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

232204Z Nov 05

UNCLAS SECTION 01 OF 06 TEGUCIGALPA 002383 
 
SIPDIS 
 
STATE FOR EB/TPP/MTA/MST AND WHA/CEN 
STATE PASS USTR FOR TMENNEN 
GUATEMALA FOR COMATT MLARSEN AND AGATT SHUETE 
SAN SALVADOR FOR DTHOMPSON 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EFIN HO
SUBJECT:  HONDURAS NATIONAL TRADE ESTIMATE REPORT 2006 
 
REF:  SECSTATE 186328 
 
¶1.   The following is in response to reftel request for update to 
the 2006 National Trade Estimate Report. 
 
------------- 
TRADE SUMMARY 
------------- 
 
¶2.   The  U.S.  trade deficit with Honduras was $565  million  in 
2004, an increase of $78 million from $486 million in 2003.  U.S. 
goods exports in 2004 were $3.1 billion, up 8.9 percent from  the 
previous year. Corresponding U.S. imports from Honduras were $3.6 
billion,  up 9.9 percent. Honduras is currently the 37th  largest 
export market for U.S. goods. 
 
¶3.  The stock of U.S. foreign direct investment (FDI) in Honduras 
in  2003 was $270 million, up from $181 million in 2002. U.S. FDI 
in  Honduras  is  concentrated largely in the  manufacturing  and 
telecommunications sectors. 
 
----------------- 
IMPORT POLICIES 
----------------- 
 
¶4. The United States engaged in free trade agreement negotiations 
with  five  Central American countries (Costa Rica, El  Salvador, 
Guatemala,  Honduras, and Nicaragua) in 2003.  The United  States 
concluded 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 
Dominican  Republic - Central America - United States Free  Trade 
Agreement (CAFTA-DR).  Honduras ratified the agreement  in  March 
¶2005. 
 
¶5. 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  correct 
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. 
 
¶6.   Honduras'  tariffs on most goods from  outside  the  Central 
American Common Market (CACM) are currently within the zero to 15 
percent  range.   Once the CAFTA-DR goes into  effect,  about  80 
percent  of U.S. industrial and commercial goods will  enter  the 
region duty-free, with the remaining tariffs phased out over  ten 
years.   Nearly  all  textile and apparel  goods  that  meet  the 
Agreement's  rules  of  origin will be duty-free  and  quota-free 
immediately,  promoting new opportunities for U.S.  and  regional 
fiber, yarn, fabric, and apparel manufacturing.  (The Agreement's 
tariff  treatment  for  textile and apparel  goods  may  be  made 
retroactive to January 1, 2004.) 
 
¶7.   Honduras  maintains a combination price band and  absorption 
agreement  for  corn, grain sorghum, and corn  meal.   Under  the 
price band mechanism, import duties can vary from 5 percent to 45 
percent,  depending  on the import price.   The  duty  for  these 
products  drops  to  1 percent if the end users  agree  to  first 
purchase a predetermined amount of corn and sorghum from domestic 
farmers;  otherwise,  the  higher  tariffs  of  the  price   band 
mechanism  remain  in  effect.  The tariff reduction  only  takes 
place  during the non-harvest season (March through August),  and 
only   end-users  who  have  previously  signed  the   absorption 
agreement  may apply for this preferential treatment.  A  similar 
absorption  agreement exists for rough rice,  with  duties  of  1 
percent  for signers of the agreement and 45 percent for everyone 
else.   The  United  States  has strongly  opposed  the  Honduran 
policies on these grains as limiting access for U.S. agricultural 
products. 
 
¶8.   Under  the CAFTA-DR, Honduras 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. 
Honduras will liberalize trade in white corn through expansion of 
a  Tariff-rate  Quota (TRQ).  Accordingly, when implemented,  the 
CAFTA-DR  will lead to the elimination of market access barriers, 
including the price band and absorption agreement system, for all 
products other than white corn. 
 
¶9.   The  Agreement also requires transparency and efficiency  in 
administering customs procedures, including the CAFTA-DR rules of 
origin.    Honduras   committed  to  ensure  greater   procedural 
certainty  and fairness in the administration of these procedures 
and  all  Parties agreed to share information to  combat  illegal 
trans-shipment of goods. 
 
