US embassy cable - 05QUITO719

UNCLAS SECTION 01 OF 07 QUITO 000719 
 
SIPDIS 
 
DEPT PASS TO USTR BENNETT HARMAN AND RUSSELL SMITH 
 
E.O. 12958: N/A 
TAGS: ETRD, EINV, ECON, EAGR, EC 
SUBJECT: ECUADOR UPDATE FOR ATPA REPORT 
 
REF: STATE 18743 
 
1.   Per reftel request, we provide the following information 
for the update to the ATPA report for Ecuador.  A Microsoft 
word version of the information below has been sent 
separately via email to USTR. 
 
2.  Ecuador Population: 13,027,000 (2004 est.) 
National Product per capita: $1,447 (2004 est., using year 
2000 USD) 
Source: Central Bank of Ecuador 
 
3.  2004 Trade Statistics (thousands $) 
U.S. Imports from Ecuador: $4,284,667 
U.S. Exports to Ecuador: $1,665,883 
U.S. Trade Balance: -$2,618,784 
Source: U.S. Department of Commerce (Tradestat) 
 
4.  Effect of the ATPA/ATPDEA:  Despite the ATPA's provision 
of duty-free entry to a wide range of Ecuadorian products, 
the country's exports remain concentrated in petroleum and a 
handful of other traditional products.  Estimated figures for 
2004 indicate that petroleum and its derivatives accounted 
for 67% exports to the United States. One of the most 
economically significant nontraditional export products that 
has benefited from duty-free treatment under ATPA is cut 
flowers.  In 2004, Ecuador exported  $201.1 million in cut 
flowers to the United States.  Exports of nontraditional 
products show a steady upward trend with exports to the 
United States increasing considerably from $719.3 million in 
2002 to $876 million in 2004.  Some products, including 
broccoli and pineapple, experienced double digit export 
increases to the U.S. in 2004.  Exports of some traditional 
products have increased since 2000. Coffee exports to the 
U.S. rose by 47% in 2004 reaching $8.7 million dollars. 
Shrimp exports reached a peak of nearly $174 million dollars 
in 2004. Cacao exports to the United States also increased 
substantially in 2003, leveling off at $39 million in 2004. 
On the other hand, banana exports have declined since 2002. 
In 2004 banana exports reached 228.1 million to the U.S. -- 
down from $256.4 million in 2002.   Ecuador expects to 
significantly increase its exports of tuna in pouches due to 
the inclusion of the product in the ATPDEA.  Source: Central 
Bank of Ecuador 
 
5.  Foreign direct investment (FDI) has risen moderately over 
the last few years.  Stock of U.S. FDI in Ecuador in 2003 was 
1.4 billion, up from 1.28 billion in 2002.   Most of the 
increase is associated with the oil sector. FDI in other 
sectors remains modest and is focused on financial services, 
food processing, telecommunications, the chemical and 
pharmaceutical industries, and machinery and vehicle 
manufacturing.  For Ecuador to take full advantage of the 
possible investment benefits associated with the ATPA, it 
will need to improve its investment climate through providing 
greater transparency and certainty for foreign investors. 
 
6.  Expropriations:  While cases of expropriation have been 
infrequent, two foreign investors have outstanding claims 
based on land and squatter disputes.  Under Ecuadorian law, 
individuals have the right to petition a judge to establish 
the appropriate price for expropriated holdings.  The 
Agrarian Development Law restricts the grounds for 
expropriation of agricultural land and provides for 
adjudication of disputes in the courts.  Though foreign and 
domestic investors are treated equally under the law, the 
extent to which investors and lenders receive prompt, 
adequate and effective compensation varies from case to case. 
 Under Ecuador's Bilateral Investment Treaty with the United 
States, expropriation can only be carried out for a public 
purpose, in a nondiscriminatory manner, and upon payment of 
prompt, adequate and effective compensation. 
 
