US embassy cable - 04TEGUCIGALPA2787

UNCLAS SECTION 01 OF 07 TEGUCIGALPA 002787 
 
SIPDIS 
 
STATE FOR EB/TPP/MTA/MST AND WHA/CEN 
STATE PASS 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 2005 
 
REF:  SECSTATE 240980 
 
1.  The text of the 2005 National Trade Estimate report for 
Honduras follows. 
 
TRADE SUMMARY 
 
(Note that the following paragraph is to be updated by Washington 
with USDOC statistics.)  In 2003, the U.S. trade deficit with 
Honduras was $486.4 million, a decrease of $203.8 million from 
deficit of $690.2 million in 2002.  U.S. goods exports to 
Honduras were $2.826 billion, an increase of $255 million from 
$2.571 billion in 2002.  Corresponding U.S. imports from Honduras 
were $3.261 billion in 2003, up $135 million from 2002.  Honduras 
is currently the United States' 32nd largest export market. 
 
(This paragraph will also be updated with USDOC statistics.)  The 
stock of U.S. foreign direct investment (FDI) in Honduras in 2002 
amounted to $184 million, down 24 percent from 2001.  U.S. FDI is 
concentrated largely in the manufacturing sector. 
 
IMPORT POLICIES 
 
Free Trade Agreements 
 
The United States and five Central American countries (Costa 
Rica, El Salvador, Guatemala, Honduras, and Nicaragua) signed the 
U.S.-Central American Free Trade Agreement (CAFTA) in May 2004. 
The CAFTA will not only liberalize bilateral trade between the 
United States and the region, but will also further integration 
efforts among the countries of Central America, removing barriers 
to trade and investment in the region by U.S. companies.  The 
CAFTA will also require the countries of Central America to 
undertake needed reforms to alleviate many of the systemic 
problems noted below in areas including customs administration; 
protection of intellectual property rights; services, investment, 
and financial services market access and protection; government 
procurements; sanitary and phytosanitary (SPS) barriers; other 
non-tariff barriers; and other areas. 
 
Tariffs 
 
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 tariffs on 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.  Once 
the CAFTA goes into effect, about 80 percent of U.S. industrial 
and commercial goods will be immediately eligible to enter 
Honduras duty free, with the remaining tariffs on such goods 
being eliminated within ten years.  Textiles and apparel will be 
duty-free and quota-free immediately if they meet the agreement's 
rule of origin, promoting new opportunities for U.S. and Central 
American fiber, yarn, fabric and apparel manufacturing. 
 
Honduras implements a combination price band and absorption 
agreement for corn, grain sorghum, and corn meal.  Under the 
price band mechanism, duties can vary from 5 to 45 percent, 
depending on the import price.  The duty for these products drops 
to 1 percent if the end users agree to first purchase a 
predetermined amount of corn and sorghum from domestic farmers - 
otherwise, the higher tariffs of the price band mechanism remain 
in effect.  The tariff reduction only takes place during non- 
harvest season (March through August) and only end-users who have 
previously signed the absorption agreement may apply for this 
preferential treatment.  A similar absorption agreement exists 
for rough rice, where duties are 1 percent for signers of the 
agreement and 45 percent for everyone else.  The United States 
has strongly opposed the Honduran policies on these grains as 
limiting access for U.S. agricultural products. 
 
When implemented, the CAFTA will lead to the elimination of this 
system for all products but white corn.  Tariffs on all other 
agricultural products will be eliminated within 15 years after 
the agreement takes effect, except for tariffs on rice, which 
will be phased out over 18 years, and tariffs on some dairy 
products, which will be phased out over 20 years. 
 
The Agreement also requires transparency and efficiency in 
administering customs procedures, including the CAFTA rules of 
origin.  Honduras committed to ensure procedural certainty and 
fairness and all parties agree to share information to combat 
illegal transshipment of goods. 
Honduras implemented the WTO Customs Valuation Agreement in 
February 2000. 
 
