US embassy cable - 05SANTODOMINGO1999

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 001999 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/TPP/BTA/EWH 
LABOR FOR ILAB; USCINCSO ALSO FOR POLAD; TREASURY FOR 
OASIA-LCARTER 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI 
 
E.O. 12958: N/A 
TAGS: ETRD, PGOV, PREL, DR 
SUBJECT: DOMINICAN POLITICS #21: PROSPECTS FOR CAFTA 
RATIFICATION 
 
 
1.  (SBU) Following is # 21 in our series on the politics of 
Leonel Fernandez's first year: 
 
Summary.  The various players in the decision process for the 
CAFTA regional free trade agreement all know that 
ratification is necessary as soon as the U. S. Congress 
approves implementing legislation. Positions have hardened, 
with major business associations demanding an end to taxation 
and levies totaling 32 percent on imports of capital goods 
and industrial inputs. Policymakers must reconcile the 
requirements of the IMF agreement, the CAFTA agreement, and 
the business elites -- it's no surprise that many Dominicans 
are yearning for more time.  End Summary. 
 
The Dominican Republic signed the CAFTA free trade agreement 
last August 5 along with all other parties, in the last ten 
days of the administration of Hipolito Mejia. Incoming 
President Leonel Fernandez has all along spoken of the need 
to meet the pressures of globalization and competition; he 
has regularly endorsed CAFTA as the way of doing so. 
However, as powerful sugar interests lobbied, propagandized, 
induced Congress to pass a deal-killing protectionist tax, 
and enlisted Fernandez himself to write to President Bush via 
Governor Jeb Bush of Florida, Fernandez has avoided pressing 
the opposition-dominated Congress for action. The repeal of 
the protectionist tax in December became possible when 
Fernandez's senior advisors made promises -- not divulged and 
perhaps not specific -- to provide compensatory measures to 
losing sectors.  The administration had a stronger hand at 
that time because the IMF had set congressional passage of a 
2005 budget as a precondition for submitting the standby to 
the IMF board. 
 
The Dominican Senate has moved with all due deliberate speed 
since that time. Chair of the special committee Sen. 
Alejandro Santos held two major open hearings, then traveled 
to Washington with two colleagues to make the rounds of 
Congressional representatives, officials and interest groups 
there. On April 6 he invited sector representatives for yet 
another round of talks, this time in the semi-private setting 
of the Hotel Santo Domingo. Embassy political officer 
attended the discussion, which brought no surprises except 
for Santos' declaration that he expected the Senate to 
approve the agreement by the end of the month and send it to 
the House of Representatives.  He and Senate President Andres 
Bautista said the Senate should ratify CAFTA &as rapidly as 
possible8 but first should approve measures &to mitigate 
the possible negative effects.8  They said those measures 
should be compatible with CAFTA and the IMF agreement, should 
be economically rational, and should put the country on an 
equal basis with its Central American competitors.  Foreign 
Minister Carlos Morales Tronocoso told Washington officials 
on April 11 that he expected ratification in the month of May 
and that the concerns of the sugar sector were being dealt 
with satisfactorily. 
 
THE EXCHANGE COMMISSION 
 
Industrialists say that as a pre-condition for assenting to 
CAFTA ratification, they want the government to abolish the 
13 percent "exchange commission" collected on the CIF value 
of all imports -- or at a minimum, to end it for the imports 
of capital investment goods and inputs for manufacturing. 
They have regularly published a chart comparing the taxation 
of such imports in the various CAFTA countries, showing that 
none of the Centrals collects more than a token amount on 
such imports.  President of the Industrialists Association 
Yandra Portella asserted that ending the measure would lower 
government collections by 2.4 billion Dominican pesos (USD 
86.4 million). 
 
The "exchange commission" is a revenue subterfuge used 
earlier and then progressively increased by the Mejia and 
Fernandez administrations in an effort to meet revenue 
targets for the IMF standby agreements. The Monetary Board, 
directors of the Central Bank, imposed the measure, not the 
Congress. The Board raised the measure from 10 percent to 13 
percent on January 1, to make up for the expiration of a 
congressionally approved temporary import surcharge. At the 
request of Honduras, the WTO Dispute Resolution Body 
considered the measure in 2003 (back when it was only 4.75 
percent) and eventually found it counter to WTO commitments. 
Embassy understands that the requirement of the IMF agreement 
for the government to propose a "major tax reform" in 
mid-2005 pushes the government to consider what other revenue 
measures could offset loss of these revenues. 
 
