US embassy cable - 04QUITO3289

UNCLAS SECTION 01 OF 05 QUITO 003289 
 
SIPDIS 
 
FOR USTR G. BLUE AND BENNETT HARMAN AND FOR STATE EB/MTA/MST 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EFIN, EC, Trade 
SUBJECT: ECUADOR 2005 NATIONAL TRADE ESTIMATE REPORT 
SUBMISSION 
 
REF: STATE 240980 
 
1.  Below is Embassy Quito's submission for the 2005 National 
Trade Estimate Report.  A copy of the report has been 
provided to USTR Bennett Harman via email.  The report was a 
collaborative effort between State, the Commercial Service 
and the Foreign Agricultural Service. 
 
 
TRADE SUMMARY 
------------- 
 
According to US Bureau of Census statistics, the United 
States, trade deficit with Ecuador was $1.3 billion in 2003 
(agricultural trade accounted for $850 million of the 
deficit).  That was an increase of $762 million from the $538 
million deficit in 2002.  U.S. goods exports in 2003 were 
$1.4 billion, down 9.9 percent from the previous year ($1.6 
billion).  Corresponding U.S. imports from Ecuador in 2003 
were $2.7 billion, up 27 percent.  U.S. agricultural imports 
from Ecuador in 2003 were $1.09 billion, a 4% increase from 
2002 ($970 million).  Ecuador is currently the 51st largest 
export market for U.S. goods. 
 
Ecuadorian Central Bank statistics estimate the stock of 
foreign direct investment (FDI) in Ecuador in 2003 was $1.5 
billion.  U.S. FDI in Ecuador in 2003 is estimated at $204 
million, primarily in the oil sector. 
 
Free Trade Area Negotiations 
---------------------------- 
 
In November 2003, the United States announced its intention 
to begin free trade negotiations with Colombia, Peru, Ecuador 
and Bolivia, the four Andean Trade Preference Act beneficiary 
countries.  The negotiations began on May 18, 2004 with 
Colombia, Ecuador and Peru. The Andeans collectively 
represent a market of about $7.1 billion for U.S. exports in 
2003, and are home to about $4.2 billion in U.S. FDI. The 
negotiation will complement the goal of completing a Free 
Trade Area of the Americas (FTAA). 
 
IMPORT POLICIES 
--------------- 
 
A. Tariffs 
 
When Ecuador joined the WTO in January 1996, it bound most of 
its tariff rates at 30 percent or less.  Ecuador's average 
applied tariff rate is 13 percent.  Ecuador applies a 
four-tiered structure with levels of five percent for most 
raw materials and capital goods, 10 percent or 15 percent for 
intermediate goods, and 20 percent for most consumer goods. 
A small number of products, including planting seeds, are 
subject to a tariff rate of zero.  Some agricultural products 
(193), most of which are chemicals and veterinary products, 
are imported duty free. 
 
As a member of the Andean Community of Nations (CAN), Ecuador 
grants and receives exemptions on tariffs (e.g., reduced ad 
valorem tariffs and no application of the Andean Price Band 
System) for products from the CAN countries (Bolivia, 
Colombia, Ecuador, Peru and Venezuela).  Currently, these 
countries have an Andean Free Trade Zone and apply Common 
External Tariffs (CET), as stated in CAN Decision 370.  There 
is a proposal for a new CET, with a three-tiered structure, 
with levels of 5, 10 and 20 percent tariffs for agricultural 
products.  The proposed structure has not been approved by 
the CAN. 
 
Ecuador maintains the Andean Price Band System (APBS) on 153 
agricultural products (13 &marker8 and 140 &linked8 
products) imported from outside the CAN.  The 13 &marker8 
products are wheat, rice, sugar, barley, white and yellow 
corn, soybean, soybean meal, African palm oil, soy oil, 
chicken meat, pork meat and powder milk.  Under this system, 
the ad valorem CET are adjusted (increased or reduced) 
according to the relationship between international reference 
prices, established floor and ceiling prices and the 
importation price of the commodity.  Upon accession to the 
WTO, Ecuador bound its ad valorem tariffs (including the 
additional levy from the APBS) for these commodities between 
31.5 and 85.5%. 
 
As part of its WTO accession, Ecuador committed to phase out 
its WTO-authorized price band system, starting in January 
1996 with a total phase out by December 2001.  No steps have 
been taken to comply with this commitment.  Instead, Ecuador 
adopted the APBS, which applies the reduced CET to the CAN 
and increased tariffs to other WTO members.  This decision 
did not comply with Ecuador,s commitments to the WTO. 
However, Ecuador maintains that, as the highest rate under 
the APBS us beneath the bound tariff rate, Ecuador,s 
participation in the APBS is WTO-consistent. 
 