7.  Arbitral Awards:  The U.S.-Ecuador Bilateral Investment 
Treaty (BIT) provides for international arbitration of 
disputes at the investor's option.  Ecuador is a member of 
the International Center for the Settlement of Investment 
Disputes (ICSID).  A U.S. company received an arbitral award 
in a dispute over the company,s eligibility for value-added 
tax refunds in 2004.  Shortly after the award was announced, 
Ecuador,s Solicitor General (Procurador) launched an 
investigation of the company.  He subsequently declared there 
were legal grounds to void the company,s contract and seize 
its considerable assets in Ecuador.  The Procurador does not 
have the final word in the matter and the case is currently 
being reviewed by other GOE entities.  The Procurador has 
also sought a judicial review of the award decision, which is 
still pending.  There are other high profile legal cases 
brought by and against foreign companies.  In early 2005, 
Ecuador modified the Arbitration and Mediation Law to 
prohibit international arbitration if the national interest 
could be affected.  This modification appears to conflict 
with the terms of the BIT with the U.S., and at a minimum 
will create confusion among investors regarding their right 
to arbitration.  It also contributes to investors, negative 
impressions about the lack of legal due process in the 
country. 
 
8.  Reverse Preferences:  The U.S. Government has no 
indication that Ecuador has granted such preferences to the 
products of a developed nation.  Furthermore, Ecuador is a 
member of the World Trade Organization (WTO) and, 
accordingly, is bound by the most-favored-nation provisions 
in the WTO Agreements. 
 
9.  Intellectual Property: 
 
a.  Ecuador's intellectual property regime is governed by the 
"Law on Intellectual Property" adopted in 1998.  The law 
provides criminal and administrative relief to right holders. 
 Ecuador has ratified the Berne Convention for the protection 
of literary and artistic works, the Geneva Phonogram 
Convention, and the Patent Cooperation Treaty.  Ecuador is 
also bound by the Andean Community Decision 345 (Common 
Regimen for the Protection of Rights of Vegetable Varieties 
Holders), Decision 351 (Common Regimen Regarding Author 
Royalties and Related Rights) and Decision 486 (Common 
Regimen Regarding Industrial Property).  Decision 486 
improves intellectual property protection by expanding the 
definition of patentability and strengthening data 
exclusivity.  In April 2001, the U.S. Trade Representative 
(USTR) removed Ecuador from its Special 301 Watch list to 
reflect improvements in Ecuador's intellectual property 
regime.  However, weakened enforcement (particularly in the 
area of pharmaceuticals) led to Ecuador's re-listing in 2003. 
 Ecuador made a public commitment to apply the WTO TRIPS 
agreement from the date of its accession to the WTO. 
 
b.  In 2004, the Andean Community confirmed the legality of a 
Colombian decree reinforcing data exclusivity rules and 
intellectual property rights.  This decision removed key 
conflicts between Andean Community rules and Ecuador,s WTO 
commitments, theoretically reinforcing the legal protections 
for intellectual property rights.  However, Ecuador continues 
to issue sanitary registrations to illegal copies of patented 
products, violate data confidentiality, and ignore violations 
of its WTO commitments and its own intellectual property law. 
 
c.  Enforcement against intellectual property infringement 
remains a serious problem in Ecuador. The national police and 
the Customs Corporation of Ecuador (CAE, by its Spanish 
initials) are responsible for carrying out IPR enforcement 
orders, but it has sometimes been difficult to have court 
orders enforced. There is a widespread local trade in pirated 
audio and video recordings, computer software and counterfeit 
activity regarding brand name apparel.  On the other hand, 
local registration of unauthorized copies of well-known 
trademarks has been reduced.  Some local pharmaceutical 
companies, who produce or import pirated drugs, have 
successfully blocked improvements in patent protection and 
enforcement of data protection. 
 
d.  The IPR law extends patent protection for 20 years from 
the date of filing.  Patenting of pharmaceutical products is 
permitted.  Compulsory licensing is relatively limited.  In 
infringement cases, the burden of proof lies with the alleged 
infringer.  The law also provides patent protection for new 
drugs.  Although Andean Community Decision 486, issued in 
late 2000, represents a significant improvement over Decision 
344, it still does not provide adequate protection for 
"second use" patents. 
 
