US embassy cable - 05SANSALVADOR3285

UNCLAS SECTION 01 OF 05 SAN SALVADOR 003285 
 
SIPDIS 
 
STATE FOR EB/MTA 
STATE PASS USTR FOR G. BLUE AND T. MENNEN 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EFIN, ES, CAFTA 
SUBJECT: DRAFT 2006 NATIONAL TRADE ESTIMATE REPORT 
 
Ref: STATE 186328 
 
1. Per reftel, following is Embassy San Salvador's 
submission for the 2006 National Trade Estimate Report. 
 
2. Begin Text. 
 
EL SALVADOR 
 
TRADE SUMMARY 
 
[Note: This section to be prepared in Washington. End note.] 
 
IMPORT POLICIES 
 
Free Trade Agreement 
 
The United States concluded free trade agreement 
negotiations with El Salvador, Guatemala, Honduras, and 
Nicaragua in December 2003 and with Costa Rica in January 
2004. In May 2004, the six countries signed the United 
States - Central America Free Trade Agreement. During 2004, 
the United States and the Central American countries engaged 
in negotiations with the Dominican Republic to integrate 
that country into the free trade agreement. On August 5, 
2004, the seven countries signed the - Central America - 
Dominican Republic - United States Free Trade Agreement 
(CAFTA-DR). El Salvador (December 2004), Honduras (March 
2005), Guatemala (March 2005), the United States (July 
2005), the Dominican Republic (September 2005), and 
Nicaragua (October 2005) have ratified the [agreement.] 
[agreement, which entered into force on January 1, 2006.] 
[Note: Throughout, references to CAFTA-DR should be updated 
depending on when the agreement goes into force, and it 
should be noted that upon implementation, trade benefits 
under the Caribbean Basin Economic Recovery Act will be 
eliminated. End note.] 
 
The CAFTA-DR will remove barriers to trade with and 
investment in the region and will further regional economic 
integration. The CAFTA-DR will also require the Central 
American countries and the Dominican Republic to undertake 
needed reforms to confront many of the problems noted below 
in areas including: customs administration; protection of 
intellectual property rights; services, investment, and 
financial services market access and protection; government 
procurement; sanitary and phytosanitary (SPS) barriers; and 
other non-tariff barriers. 
 
Tariffs 
 
Most of El Salvador's tariffs do not exceed the maximum 
common external tariff of 15 percent established by the 
Central American Common Market (CACM), of which it is a 
member. There are several exceptions, however. Among these, 
tariffs on new and used finished clothing are generally 25 
percent, while tariffs on fabrics that are not covered by 
Caribbean Basin Initiative (CBI) benefits can run 20 percent 
or more. Vehicles are assessed a 30 percent duty. 
Agricultural products face the highest tariffs. Dairy, rice 
and pork products are assessed a 40 percent duty, while the 
poultry tariff is higher. Alcoholic beverages are subject to 
a 20 to 40 percent duty, a specific tax based on alcoholic 
content, an ad valorem 20 percent sales tax, and a Value- 
Added Tax of 13 percent. 
 
Under the CAFTA-DR, about 80 percent of U.S. industrial and 
commercial goods will enter El Salvador duty-free 
immediately, with the remaining tariffs being eliminated 
within ten years. Nearly all textile and apparel goods that 
meet the Agreement's rules of origin will be traded among 
CAFTA-DR countries and the United States duty-free and quota- 
free immediately, promoting new opportunities for U.S. and 
regional fiber, yarn, fabric and apparel manufacturing 
companies. The Agreement's tariff treatment for textile and 
apparel goods are retroactive to January 1, 2004. 
 
Under the CAFTA-DR, El Salvador will eliminate its tariffs 
on nearly all agricultural products within 15 years (18 
years for rice and chicken leg quarters and 20 years for 
dairy products). For the most sensitive products, tariff 
rate quotas will permit some immediate zero-duty access for 
specified quantities during the tariff phase-out period, 
which will expand over time. El Salvador will liberalize 
trade in white corn through expansion of a TRQ, rather than 
by tariff reductions. 
 
