US embassy cable - 02TEGUCIGALPA2530

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 002530 
 
SIPDIS 
 
STATE PASS USTR: ANDREA GASH DURKIN 
GUATEMALA FOR COMMATT: DTHOMPSON 
STATE PASS AID FOR LAC 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EFIN, EIND, PREL, PGOV, HO 
SUBJECT: A/S REICH DISCUSSES TRADE AND INVESTMENT WITH THE 
HONDURAN GOVERNMENT AND PRIVATE SECTOR LEADERS; STRONG 
SUPPORT FOR USCAFTA 
 
 
1.  Summary.  WHA A/S Otto Reich, accompanied by WHA/CEN 
Director Paul Trivelli, Ambassador, DCM, USAID Director and 
EconCouns, discussed trade and investment issues over lunch 
with Honduran government officials and private sector 
leaders on August 28.  Both A/S Reich and the Honduran 
participants, led by Vice President Vicente Williams, 
confirmed their commitment in moving quickly on negotiations 
for a U.S.-Central America free trade agreement, once 
consultations with the U.S. Congress are completed.  The 
Hondurans expressed great interest in A/S Reich's 
discussions in Nicaragua of Nicaragua's 35 percent tariff on 
Honduran imports.  The Hondurans emphasized that there is 
increasing pressure to impose a retaliatory tariff and 
requested the USG to use its good offices to help resolve 
the issue.  VP Williams also discussed the Maduro 
administration's efforts to combat corruption and improve 
Honduras' investment climate.  End summary. 
 
2.  WHA A/S Otto Reich, accompanied by WHA/CEN Director Paul 
Trivelli, Ambassador, DCM, USAID Director, EconCouns and 
EconOff (notetaker), attended a lunch with select GOH 
officials and private sector leaders to discuss trade and 
investment issues, especially a U.S.-Central America free 
trade agreement (USCAFTA).  A/S Reich confirmed the USG's 
intent to pursue free trade negotiations with Central 
America and emphasized the importance of resolving border 
conflicts to improving regional economic integration and 
combating corruption in creating an attractive investment 
climate.  WHA/CEN Trivelli noted that in order to build U.S. 
congressional support for a USCAFTA, the GOH also needs to 
make progress in addressing outstanding investment disputes 
involving U.S. citizens. 
 
3.  Honduran participants included Vice President Vicente 
Williams, who leads presidential commissions on the Plan 
Puebla-Panama initiative and regional integration, Minister 
of Industry and Trade Juliette Handal, Minister without 
Portfolio for Investment Camilo Atala, Maquila Association 
President Jesus Canahuati, FIDE (Foundation for Export 
Promotion) President Norman Garcia, Honduran-American 
Chamber of Commerce (Amcham) representative Jackie Foglia 
and Ronald Barahona from COHEP, the private sector umbrella 
group. 
 
4.  Much of the discussion revolved around Nicaragua's 35 
percent retaliatory tariff on Honduran imports over a 
Caribbean maritime border dispute.  The Hondurans emphasized 
that the tariff poses a major obstacle to CentAm free trade 
negotiations with the U.S. and regional integration efforts. 
The Hondurans argued that U.S. involvement in the issue 
would be key to its resolution and requested the USG to use 
its good offices to that end.  (Note: There is increasing 
pressure in Honduras' private sector and Congress to impose 
retaliatory measures.  End note.) 
 
5.  In preparing for free trade talks with the U.S., 
Minister Handal noted that there has been an unprecedented 
level of cooperation and good will among CentAm trade 
ministers since President Bush announced USG interest in a 
free trade agreement with Central America on January 16. 
CentAm trade officials have worked closely with each other 
during preparatory meetings with U.S. trade officials and 
have agreed to a common framework for the negotiations. 
Minister Handal shared concerns about U.S. subsidies 
expressed by the private sector (especially the agro- 
industrial sector).  She expects that the Honduran 
agriculture interests will push for exclusion of these 
products from the negotiations, and flagged that U.S. 
agriculture subsidies will have to be addressed in the 
discussions. 
 
6.  On private sector participation, Minister Handal noted 
the ministry's need for private sector market analysis in 
preparing for the negotiations.  Speaking for Honduras' 
textile industry, Jesus Canahuati stated that Honduras' 
maquila sector is well organized for upcoming trade talks 
and that there is already routine communication with the 
U.S. textile industry and regional textile associations.  He 
mentioned that a USCAFTA is essential for Honduras' textile 
industry to be able to compete after quotas are eliminated 
in 2005.  Canahuati is also working with COHEP on organizing 
the negotiating positions of other Honduran industries 
(especially agriculture) and fostering communication within 
the region.  Ultimately, they would like to create common 
region-wide negotiating positions for each sector. 
 
7.  The Amcham representative highlighted the lack of 
information in the private sector and civil society in 
general regarding USCAFTA and remarked that Amcham has a 
project underway to educate the public on the benefits of 
free trade.  (Note:  The regional Amchams signed an 
agreement with the Central American System for Economic 
Integration (SIECA) on August 21 for approximately USD 
65,000 to carry out a series of focus groups to identify 
USCAFTA concerns and embark on a public relations campaign 
to support the free trade talks.  End note.) 
 
8.  FIDE President Norman Garcia, who works closely with VP 
Williams on Honduras' participation in the Plan Puebla- 
Panama (PPP) initiative and creation of the Competitiveness 
Council, noted that the USCAFTA complements the 
infrastructure projects contemplated in the PPP initiative. 
Garcia stated that the PPP and USCAFTA are opportunities to 
improve regional economic integration and investment climate 
issues region-wide, to the benefit of foreign investors. 
9.  Picking up on a key issue during A/S Reich's visit, VP 
Williams highlighted the Maduro administration's efforts to 
reform the judicial system and combat corruption.  VP 
Williams singled out the implementation of the Criminal 
Procedures Code and the new selection process for Supreme 
Court Justices as significant achievements for the GOH.  He 
also noted that the Maduro administration successfully 
pushed through the Financial Stabilization Law, which 
increases the tax base and includes tougher punitive 
measures for tax evasion (like the temporary closure of 
businesses), passed a law simplifying procedures to 
incorporate a business and initiated a project that will 
increase transparency in government procurement. 
 
10.  Atala echoed VP Williams' points and added that the 
GOH's tax collection efforts have resulted in a 20 percent 
increase in tax revenues.  Atala, who was President Maduro's 
point person on Temporary Protected Status (TPS), also noted 
that remittances constitute a major source of revenue for 
Honduras and have been increasing steadily over the last few 
years.  (Note:  Minister of the Presidency Luis Cosenza told 
the Ambassador recently that remittances increased by 38 
percent during the first six months of 2002 compared to the 
first half of 2001.  End note.) 
 
11.  In response to Atala's inquiry concerning the Millenium 
Challenge Fund, A/S Reich stated that Honduras was a good 
candidate for the Fund and emphasized that in designating 
the funds, the U.S. will evaluate a variety of factors, 
including a country's human rights record, the extent of 
investment in human capital and dedication to a free market 
economy. 
 
12.  Post notes that the throughout the conversation the 
Honduran public and private sector participants emphasized 
the need to put in place the conditions necessary for 
economic growth.  They were united in their commitment to 
moving ahead on a Central American free trade agreement with 
the U.S.  The Hondurans, as expected, made Nicaragua's 35 
percent tariff a major issue during the lunch.  Arguing that 
it represents the biggest obstacle to further regional 
economic integration and free trade talks, they pushed for 
the U.S. to play an active role in resolving the divisive 35 
percent tariff. 
 
Almaguer