VZCZCXYZ0000
RR RUEHWEB

DE RUEHSN #2264/01 2572005
ZNR UUUUU ZZH
R 142005Z SEP 06
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 3746
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SAN SALVADOR 002264 
 
SIPDIS 
 
STATE PASS AID/LAC 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD ES
SUBJECT: EL SALVADOR'S AGGRESSIVE TRADE AGENDA 
 
¶1.  Summary.  Under its export-led growth strategy launched in 1989, 
El Salvador has pursued economic integration with its Central 
American neighbors and negotiated trade agreements with the 
Dominican Republic, Chile, Mexico, Panamsa, and the United States. 
Agreements with Taiwan, Colombia, the European Union, and Canada are 
under negotiation while agreements with CARICOM and Israel are being 
considered.  The Salvadoran government has developed a comprehensive 
National Export Strategy to help local producers take advantage of 
these new markets and to overcome difficulties in diversifying 
exports beyond coffee, sugar, and apparel. End summary 
 
El Salvador's Trade Agenda 
-------------------------- 
¶2.  El Salvador has pursued trade liberalization and export-led 
growth since 1989, when the Cristiani government began lowering 
tariffs, which peaked at 290 percent, and eliminating most 
non-tariff barriers.  In addition, since 1994 El Salvador has 
aggressively pursued economic integration in Central America, 
particularly with ratification and implementation of the Guatemala 
Protocol to the General Treaty on Central American Integration in 
¶2002.  In March 2002, El Salvador, Costa Rica, Guatemala, Honduras, 
and Nicaragua also signed the Central American Treaty on Investment 
and Trade in Services 
 
¶3.  The region's next step is the establishment of a customs union, 
and on May 12, 2006, Central American countries approved the Uniform 
Central American Customs Code (CAUCA).  Countries in the region were 
to have prepared domestic regulation to implement CAUCA by year-end 
2006, but meeting that deadline appears unlikely.  Currently, 97 
percent of tariff lines are harmonized, and the remaining 3 percent 
are sensitive goods such as coffee, sugar, rice, and their 
derivatives.  There has been some progress on labeling standards, 
but the region has yet to address other issues related to creating a 
customs union such as customs procedures, sanitary and phytosanitary 
standards, labeling, quota management, and intellectual property 
rights. 
 
¶4.  Outside the region, El Salvador has aggressively sought new 
markets through trade agreements, and in 1995 it joined the Word 
Trade Organization.  In 1999, El Salvador together with Guatemala, 
Honduras, and Nicaragua signed free trade agreements with the 
Dominican Republic and Chile; in 2002, the region concluded 
agreements with Panama and Mexico.  The Central American and 
Dominican Republic Free Trade Agreement (CAFTA-DR) entered into 
force between El Salvador and the United States on March 1, 2006. 
 
Trade Talks with Taiwan, Colombia, the EU, and Canada 
--------------------------------------------- -------- 
¶5.  Guatemala, El Salvador, and Honduras are negotiating a trade 
agreement with Colombia that they plan to conclude by year-end 2006. 
 Under the agreement, products such as coffee, sugar, and 
rice--which are produced both by El Salvador and Colombia--will 
likely be excluded.  Although current exports to Colombia are 
insignificant, the largest potential for Salvadoran exports to 
Colombia is in textile and apparel and nontraditional agricultural 
products, both of which are included in the agreement. 
 
¶6.  El Salvador and Honduras are also negotiating a trade agreement 
with Taiwan.  Broader than the agreement with Colombia, it would 
include a chapter on development cooperation and one on investment. 
Minister of Economy Yolanda de Gavidia said that a principal goal of 
the treaty is to attract Taiwanese investment.  On the trade front, 
El Salvador sees potential to increase exports of sugar, coffee, 
fruits, herbs, apparel, and scrap metal.  El Salvador seeks to 
exclude from the agreement sensitive products such as rice, poultry, 
steel, iron, and certain textiles, but El Salvador's strong 
political and investment ties with Taiwan will likely keep these 
sensitivities from becoming deal breakers.  Within the region, 
Panama and Guatemala already have signed trade agreements with 
Taiwan, while Nicaragua is finalizing one. 
 