¶10.  Honduras implemented the WTO Customs Valuation Agreement  in 
February 2000. 
 
--------------------------------------------- -- 
STANDARDS, TESTING, LABELING, AND CERTIFICATION 
--------------------------------------------- -- 
 
¶11.   Food imports into Honduras could grow significantly with  a 
more  transparent  and  efficient process  of  granting  sanitary 
permits.  The Honduran government requires that sanitary  permits 
be  obtained  from  the  Ministry  of  Health  for  all  imported 
foodstuffs,  and that all processed food products be  labeled  in 
Spanish and registered with the Division of Food Control (DFC) of 
the  Ministry  of  Health.   The Ministry  of  Health  agreed  to 
expedite  this surveillance process by focusing most  closely  on 
products  considered  to be at high risk  for  sanitary  concerns 
(such  as  raw meat) and simplifying the procedures for  low-risk 
products.   However,  concerns remain that  regulations  are  not 
being  strictly enforced for Honduran competitors.  The  Honduran 
Government  has  also cited SPS concerns in periodically  denying 
applications  for  the importation of pork,  poultry,  and  dairy 
products. 
 
¶12.   Since 2002, Honduras has imposed a ban on poultry  products 
from a number of U.S. states, due to concerns over low-pathogenic 
avian influenza (LPAI).  The ban was revised and renewed in March 
2004  in  spite  of  World Organization for Animal  Health  (OIE) 
guidelines  that  the  presence of LPAI does  not  justify  trade 
restrictions,  and  despite  information  provided  to   Honduran 
officials by the U.S. Department of Agriculture (USDA) indicating 
the  dates on which testing was completed in the affected states. 
The  USDA  estimates that if Honduran restrictions  on  U.S.  raw 
poultry  and  poultry  parts were lifted,  U.S.  producers  could 
export  an additional $10 million of poultry products to Honduras 
annually. In response to Mexico's October 2005 decision  to  lift 
its  ban on poultry from nine U.S. states that had previously had 
LPIA,  the  Honduran Ministry of Agriculture has agreed  to  lift 
Honduras'  ban  as well. However, no date has yet been  announced 
for lifting the ban. 
 
¶13.  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  make difficult changes to the Central  American 
countries' SPS regimes.  Through the work of this group, Honduras 
has committed to resolve specific measures affecting U.S. exports 
to  Honduras.  In particular, for meat, dairy, and poultry, under 
CAFTA-DR,   Honduras   will   move  toward   recognizing   import 
eligibility  for all meat plants inspected under  the  U.S.  food 
safety   and   inspection  system.   Honduras'  SPS   equivalency 
legislation  is  currently before Congress; passage  is  expected 
before the end of 2005. 
 
----------------------- 
GOVERNMENT PROCUREMENT 
----------------------- 
 
¶14.   Honduras  is not a party to the WTO Government  Procurement 
Agreement.   Under the Government Contracting Law, which  entered 
into  force in October 2001, all public works contracts over  one 
million lempiras (approximately $53,850 as of December 2004) must 
be  offered through public competitive bidding.  Public contracts 
between  500,000 and one million lempiras ($26,925  and  $53,850) 
can  be  offered through a private bid, and contracts  less  than 
500,000  lempiras ($26,925) are exempt from the bidding  process. 
Currently,  to participate in public tenders, foreign  firms  are 
required  to  act  through a local agent  (at  least  51  percent 
Honduran-owned). 
 
