US embassy cable - 05TEGUCIGALPA1833

S E C R E T SECTION 01 OF 03 TEGUCIGALPA 001833 
 
SIPDIS 
 
NOFORN 
 
STATE FOR EAP/CM KLEE, WHA/PPC JBISCHOFF, WHA/EPSC 
LGUMBINER, WHA/CEN 
 
E.O. 12958: DECL: 09/06/2015 
TAGS: ETRD, ECON, PGOV, EAGR, ELAB, CH, TW, HO 
SUBJECT: CHINESE ACTIVITY IN HONDURAS 
 
REF: SECSTATE 138041 
 
Classified By: CHARGE D'AFFAIRS JAMES G. WILLIARD A.I. FOR REASONS 1.4 
(B) AND (D). 
 
1.  (C) Summary:  This cable is a response to reftel request 
for updates on Chinese activity in Latin America and the 
Caribbean.  Honduras has no significant public or private 
sector ties to the People,s Republic of China (PRC).  Data 
indicate a limited but growing trade relationship between 
Honduras and China.  Honduran business community and public 
opinion reflect great concern regarding the increasing influx 
of Chinese goods on the Honduran market, which could displace 
locally made products.  In addition, the vitally important 
maquila sector faces ongoing price competition from the PRC 
in apparel and textile sales to the United States, and fears 
that Chinese competition will alter the Honduran industry in 
the near future.  The PRC does not have diplomatic relations 
with Honduras, and has no military to military contact.  End 
Summary. 
 
--------------------------------- 
Economic Issues 
--------------------------------- 
 
2.  (U) Honduras has a growing trade deficit with China. 
China represents a small portion of total Honduran exports 
and imports; however, Honduras has seen a marked increase in 
Chinese imports over the past year and a half.  In the first 
five months of 2005, total imports from Honduras are up 23 
percent over 2005, but total Chinese imports represent 3 
percent of all imports. 
 
3.  (U) According to Honduran Secretary for Commerce and 
Industry (SIC) in 2003, total Honduran exports to China 
totaled only USD 1.9 million.  (Note:  Post has requested 
2004 and will forward data as soon as it becomes available. 
End Note.)  Silver was Honduras, number one export to China 
(USD 1.3 million), followed by aluminum (USD 333,677).  In 
that same year, Honduras imported USD 28.8 million in Chinese 
goods and services.  Available data doesn,t clearly break 
down which products were imported, with USD 15.9 million in 
imports classified as &other8 (likely consumer products). 
Of the remaining imported products, Honduras bought USD 1.2 
million in dried fish, USD 1.2 million in mussels and 
shellfish, and USD 1.1 million in fresh cheese from China. 
 
4.  (U) The PRC Xinhua News Agency reports total 2004 
Honduran imports of Chinese goods as USD 123 million.  In the 
first 5 months of 2005, this amount has increased by 23 
percent over the first 5 months of 2004.  Meanwhile, Honduran 
exports to China in all of 2004 totaled USD 11.7 million, 
while already in the first five months of 2005 total exports 
have increased by 173 percent to USD 10.8 million.  Rebecca 
Reyes, Director of External Relations at SIC, credits the 
increase in imports nearly entirely to increases in consumer 
goods imports. 
 
5.  (U) While total Honduran imports from the PRC are 
increasing quickly, they represented only 3 percent of total 
imports in 2004.  In comparison, Honduras imported USD 1.358 
billion (35 percent) from the United States.  (Note: This 
figure excludes inputs for re-export by the maquila sector, 
which represent another half a billion dollars in U.S. goods 
exported to Honduras.  As technically offshore entities, 
these businesses do not officially import goods, and the 
value added from maquila production is booked in the 
"services" account.  End Note.)  Post anticipates an 
increased presence of Chinese goods in the Honduran 
marketplace, but current volume is small. 
 
-------------------- 
Public Opinion 
-------------------- 
 
6.  (U) In a series of roundtable discussions with Chambers 
of Commerce members and executives around Honduras, EconOff 
noted significant concern within the business community about 
the increasing influx of Chinese goods to the Honduran 
market, which they believe will come to displace locally made 
products.  Honduran businesses are equally concerned about 
market share in their export markets, particularly the U.S. 
Industries as varied as tool manufacturers, artisan shop 
owners, shrimp farmers, and textile manufacturers cite China 
as the number one obstacle to U.S. market penetration.  These 
fears are exacerbated by U.S. press attention on increased 
Chinese influence in the U.S. economy. 
 
7.  (SBU) Shrimp farming in the southern city of Choluteca 
has grown into one of the largest industries in that region. 
However, industry specialists report price decreases on the 
international market of one third versus last year, which 
they blame on cheaper shrimp produced in China (under what 
they say are environmentally detrimental farming practices 
and overcrowded ponds).  However, one company commented that 
while bulk shrimp prices have fallen, value-added shrimp 
product prices have remained stable, and this company intends 
to expand its workforce in the coming five years by 1,000 
employees.  This firm has expanded its sales to one U.S. 
buyer by branching out from seafood exports into other frozen 
foods.  By night, this shrimp processor processes jalapeno 
peppers.  Through diversification and value added production, 
the shrimp company expects continued growth, despite 
increased competition from China. 
 