¶7.  At the European Union - Central American Summit in Vienna on May 
13, 2006, participants announced plans to negotiate an Association 
Agreement that will include the establishment of a Free Trade Area. 
Few details are available at this point, but Ministry of Economy 
contacts suggest that trade provisions included in the agreement 
will likely be similar to those included in EU agreements with Chile 
and Mexico.  However, the European Union has made it clear that it 
prefers to deal with Central America as a bloc and will not begin 
negotiations in earnest until the customs union is complete. 
Meanwhile, negotiations between the CA-4 (Guatemala, El Salvador, 
Honduras, and Nicaragua) and Canada are suspended, but Minister of 
Economy de Gavidia has expressed interest in renewing those talks in 
early 2007. 
 
Plans for Talks with CARICOM and Israel 
--------------------------------------- 
¶8.  The CA-4 countries plan to negotiate a trade agreement with the 
Caribbean Community (CARICOM) in 2007.  Vice Minister of Economy 
Eduardo Ayala has said the agreement would cover 90 percent of 
tariff lines.  Israel has also expressed interest in negotiating an 
agreement with Central America, viewing the region is a good export 
market as well as a location for investment. 
 
A New National Export Strategy 
------------------------------ 
¶9.  To help exporters take full advantage of the trade agreements 
negotiated, the Salvadoran Government launched El Salvador's first 
National Export Strategy on August 23, 2006. Led by Vice President 
Ana Vilma de Escobar--who is also President of the National 
Investment Promotion Agency (PROESA) and the National Export 
Promotion Agency (EXPORTA)--the initiative seeks to identify markets 
overseas for Salvadoran goods and provide assistance to local 
exporters to increase exports to $12 billion by 2016, up from about 
$3.4 billion in 2005. 
 
¶10.  With assistance from USAID and the Inter-American Development 
Bank (IDB), EXPORTA prepared the strategy in consultation with the 
private sector and government officials.  During the formal 
presentation of the strategy, EXPORTA Director Aldo Vallejo made it 
clear that El Salvador does not want to compete on low cost, low 
value added products and instead wants to take advantage of its 
relatively skilled labor force, and other strengths, to focus on 
high quality, high value added goods. 
 
¶11.  The strategy includes a component focused on improving business 
competitiveness by establishing export consortiums for certain goods 
and establishing a certification program for quality products. 
Another component will focus on insurance and financing, including 
export credits, risk capital, guarantees, and insurance.  Under this 
component, the government will provide assistance to small business 
in presenting their financial records to banks to improve access to 
credit.  Other components of the strategy address logistic and 
transportation as well as training for Salvadoran diplomats on 
commercial issues and export promotion.  Finally, the strategy seeks 
to create a culture of quality among local business through a 
publicity campaign directed at small businesses--projecting that 
image overseas through trade missions and other interactions with 
foreign buyers would also be important. 
 
¶12.  Comment: El Salvador's trade-led growth plan was designed to 
encourage local productivity improvements in response to competition 
from abroad and open export markets for these newly-efficient local 
producers.  The key to the plan was diversification--that is, 
exporting not only coffee and apparel but other goods as well. 
However, nontraditional exports (diversified, with more value added 
than traditional exports such as coffee and sugar) have fallen from 
49 percent in 1990 to 39 percent in 2005 as a percentage of total 
exports.  The new National Export Strategy suggests the government 
will make a more proactive effort to support local producers in 
their efforts to compete.  The plan is promising, but we are 
concerned that it provides few details regarding implementation--a 
shortcoming that government officials promise to rectify over the 
months to come.  End comment. 
 
Barclay