¶15.   While  foreign  firms are granted  national  treatment  for 
public  bids, some still complain of mismanagement  and  lack  of 
transparency  in the bid processes.  One way that the  Government 
of  Honduras  has tried to improve transparency and  fairness  in 
government procurement is by contracting with the United  Nations 
Development Program (UNDP) to manage procurement for a number  of 
ministries  and  state-owned entities.  However, in  some  cases, 
U.S.  companies have expressed concerns about the  way  UNDP  has 
managed major procurements for the government, such as complaints 
that  bid requirements were written so narrowly that they favored 
a  particular company from the outset and that UNDP management of 
invitation-only, limited-bid process, was not transparent. 
¶16.  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 Honduran government entities, including  key 
ministries  and  state-owned enterprises on  the  same  basis  as 
suppliers.   The  anti-corruption  provisions  in  the  Agreement 
require  each  government  to  ensure  that  bribery  in  matters 
affecting   trade   and  investment,  including   in   government 
procurement, is treated as a criminal offense, or is  subject  to 
comparable  penalties, under its law.  In addition, the  CAFTA-DR 
would eliminate the local agent requirement for participation  in 
public tenders. 
 
----------------- 
EXPORT SUBSIDIES 
----------------- 
 
¶17.   Honduras does not have export subsidies or export-promotion 
schemes  other  than the tax exemptions given to  firms  in  free 
trade zones.  Under the CAFTA-DR, Honduras 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).  Honduras may maintain 
existing   duty  waiver  measures  provided  such  measures   are 
consistent with its WTO obligations. 
 
--------------------------------------------- - 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
--------------------------------------------- - 
 
¶18.  Honduras largely complied with the Trade Related Aspects  of 
Intellectual Property Rights (TRIPs) Agreement by the January  1, 
2000  deadline.   In December 1999, the Honduran Congress  passed 
two  laws  to  reform previous legislation concerning copyrights, 
patents, and trademarks.  However, the Honduran Congress has  yet 
to  pass  laws  governing the protection  of  integrated  circuit 
designs and plant varieties.  In the CAFTA-DR, Honduras agreed to 
ratify  or  accede  to  the  International  Convention  for   the 
Protection of New Varieties of Plants by January 1, 2006. 
 
¶19.  CAFTA-DR  obligations  will also  strengthen  Honduras'  IPR 
protection regime to conform with, and in many areas exceed,  WTO 
norms.   CAFTA-DR   obligations  would  also   provide   stronger 
deterrence to piracy and counterfeiting by criminalizing end-user 
piracy   and   requiring  Honduras  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.  Finally, under current  laws  the  IP 
prosecutor  can only confiscate pirated goods when  the  affected 
company  files  a  complaint.   After  CAFTA-DR  is  implemented, 
prosecutors will be able to confiscate pirated goods and file  IP 
cases "ex-oficio", or on their own initiative. 
 
----------- 
Copyrights 
----------- 
 
¶20.   Honduras' copyright law, updated in 1999, added  more  than 
twenty   different   criminal  offenses  related   to   copyright 
infringement  and  established fines and suspension  of  services 
that  can  be levied against offenders.  However, the  piracy  of 
books,  sound  and video recordings, compact discs, and  computer 
software  is  still  widespread  in  Honduras,  due  to   limited 
enforcement capacity.  A spot survey by an industry-sponsored IPR 
advocacy group found that nearly 75 percent of all compact  discs 
for  sale  in  Honduras'  markets were  pirated.   U.S.  software 
companies   are  also  pushing  for  ministries  and  state-owned 
entities  to  ensure  their own use of only  authorized  licensed 
software.   A major U.S. software company has estimated  that  it 
loses $5 million annually due to software piracy in Honduras. 
 
The piracy of cable television signals has also been a problem in 
Honduras.  During 2004, two different U.S. companies claimed that 
their  competitors  were  broadcasting pirated  cable  television 
signals from the United States, and that the Honduran authorities 
were   not   vigorously  investigating  and   prosecuting   these 
activities.  The CAFTA-DR enforcement provisions are designed  to 
help reduce copyright piracy. 
 
------------------ 
SERVICES BARRIERS 
------------------ 
 
¶21.  Currently, special government authorization must be obtained 
to  invest  in the tourism, hotel, and banking services  sectors. 
Foreigners  may  neither  hold  a  seat  on  nor  provide  direct 
brokerage   services  in  Honduras'  stock  exchange.    Honduran 
professional  associations  heavily  regulate  the  licensing  of 
foreigners  to  practice law, medicine, engineering,  accounting, 
and other professions. 
 
