VZCZCXYZ0000
RR RUEHWEB

DE RUEHMU #0495/01 0571253
ZNR UUUUU ZZH
R 261253Z FEB 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 9213
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC 0839

UNCLAS MANAGUA 000495 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO WHA/CEN, WHA/ESPC, EB/TPP, EB/CBA 
CENT AM POSTS ALSO FOR FCS 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN and for 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN,BARTHUR 
 
E.O. 12958: N/A 
TAGS: ETRD EAGR EINV ECIN ECON BEXP NU
SUBJECT: NICARAGUA: CAFTA Update 
 
REF: Managua 01990 
 
¶1. (U) Summary: Nicaraguan exports to the United 
States during the first year of CAFTA performed 
extremely well.  Total exports to the United States 
increased 29.2%, growing from $1.18 billion in 2005 to 
$1.53 billion in 2006.  The Nicaraguan government 
separates free trade zone exports and general exports, 
which explains why its statistics are quite different 
from those we report.  Top Nicaraguan exports to the 
United States fell into three product categories: knit 
apparel, woven apparel, and automobile wiring 
harnesses Q all manufactured primarily in free trade 
zones.  Other Nicaraguan exports to the United States 
showing the strongest performance on the year included 
coffee, sugar, vegetables, tobacco products, and gold. 
Reflecting changing patterns of trade, both the number 
of products exported and number of Nicaraguan 
companies engaged in export to the United States 
increased. 
 
¶2. (U) Nicaragua imported almost 21% more from the 
United States in 2006 than it did in 2005.  Leading 
imports include machinery, cereals, electrical 
machinery, vehicles, optical equipment, fats and oils, 
and plastic products.  Most of these imports are going 
into production of some kind.  According to the 
Ministry of Trade, Industry and Development (MIFIC), 
imports of capital goods accounted for 22% of total 
imports from the United States in 2006, intermediate 
goods almost 29%, and petroleum products 13%. 
 
¶3. (U) At least $235 million in new investments have 
been Qhighly influencedQ by NicaraguaQs membership in 
CAFTA.  Investments on another $233 million in this 
same category are currently under consideration. 
These Qhighly influencedQ investments are 
predominantly in textiles and apparel industries. End 
Summary. 
 
Exports to the United States 
---------------------------- 

¶4. (U) Nicaraguan exports to the United States during 
the first year of CAFTA performed extremely well. 
Total exports to the United States increased 29.2%, 
growing from $1.18 billion in 2005 to $1.53 billion in 
¶2006.  Since CAFTA entered into force on April 1, 
2006, exports to the United States grew 28.5% compared 
to the same period in 2005.  Top exports to the United 
States fell into three broad product categories: knit 
apparel, woven apparel, and automobile wiring 
harnesses Q all manufactured primarily in free trade 
zones.  These three categories accounted for 
approximately $1 billion in trade with the United 
States, up 20% from 2005. 
 
¶5. (U) Other exports to the United States showing 
strong performances in 2006 were as follows: 
 
--  coffee and spices, up 82% to $67 million, largely 
    because of high coffee prices; 
 
--  sugar, up 62% to $26 million, largely because of a 
    second tariff rate quota afforded to Nicaragua 
    under CAFTA; 
 
--  vegetables, up 55% to $11 million, largely 
    because of the export of new products to the 
    United States under CAFTA; 
 
--  tobacco products, up 18% to $26 million, largely a 
    reflection of growing U.S. consumer demand for 
    Nicaraguan cigars; and 
 
--  gold and precious stones registered an increase of 
    12% to $ $23 million, largely a reflection of high 
    gold prices in 2006. 
 
Statistical Discrepancies 
------------------------- 

¶6. (U) We must note that for national income and 
accounting purposes, the Government of Nicaragua draws 
a clear distinction between free trade zone exports 
and general exports, tracking the two as if they were 
separate statistics.  Additionally, there are other 
discrepancies with the way Nicaragua collects data on 
exports.  As the following paragraph demonstrates, 
U.S. officials should be careful to state that our 
trade figures are based on U.S. Customs data, and 
include free trade zone exports to the United States. 
 