STANDARDS, TESTING, LABELING, AND CERTIFICATION 
 
Application of sanitary and phytosanitary requirements is 
sometimes lacking in transparency, resulting in uncertainty among 
U.S. suppliers and Honduran importers.  Honduras committed during 
the CAFTA negotiations to resolve these issues (see below). 
 
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.  The Honduran 
government has also cited SPS concerns in periodically denying 
applications for the importation of pork and dairy products. 
 
Since 2002, Honduras has imposed a ban on poultry products from a 
number of states in the U.S., due to concerns over low-pathogenic 
avian influenza (LPAI).  The ban was revised and renewed in March 
2004 in spite of World Organization for Animal Health (OIE) 
guidelines that the presence of LPAI does not justify trade 
restrictions, and despite information provided to GOH officials 
by USDA indicating the dates on which depopulation and 
surveillance testing were completed in the affected states.  The 
U.S. Department of Agriculture 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. 
 
In December 2003, Honduras imposed a ban on the import of U.S. 
beef and its derivatives, in response to the detection by USDA of 
a case of Bovine Spongiform Encephalopathy (BSE, commonly known 
as "mad cow" disease) in Washington state.  The ban was applied 
in accordance with guidelines issued by the OIE (World 
Organization for Animal Health), and did not include dairy 
products or other products considered to carry no risk of BSE. 
On June 2, 2004, the Honduran government lifted the ban in 
response to increased safety measures taken by the U.S. 
authorities. 
 
In January 2004, U.S. rice exporters complained that they were 
being to forced to fumigate with methyl bromide shipments of U.S. 
rice that had false smut present before the shipment would be 
allowed into Honduras.  This restriction added costs and delays 
to the shipping, and is not justifiable on food safety grounds. 
(The presence of false smut is a quality issue, but the GOH 
imposed restrictions as if it were a health issue.)  In September 
2004, the GOH authorities stopped requiring fumigation in 
response to information provided by APHIS on the practice. 
 
The Honduran government requires that sanitary permits be 
obtained from the Ministry of Health for all imported foodstuffs, 
and that all processed food products be labeled in Spanish and 
registered with the Division of Food Control (DFC) of 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.  However, 
during 2004, the company complained that these regulations were 
not being strictly enforced for many of its Honduran competitors, 
a complaint that post finds credible.  This lack of enforcement 
on the part of the Honduran government places any U.S. company 
which does comply with the regulations at a disadvantage. 
 
The embassy has also received complaints from a regional 
supermarket chain which, in 2003, imported more than $40 million 
worth of U.S. goods into the region, and believes the amount of 
its imports into Honduras could grow significantly, given a more 
transparent and efficient process of granting sanitary permits. 
Specifically, the company has complained that the length of time 
required for a sanitary permit to be granted (usually 2 to 3 
months) is too long, that the cost of a permit ($500 - $600) is 
excessive, and that the application requires information that is 
difficult to obtain and has little to do with the safety of the 
product in question. 
 
Under the CAFTA, Honduras agreed to apply the science-based 
disciplines of the WTO Agreement on Sanitary and Phytosanitary 
Measures, and will move toward recognizing export eligibility for 
all plants inspected under the U.S. food safety and inspection 
system.  Presently, Honduras may import meat products only from 
individual U.S. plants that have been pre-certified by Honduran 
food safety authorities. 
 
When the United States and Central America launched the CAFTA 
negotiations, they initiated an active working group dialogue on 
SPS barriers to agricultural trade that met alongside the 
negotiations to facilitate market access.  The objective was to 
leverage the impetus of active trade negotiations to seek 
difficult changes to the countries' SPS regimes. The SPS Working 
Group remains committed to continue working on the resolution of 
outstanding issues even after the negotiations concluded. 
Through the work of this group, additional commitments to resolve 
specific unjustified measures restricting trade between Honduras 
and the United States have also been agreed. 
 