e.  Producers of branded pharmaceuticals are concerned that 
the "Law on Generic Drugs", which was passed in 2000, 
enshrines discrimination against branded pharmaceuticals into 
law.  The law mandates that Government entities buy only 
generic drugs.  The law also lowers drugstore gross profit 
margins on branded medicines to 20%, while maintaining the 
margins for generic drugs at 25%.  Under the law, drugstores 
are also required to devote a certain percentage of shelf 
space to generic pharmaceuticals.  The GOE is proposing to 
further reduce allowable profit margins on pharmaceutical 
sales. 
 
f.  Printed and recorded works are in theory protected under 
the IPR law for the life of the author plus 70 years. 
Computer programs and software are also protected.  However, 
pirated CDs, DVDs and computer software (at prices beginning 
at $1) are widely sold, with apparent impunity.  Ecuador's 
Education Law appears to allow educational institutions to 
copy software without regard to such protections.  The 
Government has taken no action to correct this problem. 
 
g.  Trademark registration is permitted for renewable 10-year 
periods, but registration may be canceled if the mark is not 
used in the Andean region for a period of three years.  The 
IPR law provides protections for well-known trademarks.  A 
trademark registration cannot be voluntarily surrendered 
without the consent of the licensee. 
 
h.  The IPR law provides protection for industrial designs 
and extends protection to industrial secrets and geographical 
indicators.  Semiconductor chip layouts are protected.  Plant 
varieties and other biotechnology products are also, in 
theory, protected.  In 2004, U.S. Customs seized and 
destroyed cut-flower exports to the United States by 
Ecuadorian companies that were not paying royalties to 
holders of plant variety rights. 
 
i.  The Ecuadorian Intellectual Property Institute (known by 
its Spanish acronym IEPI) was established in January 1999 to 
handle patent, trademark and copyright registrations on the 
Ecuadorian Government's behalf.  IPR enforcement has 
improved, although piracy remains.  The Ecuadorian National 
Police and the CAE are responsible for carrying out IPR 
enforcement orders, but they often do not recognize the 
authority of, or enforce IEPI orders.  Some foreign companies 
have complained that authorities have been increasingly 
reluctant to issue and carry out IPR enforcement orders. 
IEPI has reduced its enforcement efforts due to funding and 
staffing constraints and an apparent reduction in the 
Ecuadorian government's emphasis on IPR protection.  Industry 
sources have also expressed concern about the premature 
dismissal of the former president of IEPI and the possible 
politicization of the institution. 
 
10.  Extradition: An extradition treaty was signed in Quito 
on June 28, 1872, and entered into force on November 12, 
1873.  A supplementary extradition treaty was signed in Quito 
on September 22, 1939, and entered into force on May 29, 
1941.  The treaties permit the extradition of U.S. citizens. 
A more modern extradition treaty would benefit both countries. 
 
11.  Workers, Rights: 
 
a.  The Labor Code provides for a 40-hour work week, 15 
calendar days of annual paid vacation, restrictions on child 
labor, general protection of worker health and safety, 
minimum wages and bonuses, maternity leave, and 
employer-provided benefits.  By law, companies must 
distribute at least 15% of pre-tax profits to their 
employees.  Many employers rely on short-term outsourcing 
contracts since job tenure rules make it difficult to lay off 
permanent workers.  New regulations restricting use of such 
contracts were issued in 2004. 
 
b.  Legal changes to modernize the country's Labor Code were 
passed by Congress in 2000 as part of omnibus economic reform 
legislation.  However, the Constitutional Tribunal declared 
virtually all of the changes unconstitutional.  Since then, 
efforts to reform Ecuador's antiquated labor laws have 
stalled. 
 
c.  Most workers in the private and parastatal sectors have 
the constitutional right to form trade unions and local law 
allows for unionization of any company with more than 30 
employees.  Private employers are required to engage in 
collective bargaining with recognized unions.  The Labor Code 
provides for resolution of conflicts through a tripartite 
arbitration and conciliation board process.  The Code also 
prohibits discrimination against unions and requires that 
employers provide space for union activities. 
 