¶7. (U) The Ministry of Trade, Industry and Development 
(MIFIC) reports trade statistics on the impact of 
CAFTA that are quite different from those of the 
United States International Trade Commission (USITC). 
For example, since CAFTA entered into force on April 
1, 2006, MIFIC reports that exports to the United 
States rose 10.1%, to $239 million, while imports from 
the United States rose 28.5%, to $498 million.  For 
MIFIC, these flows translate into a bilateral trade 
deficit with the United States of $259 million, 52% 
more than in 2005.  The report notes that major 
Nicaraguan exports to the United States include 
coffee, seafood, beef, sugar, tobacco products, gold, 
and vegetables.  The difference between MIFIC and 
USITC statistics is mostly, but not completely, 
explained by MIFICQs exclusion of free trade zone 
imports and exports. 
 
A Look at CAFTA Quotas 
---------------------- 

¶8. (U) CAFTA established a series of tariff quotas for 
Nicaragua for some strategic agricultural products, 
including beef, sugar, peanuts, peanut oil, cheeses, 
dairy products, ice-cream, milk and cream.  Indeed, 
these products are among NicaraguaQs leading exports 
to the United States.  Nicaragua fully utilized its 
cheese and sugar quotas under CAFTA in 2006, but 
underutilized its quotas on peanut butter, ice-cream, 
milk and cream.  Nicaragua did not utilize its CAFTA 
beef quota because it had not first exhausted its 
quota provided by the United States under the World 
Trade Organization. 
 
¶9. (U) While Nicaraguan peanut production has rapidly 
grown in recent years, local producers managed to fill 
only 14.9% of their quota under CAFTA.  Nicaraguan 
officials have told us that this is because U.S. 
producers of peanuts are very competitive in their 
home market.  The Government of Nicaragua believes 
that its producers can compete with U.S. producers in 
third country markets, particularly Mexico, but that 
U.S. credit guarantees give U.S. peanut exporters an 
unfair advantage.  For this reason, Nicaragua joined 
Canada, Argentina, Australia and others in a recent 
request for WTO consultations on the application of 
U.S. agricultural subsidies. 
 
Changing Trade Patterns 
----------------------- 

¶10. (U) One of the most important CAFTA developments 
may at first seem insignificant because the export 
quantities are so small.  MIFIC reports that since 
CAFTA entered into force, Nicaragua exported 274 
products to the United States for the first time, 
including cotton underwear and nightgowns, chili 
peppers, billiard accessories, razor blades, 
ornamental fish, papaya, and plantains.  Some of these 
products, or groups of products, promise to become 
significant export categories for Nicaragua in the 
future and, thus, greatly diversify Nicaraguan exports 
to the United States and the rest of the World. 
 
¶11. (U) A look at which companies are exporting also 
reflects changing trade patterns.  MIFIC reported that 
372 Nicaraguan companies exported during April- 
December of 2006, the nine-month period after which 
CAFTA took effect.  While 10 leading companies 
accounted for slightly more than 46% of total exports 
to the United States, 235 companies exported less than 
$100,000.  The number of companies exporting more than 
$100,000 grew 15%, to 126.  The total number of 
companies exporting to the United States grew by 4% 
over that of 2005, while the average exported by each 
company grew by 6%.  In short, more companies are 
exporting more product, and more types of products, to 
the United States than before CAFTA.  Again, while 
these movements are small, they point to changing 
trade patterns for Nicaragua. 
 