GOVERNMENT PROCUREMENT 
 
Honduras is not a party to the WTO Government Procurement 
Agreement.  Under the Government Contracting Law, which entered 
into force in October 2001, all public works contracts over one 
million lempiras (approximately $53,850 as of December 2004) must 
be offered through public competitive bidding.  Public contracts 
between 500,000 and one million lempiras ($26,925 and $53,850) 
can be offered through a private bid, and contracts less than 
500,000 lempiras ($26,925) are exempt from the bidding process. 
Currently, to participate in public tenders, foreign firms are 
required to act through a local agent (at least 51 percent 
Honduran-owned).  The CAFTA eliminates this requirement. 
 
While foreign firms are granted national treatment for public 
bids, some still complain of mismanagement and lack of 
transparency in the bid processes.  In 2004, a U.S. insurance 
company participated in a bid to provide insurance to the state- 
run electricity company, ENEE.  The U.S. company was eliminated 
from consideration on grounds that it considers to be 
unreasonable.  Every other company that participated except one 
was also eliminated for various technical reasons, leaving only 
one company to "compete" on price.  All of the eliminated 
companies, including the U.S. company and several Honduran 
companies, have together denounced the management of the bidding 
process as having been contrary to the Government Contracting 
Law, and they have submitted a complaint to the Supreme Court of 
Accounts (Tribunal Superior de Cuentas), the GOH's general 
accounting and public ethics office.  That case remains pending. 
 
One way that the GOH has tried to improve transparency and 
fairness in government procurement is by hiring the United 
Nations Development Program (UNDP) to manage procurement for an 
increasing number of ministries and state-owned entities. 
However, U.S. companies have still expressed concerns about the 
way that UNDP has managed major procurements for the government. 
Specifically, during 2004, two U.S. companies, participating in 
two separate bid processes, complained that the bid requirements 
were written so narrowly that they favored a particular company 
from the outset.  One of these companies also complained that, 
while a process for the participating companies to provide 
feedback did exist, their concerns about the unreasonable terms 
of reference did not seem to be taken into account.  A third U.S. 
company complained about UNDP management of an invitation-only, 
limited-bid process, saying that the criteria for being invited 
to bid were not transparent. 
 
Under the CAFTA, U.S. suppliers will be granted non- 
discriminatory rights to bid on contracts from most Central 
American government entities, including key ministries and state- 
owned enterprises.  The CAFTA requires fair and transparent 
procurement procedures, such as advance notice of purchases and 
timely and effective bid review procedures.  The CAFTA's anti- 
corruption provisions ensure that bribery in trade-related 
matters, including in government procurement, is specified as a 
criminal offense under Central American and U.S. laws. 
 
EXPORT SUBSIDIES 
 
Honduras does not have export subsidies or export-promotion 
schemes other than the tax exemptions given to firms in free 
trade zones.  The CAFTA will require the elimination of WTO- 
illegal export subsidies. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
 
Honduras largely complied with the Trade Related Aspects of 
Intellectual Property Rights (TRIPs) Agreement by the January 1, 
2000, deadline.  In December 1999, the Honduran Congress passed 
two laws to reform previous legislation concerning copyrights, 
patents, and trademarks.  However, the Honduran Congress must 
still pass laws governing the design of integrated circuits and 
plant variety protection to be in complete TRIPs compliance.  In 
the CAFTA, Honduras agrees to ratify or accede to the 
International Convention for the Protection of New Varieties of 
Plants by January 1, 2006, or provide effective patent protection 
for plants by the date of entry into force of the agreement. 
 
Honduras has been a member of the World Intellectual Property 
Organization (WIPO) since 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 the 
CAFTA, which, once implemented, will strengthen intellectual 
property rights protection in all areas.  Honduras became party 
to the WIPO Copyright Treaty (WCT) and the WIPO Performances and 
Phonogram Treaty (WPPT) in May 2002. 
 
CAFTA provisions will strengthen Honduras' IPR protection regimes 
to conform with, and in many areas exceed, WTO norms and will 
criminalize end-user piracy, providing a strong deterrence 
against piracy and counterfeiting.  The CAFTA will require all 
member countries to authorize the seizure, forfeiture, and 
destruction of counterfeit and pirated goods and the equipment 
used to produce them.  It will also mandate both statutory and 
actual damages for copyright infringement and trademark piracy. 
This serves as a deterrent against piracy, and ensures that 
monetary damages can be awarded, even when it is difficult to 
assign a monetary value to the violation. 
 
