US embassy cable - 04TEGUCIGALPA778

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 000778 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EB 
STATE PASS USTR FOR JWOLFE 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EAGR, PGOV, HO, WTO 
SUBJECT: HONDURAN TRADE PRIORITIES: DOHA NEGOTIATIONS AND 
CENTRAL AMERICAN CUSTOMS UNION 
 
REF: A) Tegucigalpa 715 
 
     B) Tegucigalpa 704 
     C) State 6662 
     D) Guatemala 305 
 
1.  SUMMARY: The GOH's two top trade priorities for 2004 are 
progress in the WTO negotiations of the Doha Development 
Agenda (DDA) and the creation of a Central American customs 
union.  In the WTO negotiations, Honduras' main concerns 
focus on agricultural market access, rather than 
agricultural subsidies or the Singapore issues.  In Central 
America, Honduras supports the completion of the regional 
customs union, but believes it will take several months to 
work out certain technical issues.  END SUMMARY. 
 
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Top Priorities for 2004: WTO and Central America 
--------------------------------------------- --- 
 
2.  On March 17, EconOffs met with Melvin Redondo, Director 
of Trade Policy and Honduras' chief negotiator for trade 
agreements.  In addition to discussion of Honduras' view of 
the ongoing FTAA negotiations (reftel A) and the upcoming 
UNCTAD XI session (reftel B), Redondo outlined Honduras' 
priorities in regional and global trade negotiations for the 
coming year.  He stated that, as Honduras' top trade 
priority in 2003 had been CAFTA, its focus in 2004 would be 
the WTO negotiations and the Central American customs union. 
 
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WTO Negotiations: Agricultural Market Access is Key 
--------------------------------------------- ------ 
 
3.  Redondo acknowledged that the GOH has not yet formally 
responded to Ambassador Zoellick's January letter (reftel C) 
regarding next steps in the Doha Development Agenda.  He 
said that his office is still working on putting its views 
on the negotiations into a comprehensive response that can 
be discussed in detail.  However, he was supportive of the 
letter and appreciative of Ambassador Zoellick's efforts to 
advance the Doha negotiations in 2004. 
 
4.  The GOH's primary concern with the DDA is with market 
access for agricultural goods, and the formulation of a list 
of products that will receive special treatment.  Redondo 
pointed out that Honduras is unusual for a developing 
country, in having a maximum WTO tariff binding of only 50 
percent, and a tariff binding of only 35 percent on most 
products.  Redondo compared this to other countries with 
tariff peaks of 600 percent (he mentioned Kenya and India), 
and said that the Swiss Formula, designed with countries 
with higher tariffs in mind, would not be appropriate for 
Honduras.  Applying the Swiss Formula to Honduras, according 
to Redondo, would lead to a schedule of tariff reductions 
that the Honduran private sector would find unacceptable, 
and that would seem unfair, given the already low level of 
Honduras' tariff bindings. 
 
5.  As in the CAFTA negotiations, Honduras hopes to be able 
to set aside a group of sensitive agricultural products for 
which tariff reductions will be negotiated differently. 
Redondo expects that a paper outlining the GOH position in 
greater detail will be ready for discussion by April.  The 
GOH believes that, with only Sri Lanka in a similar 
situation, an accommodation for developing countries with 
low initial bindings should be possible. 
 
6.  Redondo stressed that agricultural subsidies or domestic 
supports are not a primary concern of his government, nor 
are the Singapore issues; the agricultural market access 
issue described above is far more important.  Redondo said 
that Honduras is also working to build an offer on services 
that will lock in recent domestic liberalization of the 
telecom industry. 
 
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Central American Customs Union: Honduras Supportive 
--------------------------------------------- ------ 
 
7.  The GOH's second major trade priority for 2004 is the 
establishment of a Central American customs union.  As 
discussed in reftel D, this project has received high-level 
political attention from the new administration in 
Guatemala, which in January announced its intention to open 
its borders with El Salvador by late April, with Honduras 
and Nicaragua to follow later in the year. 
 
8.  Redondo emphasized that Honduras supports the goal of a 
regional customs union and is actively engaged in this 
project.  Redondo stated that Honduras has acquired the 
image of the regional "bad boy" simply for being the one to 
point out some of the practical difficulties involved in the 
creation of a full customs union.  He stressed that the 
issue is not the presence or absence of border controls, but 
the technical details involved in the management of the 
customs union - specifically, administration of certain tax 
issues - which imply a concern over trade distortions and 
diversions. 
 
9.  Redondo discussed at length some of the difficulties in 
managing the differing tax systems of the countries 
involved: for example, applying Honduran sales tax to goods 
which originate in El Salvador, or vice versa.  (Note: while 
commonly called a sales tax, Honduras' tax is in fact a 
hybrid of a sales tax and a value-added tax (VAT).  Tax is 
therefore levied not only at the point of sale, but also 
throughout the production and distribution process.  End 
note.)  Furthermore, Redondo stressed that, unlike Guatemala 
and El Salvador, Honduras exempts a sizable number of 
products -- mainly foodstuffs -- from the sales tax.  True 
tax harmonization across the region would imply either 
persuading other countries to exempt the same basic basket 
of goods from sales tax, or applying the sales tax to those 
goods in Honduras.  Neither is considered remotely feasible. 
 
10.  Setting aside the issue of tax harmonization, however, 
Redondo raised other examples of trading patterns which, 
under a customs union, would present "difficulties".  For 
example, if El Salvador has a trade agreement with Chile but 
other members of the customs union do not, would Chilean 
goods for the entire region simply enter the region via El 
Salvador and then be shipped throughout the region tariff- 
and tax-free?  Redondo also expressed concern over 
differences in sanitary and phyto-sanitary regulations among 
the various countries that would belong to the customs 
union, saying that Guatemala has declared itself to be free 
of certain poultry diseases, but implying that Honduran 
authorities have less than complete confidence in such 
declarations. 
 
11.  Redondo believes that, for Honduras, the technical 
questions can all be worked out so that Honduras could join 
by the end of the year.  He outlined a two-stage process. 
In stage one, Honduras would open up to all goods which 
satisfy a Central American rule of origin, and to all goods 
for which the tariff for countries from the rest of the 
world is zero.  In the second stage, Honduras would open up 
to goods originating from outside Central America, and those 
for which the different Central American countries have 
different tariffs. 
 
12.  In a separate meeting the following week, EconOffs also 
discussed the customs union with Marlene Urtecho, who is 
Assistant Director of Customs at the Honduran tax collection 
agency, the DEI (Direccion Ejecutiva de Ingresos).  Urtecho 
downplayed the difficulty of managing different internal 
taxes, saying that each country could simply impose its own 
taxes on products passing through its own territory. 
Instead, she focused on the revenue losses to Honduras that 
would likely accrue because importers of the five products 
for which Honduras has higher taxes than its neighbors 
(petroleum products, wheat, sugar, alcoholic beverages and 
ethyl alcohol) would transship these imports through 
neighboring countries to avoid the tax.  Honduras is not in 
a position to lower these taxes (particularly the fuel 
taxes), given the importance of meeting IMF fiscal targets. 
Like Redondo, however, Urtecho believes that these 
outstanding tax issues can be handled and expects that 
Honduras will belong to the customs union before the end of 
the year. 
 
Palmer