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

UNCLAS SECTION 01 OF 06 QUITO 002852 
 
SIPDIS 
 
PASS TO EB/MTA AND USTR GLORIA BLUE AND BENNETT HARMAN 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EFIN EINV EAGR EC FTA
SUBJECT: ECUADOR 2006 NATIONAL TRADE ESTIMATE REPORT DRAFT 
 
REF: STATE 186328 
 
Below is the text previously sent via email to USTR in 
response to reftel request for Post input for the 2006 
National Trade Estimate Report for Ecuador.  We were also 
informed via email that USTR would revise the first two 
sections "Trade Summary" and "Free Trade Negotiations." 
 
TRADE SUMMARY 
 
The U.S. trade deficit with Ecuador was $2.6 billion in 2004, 
double the trade deficit of $1.3 billion in 2003.  U.S. goods 
exports in 2004 were $1.7 billion, up 15.2 percent from the 
previous year.  Corresponding U.S. imports from Ecuador were 
$4.3 billion, up 57.4 percent, largely due to increased oil 
prices.  Ecuador is currently the 50th largest export market 
for U.S. goods. 
 
The stock of U.S. foreign direct investment (FDI) in Ecuador 
in 2003 was $1.4 billion, up from $1.28 billion in 2002. 
U.S. FDI in Ecuador is concentrated largely in the natural 
resource extraction sector. 
 
FREE TRADE NEGOTIATIONS 
 
In May 2004, the United States initiated free trade agreement 
(FTA) negotiations with three Andean nations -- Colombia, 
Peru and Ecuador.  Bolivia is participating as an observer 
and is expected to become part of the agreement at a later 
stage.  The U.S. Government will seek to address the issues 
described in this chapter within the context of these 
negotiations.  The four Andean countries collectively 
represented a market of about $8.5 billion for U.S. exports 
in 2004, and were home to about $7.2 billion in U.S. foreign 
direct investment. 
 
IMPORT POLICIES 
 
Tariffs 
 
When Ecuador joined the WTO in January 1996, it bound most of 
its tariff rates at 30 percent or less.  Ecuador's average 
applied MFN tariff rate is 11.9 percent.  Ecuador applies a 
four-tiered structure with levels of 5 percent for most raw 
materials and capital goods, 10 percent or 15 percent for 
intermediate goods, and 20 percent for most consumer goods. 
A small number of products, including planting seeds, 
agricultural chemicals and veterinary products are duty-free. 
 
As a member of the Andean Community (CAN), Ecuador grants and 
receives exemptions from tariffs (i.e., reduced ad valorem 
tariffs and no application of the Andean Price Band System) 
for products from the other CAN countries (Bolivia, Colombia, 
Peru and Venezuela).  Currently, these countries have an 
Andean Free Trade Zone and apply Common External Tariffs 
(CET), as stated in CAN Decision 370.  There is a proposal 
for a new CET with a three-tiered structure, with levels of 
5, 10 and 20 percent tariffs.  The proposed structure has not 
been approved by the CAN and a final decision is expected to 
be taken by the end of 2005. The United States is seeking the 
elimination of Ecuador,s duties on U.S. exports in the FTA 
negotiations, with phased reductions for the most sensitive 
products. 
 
Ecuador maintains the Andean Price Band System (APBS) on 153 
agricultural products (13 &marker8 and 140 &linked8 
products) imported from outside the CAN.  The 13 &marker8 
products are wheat, rice, sugar, barley, white and yellow 
corn, soybean, soybean meal, African palm oil, soy oil, 
chicken meat, pork meat and powder milk.  Under this system, 
the ad valorem CET is adjusted (increased or reduced) 
according to the relationship between international reference 
prices, established floor and ceiling prices and the 
importation price of the commodity.  Upon accession to the 
WTO, Ecuador bound its ad valorem tariffs (including the 
additional levy from the APBS) for these commodities at 
between 31.5 and 85.5%. 
 
As part of its WTO accession, Ecuador committed to phase out 
its price band system, starting in January 1996, with a total 
phase out by December 2001.  No steps have been taken to 
comply with this commitment.  The U.S. Government is seeking 
through the FTA negotiation to eliminate Ecuador,s barriers 
to trade in agricultural products, while providing reasonable 
adjustment periods and safeguards for producers of 
import-sensitive agricultural products. 
 