Copyrights 
 
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 to limited enforcement capacity.  A 
spot survey by an industry-sponsored IPR advocacy group found 
that nearly 75 percent of all compact discs for sale in Honduras' 
markets were pirated.  The Public Ministry, which is responsible 
for prosecuting crimes, assigns just one prosecutor half-time to 
intellectual property crimes.  As a result, U.S. companies which 
have tried to pursue software infringement cases have received 
little co-operation from the Honduran authorities.  U.S. software 
companies are also pushing for ministries and state-owned 
entities to legalize the pirated software that many currently 
use.  A major U.S. software company has estimated that it loses 
$5 million annually due to software piracy in Honduras.  The 
CAFTA enforcement provisions are designed to help reduce 
copyright piracy. 
 
The piracy of cable television signals is also a problem in 
Honduras.  During 2004, two different U.S. companies claimed that 
their competitors were broadcasting pirated cable television 
signals from the United States, and complained that the Honduran 
authorities do not vigorously investigate and prosecute these 
activities. 
 
Patents and Trademarks 
 
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 currently must be registered with the 
Ministry of Industry and Trade.  The CAFTA will eliminate 
cumbersome registration requirements. 
 
Modifications to the Patent Law of 1993 included patent 
protection for pharmaceuticals, and extension of 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 was 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. 
The CAFTA enforcement provisions are designed to help reduce 
trademark piracy. 
 
U.S. pharmaceutical companies have complained that the Ministry 
of Health, in approving competing companies' pharmaceutical 
products, has often failed to respect 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 CAFTA obligations 
clarify that test data and trade secrets submitted to a 
government for the purpose of product approval will be protected 
against unfair commercial use for a period of 5 years for 
pharmaceuticals and 10 years for agricultural chemicals. 
SERVICES BARRIERS 
 
Currently, special government authorization must be obtained to 
invest in the tourism, hotel, and banking services sectors. 
Foreigners may neither hold a seat on nor provide direct 
brokerage services in Honduras' stock exchange.  Honduran 
professional bodies heavily regulate the licensing of foreigners 
to practice law, medicine, engineering, accounting, and other 
professions. 
 
Under the CAFTA, Honduras will accord substantial market access 
in services across their entire services regime, subject to very 
few exceptions.  In addition, U.S. financial service suppliers 
would have full rights to establish subsidiaries, joint ventures 
or branches for banks and insurance companies.  Honduras will 
allow U.S.-based firms to offer cross-border services in areas 
such as financial information and data processing, and financial 
advisory services. In addition, Central American mutual funds 
will be able to use foreign-based portfolio managers.  The 
commitments in services cover both cross-border supply of 
services as well as the right to invest and establish a local 
services presence (such as in tourism or securities).  Market 
access to services is supplemented by requirements for regulatory 
transparency.  Regulatory authorities must use open and 
transparent administrative procedures, consult with interested 
parties before issuing regulations, provide advance notice and 
comment periods for proposed rules, and publish all regulations. 
The right to provide professional services will be granted on a 
reciprocal basis depending on the requirements in individual U.S. 
states. 
 
INVESTMENT BARRIERS 
 
The Constitution of Honduras requires that all foreign investment 
complement, but not substitute for, national investment. 
Currently, the Government of Honduras must approve any foreign 
investment in sectors including telecommunications, basic health, 
air transport, insurance and financial services, private 
education, and most sectors related to natural resources and 
farming.  Foreigners are barred from small-scale commercial and 
industrial activities with an investment less than 150,000 
lempiras (about $8,078).  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, including 
overlapping claims and a weak judiciary, have led to numerous 
investment disputes involving U.S.-citizen landowners.  Under the 
CAFTA, U.S. investors will enjoy in almost all circumstances the 
right to establish, acquire and operate investments in Honduras 
on an equal footing with local investors. 
 
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. 
 
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. 
 
