This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 QUITO 001621 
 
SIPDIS 
 
STATE FOR WHA/AND, EB/CIP 
USITC FOR L.M. SCHLITT 
TREASURY FOR OASIA/INL 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USTR FOR BHARMAN 
 
E.O. 12958: N/A 
TAGS: ETRD ECON OTRA ASEC PE
SUBJECT:  USITC 2004 Annual Andean Investment and Drug Crop 
Survey for Report on ATPA 
 
REF: STATE 70739 
 
¶1.  Below is Post's response to the U.S. International Trade 
Commission's request for information regarding Andean Trade 
Promotion and Drug Eradication Act (ATPDEA) related 
investment in Ecuador in 2004. 
 
¶2.  Summary.  Ecuadorian investment in industries that 
export to the United States has not grown significantly over 
the last two years, despite the opportunities offered by the 
ATPDEA or the prospect of an Andean FTA.  Foreign direct 
investment has slightly fallen, with oil, which does not 
receive preferences under the ATPDEA or a prospective FTA, 
continuing to receive the bulk of new investment.  Other 
industries have seen much less investment than might have 
been expected, largely due to political instability and the 
absence of broad political support for an FTA.  The prospect 
of ATPDEA expiration and concern that an FTA may not be 
approved has dampened the Ecuadorian business community's 
desire to invest for the future.  Even the cut-flower 
industry, Ecuador's principal beneficiary of ATPDEA benefits 
with 17% sales growth from 2003 to 2004, saw only $4 million 
of identifiable new investment last year. 
 
¶3.  There is considerable concern that Ecuador's competitive 
position in most industries favored by ATPDEA would 
significantly worsen if CAFTA were approved, unless Ecuador 
joins an Andean FTA, as Central American economies compete 
directly with Andean ones in many agricultural products. 
The concern is much greater, however, that Colombia and Peru 
could conclude an FTA with the U.S. without Ecuador, giving 
them a significant trade advantage. Despite this fear, 
continuing political volatility has convinced most 
businesses to postpone investment until their options become 
clearer.   Ecuador's businesses traditionally plan no 
further than three or six months into the future, having 
learned repeatedly the virtue of caution in the face of 
continuing political and economic uncertainty.  End Summary. 
 
 
Effect of the ATPA/ATPDEA on Exports 
------------------------------------ 
 
¶4.  Despite the ATPA/ATPDEA's provision of duty-free entry 
to a wide range of Ecuadorian products, the country's 
exports remain concentrated in petroleum and a handful of 
other traditional products.  Estimated figures for 2004 
indicate that petroleum and its derivatives accounted for 
67% of Ecuadorian exports to the United States. Exports of 
some traditional products have increased since 2000. Coffee 
exports to the U.S. rose 47% in 2004, totaling $8.7 million. 
Shrimp exports reached a peak of nearly $185.6 million in 
¶2004. Cacao exports to the United States also increased 
substantially in 2004, totaling $39 million. On the other 
hand, banana exports have declined since 2003. In 2004 
banana exports reached $228.1 million to the U.S., down from 
$241 million in 2003.   Ecuador has significantly increased 
its exports of tuna in pouches due to the inclusion of the 
product in the ATPA/ATPDEA. 
 
¶5.  Cut roses are the most economically significant 
nontraditional export product that has benefited from duty- 
free treatment under ATPA/ATPDEA.  In 2004, Ecuador exported 
$168 million in cut roses to the United States. Exports of 
nontraditional products show a steady upward trend with 
exports to the United States increasing from $807.6 million 
in 2003 to $876 million in 2004.  Some products, including 
broccoli and pineapple, experienced double digit export 
increases to the U.S. in 2004, though from a small base. 
 
Apparel Investment Projects and Prospects for Exports 
--------------------------------------------- -------- 
 
¶6.  Ecuador's well-organized (but small even by Andean 
standards) textile industry has largely dedicated its 
efforts to supplying fabric to Colombian exporters. 
Virtually all Ecuadorian cotton fabrics are produced using 
imported U.S. cotton fiber.  Ecuador's textile industry is 
benefiting from ATPDEA preferences by supplying fabrics to 
Colombian garment producers, who in turn export to the U.S. 
Ecuador appears not to be offering full-package apparel 
programs, and its apparel industry remains small and under- 
industrialized. 
 
¶7.  Total textile exports under the ATPA (as amended by the 
ATPDEA Andean Trade Promotion and Drug Eradication Act) to 
the U.S. in 2004 were $46.6 million, of which $14.5 million 
was apparel. Total textile exports in 2004 were $84.4 
million. 
 