d.  Some companies have taken advantage of the law that 
prohibits unions from organizing at companies that have less 
than 30 employees by sub-contracting with several shell 
companies, each of which has less than 30 workers.  Under the 
Labor Code, these subcontracted workers have no legal right 
to freedom of association or right to bargain collectively 
with the companies that ultimately benefit from their labor, 
nor do they have legal protection against anti-union 
discrimination.  New regulations restricting use of such 
contracts were issued in 2004. 
 
e.  Except for public servants and workers in some 
parastatals, workers by law have the right to strike. 
Legally striking employees are entitled to full pay and 
benefits and may occupy the premises under police protection, 
although there are restrictions on solidarity strikes.  Most 
public sector employees are technically prevented from 
joining unions, but most are members of a labor organization 
and most labor actions are in fact illegal strikes by public 
employees.  Although trade union political influence has 
declined in recent years, labor groups occasionally attempt 
to stage national strikes to protest economic reform 
measures. 
 
f.  In practice, employers that violate worker rights are 
seldom punished.  Labor rights activists allege that violent 
tactics, which resulted in serious injury to workers, were 
employed to break a strike on a large banana plantation in 
2002.   In each of the last three years, at least 30 Members 
of the US Congress have signed a letter expressing 
Congressional concern about labor rights protections in 
Ecuador. 
 
g.  The Constitution and the labor code prohibit forced 
labor.  The law also prohibits the employment of persons 
under the age of fifteen years old, except in special 
circumstances such as an apprenticeship.  Enforcement of this 
provision is uneven, especially in rural communities.   In 
the cities, many children under fifteen years old work in 
family businesses in the informal sector. The International 
Labor Organization estimated that 69,000 children ages 10 to 
14, and an additional 325,000 young people ages 15 to 19, 
were working on plantations in 1999. These figures have 
dropped since 1999, but remain high according to the 
International Labor Organization,s report for 2004. Child 
labor is still common on plantations, large and small. In 
2004, Ecuador hired child labor inspectors in an effort to 
combat the child labor problem. 
 
h.  Only a significant increase in wages, at best a distant 
prospect in a country where the average worker earns $5.74 a 
day, will keep families from sending their children out into 
the fields, labor advocates in Ecuador and in the United 
States say. But while rights activists regard such labor as 
unacceptable, many parents see it as a necessity. 
 
i.  The minimum wage appears inadequate to provide a decent 
standard of living for a worker and his or her family.  Most 
organized workers in state industries and in the formal 
sector (private enterprises) earn more than the minimum wage 
and are provided other significant benefits through 
collective bargaining.  The majority of workers work in the 
large informal sector, without recourse to the minimum wage 
or legally mandated benefits. 
 
12.  Economic Conditions:  Ecuador adopted the U.S. dollar as 
its national currency in 2000 in response to the most serious 
economic crisis in its history.  Dollarization, combined with 
recent responsible fiscal policies, has helped to tame 
inflation and bring the country back to positive growth. 
However, to sustain dollarization in the medium term Ecuador 
must enact structural economic reforms and improve its 
ability to compete in the global marketplace.   Ecuador,s 
GDP grew an estimated 2.7 percent in 2003, and 6.6 percent, 
largely a result of increased oil exports and record high oil 
prices. (Source: Central Bank of Ecuador) 
 
13.  Market Access:  Ecuador's accession to the WTO in 1996 
was an important step in improving access to Ecuador's 
market.  However, a number of trade barriers remain.  For 
example, despite recent improvements, bureaucratic procedures 
required to obtain clearance for imports from the 
Government,s standards-setting body still appear to 
discriminate against foreign products.  Also, corruption and 
inefficiency in the sanitary registration process have 
delayed and even blocked the entry of some agricultural 
imports from the United States. 
 
a.  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. 
 
b.  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. 
 