Under current Honduran law, the government-owned telephone 
company Hondutel maintains monopoly rights over all fixed-line 
telephony services.  However, in 2003 the government began to 
allow foreign investors to participate in fixed-line telephony 
services as "sub-operators" in partnership with Hondutel.  At 
present, approximately 40 firms have entered into "sub-operator" 
contracts with Hondutel, of which five firms are already 
providing services to the public.  By law, Hondutel's monopoly 
expires in December 2005, and the government of Honduras has 
announced plans for full privatization of Hondutel thereafter. 
Both foreign and domestic firms already enjoy full rights to 
invest in cellular telephony services. 
 
In July 2004, the Minister of Natural Resources and the 
Environment issued a decree calling for a new national policy on 
mining, and ordering the government agency responsible for 
granting mining permits and concessions, DEFOMIN, to stop 
granting any new mining concessions.  This decision affected a 
U.S. company that already operates in Honduras and was planning 
to expand its operations, which had applied for additional 
concessions in late 2003.  The same company has also been waiting 
for over a year for the environmental permit to operate a 
separate mine, and as of December 2004 has received neither 
permission, nor denial, nor an explanation of the status of the 
application.  Other U.S. companies also complained during 2004 
that the GOH seems to no longer welcome foreign investment in the 
mining sector. 
 
In the investment chapter of the CAFTA, Honduras will commit to 
provide a higher level of protection for U.S. investors than 
under the existing BIT.  The CAFTA requires that all forms of 
investment be protected, including enterprises, debt, 
concessions, contracts and intellectual property.  Among the 
rights afforded to U.S. investors are due process protections and 
the right to receive a fair market value for property in the 
event of an expropriation.  Investor rights will be backed by an 
effective, impartial procedure for dispute settlement that is 
fully transparent.  Submissions to dispute panels and panel 
hearings will be open to the public, and interested parties will 
have the opportunity to submit their views. 
 
TRADE RESTRICTIONS AFFECTING ELECTRONIC COMMERCE 
 
Honduras currently has no domestic legislation concerning 
electronic commerce, as the sector is still not developed in the 
Honduran market.  The Electronic Commerce System Directorate 
(DISELCO), a joint 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. 
 
Although improving, the country still lacks adequate basic 
telecom infrastructure and Internet bandwidth capacity to 
effectively support significant electronic commerce.  Except for 
web page promotional material, companies are not utilizing 
computer-based sales as a substantial distribution channel in 
Honduras. 
 
Under the CAFTA, Central America and the United States agreed to 
provisions on e-commerce that reflect the issue's importance in 
global trade and the importance of supplying services by 
electronic means as a key part of a vibrant e-commerce 
environment.  As it develops its electronic commerce sector, 
Honduras joined other parties in committing to non-discriminatory 
treatment of digital products and agreeing not to impose customs 
duties on such products and to cooperate in numerous policy areas 
related to e-commerce. 
 
OTHER BARRIERS 
 
Anti-Competitive Practices 
 
U.S. investors who set up businesses in Honduras at times find 
themselves subject to forms of competition that, in the U.S., 
would be considered unfair business practices.  In 2003, a U.S.- 
Japanese joint venture established a cement company in Honduras, 
challenging the duopoly enjoyed by the two Honduran companies in 
the market.  The two established companies engaged in a campaign 
of predatory pricing that brought cement prices below the cost of 
production.  After the U.S.-Japanese venture dropped out of the 
market, prices returned to their earlier level.  While such 
actions might be illegal in the U.S., there is currently no law 
against predatory pricing in Honduras, although a draft 
competition law, which would address certain types of anti- 
competitive behavior, is currently before a congressional 
committee. 
 
Corruption 
 
Historically, U.S. firms and private citizens have found 
corruption to be a problem which seriously complicates doing 
business in Honduras, thus creating a constraint on foreign 
direct investment.  Corruption appears to be most pervasive in 
the areas of 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 progress has been extremely slow and serious problems 
remain in these areas.  Anti-corruption provisions in the CAFTA 
aim to help alleviate these problems, particularly by 
criminalizing the bribery of a public official in any area 
related to trade and investment. 
 
Palmer