¶8.  There is no information available on the effects of 
ATPA/ATPDEA benefits on the Ecuadorian textile industry. 
According to industry sources, it is not possible to 
quantify the effects because a great deal of the fabric, 
thread and knits produced in Ecuador is now being exported 
to Colombia to be used in the manufacture of apparel, some 
of which, in turn, is exported to the U.S as Colombian 
exports.  Therefore, Ecuadorian textiles benefit indirectly 
from the ATPA/ATPDEA via Colombia.  This is likely to 
continue given Colombia's demand for fabric. 
 
¶9.  According to the Ecuadorian Textile Association, capital 
goods imported from the U.S. for the textile industry during 
2003 were $977,814.  No imports of capital goods from the 
U.S. for the textile industry were registered during 2004. 
Imports of capital goods for the apparel industry from the 
U.S. during 2004 were reported at $4.4 million, a slight 
decrease from $5 million imported during 2003. 99% of cotton 
used in the textile industry was imported from the U.S. 
during 2004.  Local cotton production has declined due to 
climactic conditions, low productivity, and lack of credit. 
 
Footwear Investment Projects and Prospects for Exports 
--------------------------------------------- --------- 
 
¶10.  The footwear and leather industries have not taken 
advantage of ATPA/ATPDEA benefits to any significant extent. 
The industry is fragmented and the existing production 
capacity cannot meet the demand of the U.S. market. 
Approximately eight leather-processing companies have closed 
down operations; only two of the large firms have renovated 
their equipment and upgraded their technology to meet local 
demand. Most production is handicraft. 
 
Tuna Investment Projects and Prospects for Exports 
--------------------------------------------- ---------- 
 
¶11.  In 2004, the tuna fish industry (canned and pouched 
tuna) generated $185.6 million in total Ecuadorian export 
sales, declining 12% relative to 2003's $211 million.  The 
U.S. market share of Ecuador's tuna exports slipped from 52% 
in 2003 to 31.54% in 2004.  Ecuador has diversified its 
export markets to other countries such as the United 
Kingdom, Spain and Germany. 
 
¶12.  One example of the increase in investment in this 
sector due to inclusion of tuna in pouches in the 
ATPA/ATPDEA is Empresa Pesquera Ecuatoriana (Ecuadorian 
Fishing Company), which invested $12 million to expand its 
activities in 2004. 
 
¶A.   Name of Company: EMPRESA PESQUERA ECUATORIANA 
¶B.   2004 investment amount: USD 12 million (production 
     capacity: 200 Tons per day) 
¶C.   New or expansion investment: Expansion 
¶D.   Located in free trade zone: No 
¶E.   Type of product to be exported: Tuna in pouch 
¶F.   FOB value of 2004 exports to the U.S.: $108,156 
¶G.   Would project have been launched in the absence of 
     ATPA/ATPDEA preferences? No 
¶H.   Does firm use inputs of U.S., U.S. Virgin Islands, 
Puerto Rico? No 
 
Flower Investment Projects and Prospects for Exports 
--------------------------------------------- ------- 
 
¶13.  Ecuadorian flower exports have had a steady upward 
trend for many years, growing by 80% since 2000. Total 
exports reached $348 million in 2004, a 17% increase from 
¶2003. 
 
¶14.  The primary market for Ecuador's flower industry is the 
United States, which purchases 64% of total flower exports. 
This represents more than $223 million in exports to the 
U.S. in 2004.  Ecuador is diversifying its export market to 
other countries. The U.S. accounted for more than 70% of 
total Ecuadorian flower exports in year 2000, a decrease 
from 76% in 2004. 
 
¶15.  The cut roses sub-sector has been the main beneficiary 
of the ATPA/ATPDEA program, with $168 million in exports to 
the U.S. in 2004, accounting for more than 75% of total 
flower exports.  Gypsophila is also growing significantly. 
It reached a $17 million export record to the U.S. in 2004, 
compared with almost no production in 2001. 
 
Other Agriculture Investment Projects and Prospects -------- 
--------------------------------------------- ---- 
 
¶16.  In 2004, total Ecuadorian exports of asparagus were 
$289,280 -- an increase of 283% in comparison to 2003 when 
Ecuador exported only $75,000.  The U.S. became almost the 
only market for Ecuadorian asparagus exports in 2004. The 
U.S. market took 61% of Ecuador's production in 2003 and 95% 
in 2004, while other markets such as the United Kingdom were 
abandoned.  This market reorientation may be a consequence 
of ATPA/ATPDEA benefits. 
 
¶17.  In 2004, total Ecuadorian exports of broccoli were 
$26.4 million, increasing 67% from $15.7 million in 2003. 
The U.S. market took 34%. 
 
