US embassy cable - 02TEGUCIGALPA2972

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 002972 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CEN, WHA/EPSC 
STATE PASS TO USTR: ANDREA GASH-DURKIN, DAN FANTOZZI 
STATE PASS TO USDA/FAS FOR BRENDA FREEMAN/AA/ITP 
DOL FOR ILAB: ROBERT WHOLEY 
GUATEMALA FOR COMMATT: DTHOMPSON 
GUATEMALA FOR AGATT: FCOOLIDGE 
 
E.O. 12958: N/A 
TAGS: ETRD, EAGR, ECON, ELAB, EINV, PREL, XK, HO, USTR 
SUBJECT: HONDURAN-U.S. BILATERAL TRADE AND NON-TRADE ISSUES 
AFFECTING USCAFTA 
 
REFS: A) SECSTATE 203301 
 
      B) SECSTATE 207175 
      C) TEGUCIGALPA 728 
      D) TEGUCIGALPA 1951 
      E) TEGUCIGALPA 2307 
      F) TEGUCIGALPA 2207 
      G) TEGUCIGALPA 2857 
      H) TEGUCIGALPA 2897 
      I) TEGUCIGALPA 1920 
      J) TEGUCIGALPA 1756 
      K) TEGUCIGALPA 2829 
      L) TEGUCIGALPA 2916 
 
1.  (U) In response to refs a & b, Post identifies the 
following outstanding bilateral trade and non-trade issues 
that could negatively impact perception of a U.S.-Central 
American free trade agreement in the U.S. private sector and 
Congress. 
 
Agriculture Import Restrictions 
------------------------------- 
 
2.  (U) Honduras has had a ban on U.S. raw poultry imports 
for some time.  USDA FAS estimates that if Honduran 
restrictions on U.S. raw poultry and poultry parts were 
lifted, U.S. producers could export an additional USD 10 
million of poultry products to Honduras, annually. 
 
3.  (U) Since President Maduro took office on January 27, 
Embassy has received a series of complaints from local 
importers regarding import restrictions, difficult 
certification requirements and other obstacles to the 
importation of U.S. pork, poultry and dairy products.  GOH 
agriculture officials, in increasing the bureaucratic 
requirements to import U.S. products, appear bent on using 
sanitary and phytosanitary (SPS) measures as a way to 
restrict imports and support local poultry and pork 
producers.  GOH officials, in turn, claim that Honduran 
importers provide partial documentation, either for purposes 
of tax evasion or in order to evade SPS restrictions on 
products from third countries.  U.S. companies Cargill and 
PriceSmart (a subsidiary of Costco) have been among the 
companies complaining in 2002 of import obstacles.  Post 
notes that in 2001, Honduras imported USD 6.1 million of 
U.S. dairy products, USD 6 million of U.S. pork products, 
USD 3.5 million of U.S. poultry products. 
 
4.  (U) In February, several Honduran importers of U.S. meat 
and dairy products complained to the Embassy that Honduras' 
Office of Plant and Animal Health (SENASA) was denying 
applications for the importation of goods from the United 
States on the basis that the plants producing the food 
products had not been certified by SENASA (ref c).  SENASA 
Director Reyes explained that the actions were being taken 
not on the basis of Honduran phytosanitary law but due to a 
Honduran implementing regulation adopted in late 2001 and 
that the GOH believes its actions are consistent with its 
WTO commitments.  He committed to ensuring the clearance of 
all U.S. agriculture imports as soon as the importers fill 
out applications for pre-certification.  While the 
complaints have lessened since that time, there have been 
some sporadic incidents over this requirement. 
 
5.  (U) In June, SENASA began restricting imports of U.S. 
poultry products over concerns of an outbreak of avian 
influenza in the U.S.  After some negotiation, GOH officials 
agreed to allow poultry imports if and when USDA certifies 
that the products originate from a zone free of avian 
influenza (ref d).  The ensuing back and forth on whether 
USDA can certify poultry products free of low pathogen avian 
influenza delayed entry of cooked and mechanically deboned 
poultry meat into the Honduran market.  USDA FAS is aware of 
several U.S. suppliers that have turned away from selling to 
Honduras because of these reported difficulties. 
 
6.  (U) There doesn't seem to be any legitimate health 
concern over U.S. pork imports, which SENASA began 
restricting in June and July (ref e).  The GOH indicated 
privately to importers that it is interested in limiting the 
number of containers from certain companies (ostensibly over 
concerns that importers don't have the necessary cold 
storage capacity to handle the amount of imports).  After 
discussions with Embassy and importers about paperwork 
requirements, GOH obstacles to pork product imports from the 
U.S. began to ebb. 
 