The Agreement also requires transparency and efficiency in 
administering customs procedures, including the CAFTA-DR 
rules of origin. El Salvador committed to ensure greater 
procedural certainty and fairness and all Parties agreed to 
share information to combat illegal transshipment of goods. 
El Salvador also has free trade agreements with Chile, the 
Dominican Republic, Mexico, and Panama. 
Non-Tariff Measures 
Rice and pork are both subject to import quota systems in 
addition to 40 percent duties. Rice millers are required to 
buy rice locally. When there is insufficient local supply, 
the Ministry of Agriculture allows imports under the quota, 
and if after the import quota has been exhausted, there is 
still a need for imported rice, rough or milled rice can be 
imported without limit, subject to a 40 percent duty. Pork 
importers face similar requirements to first buy locally and 
only import if a shortage remains after domestic supplies 
are exhausted, subject to a 40 percent duty. In addition, 
substantial tariff-rate quotas, which grow over time, were 
established under the CAFTA-DR for rice and pork to provide 
duty-free access for U.S. exports while the out-of-quota 
duties are phased-out. 
 
STANDARDS, TESTING, LABELING AND CERTIFICATION 
 
Although sanitary standards have generally not been a 
barrier in El Salvador, practices with respect to raw 
poultry are a notable exception. Since 1992, the Ministry of 
Agriculture has imposed arbitrary sanitary measures on U.S. 
poultry imports. The Salvadoran government applies these 
standards in a discriminatory manner since domestic 
production is not subject to the same requirements as 
imports. As a result of these measures, the United States 
has been unable to export poultry to El Salvador. The 
industry estimates the value of lost U.S. poultry exports at 
$5 million to $10 million per year. Resolution of this issue 
has been a priority for U.S. agencies, which continue to 
work with the Government of El Salvador. 
 
In addition, the Salvadoran government requires that rice 
shipments be fumigated at importers' cost unless they are 
accompanied by a U.S. Department of Agriculture certificate 
stating that the rice is free of Tilletia barclayana. 
However, since there is no chemical treatment that is both 
practical and effective against Tilletia barclayana, USDA 
cannot issue these certificates. El Salvador failed to 
notify the WTO under the Agreement on the Application of 
Sanitary and Phytosanitary Measures when it imposed this 
requirement. Importers must deliver samples of all foods for 
laboratory testing to the Ministry of Public Health, which, 
upon approval, issues the product registration numbers that 
allow them to be sold at retail outlets. Some U.S. processed 
foods that were approved in the United States were rejected 
after analysis in El Salvador, thereby barring their sale. 
The United States and the Ministry of Public Health 
initiated discussions on this issue in 2002. The U.S. 
Embassy has been able to obtain access for U.S. products 
rejected by the Ministry of Public Health testing on a case- 
by-case basis. At present, there is not yet a standard 
regulation allowing entry of U.S.- approved products. The 
CAFTA-DR provides an opportunity for the United States to 
engage El Salvador in several venues, including the SPS and 
Trade Capacity Working Groups established under the 
Agreement, and fosters significant movement toward the 
establishment of standard regulations for the import of 
foreign food products. A prime example is the work being 
done on the recognition of the equivalence of the U.S. 
inspection system for meat, dairy and poultry (see below). 
 
All imports of fresh food, agricultural commodities, and 
live animals must have a sanitary certificate from the 
Ministry of Agriculture and the Ministry of Public Health. 
Basic grains must have import licenses from the Ministry of 
Agriculture, while dairy products require import licenses 
from the Ministry of Public Health. Consumer products 
require a certificate showing approval by U.S. health 
authorities for public sale. 
 
The United States has raised concerns regarding the 
potentially discriminatory effects of a proposed Salvadoran 
technical standard for distilled spirits. U.S. industry has 
expressed concern with El Salvador's proposed standards for 
rum and aguardiente. However, the five Central American 
countries, including El Salvador, are in the process of 
developing common standards for several products, including 
distilled spirits, which could serve to increase market 
access and facilitate trade. U.S. industry also welcomes El 
Salvador's commitment under CAFTA-DR to explicitly recognize 
Bourbon and Tennessee whiskey as distinctive products of the 
United States. 
 