Non-Tariff Measures 
 
Ecuador has failed to eliminate several non-tariff barriers 
since its WTO accession.  Importers must register with the 
Central Bank through approved banking institutions to obtain 
an import license.   Ecuador requires prior authorization 
from various government agencies, e.g., the Ministry of 
Agriculture (MAG), for importation of most commodities, 
seeds, animals and plants.  Also, the Ministry of Health must 
give its prior authorization (i.e., sanitary registration) 
before processed, canned and packed foods, food ingredients, 
beverages, cosmetics and pharmaceutical products may be 
imported.  Another administrative hurdle agricultural 
importers must overcome is the MAG,s use of &Consultative 
Committees.8  These committees, mainly composed of local 
producers, often advise the MAG against granting import 
permits to foreign suppliers.  The MAG often requires that 
all local production be purchased at high prices before 
authorizing imports.  If this barrier was removed, it is 
estimated that corn and soybean meal exports could increase 
by $10-25 million each. 
 
Ecuador also continues to maintain a pre-shipment inspection 
(PSI) regime for imports with an f.o.b. value of more than 
US$4,000.  Pre-shipment inspection by an authorized 
inspection company (both before shipment and after specific 
export documentation has been completed at the intended 
destination) results in delays far exceeding the time saved 
in customs clearance.  Customs authorities perform random 
spot-checks, causing further delays.  These practices 
generally add between six and eight weeks to shipping times. 
While this does increase the landed cost of products, the 
impact on exports is likely negligible. 
 
Ecuador maintains bans on the import of used motor vehicles, 
tires and clothing, and applies a 27 percent excise tax (ICE) 
on imported distilled spirits.  As excise taxes on imports 
are calculated on CIF value plus import duties, the effective 
rate is higher for imports than domestic products.  Ecuador 
has not equalized the application of excise taxes between 
imported and domestic products.  Exports lost as a result of 
the ban on vehicles and tires are estimated to range between 
$100-500 million.  Used clothing exports could amount to 
$25-100 million, if the import ban was lifted. 
 
In December 1999, the MAG, through the Ecuadorian Animal and 
Plant Health Inspection Service (SESA), issued a requirement 
that all importers must present a certificate stating that 
imported agricultural products (plants, animals, their 
products or byproducts) have not been produced using modern 
biotechnology.  In November 2002, the President issued 
Executive Decree 3399 creating the National Commission for 
Biosafety as an office of the Ministry of Environment.  It is 
responsible for biotechnology-related products and 
regulations issues.  However, no rules have yet been enacted. 
 If the trade barrier was established according to the law, 
the potential loss of exports is estimated to be $25-100 
million. 
 
STANDARDS, TESTING, LABELING AND CERTIFICATION 
 
Over the last two years, INEN has imposed unreasonable and 
costly certification requirements on imports of 
refrigerators, freezers and gas ranges of U.S. origin.  These 
requirements were not published in advance and have impeded 
market access for U.S. manufacturers.  None of these 
certification requirements were notified to WTO members for 
comment as required by the WTO Agreement on Technical 
Barriers to Trade. Ecuador submitted its first notification 
of changes in certification requirements to the WTO at the 
beginning of 2005. Since then, Ecuador has submitted 5 
additional notifications. Lost U.S. exports are estimated to 
be $10-25 million. 
 
SESA is responsible for administering Ecuador's sanitary and 
phytosanitary controls.  According to Ecuadorian importers, 
bureaucratic procedures required to obtain clearance still 
appear to discriminate against foreign products.  Ecuador is 
bound by the WTO Agreement on the Application of Sanitary and 
Phytosanitary (SPS) Measures, yet denials of SPS 
certification often appear to lack a scientific basis and to 
have been used in a discriminatory fashion to block the 
import of U.S. products that compete with Ecuadorian 
production.  This occurs most often with poultry, turkey and 
pork meats, beef, dairy products and fresh fruit.  The 
ability to import some products, such as rice, corn, soybeans 
and soybean meal depends entirely on the discretion of the 
MAG, which will often look to the Consultative Committees for 
advice. Ecuador has yet to fulfill its notification 
obligations under the WTO SPS Agreement.  The impact of 
removing this barrier would mean an increase of U.S. exports 
of up to $10 million. 
 