Foreign Direct Investment Drops in Non-Oil Sector 
--------------------------------------------- ---- 
 
¶18.  Foreign Direct Investment in Ecuador has declined 
overall, with the non-oil sector taking the biggest hit. 
Investment in non-oil industries declined by $469.5 million 
in 2004. 
 
                           Table 1 
      Foreign Direct Investment by Sector, 2003 & 2004 
                  (In Thousands of Dollars) 
--------------------------------------------- -------------- 
Sector                                       2003      2004 
--------------------------------------------- -------------- 
Agriculture, Hunting, Forestry, Fishing  48,388.0  41,241.3 
Oil, Mining, Quarrying                  828,050.7 984,243.3 
Manufacturing                            70,992.7  36,891.9 
Electricity, Gas, Water                     281.4   6,045.9 
Construction                            441,684.3  30,954.1 
Commerce                                 50,381.5  49,705.0 
Transport, Warehousing, Communications   24,815.4  52,218.9 
Company Services                         89,239.7  39,691.3 
Community, Social, Personal Services        903.5     469.1 
--------------------------------------------- -------------- 
Total                             1,554,737.2   1,241,460.9 
--------------------------------------------- -------------- 
Non-Oil                             726,686.6     257,217.6 
Oil                                 828,050.6     984,243.3 
--------------------------------------------- -------------- 
Source: Central Bank of Ecuador 
 
Industry Concerns about Trade Issues 
------------------------------------ 
 
¶19.  Ecuador's businesses are concerned about the impact of 
other U.S. trade agreements (Cafta, Nafta, etc.).  The 
concern is much greater, however, that Colombia and Peru 
could conclude an FTA with the U.S. without Ecuador.  This 
concern is in fact the most convincing argument within 
Ecuador for approving an FTA with the United States. 
Colombia's cut flower industry would quickly displace 
Ecuador's; Peru (or Costa Rica) would likely be able to 
supplant Ecuador's strong tuna processing industry; and both 
Colombia and Peru's much stronger textile industries would 
permanently relegate Ecuador to supplier status, at best. 
Ecuador's businesses are transfixed by the specter of 
Colombia and Peru's economies growing much stronger while 
Ecuador's withers.  Ecuador will have to be more competitive 
in order to expand its export base.  The ATPA has played an 
important role in providing trade opportunities in the agro- 
industrial sector.  This has created many jobs with the 
rapid growth of flowers, fresh fruits, vegetables and 
cereals. 
 
¶20.  The Ecuadorian textile industry believes that the 
elimination of global textile and apparel quotas could 
displace their production entirely from the U.S. market. 
If, however, quotas or barriers are partially reinstated, 
Ecuador believes that the Andean industry could find a niche 
based on rules of origin because of their reliance on U.S. 
cotton fiber or by fashioning garments from Asian fabric. 
 
Domestic Programs that support ATPA/ATPDEA 
------------------------------------------ 
 
¶21.  The Export and Investment Promotion Corporation of 
Ecuador (CORPEI), has the following programs, which are 
designed to promote ATPA/ATPDEA-related investment and 
exports: 
 
a. Identifying successful investment promotion programs: 
The Ecuadorian Government and the UNIDO (United Nations 
Industrial Development Organization) are creating an 
evaluation system for investment projects. CORPEI will use 
this system to attract investors and identify potential 
local investment opportunities. 
 
b.   Business Center for Development and Investment 
Evaluation (CEEDI): Established in 2004, the Center assists 
potential exporters in evaluating projects and finding 
financing. 
 
c.   The "Expoecuador" Program: A cooperation program 
between Ecuador and the European Community, to promote small 
industries with export potential. 
 
d.   Bio-Commerce 2004: Established in 2004, the program 
promotes sustainable growth and biodiversity preservation 
through specialized export programs.  The pilot programs in 
course are: scented oils, scallops cultivation, alpaca 
fiber, shells and crabs. 
 
Impact of ATPA on drug crop eradication and alternative 
development 
--------------------------------------------- ---------- 
 
¶22.  The successful development of more profitable 
agricultural industries in Ecuador will help prevent Ecuador 
from becoming a major coca-producing country.  Ecuador's 
proximity to Colombia and Peru, the world's leading coca 
leaf and cocaine hydrochloride suppliers, warrants continued 
vigilance to prevent illicit crop cultivation in Ecuador. 
 
¶23.  The ATPA/ATPDEA has played an important role in 
providing Ecuadorians with jobs, through the growth of 
agricultural industries, thus deterring them from becoming 
involved in growing narcotics crops and helping prevent the 
entrenchment of narcotics trafficking in Ecuador. 
ATPA/ATPDEA's contribution to the rapid growth of Ecuador's 
cut flower industry has been particularly important, as well 
as the cultivation of fresh fruits, vegetables and cereals 
in the highlands. 
 
HERBERT