¶22.  Under  the CAFTA-DR, Honduras will allow substantial  market 
access  in services across their 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.   Also, 
Honduras  will  allow  U.S.-based  firms  to  offer  cross-border 
services  in  areas  such  as  financial  information  and   data 
processing,  and  financial  advisory  services.   In   addition, 
Honduran mutual funds will be able to use foreign-based portfolio 
managers.   The  right to provide professional services  will  be 
granted  on  a reciprocal basis depending on the requirements  in 
individual U.S. states. 
 
-------------------- 
INVESTMENT BARRIERS 
-------------------- 
 
¶23.  Currently,  the  Government of  Honduras  must  approve  any 
foreign investment in sectors including telecommunications, basic 
health,  air transport, insurance and financial services, private 
education,  and  most  sectors related to natural  resources  and 
farming.   Foreigners are barred from small-scale commercial  and 
industrial  activities  with  an  investment  less  than  150,000 
lempiras (about $8,078).  Foreign ownership of land within 40  km 
of  the  coastlines  and national boundaries is  constitutionally 
prohibited,  although tourism investment laws allow  for  certain 
exceptions.    Inadequate   land  title   procedures,   including 
overlapping  claims and a weak judiciary, have  led  to  numerous 
investment disputes involving U.S.-citizen landowners. 
 
¶24.  In  2001,  a Bilateral Investment Treaty (BIT)  between  the 
United  States  and  Honduras entered  into  force.   The  treaty 
provides, among other things, for equal protection under the  law 
for   U.S.  investors,  with  limited  exceptions,  and   permits 
expropriation   only  in  accordance  with  international   legal 
standards   and  accompanied  by  adequate  compensation.    U.S. 
investors in Honduras also have the right to submit an investment 
dispute to binding international arbitration. 
 
¶25.  Under  current Honduran law, the government-owned  telephone 
company  Hondutel maintains monopoly rights over  all  fixed-line 
telephony  services.   However, in 2003 the government  began  to 
allow  foreign  investors to participate in fixed-line  telephony 
services  as  "sub-operators" in partnership with  Hondutel.   At 
present,  approximately 40 firms have entered into "sub-operator" 
contracts  with  Hondutel,  of  which  five  firms  are   already 
providing  services  to the public.  By law, Hondutel's  monopoly 
expires  in  December 2005, and the Government  of  Honduras  has 
announced  plans  for full privatization of Hondutel  thereafter. 
Both  foreign  and domestic firms already enjoy  full  rights  to 
invest in cellular telephony services. 
 
¶26.  The  Ministry of Natural Resources and Environment at  times 
delays  the  issuance  of  environmental  permits  for  U.S.  and 
domestic  investors,  despite continued pressure  from  the  U.S. 
Government to decide on these permits in a transparent and timely 
manner.  In July 2004, the Minister of Natural Resources and  the 
Environment issued a decree calling for a new national policy  on 
mining and ordered the government agency responsible for granting 
mining permits and concessions, DEFOMIN, to stop granting any new 
mining concessions.  This review is ongoing and has blocked plans 
of  some U.S. investors, including the expansion plans of a  U.S. 
company  operating in Honduras, which has cancelled an $8 million 
investment  in  the mining sector due to this delay.    The  U.S. 
government  is  aware of other investment delays in  the  mining, 
housing, and renewable energy sectors, due to ongoing reviews and 
non-issuance   of  their  environmental  permits.   Environmental 
permits  often  take  more than a year for  issuance,  after  the 
submission of a complete application. 
¶27.  Under the CAFTA-DR, U.S. investors will enjoy, in almost all 
circumstances,  the  right  to establish,  acquire,  and  operate 
investments in Honduras on an equal footing with local investors. 
 
¶28.  In  the  investment chapter of the CAFTA-DR,  Honduras  will 
commit to provide a higher level of protection for U.S. investors 
than  under the existing BIT.  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  backed  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.  The CAFTA-DR requires that  all  forms  of 
investment    be   protected,   including   enterprises,    debt, 
concessions,  contracts, and intellectual property.   Upon  entry 
into  force  of the CAFTA-DR, the BIT will be suspended.   For  a 
period  of  10 years, however, current U.S. investors may  choose 
either dispute settlement under the BIT or the FTA. 
 