B. Non-Tariff Measures 
 
 
Ecuador has failed to eliminate several non-tariff barriers 
since its WTO accession.  Importers must register with the 
Central Bank, through approved banking institutions to obtain 
an import license.  In order to get this license, an importer 
must first obtain, inter alia, a tax registration number from 
Ecuador,s Internal Revenue Service (SRI).  Ecuador requires 
prior authorization from various government agencies, e.g., 
the Ministry of Agriculture (MAG) for importation of most 
commodities, seeds, animals, and plants.  Also, the Ministry 
of Health must give its prior authorization (i.e., sanitary 
registration) before the importation of processed, canned, 
and packed foods as well as food ingredients and beverages, 
cosmetics and pharmaceutical products.  Another 
administrative hurdle agricultural importers must overcome is 
the MAG,s use of &Consultative Committees8 (Committees). 
The Committees, mainly composed of local producers, often 
advise the MAG against granting import permits to foreign 
suppliers.  The MAG often requires that all local production 
be purchased at high prices before authorizing imports. 
 
Ecuador also continues to maintain a preshipment inspection 
(PSI) regime.  Preshipment inspection by an authorized 
inspection company (both before shipment and after specific 
export documentation has been completed at the intended 
destination) results in delays far exceeding the time saved 
in customs clearance.  Customs authorities sometimes perform 
spot-checks, causing further delays.  These practices 
generally add six to eight weeks to shipping times.  The 
following imports are exempt from verification: imports below 
FOB $4000, arms and defense materials, newspapers and printed 
material, traveler,s personal effects, donation to the 
public sector, imports by diplomatic missions, imports by the 
public sector that are financed by international loans, 
imports of gas, fuel, equipment made by the state oil 
company, imports destined for temporary entry, coffins and 
samples with no commercial value. 
 
Ecuador maintains bans on the import of used motor vehicles, 
tires, and clothing.  Ecuador applies a 27 percent markup on 
imported distilled spirits for excise tax purposes.  As 
excise taxes on imports are calculated on CIF value plus 
import duties, the effective rate is higher for imports than 
domestic products.  Ecuador has not equalized the application 
of excise taxes between imported and domestic products. 
 
In December 1999, the MAG, through the Ecuadorian Animal and 
Plant Health Inspection Service (SESA), issued a requirement 
that all importers must present a certificate stating that 
imported agricultural products (plants, animals, their 
products or byproducts) have not been produced using modern 
biotechnology.  In November 2002, the President issued 
Executive Decree 3399 creating the National Commission for 
Biosafety as an office of the Ministry of Environment.  It 
will be responsible for biotechnology-related products and 
regulations issues.  However, no rules have yet been enacted. 
 
STANDARDS, TESTING, LABELING AND CERTIFICATION 
--------------------------------------------- - 
 
National standards are set by the Ecuadorian Norms Institute 
(INEN) of the Ministry of Commerce and generally follow 
international standards.  SESA (an agency of the Ministry of 
Agriculture) is responsible for administering Ecuador's 
sanitary and phytosanitary controls.  According to Ecuadorian 
importers, bureaucratic procedures required to obtain 
clearance still appear to discriminate against foreign 
products.  Ecuador must comply with the WTO Agreement on the 
Application of Sanitary and Phytosanitary (SPS) Measures, yet 
denials of SPS certification often appear to lack a 
scientific basis and to have been used in a discriminatory 
fashion to block the import of U.S. products that compete 
with Ecuadorian production.  This occurs most often with 
poultry, turkey and pork meats, beef, dairy products and 
fresh fruit.  The ability to import some products, such as 
rice, corn, soybeans, and soybean meal depends entirely on 
the discretion of the MAG, which will often look to the 
Consultative Committees for direction. 
SESA follows the &Andean Sanitary Standards8 established 
under the Andean Community of Nations (CAN).  Some standards 
applicable for third countries are different from those 
applied to CAN members.   For example, there can be 
differences in the requirements for CAN and third countries 
for the importation of live animals, animal products, and 
plants and plant by-products.  SESA also requires 
certifications for each product stating that the product 
complies with risk analysis and that the country of origin or 
the area of production is free from certain exotic plant or 
animal diseases. 
 