7.  (U) In October, in response to an announcement by USDA 
of a recall of turkey products originating from certain 
plants in the U.S. due to listeria, SENASA announced that it 
would restrict imports of U.S. turkey, chicken and other 
products susceptible to listeria.  Without consultation or 
prior notice, SENASA told importers it requires FSIS or 
APHIS to certify that these products are free of listeria 
and newcastle disease.  Embassy has begun discussions with 
SENASA officials over USDA's zero tolerance policy for 
listeria in cooked and processed food, and appropriate 
action on raw turkey.  We expect this issue to be 
problematic in the near term. 
 
8.  (U) Post is also concerned that the GOH is not giving 
advance notice of changes in import regulations as required 
by WTO rules.  We are skeptical that SENASA is applying 
equivalent SPS treatment to domestic poultry and pork 
products. 
 
IPR Issues 
---------- 
 
9.  (SBU) U.S. pharmaceutical company Pfizer has complained 
that the Ministry of Health, in approving a competing 
company's pharmaceutical product, did not respect Pfizer's 
data exclusivity rights as guaranteed in article 77 of 
Honduras' Industrial Property Law and article 39 of the WTO 
TRIP's agreement.  The Ministry of Health approved the 
pharmaceutical product, despite communication from Honduras' 
IPR Division that Pfizer's research and data were protected 
under Honduran law.  Pfizer argues that in order for the 
competing product to be legally registered with the Ministry 
of Health, the company needs to provide the research and 
data to support their application.  Honduran law provides 
five-year exclusive use of data provided in support of 
registering pharmaceutical products. 
 
10.  (U) U.S. companies, through the Business Software 
Alliance (BSA), complain that attempts to prosecute computer 
software infringement cases have been met with resistance by 
officials in the Ministry of Industry and Trade's IPR 
Division and the GOH's Attorney General's Office who often 
cite procedural problems or lack of resources as the main 
causes of government inaction. 
 
11.  (U) Honduras largely complied with the Trade Related 
Aspects of Intellectual Property Rights (TRIPS) Agreement by 
the January 1, 2000 deadline.  However, there has been no 
action by the GOH to obtain approval of two laws governing 
the designs of integrated circuits and plant variety 
protection in the National Congress.  Approval of the two 
laws is necessary for Honduras to be in complete TRIPS 
compliance. 
 
AES 
--- 
 
12.  (SBU) U.S. energy company AES is the only U.S. finalist 
in the current bidding for a 210 MW tender by the GOH (refs 
f, g & h).  AES has plans to build a usd 650 million liquid 
natural gas-fired power plant with transmission lines and 
LNG port that would serve Honduras, El Salvador and other 
countries in the region.  General Electric is a strategic 
partner in this project.  The state-run electricity company 
(ENEE) has delayed announcement of the winner, presumably 
because of heavy pressure by Honduran competitors in the 
thermal and hydropower sector.  While the Maduro 
administration has assured that the 210 MW tender will be 
fair and transparent, the government-controlled process 
provides ample opportunity for discretion and manipulation. 
One possible issue is that one domestic firm, which bid low, 
did not include the price of constructing a new substation 
and accompanying power lines in its bid offer.  Presumably 
this company should be disqualified. 
 
Property, Investment and Commercial Disputes 
-------------------------------------------- 
 
13.  (SBU) The Embassy has files on over 150 property and 
investment cases involving U.S. citizens.  The 2002 Helms 
Act report (ref I) includes 9 cases that could be termed 
expropriation without adequate compensation, under the 
definition used in the Helms Act.  Eight of the claims 
described in the Helms Act report involve the Honduran 
National Agrarian Institute (INA) and land invasion by 
squatters.  Land invasions are common for both Honduran and 
foreign landowners.  According to the National Agrarian 
Reform Law, idle land fit for farming can be expropriated 
and awarded to the landless poor.  Generally, an INA 
expropriation case begins after squatters target and invade 
unprotected property. The squatters then file for the land 
with the INA under the Agrarian Reform Law.  In most cases, 
pursuit of the subsequent legal avenues has proven to be 
costly and time consuming, and has rarely lead to positive 
results.  Representatives in the U.S. Congress have been 
contacted about land cases in Honduras, especially Senator 
Graham of Florida who has been contacted by four 
constituents about their cases. 
 
14.  (SBU) Post demarched the Honduran government repeatedly 
in 2001 and 2002 on the importance of establishing a 
mechanism that will allow progress on expropriation cases 
involving U.S. citizens (ref j).  In late August, the GOH 
informed us that they are pursuing our recommendation of 
letting land cases involving the Honduran or municipal 
government be resolved in arbitration rather than through 
the courts (this will require legislation, which has not yet 
been submitted to Congress).  Note: Honduras' first 
experience with arbitration involving a private dispute 
between U.S. and Honduran companies does not bode well; the 
U.S. company is now appealing the arbitral award to its 
former subcontractor, alleging corruption.  End note. 
 
