US embassy cable - 04BOGOTA4326

C O N F I D E N T I A L SECTION 01 OF 04 BOGOTA 004326 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 04/29/2014 
TAGS: EAGR, ECON, ETRD, CO, FTA 
SUBJECT: ANDEAN FTA ANALYSIS: AGRICULTURE SECTOR IN COLOMBIA 
 
 
Classified By: Ambassador William B. Wood for reasons 1.5 (b and d) 
 
1. (C) SUMMARY: Agriculture will probably be one of 
Colombia's most sensitive sectors in the FTA negotiations, 
due to its historical role and the sector's high level of 
government intervention.  The U.S. has comparative advantage 
in the products most protected by Colombia, particularly 
wheat, corn and oilseeds.  The GOC's negotiating strategy for 
an FTA will most likely be to try to retain all ATPDEA 
benefits while claiming that key crops should be protected to 
underpin the fight against drugs and civil disorder.  The GOC 
will also most likely seek to offset U.S. domestic supports 
for key products through safeguard mechanisms or long 
transition times (up to 20 years). This is the first of a 
series of sector briefs developed in preparation for the 
Andean FTA.  The summaries are based on in-depth studies 
which are available from USAID Bogota.  END SUMMARY. 
 
Background 
 
2. (SBU) While ATPA and ATPDEA have brought benefits to some 
Colombian producers, an earlier market opening still haunts 
farmers.  When commercial reforms opened the market in 1990, 
Colombian agricultural exports increased from US $2.7 billion 
in 1991 to US$ 4.7 billion in 1997.  But producers blame the 
reform for the sector's anemic 1 percent GDP growth in recent 
years, and claim that the resulting 9 percent rural job loss 
fueled illicit drug production and violence. 
 
3. (U) Current GOC agricultural policies tend to support 
products with a strong political base.  A recent USAID and 
WB-sponsored study found that protected agricultural 
commodities, especially basic grains, would be uncompetitive 
even if world prices rose as much as 30 percent.  The study 
concluded Colombia is highly competitive in many 
nontraditional agricultural products (flowers, fresh fruits 
and vegetables, palm oil, cacao, and forestry products). 
These have stronger direct and indirect employment-generation 
effects than  basic grain products favored by current 
protections.  The current system distorts agricultural 
finance, with subsidies making protected products more 
attractive than under a market-based system. 
 
4. (U) The recent recovery of agriculture (4.5 percent growth 
in 2003) was fueled largely by non-traditional exports.  But 
protectionists dismiss this as a "fragile" recovery that 
could fail if traditional agricultural interests are not 
protected from domestically-supported U.S. products.  Though 
the GOC worries about rural unemployment, cheap U.S. grain 
exports would benefit Colombia's rural and urban consumers as 
well as dairy, poultry and swine production. 
 
A Variety of Trade Barriers 
 
5. (U) The Andean Common External Tariff applies to most 
products. It varies from 5 percent and 10 percent for inputs 
and 15 percent and 20 percent for final products.  Some 
excepted products are tariff-free to encourage growth of 
their productive chains.  Finally, a group of sensitive 
products are included in the price-band system. 
 
6. (SBU) The Price-Band System includes the 14 most protected 
Colombian products (including basic grains, soybeans and 
chicken) and 150 substitutes and derivatives.  It was 
designed to stabilize prices of agricultural imports with 
high price volatility in international markets, and to 
counter export and production subsidies. When international 
prices surpass the band ceiling, tariffs are reduced; when 
prices drop below the band floor, tariffs are raised. 
Tariffs are calculated using reference prices and not real 
transaction values, a practice similar to setting a "minimum 
price," violating WTO rules.  Although the price-band has 
succeeded in stabilizing prices, it also raises the cost of 
key inputs for other products, lowering their competitiveness 
and dampening consumption through higher local prices. 
According to a USAID/WB study, it often raises the effective 
protection on some products to over 200 percent.  This system 
is not compatible with the WTO and will need to be phased out. 
 
7. (C) Voluntary Tariff-Rate Quotas (TRQs) protect six of the 
most politically-sensitive agricultural products-- white and 
yellow corn, grain sorghum, rice, soybeans and cotton.  The 
TRQs are set by historic import levels and then auctioned off 
by the Agricultural Commodities Board.  Importers offering to 
purchase the most domestic production win the right to 
purchase the imports bid at a reduced tariff rate.  Imports 
beyond the TRQ are allowed, but face the general tariff rate. 
 GOC sees TRQs as a way to decrease protection for sensitive 
agriculture sectors while preparing them for free trade.  FTA 
talks will then provide the political cover and concessions 
necessary to dismantle them. 
 
8. (SBU) Stabilization Funds provide income support for 
producers of sugar, palm oil, cocoa, beef and dairy products 
by maintaining domestic prices above world prices.  The cacao 
and cotton funds are currently not operating due to funding 
shortfalls.  The Funds are financed by a levy on domestic 
sales, with the resulting income used to subsidize exports of 
surplus production.  While the GOC and producers deny that 
these are export subsidies, these are producer-financed 
exports subsidies covered by WTO limits.  Subsidized beef 
exports are relatively small, but export subsidies for sugar, 
palm oil and dairy products are in excess of WTO limits. 
These programs should be removed. 
 
