US embassy cable - 04SANTODOMINGO5242

C O N F I D E N T I A L SECTION 01 OF 04 SANTO DOMINGO 005242 
 
SIPDIS 
 
STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA 
NSC FOR SHANNON AND MADISON 
WHITEHOUSE FOR USTR-VARGO 
USDA FOR ITP - SHEIKH AND GRUNENFELDER 
LABOR FOR ILAB 
TREASURY FOR OASIA-LAMONICA 
USCINCSO ALSO FOR POLAD 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH 
STATE FOR USTR 
 
E.O. 12958: DECL: 09/17/2009 
TAGS: ETRD, EFIN, PREL, PGOV, DR 
SUBJECT: DOMINICAN PRES. FERNANDEZ OFFERS TO RESOLVE CORN 
SYRUP TAX ISSUE 
 
REF: A. SANTO DOMINGO 5080 
 
     B. SANTO DOMINGO 5024 
 
Classified By: Ambassador Hans H. Hertell for Reason 1.4 (a) and (d). 
 
 1. (C) Summary: Visiting USOAS PermRep Ambassador John 
Maisto and Ambassador Hertell took advantage of a meeting 
planned on Summit of the Americas to tell President Fernandez 
and Foreign Secretary Carlos Morales Troncoso September 16 
that a proposed 25 percent tax on products containing high 
fructose corn syrup (HFCS), if approved by the Domnican 
Congress as planned September 21, would be a deal-breaker for 
U.S. ratification of DR-CAFTA.  Fernandez got the message and 
proposed that he (and the USG) try to convince leaders of the 
opposition PRD -- which controls the Dominican Congress -- to 
delete the tax from the fiscal reform bill, now awaiting 
passage as part of a series of measures needed to re-launch 
an IMF program.  Both sides agreed there were other, better 
ways to deal with the Dominican sugar industry's concerns, 
e.g., joining us as allies in the WTO to negotiate a global 
opening in agriculture as part of the multilateral 
negotiations launched at Doha.  On the fiscal reform overall, 
Maisto noted that the key to resuming an IMF program was to 
develop a program that would meet the government's financial 
needs.  Such a program would offer a basis for dialogue with 
the IMF and other international financial institutions. 
Fernandez said he was "trying to do things correctly" with 
the IMF, but had to consider the dire social consequences of 
a drastic fiscal adjustment, which could mean political 
"suicide" for his newly installed administration.  Also on 
September 16, Ambassador Hertell met with leaders of 
free-zone businesses and urged them to mount a last-minute 
lobbying effort.  End summary. 
 
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Status of HFCS tax 
------------------ 
 
2. (C) Visiting USOAS PermRep Ambassador John Maisto and 
Ambassador Hertell, accompanied by Embassy staff, met 
September 16 with President Fernandez (PLD) and Foreign 
Secretary Carlos Morales Troncoso to discuss Summit of the 
 
SIPDIS 
Americas.  They took advantage of the opportunity to raise 
the pending fiscal reform, passage of which is needed for 
renewal of the Dominican Republic's IMF program.  The 
conversation focused on a 25 percent tax on beverages 
containing high fructose corn syrup (HFCS) that had been 
added to the bill at the last minute before approval in the 
Chamber of Deputies and which President Fernandez, opposition 
PRD chief Vicente Sanchez Baret, and Senate president Andres 
Bautista (PRD) had all promised Ambassador Hertell September 
9 would be removed before full passage of the fiscal reform 
bill (see reftel).  The Senate unexpectedly approved the 
first reading of the fiscal reform bill September 14 with the 
25 percent tax still in it.  A second (final) reading and 
vote is scheduled for September 21. 
 
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Deal-Breaker for DR-CAFTA 
------------------------- 
 
3. (C) Ambassadors Maisto and Hertell told Fernandez that, 
despite much good will in Washington toward his newly 
installed administration, we could not renegotiate any 
provision of the free trade agreement (DR-CAFTA), period. 
The negotiations are over, they emphasized.  The DR-CAFTA, as 
signed in August, was an international commitment, subject 
only to ratification.  The proposed tax on products 
containing HFCS ran counter to DR-CAFTA and would be a 
deal-breaker in the ratification process.  U.S. legislators 
who are friends of the Dominican Republic have indicated that 
the tax would kill DR-CAFTA's chances for ratification. 
 
4. (C) On the fiscal reform as a whole, Maisto urged 
Fernandez to exert leadership and take bold strokes; band-aid 
solutions would not work.  The GODR needed to develop a 
financial program that adds up and makes sense.  If this 
happens, there would be a basis for a solution to be 
discussed with the IMF and other international financial 
institutions. 
 