Finance Minister Bengoa expostulated at the Ambassador's 
dinner for Chilean trade expert Osvaldo Rosales last week 
that the mistake of both administrations had been to task 
Customs to collect the levy; after all, he argued, it was 
really a tax mostly on offshore transactions. Leading 
merchant and industrialist "Pepin" Corripio dismissed that 
logic: "It's a ransom. If you weren't holding the goods 
hostage in customs, you couldn't collect half of it. " 
 
VAT AND DUTIES ON GOODS FOR INDUSTRY 
 
The other big number for the Dominican exporters in the 
comparative chart is the value-added tax, or ITBIS, which 
rose to 16 percent last September. According to the chart, 
none of the other Latin American CAFTA partners charges a VAT 
on imports for industry.  Portella did not estimate the 
revenue cost, but her methodology for &exchange commission8 
suggests to us that it would be about 3 billion pesos (USD 
107 million). The Dominican Republic assesses a 3 percent 
tariff on imported machinery; none of the Centrals except 
Costa Rica charges such a tariff, and there it is only 1 
percent.  Portella estimated that the revenue effect of 
ending the tariff would be 379 million Dominican pesos (USD 
13.5 million). 
 
This fiscal debate revolves really around the issue of 
timing, with a sub-theme of the political difficulty of 
planning and negotiating major tax reform involving offsets 
of more than USD 200 million previously collected on imports 
of roughly USD 4.5 billion.  This compares with a central 
government budget of 1.6 billion (USD 5.3 billion at the 
current exchange rate; USD 4.32 billion when drawn up with an 
assumption of 37 pesos to the dollar).  The provisions of 
CAFTA are designed to deliver the changes that the 
industrialists have set as their preconditions. Explicit in 
the CAFTA is the ending of taxes and duties on trade, at 
least for merchandise imported from member countries. 
 
WHY SUCH HASTE? 
 
With these lines drawn and Leonel Fernandez conspicuously 
mute about them, a major comment from several business 
leaders -- especially those close to sugar, such as Luis 
Viyella of the fertilizer manufacturer FERSAN - - has been 
that there is "really no hurry to ratify."  This issue was 
raised repeatedly during the successful high-profile working 
visit of Chilean former trade negotiator Osvaldo Rosales, an 
initiative of the Ambassador supported by USAID (reftel). 
Rosales countered the objection with a comic question (&If 
an attractive international film star like Sharon Stone 
insisted on a date with you, would you ask her to wait a 
couple of months while you got yourself into shape?8) and 
with a reminder: &Timing of ratification is one thing; 
timing of international investment decisions is another, and 
those who are full participants from the start will be the 
most competitive.  Those who delay will be left out.8 
 
The CAFTA agreement goes into effect when the United States 
and one other signatory have ratified.  Since three other 
parties have already done so, the agreement will be &live8 
as soon as the U.S. Congress approves implementing 
legislation. All of the calendars for market opening will 
begin to run.  The remaining signatories will have up to two 
years to ratify ) failing which, they lose the opportunity 
and they lose various benefits under U.S. programs favoring 
Caribbean trade. 
 
The Dominican administration and congressional leadership 
will have to use political chips to get CAFTA ratified.  All 
are watching the U.S. Congress. Many are hoping that CAFTA 
will fail to pass there, so that Dominicans will not have to 
take these difficult decisions. The Dominican tableau is 
likely to remain static for some time, with the Senate making 
haste slowly and the business sectors looking to deal with an 
immobile Fernandez administration. At the same time the 
Ambassador and Embassy officers will insist with vigor and 
great optimism that the Dominican administration, Congress, 
and private sector should seize the salutary opportunity to 
embrace globalization and market competition. 
 
2. (U)  Drafted by Michael Meigs, Joseph Goodwin, and Bain 
Cowell. 
 
3. (U)  This piece and others in our series may be viewed at 
our SIPRNET site www.state.sgov.gov/p/wha/santodomingo  along 
with extensive other material. 
HERTELL