granted. 
 
Sanitary permits are required for the importation of many 
agricultural products.  In practice, these sanitary permits 
are used as import licenses to control import levels of 
selected commodities and products.  The inability to apply 
for and receive sanitary permits in a timely manner in the 
Dominican Republic for shipments of U.S. meat and dairy 
products continues to be a serious problem for U.S. export 
companies and Dominican importers.  This is a result of a 
continuing policy by the General Directorate of Livestock 
within the Ministry of Agriculture to delay or reject 
applications for sanitary permits, based on its assessment of 
market needs and the effect imports would have on domestic 
producers. 
 
The trade-restrictive actions of the Livestock Directorate 
fall into two main areas: absorption requirements and lack of 
transparency. 
 
Absorption Requirements 
 
Absorption requirements, which require an importer to 
purchase specified quantities of domestic products in order 
to import those same types of products, were to be 
eliminated.  However, U.S. companies indicate that the 
Livestock Directorate is requiring importers to purchase 25 
percent of their requirements for turkeys from domestic 
sources, in order to receive sanitary permits. 
 
Transparency 
 
The current process for granting sanitary permits is 
arbitrary, with applications for permits being rejected or 
subject to lengthy delays, with little or no explanation and 
no apparent basis in Dominican law.  This is especially a 
problem for products with a short shelf life, such as yogurt, 
which could quickly pass its expiration date if delayed in 
port.  Some U.S. companies have reported that they are no 
longer attempting to export to the Dominican Republic because 
of financial losses and frustration from previous attempts to 
obtain import permits. 
 
U.S. companies have also expressed concern that the Dominican 
Dealer Protection Law 173, which applies only to foreign and 
not domestic suppliers, makes it extremely difficult to 
terminate contracts with local agents or distributors without 
paying exorbitant indemnities.  Several U.S. companies have 
lost lawsuits brought under this law and have suffered 
significant financial penalties.  This law has had a negative 
impact on market access and on consumer welfare in the 
Dominican Republic. 
 
STANDARDS, TESTING, LABELING AND CERTIFICATION 
 
The Dominican Republic generally accepts U.S. certifications 
and standards.  U.S. agricultural exports are sometimes 
subject to sanitary and phytosanitary measures that appear to 
be arbitrarily enforced and not based on science. 
 
GOVERNMENT PROCUREMENT 
 
There is no explicit &buy national8 policy; however, 
government procurement is often conducted without benefit of 
open bidding.  The processes by which contractors and/or 
suppliers are chosen are often opaque.  The Dominican 
Republic is still not a signatory of the WTO Agreement on 
Government Procurement.   The United States lifted its 
suspension of a waiver under the &Buy America Act8 in 2003 
after the Dominican government increased its cooperation in 
the World Trade Organization Working Party on Transparency in 
Government Procurement, which was based partly on legislation 
presented to the Dominican Congress to make government 
procurement more transparent.  The law has not yet been 
approved. 
 
EXPORT SUBSIDIES 
 
The Dominican Republic does not have aggressive 
export-promotion schemes other than the exemptions given to 
firms in the free trade zones.  A tax rebate scheme designed 
to encourage exports has been considered a failure. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
 
The Dominican government took steps to strengthen its 
intellectual property rights regime during 2003, and as a 
result, the United States improved the country,s standing 
under Special 301 from &priority watchlist8 to 
&watchlist.8  Although the Dominican Republic has strong 
legislation to protect copyrights and has improved the 
regulatory framework for patent and trademark protection, 
United States industry representatives continue to cite lack 
of IPR enforcement as a major concern.  The government has 
taken some steps to prosecute violators, however, there is 
insufficient training or resources for enforcement, and the 
judicial process moves very slowly.  The Dominican Republic 
recently ratified the WIPO Copyright Treaty and has submitted 
the WIPO Performances and Phonograms Treaty to Congress for 
ratification. 
 
Patents and Trademarks 
 
The government passed regulatory measures in 2003 that appear 
to significantly strengthen the Industrial Property Law 
passed in 2000 and bring the law into compliance with Trade 
Related Aspects of Intellectual Property (TRIPS) under the 
WTO.  However, the new regulations have not yet been applied 
in legal proceedings, so the effectiveness of those measures 
has not been tested. 
 
Copyrights 
 
Despite a new, TRIPS-compliant copyright law passed in 2000 
and some improvement in enforcement activity, piracy of 
copyrighted materials is still widespread. Video and audio 
recordings and software are being copied without 
authorization despite the government,s efforts to seize and 
destroy such pirated goods. The United States Government 
continues to receive serious reports of television and cable 
operators rebroadcasting signals without compensating either 
the original broadcaster or the originator of the recording. 
U.S. industry representatives point to extended delays in the 
judicial process when cases are submitted for prosecution. 
 