15.  (SBU) The Embassy is aware of numerous other property 
and investment disputes involving U.S. investors, the 
majority of which have arisen out of inadequate titling 
procedures or fraudulent business dealings and involve 
disputes between U.S. and Honduran citizens.  In many of the 
private disputes between U.S. and Honduran citizens, the 
U.S. citizens charge unfair, often egregious, treatment in 
the court system.  Most of these problems arose under 
previous administrations.  In the case of the Moore family 
in Roatan, however, an unwarranted eviction from their 
property occurred in August (ref k).  While the case has 
received widespread attention, there has not yet been a 
favorable result. 
 
16.  (SBU) U.S. Tobacco and textile company JE Morgan have 
both had difficult and prolonged labor cases that arose when 
the companies tried to investigate or dismiss key employees. 
(Note: In the case of U.S. Tobacco, the dismissed employee 
is a U.S. citizen and the Embassy is therefore limited in 
its role.  End note.)  In both cases, the employees have 
gone to the labor courts requesting extremely high severance 
packages.  Texaco has complained of undue delays and lack of 
due process in its contractual dispute with a franchisee. 
Transpacific Geothermal has complained that slow, 
inefficient court proceedings have unjustifiably tied up the 
company's bid to build a small geothermal energy project in 
Western Honduras.  (Note: Another U.S. citizen is suing the 
GOH over a former mining concession on the land.  End note.) 
U.S. companies have also complained about judicial 
procedures that inhibit the return of stolen property. 
Several U.S. companies and investors have complained of 
arbitrary and unfair environmental permitting procedures, 
although this appears to have improved significantly under 
the Maduro administration.  The U.S. companies have alleged 
unfair treatment in the courts and indicated that the state 
of the judicial system has dissuaded them from any new 
investments. 
 
Labor 
----- 
 
17.  Although not mentioned in other Central American posts' 
cables on bilateral trade and non-trade issues affecting 
U.S.-CAFTA, civil society in Central America and the U.S. 
have voiced concern over labor issues throughout the region 
and are likely to press for improvement in the labor 
situation and swifter action to eradicate the worst forms of 
child labor as conditions for a trade agreement.  Concerns 
frequently mentioned by international labor organizations 
and NGOs, especially in the maquila sector, include 
challenges to and problems with the freedom of association, 
the right to organize, the right to strike and the right to 
collectively bargain.  These rights are generally respected 
in practice, but enforcement is weak.  While many Central 
American countries, including Honduras, are party to ILO 
Convention 182 to eradicate the worst forms of child labor, 
the private sector - particularly in coffee, melon, 
sugarcane, and lobster agroindustrial production for export 
- continues to employ children in hazardous agricultural 
activities in which the minors also lose opportunities for 
schooling (see ref L).  Other illicit activities in which 
minors engage in throughout Central America and which are 
even more difficult to enforce include commercial sex 
exploitation in tourist and border areas and illegal 
narcotics smuggling in the border areas and the Caribbean 
coast.  (Note:  There are numerous regional projects 
supported by USDOL with the goal of working to eradicate the 
worst forms of child labor.  End Note.) 
 
Other Issues 
------------ 
 
18.  (SBU) The GOH provides extensive tax incentives to 
foreign and domestic companies, especially in the apparel 
assembly sector and widely defined tourism.  Companies 
operating in designated export processing zones are exempt 
from paying import duties on goods and capital equipment and 
from state and municipal taxes.  In the lead up to the 
initiation of the Doha round, the GOH put priority on 
maintenance of its incentives regime.  The GOH will continue 
to provide incentives through 2010 per WTO rules allowing 
countries with GDP per capita under USD 1,000 to maintain 
free trade zones.  Previously negotiated contracts with 
franchisees provide tax incentives to some Honduran owners 
of fast food outlets for another 15 years.  Electric power 
producers are allowed to import fuel duty free, but some 
national firms may be taking advantage of the tax exemption 
to evade taxes on the sale of refined oil products.  Embassy 
understands that investment incentives are an issue in the 
Canada-Central America free trade talks.  International 
donors, including the IMF, IDB and World Bank, have 
identified the GOH's extensive tax exemptions as a main 
contributor to the Government's perennial fiscal problems. 
During U.S-CAFTA talks, U.S. negotiators should be aware of 
the interplay of the trade and fiscal issues. 
 
19.  (SBU) The IMF and the World Bank are looking closely at 
the fragile financial sector in Honduras.  The Honduran 
banking system is considered weak and in need of 
consolidation.  Insider abuses and heavy losses in key 
sectors have combined to contribute to a large overhang of 
bad loans.  Problems in the financial sector affect interest 
rates and the availability of medium and long-term lending. 
During the U.S.-CAFTA trade talks on financial services, 
U.S. negotiators should be aware of the measures the IMF and 
World Bank are recommending to strengthen the banking 
sector. 
 
20.  (U) We also note that Honduras has failed to implement 
fully its customs valuation obligations.  The U.S.-CAFTA 
negotiations could be used to push for more complete 
implementation of the WTO customs valuation agreement. 
 
Pierce