 
c.  When it joined WTO in January 1996, Ecuador bound most of 
its tariff rates at 30 percent or less.  Ecuador,s average 
applied tariff rate is about 13 percent ad valorem.  Since 
February 1995, Ecuador has applied a common external tariff 
(CET) with two of its Andean Community partners, Colombia and 
Venezuela.  Although Ecuador has harmonized its tariff 
schedule with the CET, it took numerous exceptions in order 
to maintain lower tariff rates on capital goods and 
industrial inputs.  Agricultural inputs and equipment are 
imported duty-free. 
 
d.  Ecuador,s foreign investment policy is governed largely 
by the national implementing legislation for Andean Community 
Decisions 291 and 292 of 1991 and 1993.  Foreign investors 
are accorded the same rights of entry 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.  There are no performance requirements, 
with the exception of the auto regime.  A Bilateral 
Investment Treaty with the United States that guarantees 
access to binding international arbitration entered into 
force in May 1997. 
 
e.  Certain sectors of the economy are reserved to the state, 
although the scope for private sector participation, both 
foreign and domestic, is increasing.  All foreign investment 
in petroleum exploration and development in Ecuador must be 
carried out under a contract with the state oil company. 
Ecuadorian law permits the sales of 51 percent of the 
state,s electrical sector facilities and telephone 
companies.  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 and are not permitted to obtain 
broadcast concessions. Foreign investors must obtain approval 
from the President and the National Security Council to 
obtain mining rights in zones adjacent to international 
boundaries. 
 
14.  WTO Agreements:  Ecuador acceded to the WTO in January 
1996.  Ecuador has failed to meet deadlines for fulfilling 
some of its WTO obligations related to the elimination of 
non-tariff barriers.  These include requirements for prior 
authorization for certain goods before the central bank can 
issue an import license, and Ministry of Agriculture denial 
of import permits for certain agricultural products in order 
to protect local producers.  Ecuador is not complying with 
its commitments under the WTO,s Technical Barriers to Trade 
Agreement (TBT). 
15.  FTAA Participation:  Ecuador chaired the FTAA 
negotiations process until the Quito Ministerial, held in 
November 2002, and continues to participate in the process. 
Ecuador,s FTAA negotiating positions are usually developed 
jointly with its Andean Community partners Ecuador, Peru, and 
Colombia are currently negotiating an FTA with the United 
States. 
 
16.  Subsidies or Other Requirements that Distort 
International Trade:  Ecuador does not use export subsidies. 
It does maintain a drawback system to reimburse the cost of 
duties and taxes paid on raw materials and other inputs 
incorporated in products that are subsequently exported. 
 
17.  Trade Policies that Revitalize the Region:  Ecuador 
acceded to the Andean Community in early 1993.  Ecuador,s 
trade is gradually reorienting toward the Community.   In 
2003, the Andean Community absorbed 17.47 percent of 
Ecuador,s exports and provided 22.8 percent of its imports 
(Source: Central Bank of Ecuador). 
 
18.  Narcotics Cooperation:  Ecuador has received full 
certification for its cooperation through 2002 with the 
United States on counter-narcotics issues under the Foreign 
Assistance Act, as described in the International Narcotics 
Control Strategy Report of March 2003.  With the support of 
the U.S. Government, Ecuador maintains an active drug 
detection and interdiction program.  Its programs focus on 
demand reduction, interdiction, training in police 
investigations and drug detection, information sharing and 
control of money laundering.  A program initiated in 1996 
targets modernizing the judicial system.  However, Ecuador,s 
current money laundering law is largely ineffective and needs 
to be reformed.  A proposal to reform the money laundering 
law was presented to the Ecuadorian Congress in 2004, but 
little progress has been made in getting it enacted. 
 
a.  The Government of Ecuador continues to work with the U.S. 
Government to reduce trafficking through Ecuador.  Ecuador 
has criminalized the production, transport and sale of 
controlled narcotic substances.  Although smuggling of 
precursor chemicals through Ecuador remains a problem, the 
Government of Ecuador is making efforts to monitor and 
control these chemicals.  Nonetheless, it appears that, 
despite Ecuadorian efforts, transshipment of narcotics 
through Ecuadorian maritime and land routes to the United 
States is widespread. 
 