--------------------------------- 
Good Administration, Bad Congress 
--------------------------------- 
 
5. (C) President Fernandez replied that he was carrying out 
the fiscal reform as mandated by the IMF: "I'm willing to 
cooperate and am trying to do things correctly."  His 
proposed fiscal adjustment, 2.5 percent of GDP through 
revenue measures plus a 10 percent cut in public spending, 
was the limit of what was politically feasible or 
economically possible.  If he deepened the adjustment to 4 
percent of GDP as recommended by the IMF, "people would go 
into the streets" and his new government would commit 
"suicide."  The country is very fragile, he asserted.  He is 
still consolidating his administration.  Critics, here and 
abroad, were "misunderstanding" his good faith efforts.  He 
had anticipated that relations with the IMF would be "more 
fluid," but now his government was "paralyzed" (by lack of 
access to further IFI disbursements).  The DR's financial 
predicament was due to the previous administration's "failure 
of leadership and mismanagement."  His government, by 
contrast, was trying hard to move on all fronts -- with the 
IMF, with the Paris Club, and with Venezuelan President 
Chavez over preferential terms for buying oil.  Fernandez 
asked that the IFIs "give me the green light." 
 
6. (C) The opposition PRD -- not the Fernandez administration 
-- inserted the HFCS tax into the legislation, the President 
noted.  The PRD, which controls Congress, had created the 
problem.  Ambassador Hertell had asked him to remove the tax, 
and Fernandez noted that critics were saying such a move 
would be tantamount to promoting a special interest over the 
national interest.  Fernandez mentioned "options" of (1) 
passing the urgently needed fiscal reform as is and later 
revoking the HFCS tax through separate legislation, or (2) 
reducing the tax from 25 percent to 15 or 10.  Ambassador 
Hertell emphasized that both these ideas were non-starters. 
Fernandez said he had acceded to our wishes and sent a letter 
to the Senate requesting deletion of the tax.  For this he 
had been harshly criticized in the press.  The tax was a real 
problem, but should be viewed as a conflict between private 
interests, not between governments. 
 
7. (C) Ambassador Hertell said we appreciated Fernandez's 
effort with the letter.  However, Senate contacts had told us 
that the letter -- signed by Technical Secretary of the 
Presidency Temistocles Montas -- had been insufficient and 
that it was necessary for Fernandez to send a clear statement 
of policy over his own signature.  Ambassador Maisto urged 
Fernandez to agree to a meeting with Treasury Secretary Snow 
in Washington during the President's upcoming trip to the 
United States (September 19-26).  President Fernandez said he 
first wanted to hear back from the GODR officials who were 
visiting Treasury September 16.  Maisto emphasized that the 
only way to resolve the protectionism issue, which underlay 
the proposal to tax beverages using HFCS, was for the United 
States and the Dominican Republic to work together in Geneva 
to significantly reduce agricultural subsidies worldwide. 
That, he said, would be a win-win for all. 
 
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Leonel's Proposal 
----------------- 
 
8. (C) Near the end of the long discussion, President 
Fernandez acknowledged the urgent need to find a solution to 
the HFCS tax issue.  This provision had to be removed from 
the fiscal package.  Fernandez would talk with three PRD 
leaders -- former President Mejia, party president Vicente 
Sanchez Baret, and Senate president Andres Bautista -- and 
convince them to modify the bill in the Senate on September 
21 and then secure prompt approval of the bill by the Chamber 
of Deputies without the 25 percent tax.  Mejia, despite his 
electoral defeat, was still influential, and he might be 
willing to help to save the DR-CAFTA.  Fernandez had succeed 
in getting Mejia to weigh in on other occasions.  Fernandez 
requested that Ambassador Hertell lend a hand in trying to 
persuade these leaders.  The Ambassador plans follow-up. 
Fernandez also mentioned that the GODR could then bring a 
case against the USG in the WTO for use of "unfair 
agricultural subsidies."  Ambassadors Maisto and Hertell 
urged President Fernandez to take the high-road, win-win 
approach of joining forces in the WTO, rather than this 
low-road approach of a WTO dispute that had been suggested by 
some private sector Dominicans. 
 
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Comment 
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9. (C) This is the second time that Fernandez has agreed to 
action to get the Senate to remove the 25 percent tax from 
the fiscal reform bill before the bill's passage.  Bautista's 
about-face, which we understand was due to his offense at 
being pressured by PRD party chief Sanchez Baret, suggests 
that institutional, partisan, or interpersonal sensitivities 
could still override clear calculation of national interests. 
 Another potential obstacle could be the lack of a letter to 
the Senate signed by Fernandez himself.  Despite the fact 
that Fernandez's Technical Secretary Temistocles Montas had 
written a letter to the Senate requesting removal of the 25 
percent tax, the opposition has been asking for one from 
Fernandez to, in their own words, "dispel doubts" about his 
true views on this issue.  Despite Embassy's many 
conversations with government, party, congressional, and 
private sector representatives, it is still too early to know 
how the vote will go; we hope that our many Dominican 
interlocutors have heard our insistent and clear message that 
the 25 percent tax is unacceptable. 
10. (C) The leaders of manufacturing and free zone 
enterprises that stand to benefit from the DR-CAFTA are 
finally awakened to the threat of the well-organized campaign 
that agricultural interests have conducted for the past 
several months to sink the accord.  Whether the businesses' 
last-minute lobbying will be enough to turn the tide in 
Congress remains to be seen. 
HERTELL