SESA follows the CAN,s &Andean Sanitary Standards.8  Some 
standards applicable for third countries are different from 
those applied to CAN members.   For example, there can be 
differences in the requirements for CAN and third countries 
for the importation of live animals, animal products, and 
plants and plant by-products.  SESA also requires 
certifications for each product stating that the product is 
safe for human consumption or, in the case of live animals, 
that the animal is healthy and that the country of origin or 
the area of production is free from certain exotic plant or 
animal disease.  Industry sources assert that this process 
has been used unreasonably by SESA to prevent entry of animal 
products -- especially poultry -- that compete with local 
producers. 
 
Sanitary registrations are required for imported as well as 
domestic processed food, cosmetics, pesticides, 
pharmaceuticals, and syringes, as well as some other consumer 
goods.  However, in a side agreement to its WTO Accession 
Agreement, Ecuador committed to accept the U.S. Certificate 
of Free Sale authorized by the U.S. Food and Drug 
Administration, instead of the Government of Ecuador,s 
Sanitary Registration.  In August 2000, the Government of 
Ecuador passed a law (Ley de Promocion Social y Participacion 
Ciudadana, Segunda Parte ) also known as Troley II), 
followed by regulations issued in June 2001, to reform the 
issuance of sanitary permits for food products.  This is a 
step towards modernizing the issuance of sanitary 
registrations with new regulations that allow the acceptance 
of free sale certificates, require that the government issue 
sanitary permits within 30 days of the receipt of the 
request, and reduce the number of documents required to 
obtain a permit.  However, it does not appear that these 
regulations are being applied consistently and export losses 
are estimated to be around $5 million.  U.S. firms report 
that the Izquieta Perez National Hygiene Institute (INHIP - 
the Ministry of Health,s executive arm is responsible for 
granting the sanitary registration certificate) office in 
Guayaquil accepts the U.S. Certificates of Free Sale but 
continues to apply the old regime for sanitary permits.    In 
addition, non-transparent bureaucratic procedures and 
inefficiency have delayed issuance beyond 30 days and in some 
cases have reportedly blocked the entry of some imported 
products from the United States.  Agricultural exporters 
estimate that the removal of this delay could mean an 
increase in U.S. exports of about $5 million. 
 
U.S. companies have expressed concerns regarding regulations 
issued by Ecuador,s public health ministry requiring foreign 
food manufacturers to disclose confidential information such 
as formulas of imported food and pharmaceutical products. 
This requirement appears to go beyond the requirements of the 
Codex Alimentarius Commission on Internationals Standards and 
Labeling.  Pharmaceutical and agrichemical industry sources 
estimate that lost exports due to this problem amount to 
$10-25 million. 
 
GOVERNMENT PROCUREMENT 
 
Government procurement is regulated by the 2001 public 
contracting law.  Foreign bidders must be legally represented 
in Ecuador.  The law does not discriminate against U.S. or 
foreign suppliers.  Bidding for government contracts can be 
cumbersome and insufficiently transparent.  This can lead to 
multiple cancellations of bid solicitations, unnecessarily 
adding to the costs of submitting bids, and opens the process 
to possible manipulation by contracting authorities.  Ecuador 
is not a signatory to the WTO Agreement on Government 
Procurement.  In the FTA negotiations the U.S. Government is 
seeking opportunities for U.S. companies to bid on Ecuadorian 
government procurement.  If government procurement was opened 
to transparent competition by U.S. companies, exports could 
increase $10-25 million. 
EXPORT SUBSIDIES 
 
Ecuador has created a semi-independent agency, the 
Corporation for the Promotion of Exports and Investments 
(Corpei), to promote Ecuadorian exports.  Using a European 
Union loan, Corpei offers matching grants to exporters to 
help fund certain expenses, including international 
promotional events and export certifications. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
 
In 1998, Ecuador enacted a comprehensive law that 
significantly improved the legal basis for protecting 
intellectual property, including patents, trademarks and 
copyrights.  The intellectual property law provides greater 
protection for intellectual property; however, it is 
deficient in a number of areas and the law is not being 
adequately enforced. 
 