b.  The ATPA has played an important role in providing trade 
opportunities in agricultural industries in Ecuador.  Such 
opportunities have provided the citizenry with jobs, thus 
deterring them from becoming involved in growing narcotics 
crops and, consequently, preventing the entrenchment of 
narcotics trafficking in Ecuador.  ATPA's contribution to the 
rapid growth of Ecuador,s cut flower industry has been 
particularly important.  Cultivation of fresh fruits, 
vegetables and cereals in the highlands is also growing and 
offering similarly promising export and employment 
opportunities.  Ecuador,s beneficiary status under the ATPA 
helps to create the conditions for such opportunities. 
 
c.  The successful development of more profitable 
agricultural industries in Ecuador will help prevent Ecuador 
from becoming a major coca-producing country.  Ecuador's 
proximity to Colombia and Peru, the world's leading coca leaf 
and cocaine hydrochloride suppliers, warrants continued 
vigilance in preventing illicit crop cultivation in Ecuador. 
 
19.  Anti-Corruption:  In international rankings, Ecuador has 
been reported to suffer from high levels of corruption. 
Judicial insecurity, impunity and lack of transparency in 
regulatory bodies and GOE-related entities are frequently 
cited as the root causes of corruption in Ecuador.  Efforts 
at reform have had mixed results to date.  There is an 
independent anti-corruption agency, but it is under funded 
and without legal teeth.  There are few non-governmental 
institutions that fight corruption. 
 
20.  Government Procurement: 
 
a.  Ecuador is not a signatory to the WTO Agreement on 
Government Procurement.   The Public Contracting Law, issued 
in 2001, regulates government procurement of goods, 
equipment, and services.  Purchases made by the State-owned 
telephone and electric power distributors, and by 
military-owned companies are not required to follow this law. 
 Foreign bidders must be legally represented in Ecuador. 
Ecuadorian companies and those of the foreign country 
sponsoring the bid may participate in public bids financed by 
government-to-government credits.  Association with an 
Ecuadorian company is only required for the execution of 
government-to-government public works contracts and those 
that are carried out with direct or supplier credits.  It is 
only for these types of contracts that the foreign company 
needs to retain at least double the capital of its Ecuadorian 
associate.  Foreign contractors may not use national credit 
for the execution of their contracts. 
 
b.  Procurement by public invitation involves various steps. 
The government agency usually inserts announcements in 
newspapers and trade journals inviting potential suppliers to 
present bids for specific types of equipment or services 
desired.  The interested party must purchase bid documents 
containing detailed information.  The bids must be completed 
in Spanish, using the format specified by the inviting 
agency, and be delivered to the contracting agency in person. 
 
c.  Bidding for government contracts can be cumbersome, and 
competitors from other countries do not operate under the 
restrictions of the U.S. Foreign Corrupt Practices Act. 
There is no formal discrimination against U.S. suppliers. 
 
d.  Under the Public Contracting Law, the government requires 
either a bank-issued guarantee or an insurance guarantee to 
cover 5 percent of the contract, to ensure execution of the 
contract.  (Military contracts, however, permit only 
bank-issued guarantees.)  A guarantee of money advances made 
by the Government is also required from the supplier.  Before 
a Government contract is approved, it must have authorization 
from both the Comptroller and Attorney General. 
 
e.  The Public Contracting Law prohibits government 
institutions from purchasing used equipment. 
 
21.  Counter-Terrorism:  As did most Latin American nations 
in the wake of the September 11 attacks in the United States, 
Ecuador voiced strong support for U.S., Organization of 
American States and United Nations antiterrorism declarations 
and initiatives put forth in various international fora. 
During President Gutierrez,s February 2003 visit to 
Washington, he publicly proclaimed his desire to make Ecuador 
a strong ally in the fight against terrorism.  Ecuador is 
making efforts to improve control of its borders.  Other 
issues of concern include Ecuador,s weak financial controls, 
widespread document fraud and reputation as a strategic 
corridor for arms, ammunition and explosives destined for 
Colombian terrorist groups. 
KENNEY