------------------- 
ELECTRONIC COMMERCE 
------------------- 
 
¶29.  Honduras  currently  has no domestic legislation  concerning 
electronic commerce, as the sector is still not developed in  the 
Honduran  market.   The  Electronic Commerce  System  Directorate 
(DISELCO),  a  joint  project  of the  Chamber  of  Commerce  and 
Industry  of  Tegucigalpa  (CCIT), the Chamber  of  Commerce  and 
Industry  of Corts (CCIC), and the National Industry Association 
(ANDI), is the institution in charge of establishing the policies 
and norms pertaining to electronic commerce in Honduras. 
 
¶30.  Although  improving,  Honduras still  lacks  adequate  basic 
telecommunications infrastructure and Internet bandwidth capacity 
to  effectively support significant electronic commerce.   Except 
for  web  page promotional material, companies are not  utilizing 
computer-based  sales  as a substantial distribution  channel  in 
Honduras. 
 
¶31.  The CAFTA-DR includes provisions on electronic commerce that 
reflect its importance in global trade and for supplying services 
by  electronic  means  as  a key part  of  a  vibrant  electronic 
commerce   environment.   Under  the  Agreement,   Honduras   has 
committed  to  provide  non-discriminatory treatment  of  digital 
products and not to impose customs duties on such products and to 
cooperate   in  numerous  policy  areas  related  to   electronic 
commerce. 
 
--------------- 
OTHER BARRIERS 
--------------- 
 
¶32.  Historically,  U.S. firms and private  citizens  have  found 
corruption  to  be  a problem which seriously  complicates  doing 
business in Honduras.  Corruption appears to be most prevalent in 
the  areas  of government procurement, the buying and selling  of 
real  estate  (particularly  land title  transfers),  performance 
requirements,  and  the  regulatory system.   Honduras'  judicial 
system  is subject to influence, and the resolution of investment 
and  business  disputes  involving  foreigners  is  largely  non- 
transparent.   Currently,  with  considerable  U.S.   help,   the 
government  is reforming Honduras' judicial system  and  fighting 
corruption;  however,  progress has been very  slow  and  serious 
problems  remain.  In April 2004, Honduras was chosen as eligible 
to  apply  for Millennium Challenge Account (MCA) assistance.  In 
June   2005,  the  Government  of  Honduras  and  the  Millennium 
Challenge Corporation signed a program compact for $215  million. 
MCA  countries  are deemed to have shown a commitment  to  ruling 
justly  (including  by tackling corruption), investing  in  their 
people,  and  encouraging economic freedom.  The  anti-corruption 
provisions in the CAFTA-DR require each government to ensure that 
bribery in matters affecting trade and investment is treated as a 
criminal  offense, or is subject to comparable  penalties,  under 
its law. 
 
--------------------------- 
Anti-Competitive Practices 
--------------------------- 
 
¶33. U.S. industry has expressed concern that investors who set up 
business  in Honduras have at times found themselves  subject  to 
forms  of  competition  that,  in the  United  States,  would  be 
considered anticompetitive. For example, in 2003, a U.S.-Japanese 
joint   venture  established  a  cement  company   in   Honduras, 
challenging the duopoly enjoyed by the two Honduran companies  in 
the  market.   The new joint venture investment accused  the  two 
established  companies of predatory pricing  that  brought  local 
cement  prices  below the cost of production.   After  the  U.S.- 
Japanese  venture dropped out of the market, prices leapt  up  to 
well  above  their  previous level, until they were  subsequently 
regulated  by  GOH  action.   Steel  prices  are  also  fixed  in 
Honduras,  and  on  a regional basis there are reports  of  price 
collusion  by the major steel producers.  In fall of  this  year, 
the  Competition Law was passed which regulates against predatory 
pricing and other monopolistic practices in Honduras, but it will 
take  some  time  for  this law (and the  GOH  institutions  that 
support it) to come fully into effect. 
 
Ford