9. (SBU) Special Safeguard Measures are applied to 56 
products listed with the WTO.  Here an additional tariff is 
applied when the volume of imports increases or when the 
price of imports decreases against a set reference price. 
Special safeguard measures also apply to 85 products listed 
under the Andean Community.  Many of these safeguards are not 
being applied because of other protectionist measures in 
place such as price bands and tariff rate quotas.  The GOC 
says the measures are permitted by the WTO, but they may not 
comply with the most-favored nation principle. 
 
10. (U) Promotion Fund Quotas (PFQs) are tariffs collected on 
certain imported goods to help fund scientific research, 
development, and technological transfer projects to promote 
domestic exports.  Such levies are applied on products such 
as malt, cacao, almonds, cotton, cottonseeds, and tobacco 
among others, raising the cost of imports. 
 
11. (SBU) Discretionary Import Licensing requirements were 
removed for corn, rice and poultry with the expiration of a 
WTO waiver January 1, 2004.  However, requirements remain for 
dry beans, beef and milk powder, the latter two instituted in 
2003 in violation of WTO rules.  The FTA will need to 
eliminate these requirements and the legislative authority of 
the Ministry of Agriculture to implement such restrictions in 
the future. 
 
12. (SBU) Sanitary and Phytosanitary Measures (SPS) have not 
been a major problem.  U.S. beef and poultry are currently 
banned due to BSE and Avian Influenza concerns, but 
restrictions may be lifted prior to FTA negotiations. 
Salmonella requirements on poultry were previously a problem 
and could be used again to block imports.  SPS restrictions 
could increase as the FTA removes the GOC's discretionary 
authority to protect sensitive products through import 
licensing and high tariffs. 
 
13. (U) Technical Barriers to Trade have generally been in 
the form of restrictive registration requirements.  While 
these requirements have not been used to keep products out, 
the long and complicated process significantly delays the 
entry of new products.  Biotechnology restrictions have not 
been a problem, but stricter enforcement of biotech 
regulations related to international agreements could be a 
problem in the future. 
 
14. (C) Getting to the Table:  What the GOC Needs to Do 
 
A. Develop an export promotion strategy that eliminates 
protectionist barriers. 
 
B. Implement key policy and institutional reforms to improve 
land market access and allocation and public infrastructure 
planning to reinforce comparative advantages in highly 
labor-intensive export sectors. 
 
C. Review protection for less-competitive products that serve 
as inputs for other agricultural goods, negatively affecting 
their competitiveness. 
 
D. Develop more market-based approaches for integrating the 
agricultural and agro-business sectors into the formal 
financial system. 
 
E. Resolve the ongoing battle between the ministries of Trade 
and Agriculture fro control of agricultural trade policy. 
 
15. (C) Overall GOC Demands in Agriculture 
 
A. U.S. domestic subsidies should betaken into account in FTA 
negotiations.  GOC will leverage this issue to push the U.S. 
to examine alternative financial mechanisms (such as 
compensation or reconversion funds) and extended phase-out 
periods for protectionist mechanisms (eg. price-bands) to 
"counter" U.S. subsidies. 
 
B. U.S. phytosanitary standards should be negotiated or 
modified to give Colombia rapid market access to dairy, beef, 
poultry, fruit and horticultural exports.  GOC should agree 
to establish a harmonization or equivalence strategy for 
improved registration, control, inspection and certification 
procedures and intensive technical and institution-building 
assistance to achieve international standards. 
 
C. Retain current ATPDEA benefits on all agriculture 
products. 
 
16. (C) GOC Positions on Key Agricultural Products 
 
A. Basic crops (rice, sorghum, corn and cotton) should enjoy 
special consideration in the FTA.  The GOC argues these crops 
play a critical role in providing rural jobs that enhance 
social stability and keep farmers from illicit drugs and 
conflict.  While seemingly valid, this argument is false. 
Basic grains offer a minor source of employment and 
subsistence farmers most likely to switch to illegal crops 
are not grain producers. The GOC and alternative development 
donors are shifting their focus from grains to more 
financially viable crops as better substitutes for drug 
crops. The GOC will seek long-phase-in periods, technical 
assistance and crop substitution financing for dismantling of 
protection for basic grains. 
 
B. Keep out U.S. corn and soybean oil to protect Colombian 
corn and palm oil.  The GOC wants import substitution 
opportunities for Colombian corn & soybeans and will try to 
ensure a lengthy transition period for tariff reductions in 
these areas.  The GOC may be willing to eliminate export 
subsidies for palm oil more rapidly. 
 
C. Keep out high fructose corn syrup to protect high domestic 
sugar prices and provide a large sugar quota for Colombia 
(over 100,000 MT). 
 
D. Keep U.S. poultry leg quarters out of Colombia for as long 
as possible. Colombians prefer leg quarters while U.S. 
consumers prefer breast meat. 
 
E. Emphasize market access for exotic fruits and vegetables. 
 
 
F. Gain greater access for Colombian beef (including removal 
of foot-and-mouth related restrictions) and dairy products 
into the U.S. market. 
 
17. (C) Overall GOC Negotiating Strategy for Agriculture 
 
A. Plan A will be to argue that Colombian agriculture must be 
protected in order to underpin the fight against 
narcoterrorism.  Plan B will be to demand long phase-in 
periods for sensitive crops. The GOC is likely to assume a 
hard line for an extended period of time, until they sense 
that the success of the FTA is imperiled. 
 
B. Agriculture Minister Cano, a hard-line protectionist, is 
seen as reflecting President Uribe's policy instincts on 
agriculture, and is pitted against Trade Minister Botero on 
the FTA.  Final decisions on tough issues will be taken by 
President Uribe. 
WOOD