SERVICES BARRIERS 
 
In October 2002, the Dominican Republic passed a new monetary 
and financial law that provides for national treatment of 
investors in most of the financial services sector.  The law 
establishes a regulatory regime for monetary and financial 
institutions, and provides for participation of foreign 
investment in financial intermediary activities in the 
Dominican Republic. 
 
It is not clear at this time what long-term effects the Banco 
Intercontinental (Baninter) bank fraud scandal will have on 
financial services sector investment.  The fraud resulted in 
an estimated $2.2 billion loss, equivalent to roughly 12-15 
percent of GDP.  The Dominican government chose to guarantee 
all deposits, even though the banking law sets a relatively 
low ceiling for government guarantees of bank deposits. 
Since the Baninter scandal, the government has intervened in 
two other Dominican banks that became insolvent, BanCredito 
and Banco Mercantil.  The Dominican Republic,s Leon Jimenez 
Group subsequently purchased BanCredito, and Republic Bank, 
based in Trinidad & Tobago, acquired Banco Mercantil. 
 
Although the Dominican Republic has not yet ratified the 1997 
WTO Financial Services Agreement the new monetary and 
financial law appears to go beyond the commitments of the WTO 
agreement.  The Dominican Republic has committed itself to 
allow foreign banks to establish branches or local companies 
with up to 100 percent foreign equity to supply 
deposit-taking, lending, and credit card services.  Foreign 
investors could also own up to 100 percent equity in local 
suppliers of leasing and insurance service suppliers.  There 
is no longer any need for local participation. 
 
The Dominican Insurance Law remains unchanged requiring that 
Dominican shareholders hold at least 51 percent of the shares 
of national insurance companies. 
 
INVESTMENT BARRIERS 
 
Dominican legislation does not contain effective procedures 
for settling disputes arising from Dominican Government 
actions.  Dominican expropriation standards are not 
consistent with international law standards; several 
investors have outstanding disputes related to expropriated 
property.  Subsequent to U.S.-Dominican Trade and Investment 
Council meetings in October 2002, the Government set out to 
examine outstanding expropriation cases for possible 
resolution through payment or issuance of government bonds 
under a 1999 law.  With the help of a USAID contractor, the 
Boston Institute for Developing Economies (BIDE), the 
Dominican government has been able to identify analyze 245 
cases and has sent to and received approval for 188 (76.7%) 
by the Debt Commission.  The remaining cases will be sent to 
the next Debt Commission meeting, which has yet to be set. 
 
The Dominican Republic implemented the New York Convention on 
Recognition and Enforcement of Foreign Arbitral Awards (the 
New York Convention) in August of 2002, which provides courts 
a mechanism to enforce international arbitral awards. 
 
In 1999, capitalization of the state electric company left 
control of the distribution system and most generating 
capacity in private hands.  In 2002, the Dominican government 
reached agreement to renegotiate most of the contracts with 
independent power producers (IPP) and established a new 
agreement with the distributors on collection and payment 
mechanisms, as well as rate structure.  In 2003, however, the 
electricity sector in the Dominican Republic began to 
deteriorate.  The crisis in the sector is primarily due to 
distributor,s inability to collect sufficient funds from 
consumers and the Dominican Government, and the pricing 
formula that distributors must use to convert dollar-indexed 
tariffs into peso charges to their customers, which has been 
exacerbated by the devaluation of the peso.  The total amount 
owed in payment arrears to the generators and distributors 
exceeds USD 350 million, and continues to grow.  In 
September, the government surprised many observers by 
re-purchasing Spanish firm Union Fenosa,s share of two 
distributors (EDENORTE and EDESUR).  The buyout resulted in a 
suspension of the IMF stand-by agreement that had been agreed 
in August.  Electrical sector problems threaten the economic 
competitiveness and have the potential to spark further 
social unrest in the Dominican Republic. 
 
 
LACK OF GOVERNMENT ACTION AGAINST ANTI-COMPETITIVE PRACTICES 
 
The Dominican Republic does not have a well-developed legal 
framework against anti-competitive practices.  There have 
been no reported incidents in which a U.S. firm has initiated 
legal action against a state-owned or private company for 
practices that restricted the sale of U.S. products or 
services. 
TRADE RESTRICTIONS AFFECTING ELECTRONIC COMMERCE 
 
Embassy is not aware of specific legislation or taxes that 
apply to electronic commerce.  However, shipping costs, 
difficulties with the postal system and customs, and import 
duties are practical constraints to e-commerce. 
 
OTHER BARRIERS 
 
U.S. companies continue to complain about lack of 
transparency and corruption in all sectors.  Lack of 
predictability in the judicial process also presents problems 
for U.S. companies seeking to resolve contract disputes.  The 
Dominican Republic also has a dealer protection law that 
imposes financial penalties on foreign companies that 
terminate agreements with local distributors. 
HERTELL