Ecuador's current intellectual property regime is provided 
for under its IPR law and Andean Pact Decisions 486, 345 and 
¶351.  Ecuador is a member of the World Intellectual Property 
Organization (WIPO) and is a member of the WIPO Copyright 
Treaty and the WIPO Performances and Phonograms Treaty. 
Furthermore, Ecuador has ratified the Berne Convention for 
the Protection of Literary and Artistic Works, the Geneva 
Phonograms Convention, the Paris Convention for the 
Protection of Industrial Property and the WIPO Patent 
Cooperation Treaty. 
 
The United States is currently negotiating IPR provisions 
under the ongoing Andean FTA negotiations to improve 
protection and strengthen enforcement of IPR.  The U.S. 
Government is seeking to address specific U.S. industry 
concerns related to the protection and enforcement of 
copyrights and related rights, patents, proprietary data for 
pharmaceutical and agricultural products, trademarks and 
geographical indications. 
Copyrights 
 
The Government of Ecuador, through the National Copyright 
Office,s Strategic Plan against Piracy, has committed to 
take action to reduce the levels of copyright piracy, 
including implementation and enforcement of its 1998 
Copyright Law.  However enforcement of copyrights remains a 
significant problem, especially concerning sound recordings, 
computer software and motion pictures.  The Government of 
Ecuador has taken no action to clarify Article 78 of the 1999 
Law on Higher Education, which could be interpreted to permit 
software copyright violations by educational institutions. 
 
Patents and Trademarks 
 
Ecuador's 1998 IPR law provided an improved legal basis for 
protecting patents, trademarks, and trade secrets.  However, 
concerns remain regarding several provisions, including a 
working requirement for patents, compulsory licensing and the 
lack of enforcement in the protection of test data.  U.S. 
companies also are concerned that the Ecuadorian government 
does not provide patent protection to second uses, which 
would allow a company with a patented compound for one use to 
subsequently patent a second use of that compound. 
 
Government of Ecuador health authorities continue to approve 
the commercialization of new drugs that are the 
bioequivalents of patented drugs, thereby denying the 
originator companies the exclusive use of their data.  In 
effect, the Government of Ecuador is allowing the test data 
of registered drugs from originator companies to be used by 
others seeking approval for their own pirate version of the 
same product. In the FTA negotiations the U.S. Government is 
supporting protection of data exclusivity. 
 
Enforcement 
 
There continues to be an active local trade in pirated audio 
and video recordings, computer software and counterfeit brand 
name apparel.  The International Intellectual Property 
Alliance estimates that piracy levels in Ecuador for both 
motion pictures and recorded music has reached 95 percent, 
with estimated damage due to music piracy of $80 million.  At 
times, judges in IPR cases, before issuing a preliminary 
injunction, demand a guaranty and evidentiary requirements 
that exceed legal requirements and in effect limit the 
ability of rights holders to enforce their rights.  Ecuador 
has made no progress in establishing the specialized IPR 
courts required by Ecuador,s 1998 IPR law.  The national 
police and the customs service are responsible for carrying 
out IPR enforcement but do not always enforce court orders. 
Some local pharmaceutical companies produce or import pirated 
drugs and have sought to block compliance with Ecuador,s 
Intellectual Property law and improvements in patent 
protection.  U.S. industry estimates damage due to the 
failure to provide data exclusivity is at least $5 million. 
The U.S. Government is supporting enforcement of IPR in the 
FTA negotiations.  Overall in the IPR sector, industry 
sources estimate that the impact of removing these barriers 
would amount to $100-500 million. 
 
SERVICES BARRIERS 
 
Ecuador has ratified the WTO Agreement on Financial Services. 
 The 1993 Equity Markets Law and the 1994 General Financial 
Institutions Law significantly opened markets in financial 
services and provided for national treatment of foreign 
suppliers.  Foreign professionals are subject to national 
licensing requirements. The Superintendent of Banks must 
certify accountants. 
 
In the area of basic telecommunications, Ecuador only 
subscribed to WTO commitments for domestic cellular services. 
 It did not make market access or national treatment 
commitments for a range of other domestic and international 
telecommunications services, such as voice telephony and 
data.  In addition, Ecuador does not adhere to the 
pro-competitive regulatory commitments of the WTO Reference 
Paper.  Several U.S. telecommunications companies have had 
their international circuits disconnected without proper 
notice of alleged infractions. 
 