When the United States and Central America launched the free 
trade agreement negotiations, they initiated an active 
working group dialogue on SPS barriers to agricultural trade 
that met alongside the negotiations to facilitate market 
access. The objective was to leverage the impetus of active 
trade negotiations to seek difficult changes to the Central 
American countries' SPS regimes. Through the work of this 
group, El Salvador has committed to resolve specific 
measures restricting trade between El Salvador and the 
United States. In particular, for meat and poultry, El 
Salvador will move toward recognizing import eligibility for 
all plants inspected under the U.S. food safety and 
inspection system. [Note: Dairy imports are still approved 
on a plant-by-plant basis. End Note.] 
 
GOVERNMENT PROCUREMENT 
 
El Salvador is not a party to the WTO Agreement on 
Government Procurement. However, government purchases and 
construction contracts are usually open to foreign bidders. 
The Legislative Assembly passed a new, more transparent 
procurement law in April 2000 that applies to the central 
government structure as well as to autonomous agencies and 
municipalities. The CAFTA-DR requires fair and transparent 
procurement procedures, including advance notice of 
purchases and timely and effective bid review procedures. 
Under the CAFTA-DR, U.S. suppliers will be permitted to bid 
on procurements covered by the Agreement for most Salvadoran 
government entities, including key ministries and state- 
owned enterprises on the same basis as Salvadoran suppliers. 
The anti-corruption provisions in the Agreement require each 
government to ensure that bribery in trade-related matters, 
including in government procurement, is treated as a 
criminal offense, or is subject to comparable penalties, 
under its law. 
 
EXPORT SUBSIDIES 
 
El Salvador gives a six percent tax rebate on exports 
shipped outside the Central American area based on the 
F.O.B. port of exit value of the goods. The rebate is not 
granted to exports of coffee, sugar, or cotton unless these 
products have undergone a transformation process that adds 
at least 30 percent to the original value. Assembly plants 
outside of free trade zones (maquilas) are eligible if they 
meet the criteria for adding 30 percent Salvadoran value in 
the production process. Firms operating in free trade zones 
are not eligible to receive rebates as they already enjoy a 
10-year exemption from income tax and duty-free privileges. 
Under the CAFTA-DR, El Salvador may not adopt new duty 
waivers or expand existing duty waivers conditioned on the 
fulfillment of a performance requirement (e.g., the 
exportation of a given level or percentage of goods). El 
Salvador may maintain existing duty waiver measures through 
2009 provided such measures are consistent with its WTO 
obligations. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
 
Criminal enforcement of IPR laws at the Attorney General's 
office is handled by the Crimes Against Private Property and 
Intellectual Property Unit, where 5 of the approximately 25 
prosecutors are assigned to IPR cases, but not necessarily 
full time. The National Police established an IPR unit that 
supports the Attorney General's office, but also conducts 
its own investigations and raids. The National Health 
Council has administrative enforcement authority for cases 
involving pharmaceuticals and other intellectual property 
issues related to public health. 
 
In January 2005, El Salvador created a government-wide 
commission including the Attorney General, National Civilian 
Police, and the National Registry Center to coordinate 
efforts to protect intellectual property rights. Through 
this commission, the Ministry of Economy has prepared 
legislative reforms to bring domestic IPR law into 
compliance with CAFTA obligations and strengthen El 
Salvador's IPR protection regime to conform with, and in 
many areas exceed, WTO norms. CAFTA-DR obligations would 
also provide stronger deterrence against piracy and 
counterfeiting by criminalizing end user piracy and 
requiring El Salvador to authorize the seizure, forfeiture, 
and destruction of counterfeit and pirated goods and the 
equipment used to produce them. The CAFTA-DR text also 
mandates both statutory and actual damages for copyright and 
trademark infringement, which would ensure that monetary 
damages can be awarded even when it is difficult to assign a 
monetary value to the violation. 
 
Patents 
 
The 1993 Intellectual Property Protection Law and El 
Salvador's acceptance of the disciplines in the TRIPS 
Agreement addressed several deficiencies in the patent 
regime. The 1993 law lengthened patent terms to 20 years 
from the application filing date. Although pharmaceutical 
patent terms were kept at 15 years, the Salvadoran 
government's Registry for Intellectual Property issues 20 
year patents for pharmaceutical products in practice, which 
start on the filing date of the application. A major concern 
for U.S. pharmaceutical and agricultural chemical companies 
is the lack of data protection in El Salvador for 
undisclosed test data submitted for the marketing approval 
of a pharmaceutical or agricultural chemical product. 
Implementation of CAFTA-DR obligations will ensure adequate 
and effective protection of such data from disclosure and 
unfair commercial use. 
 