8.  (U) We have heard similar predictions from Imapro, a 
producer of handicrafts, which intends to compete with 
quality rather than price in the export market.  Industry 
leaders are recognizing areas in which they can compete with 
China for U.S. market share, and are making adjustments to 
foster those niche advantages.  For example, "full package" 
maquilas expect to compete with China based upon 
time-to-market advantages and by offering full-service, 
vertically-integrated production to prospective clients. 
Most industry representatives expressed doubt, however, about 
the continued viability of companies that do not find and 
foster these types of economic advantages. 
 
----------------- 
Investment 
----------------- 
 
9.  (SBU) According to the Honduran Manufacturers Association 
(AHM), there are four Chinese-owned manufacturers in 
Honduras:  Dong Xian Xu, Dragon Maya, Ensambles Industriales, 
S.A. (the latter two both joint Honduran-Chinese ventures, 
with the Honduran Kattan family owning significant stakes), 
and Dragon Head Textiles. According to Angela Castilla, 
Director of Promotion at AHM, Dragon Head recently laid off 
all its workers except for five administrators, and is 
currently looking for new orders.  Though dollar values were 
not available, Ms. Castilla went on to note that Chinese 
companies represent less than 1 percent of all maquila 
investment in Honduras.  (Note:  These figures do not include 
Taiwan and Hong Kong, whose investors own 5 and 6 maquilas, 
respectively). 
 
10. (SBU) In numerous conversations with maquila owners and 
industry executives, China has been the number one hot topic 
of conversation, less for its operations in Honduras than for 
the anticipation of competition for the U.S. market.  Despite 
these private concerns, Honduran industry and government 
officials remain publicly optimistic that Honduras, industry 
will remain competitive on the world stage.  Castillo 
emphasized that in the first 6 months of 2005, Honduras 
remained the third largest supplier of finished textile and 
apparel goods to the U.S. market, and the Central Bank of 
Honduras predicts the sector will grow 10 percent in 2005. 
Conversations with management of several maquilas, who credit 
the positive AHM spin to political pressures, were less rosy. 
 Several commented that while Chinese rivals cannot yet 
compete on consistent quality, it is only a matter of time 
before the Chinese will make necessary adjustments.  One 
firm, Grupo Beta, currently employs 5,000 workers, but 
anticipates that it will need to halve its workforce in the 
next 5 years in order to compete with the Chinese. 
 
11.  (U) There is a general consensus, both within the AHM 
and among individual firms, that the textile manufacturers 
most diversified into &full package8 regimes are the ones 
best poised to compete with increasing Asian competition. 
Other &cut and sew8 operations, producing unspecialized 
products (and in particular local maquilas that depend on 
overflow orders from the larger, foreign-owned maquilas 
operating in Honduras) will have a difficult time competing 
with China. 
 
-------------------- 
Taiwan 
-------------------- 
 
12. (SBU) Honduras maintains diplomatic relations with the 
Republic of Taiwan, and Tegucigalpa maintains a sister city 
relationship with Taipei.  In a March 29 meeting, then-Vice 
Minister of Trade Irving Guerrero (now Minister of Trade) 
indicated that the Taiwanese were interested in pursuing a 
free trade agreement with Honduras, but Guerrero dismissed 
the prospect as being  not worth our time.,  Pointing out 
that trade between Honduras and Taiwan is minimal, Guerrero 
asked, &What would we gain from a deal with them?8  He went 
on to state that only if the Taiwanese offered a significant 
Trade Capacity Building program or valuable technology 
transfer would an agreement be attractive to Honduras.  It 
would be not the trade, but the associated aid, that would be 
worthwhile. 
 
--------------------------------------------- -- 
Military / Organized Crime Issues 
--------------------------------------------- -- 
 
13.  (C) There is no military contact and/or assistance 
between China and Honduras, nor any Chinese 
military-to-military contacts and efforts to sell weapons to 
Honduras. 
 
14.  (C) Post has information that suggests Greater China 
organized crime groups may have a limited presence within the 
country. 
 
15.  (S/NF) They have been involved in smuggling of PRC 
Chinese immigrants into the country for the last 15 years. 
According to the Ministry of Government and Justice that 
oversees Honduran Immigration, since 2002, 172 foreigners 
have been naturalized, including 13 Chinese citizens.  Press 
reports have estimated that the Chinese have spent 
approximately USD 400,000 in Honduras through payoffs to 
Immigration officials and other illegal activities. 
(Comment:  SIMO provided information that the numbers are 
much higher.  Since January 2002, an estimated 50 illegal 
Chinese immigrants per month have entered the country.  From 
January 2005, those numbers have increased to about 75 - 100 
per month.  Approximately USD 2,500 in corrupt payments are 
made to Immigration for the documentation in each case.  Post 
believes that a number of these illegal immigrants may have 
migrated north across U.S. borders.  According to statistics 
from the Bureau of Consular Affairs, worldwide since 2001, 
approximately 210-215 PRC-born Honduran passport holders have 
applied for U.S. visas.  End Comment) 
 
16.  (C) The evidence suggests that the Chinese organized 
crime groups are tied into Chinese restaurants and small 
Chinese-owned businesses.  Some phony requests for Honduran 
visas for Chinese are for workers in these businesses. 
 
Williard 
Williard