Imports from the United States 
------------------------------ 

¶12. (U) Using USITC statistics, Nicaragua imported 
almost 21% more from the United States in 2006 than it 
did in 2005, growing to $755 million from $625 
million.  Since CAFTA entered into force, Nicaraguan 
imports from the United States increased almost 17% 
when compared to same period in 2005.  Leading imports 
from the United States include machinery, cereals, 
electrical machinery, vehicles, optical equipment, 
fats and oils, and plastic products.  Most of these 
imports are going into production of some kind.  MIFIC 
trade statistics for 2006 show that imports of capital 
goods accounted for 22% of total imports from the 
United States in 2006, intermediate goods almost 29%, 
and petroleum products 13%.  Consumer goods accounted 
for 35% of total imports from the United States in 
¶2006.  Reflecting the depth of the U.S. economy, 
imports are more evenly distributed over a wider range 
of products than are Nicaraguan exports to the United 
States. 
 
Investment 
---------- 

¶13. (U) ProNicaragua, the governmentQs investment 
promotion agency, reports that at least $235 million 
in new and active investments were Qhighly influenced 
by NicaraguaQs membership in CAFTA.  The largest of 
these is U.S.-based ITG Cone DenimQs new $100 million 
textile plant currently under construction in Ciudad 
Sandino.  Half of the fifteen enterprises involved are 
already operating -- all but one are manufacturers of 
textiles or apparel.  Together, these companies will 
directly employ more than 13,000 Nicaraguans.  Another 
sixteen enterprises, mostly in textiles and apparel, 
are considering investing another $233 million as a 
result of NicaraguaQs membership in CAFTA.  If these 
new investments materialize, they would directly 
employ another 9500 Nicaraguans.  NicaraguaQs 
membership in CAFTA has also inspired a number of 
companies to re-invest in existing operations and the 
expansion production. 
 
Conclusion 
---------- 

¶14. (SBU) Though still early days, Nicaragua is 
clearly benefiting from CAFTA.  Exports are up and 
more companies are trading a growing variety of goods. 
Once companies begin to export, they become more 
confident in their abilities to do business in new 
markets and with new products.  Anecdotal evidence 
suggests that a growing number of small- and medium- 
sized businesses are borrowing to invest in the 
manufacture of components and other items for export. 
 
¶15. (SBU) USITC trade statistics reveal that no 
country has benefited more from CAFTA at this early 
juncture than Nicaragua.  This partially reflects the 
fact that Nicaragua started from a lower base than its 
Central American neighbors, with fewer industries 
enjoying effective tariff protection.  It partially 
reflects the fact that NicaraguaQs clothing and 
apparel industry was not well integrated into regional 
supply chains that experienced disruption when fellow 
countries implemented CAFTA on different dates.  It 
also may reflect certain competitive advantages for 
Nicaragua.  For example, the country has plenty of 
arable land and water for agriculture.  Nicaragua 
offers textile and apparel manufacturers the lowest 
labor wages in Central America.  Nicaragua has the 
only Trade Preference Level (TPL) among CAFTA 
countries, allowing it to import low cost third 
country fabric for the manufacture and export of 
apparel to the United States.  Nicaragua also has the 
lowest crime rate in Central America.  Despite the 
lack of infrastructure and irregularities in the legal 
system, these factors make the country a relatively 
attractive place to invest, particularly in 
agriculture and light manufacturing. 
 
¶16. (SBU) Equally significant is that the 
administration of former President Enrique Bolanos 
worked hard to improve customs, tax collections, and 
reduce red tape for investors.  Bolanos stabilized 
inflation, reduced foreign debt, grew foreign exchange 
reserves, and stabilized foreign exchange rates.  In 
addition, his administration successfully marketed the 
country to investors, providing tax and investment 
incentives when necessary.  On January 10, Bolanos 
handed power over to newly elected President Daniel 
Ortega, and left the job of promoting Nicaragua to a 
new administration with a very different approach to 
government.  The jury is out as to how hard OrtegaQs 
administration will work to fulfill the promise of 
private sector-led growth and development that 
membership in CAFTA holds for Nicaragua. 
 
BRENNAN