Sanitary registrations are required for imported as well as 
domestic processed food, cosmetics, pesticides, 
pharmaceuticals, and syringes, as well as some other consumer 
goods.  However, in a side agreement to its WTO Accession 
Agreement, Ecuador committed to accept the U.S. Certificate 
of Free Sale authorized by the U.S. Food and Drug 
Administration, instead of the Government of Ecuador,s 
Sanitary Registration.  In August 2000, the Government of 
Ecuador passed a law (Ley de Promocion Social y Participacion 
Ciudadana, Segunda Parte ) also known as Troley II) followed 
by application rules issued in June 2001 to reform the 
issuance of sanitary permits for food products.  This is a 
step towards modernizing the issuance of sanitary 
registrations with new regulations that allow the acceptance 
of free sale certificates, require that the government issue 
sanitary permits within 30 days of the receipt of the 
request, and reduce the number of documents required to 
obtain a permit.  However, these regulations are not being 
applied consistently.  U.S. firms report that the Izquieta 
Perez National Hygiene Institute (INHIP - the agency 
responsible for registering imported processed food products) 
office in Guayaquil has refused to accept U.S. Certificates 
of Free Sale and continues to apply the old regime for 
sanitary permits.  In addition, non-transparent bureaucratic 
procedures and inefficiency have delayed issuance beyond 30 
days and in some cases blocked the entry of some imported 
products from the United States. 
 
U.S. companies have expressed concerns regarding regulations 
issued by Ecuador,s public health ministry requiring foreign 
food manufacturers to disclose confidential information such 
as formulas of imported food and pharmaceutical products. 
This requirement appears to go beyond the requirements of the 
Codex Alimentarius Commission on Internationals Standards and 
Labeling. 
 
GOVERNMENT PROCUREMENT 
---------------------- 
 
Government procurement is regulated by the 1990 public 
contracting law.  Foreign bidders must be legally represented 
in Ecuador.  There is no legal requirement to discriminate 
against U.S. or other foreign suppliers.  Bidding for 
government contracts can be cumbersome and insufficiently 
transparent.  Ecuador is not a signatory to the WTO Agreement 
on Government Procurement. 
 
EXPORT SUBSIDIES 
---------------- 
 
Ecuador has created a semi-independent agency, the 
Corporation for the Promotion of Exports and Investments 
(Corpei), to promote Ecuadorian exports.  Using a European 
Union loan, Corpei offers matching grants to exporters to 
help fund certain expenses, including international 
promotional events and export certifications.  The individual 
grant amount varies according to the project. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
--------------------------------------------- 
 
In 1998, Ecuador enacted a comprehensive law that 
significantly improved the legal basis for protecting 
intellectual property, including patents, trademarks, and 
copyrights.  The intellectual property law provides greater 
protection for intellectual property; however, it is 
deficient in a number of areas and the law is not being 
adequately enforced.  Enforcement of copyrights remains a 
significant problem, especially concerning sound recordings, 
computer software, and motion pictures. 
Ecuador's current intellectual property regime is provided 
for under its intellectual property rights (IPR) law and 
Andean Pact Decisions 486, 345, and 351.  Ecuador is a member 
of the World Intellectual Property Organization (WIPO) and is 
a member of the WIPO Copyright Treaty and the WIPO 
Performances and Phonograms Treaty.  Furthermore, Ecuador has 
ratified the Berne Convention for the Protection of Literary 
and Artistic Works, the Geneva Phonograms Convention, the 
Paris Convention for the Protection of Industrial Property, 
and the WIPO Patent Cooperation Treaty. 
 
A. Copyrights 
 
The Government of Ecuador, through the National Copyright 
Office,s Strategic Plan against Piracy, has committed to 
take action to reduce the levels of copyright piracy, 
including implementation and enforcement of its 1998 
Copyright Law.  Article 78 of the 1999 Law on Higher 
Education appears to permit software copyright violations by 
educational institutions. 
 
B. Patents and Trademarks 
 
Ecuador's 1998 IPR law provided an improved legal basis for 
protecting patents, trademarks, and trade secrets.  However, 
concerns remain regarding several provisions, including a 
working requirement for patents, compulsory licensing, and 
the lack of enforcement in the protection of test data. 
 
Government of Ecuador health authorities continued to approve 
the commercialization of new drugs which were the 
bioequivalents of already approved drugs, thereby denying the 
originator companies the exclusive use of their data.  In 
effect, the Government of Ecuador is allowing the test data 
of registered drugs from originator companies to be used by 
others seeking approval for their own pirate version of the 
same product.  Also, U.S. companies are concerned that the 
Government of Ecuador is implementing a policy that a company 
that had patented a compound for one use cannot subsequently 
patent a second use of that compound.  This puts Ecuador at 
odds with international norms. 
 