The U.S. Government is seeking through the FTA negotiations 
to secure greater access for U.S. providers of cross-border 
services to the Ecuadorian market, including in the areas of 
financial and telecommunications services. 
 
INVESTMENT BARRIERS 
 
Ecuador's foreign investment policy is governed largely by 
the national implementing legislation for Andean Pact 
Decisions 291 and 292 of 1991.  Under Ecuadorian law, foreign 
investors are accorded the same rights of establishment as 
Ecuadorian private investors, may own up to 100 percent of 
enterprises in most sectors without prior government 
approval, and face the same tax regime.  There are no 
controls or limits on transfers of profits or capital.  The 
U.S.-Ecuador Bilateral Investment Treaty (BIT), which entered 
into force in May 1997, includes obligations relating to 
national and most-favored-nation treatment; prompt, adequate 
and effective compensation for expropriation; the freedom to 
make investment-related transfers; and access to binding 
international arbitration of investment disputes.  U.S. 
companies are sometimes reluctant to resolve commercial 
disputes in the Ecuadorian legal system, fearing a prolonged 
process and a lack of impartiality. 
 
In early 2005, Ecuador's Congress modified the Arbitration 
and Mediation Law to prohibit international arbitration if 
the national interest could be affected.  Depending on how it 
is interpreted and applied, this modification of Ecuador,s 
law could conflict with Ecuador,s standing consent to 
binding arbitration under the U.S.-Ecuador BIT.  At a 
minimum, the new law will create confusion among investors 
regarding their arbitration rights and may also reinforce 
negative impressions among investors of Ecuador,s commitment 
to international arbitration. 
 
Certain sectors of Ecuador's economy are reserved to the 
state.  All foreign investment in petroleum exploration and 
development in Ecuador must be carried out under contract 
with the state oil company.  U.S. and other foreign oil 
companies produce oil in Ecuador under such contracts. 
Several of these companies are involved in a dispute with the 
government of Ecuador relating to the refund of value-added 
taxes.  In 2004, one of the disputing U.S. companies won a 
$75 million international arbitration award against the 
government of Ecuador.  The Government has requested a 
judicial review of the arbitration award.  After notice of 
the award, Ecuador,s Solicitor General (Procurador General) 
initiated an investigation of the company for allegedly 
transferring assets to another foreign company without 
obtaining the required authorization from the state.  The 
Ecuadorian government has since threatened the nullification 
of the company,s contract and seizure of the company,s 
considerable assets in Ecuador. 
 
Foreign investment in domestic fishing operations, with 
exceptions, is limited to 49 percent of equity.  Foreign 
companies cannot own more than 25 percent equity in broadcast 
stations.  Foreigners are prohibited from owning land on the 
borders or the coast. 
 
Effective compensation for expropriation is provided for in 
Ecuadorian law but is often difficult to obtain.  The extent 
to which foreign and domestic investors receive prompt, 
adequate and effective compensation for expropriations varies 
widely.  It can be difficult to enforce property and 
concession rights, particularly in the agriculture, oil and 
mining sectors.  Foreign oil, energy and telecommunications 
companies, among others, have often had difficulties 
resolving contract issues with state or local partners.  The 
transparency and stability of the country,s investment 
regime are significantly weakened by the existence of 
numerous investment-related laws which overlap or appear to 
have mutually inconsistent provisions.  This judicial 
complexity increases the risks and costs of doing business in 
Ecuador. 
 
The U.S. Government has worked with the Government of Ecuador 
both before and in parallel with the FTA negotiations to 
ensure a fair resolution of U.S. investor disputes, 
consistent with Ecuadorian law.  Since May of 2003, when some 
disputes were resolved, not one U.S. investor dispute has 
been settled. 
 
ELECTRONIC COMMERCE 
 
Ecuador passed an electronic commerce law in April 2002 that 
makes the use of electronic signatures in business 
transactions on the Internet legally binding and makes 
digital theft a crime.  Ecuador has initiated a program for 
e-government services and to promote public access to 
information technology through funding from international 
financial institutions.  The U.S. is seeking in the FTA 
negotiations to include rules prohibiting duties on and 
discrimination against digital products, such as computer 
programs, videos, images, and sound recordings, based on 
where they are made or the nationality of the firms or 
persons making them. 
JEWELL