Copyrights 
 
The piracy of optical media, both music and video, remains a 
concern in El Salvador. Optical media imported from the 
United States by pirates are being used as duplication 
masters. The Business Software Alliance estimates that the 
rate of software piracy is 79 percent. There has also been 
concern expressed about inadequate enforcement of cable 
broadcast rights and the competitive disadvantage it places 
on legitimate providers of this service. The police and 
Attorney General's Office seized 430,346 optical media in 
2005; however, there have been no successful prosecutions of 
pirates. CAFTA IPR provisions will provide law enforcement 
with expanded authority to prosecute violators. 
 
Trademarks 
 
In 2002, El Salvador's Legislative Assembly passed the Law 
of Trademarks and Other Distinctive Signs. The law provides 
for new protections against bad-faith registration of famous 
marks. Under the law, the National Registry of Intellectual 
Property requires that applicants show that they either own 
or have permission to register the famous mark. During 2003, 
there was progress in a significant intellectual property 
dispute involving trademark and copyright infringement by an 
ex-franchisee. The case, however, is still not fully 
resolved. Judicial enforcement continues to be the weakest 
pillar of intellectual property protection in El Salvador, 
but CAFTA-DR IPR enforcement provisions are expected to help 
reduce trademark infringement. 
 
SERVICES BARRIERS 
 
El Salvador maintains few barriers to services trade. El 
Salvador has accepted the Fifth Protocol to the WTO General 
Agreement on Trade in Services, which was necessary to bring 
its commitments on financial services into effect. Foreign 
investors are limited to 49 percent of equity in free 
reception television and AM/FM radio broadcasting. There are 
no such restrictions on cable television ownership. Notaries 
must be Salvadoran citizens. Under the CAFTA-DR, El Salvador 
will accord substantial market access in services across its 
entire services regime, subject to very few exceptions. In 
addition, U.S. financial service suppliers will have full 
rights to establish subsidiaries, joint ventures or branches 
for banks and insurance companies. 
 
INVESTMENT BARRIERS 
 
There are few formal investment barriers in El Salvador. 
However, U.S. investors complain that judicial and 
regulatory weaknesses limit their investment in El Salvador. 
The United States has raised concerns about the impact of re- 
regulation of the electric power sector and regulatory 
decision-making processes on U.S. electric energy investors 
in El Salvador. A U.S. long distance telephone service 
provider complained that the dominant fixed-line telephone 
company refuses to sign an interconnection agreement with it 
on terms already extended to another market entrant, as 
required by Salvadoran law. 
 
The first case of commercial arbitration in El Salvador 
involved a U.S. firm and the parastatal water company. The 
arbitration panel ruled in favor of the U.S-owned firm, but 
a legal challenge by the water company relating to the 
bidding process led the Supreme Court to suspend the 
proceedings in August 2004 pending a review of the case. 
Judicial delays are common in El Salvador, and the Supreme 
Court has yet to review the case. 
 
The United States and El Salvador signed a Bilateral 
Investment Treaty (BIT) in 1999. The United States and El 
Salvador each ratified the BIT in 2001 but did not exchange 
the instruments of ratification necessary to bring the 
treaty into force. When CAFTA-DR enters into effect, the 
investment chapter will provide for protection of U.S. 
investors comparable to those that were included in the 1999 
BIT. Under the CAFTA-DR, all forms of investment will be 
protected, including enterprises, debt, concessions, 
contracts and intellectual property. U.S. investors will 
enjoy, in almost all circumstances, the right to establish, 
acquire and operate investments in El Salvador on an equal 
footing with local investors. Among the rights afforded to 
U.S. investors are due process protections and the right to 
receive a fair market value for property in the event of an 
expropriation. Investor rights will be protected by an 
effective, impartial procedure for dispute settlement that 
is fully transparent. Submissions to dispute panels and 
panel hearings will be open to the public, and interested 
parties will have the opportunity to submit their views. 
 
End Text. 
Barclay