C. Enforcement 
 
There continues to be an active local trade in pirated audio 
and video recordings, computer software, and counterfeit 
brand name apparel.  The International Intellectual Property 
Alliance estimates that piracy levels in Ecuador for both 
motion pictures and recorded music has reached 95 percent, 
with estimated damage due to music piracy of $50-60 million. 
At times, judges in IPR cases, before issuing a preliminary 
injunction, demand a guaranty and evidentiary requirements 
that exceed legal requirements and in effect limit the 
ability of rights holders to enforce their rights.  The 
national police and the customs service are responsible for 
carrying out IPR enforcement but do not always enforce court 
orders.  Some local pharmaceutical companies produce or 
import pirated drugs and have sought to block improvements in 
patent protection.  U.S. industry estimates damage due to the 
failure to provide data exclusivity is at least $5 million. 
 
SERVICES BARRIERS 
----------------- 
 
Ecuador has ratified the WTO Agreement on Financial Services. 
 The 1993 Equity Markets Law and the 1994 General Financial 
Institutions Law significantly opened markets in financial 
services and provided for national treatment.  Foreign 
professionals are subject to national licensing legislation, 
and the Superintendent of Banks must certify accountants. 
 
In the area of basic telecommunications, Ecuador only 
subscribed to WTO commitments for domestic cellular services. 
 It did not make market access or national treatment 
commitments for a range of other domestic and international 
telecommunications services, such as voice telephony and 
data.  In addition, Ecuador did not adhere to the 
pro-competitive regulatory commitments of the WTO Reference 
Paper.  Several U.S. telecommunications companies have had 
their international circuits disconnected without proper 
notice of alleged infractions.  The Government has also used 
Ecuadorian courts to delay implementation of an arbitral 
award in favor of a U.S. company. 
INVESTMENT BARRIERS 
------------------- 
 
Ecuador's foreign investment policy is governed largely by 
the national implementing legislation for Andean Pact 
Decisions 291 of 1991 and 292 of 1993.  Foreign investors are 
accorded the same rights of establishment as Ecuadorian 
private investors, may own up to 100 percent of enterprises 
in most sectors without prior government approval, and face 
the same tax regime.  There are no controls or limits on 
transfers of profits or capital.  The U.S.-Ecuador Bilateral 
Investment Treaty (BIT) entered into force in May 1997 and 
includes guarantees regarding national and 
most-favored-nation treatment, prompt, adequate and effective 
compensation for expropriation, freedom to make financial 
transfers, and access to international arbitration.  U.S. 
companies are sometimes reluctant to resolve commercial 
disputes through the Ecuadorian legal system, fearing a 
prolonged process and a lack of impartiality. 
 
Certain sectors of Ecuador's economy are reserved to the 
state.  All foreign investment in petroleum exploration and 
development in Ecuador must be carried out under contract 
with the state oil company.  U.S. and other foreign oil 
companies produce oil in Ecuador under such contracts. 
Several of these companies are involved in a dispute with the 
government of Ecuador regarding the refund of value-added tax 
rebates.  In 2004, one U.S. company won a $75 million 
international arbitration award against the government of 
Ecuador regarding this dispute.  The Government has requested 
a judicial review of the arbitration award.  After notice of 
the award, Ecuador,s Solicitor General (Procurador General) 
initiated an investigation of the company and has since 
advocated the nullification of the company,s contract and 
seizure of the company,s considerable assets in Ecuador. 
 
Foreign investment in domestic fishing operations, with 
exceptions, is limited to 49 percent of equity.  Foreign 
companies cannot own more than 25 percent equity in broadcast 
stations.  Foreigners are prohibited from owning land on the 
frontier or coast. 
 
Appropriate compensation for expropriation is provided for in 
Ecuadorian law but is often difficult to obtain.  The extent 
to which foreign and domestic investors receive prompt, 
adequate, and effective compensation varies widely.  It can 
be difficult to enforce property and concession rights, 
particularly in the agriculture, oil and mining sectors. 
Foreign oil, energy, and telecommunications companies, among 
others, have often had difficulties resolving contract issues 
with state or local partners.  Several U.S. companies have 
also raised concerns about the lack of transparency, 
predictability, and stability in Ecuador,s legal and 
regulatory regime, which increases the risks and adds to the 
cost of doing business in Ecuador. 
 
ELECTRONIC COMMERCE 
------------------- 
 
Ecuador passed an electronic commerce law in April 2002 that 
makes the use of electronic signatures in business 
transactions on the Internet legally binding and makes 
digital theft a crime. Ecuador has initiated a program for 
e-government services and universal access to information 
technology through funding from international financial 
institutions. 
KENNEY