VZCZCXRO8631
RR RUEHLMC
DE RUEHSN #1484/01 2132250
ZNR UUUUU ZZH
R 012250Z AUG 07
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 7197
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 03 SAN SALVADOR 001484 
 
SIPDIS 
 
STATE PASS USAID/LAC 
STATE ALSO PASS USTR 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ES
SUBJECT: CAFTA-DR FIRST YEAR IMPACT ON TRADE 
 
REF: A. SAN SALVADOR 453, B. SAN SALVADOR 2513, C. SAN SALVADOR 
 
2475, D. SAN SALVADOR 1185, E. SAN SALVADOR 1183. 
 
Summary 
------- 
 
¶1. The one year results on CAFTA-DR are very positive.  Total 
nonmaquila exports increased by 59.1 percent during the first year 
of CAFTA-DR, rising from $266 million in March 2006 to $423 million 
by February 2007.  Though ethanol exports accounted for 88.1% of 
this increase, other sectors also enjoyed significant export growth. 
 Due chiefly to Chinese and regional competition, exports in the 
large maquila sector fell by 11%.  As a result, total Salvadoran 
exports to the United States fell slightly (by 1.5%) during the 
first year of CAFTA-DR.  While clearly presenting opportunities, 
CAFTA-DR will not be the success it can be unless El Salvador 
resolves its severe crime problem.  In addition to increased trade, 
the other benefits of CAFTA-DR, such as good governance and business 
practices, could have the greatest impact on El Salvador in the long 
run.  End summary. 
 
Salvadoran Ethanol Exports Expand Most 
-------------------------------------- 
 
¶2. Nonmaquila exports (which do not include apparel manufactured for 
export in a free trade zone using mostly imported components) 
increased by 59.1% during the first year of CAFTA-DR, which entered 
into force for El Salvador on March 1, 2006. From March 2006 through 
February 2007, nonmaquila exports increased from $266 million to 
$422.5 million. Ethyl alcohol (ethanol) accounted for 88.1% of the 
increase. Exports of ethanol grew from $34 million to $173 million, 
a 402% increase in one year. (Comment.  Much of the ethanol that is 
exported to the United States comes from Brazil and is dehydrated to 
qualify for duty free export. Reftel B describes Salvadoran ethanol 
production capacity and plans for expansion. End comment.) 
Excluding ethanol, nonmaquila exports to the U.S. grew by 8.1% in 
the first year of CAFTA-DR (from $231.2 million to $250 million). 
 
¶3. According to the Central Bank, total Salvadoran exports to the 
United States in the period fell by 1.5% (from $1.97 billion to 
$1.94 billion). An 11% decline in maquila exports, from $1.7 billion 
to $1.5 billion, offset the significant increase in other 
nontraditional exports.  Maquila exports fell mainly due to the 
increased Chinese and regional competition (see reftel C for more 
information about the textile and apparel industry). 
 
Other Salvadoran Exporters Also Benefit 
--------------------------------------- 
 
¶4. Though on a smaller scale than ethanol exporters, other exporters 
have taken advantage of the permanent benefits provided by CAFTA-DR, 
especially those exporting to the Salvadoran ethnic market in the 
United States. During the first year of CAFTA-DR, dairy exports more 
than tripled, growing from $262 thousand to $814 thousand.  Cheese 
varieties aimed at the ethnic market accounted for most of the 
increase. Packaged and prepared fruits and vegetables increased by 
almost 50% from $2.2 million to $3.2 million. Exports of cookies, 
pastries and other prepared foods grew from $4.9 million to $6.4 
million (a 31% increase). Exports of other ethnic related products, 
including a variety of prepared foods, herbs, spices and local 
fruits, have also increased.  Seafood exports to the United States 
grew by 17%, to $25 million.  Most of this increase was concentrated 
in the exports of prawns which grew by 36%, and to a lesser extent 
in the exports of small salted shrimps, which increased by 27%. The 
latter are aimed to the Salvadoran ethnic market in the U.S. for the 
production of Salvadoran style shrimp cocktails. 
 
¶5. Exports of apparel, especially cotton t-shirts and dresses, 
showed a notable increase under CAFTA-DR, growing from $21.5 million 
to $33.7 million, a 28.9% increase.  Towel exports grew by 36%, to 
$9.6 million. Exports of synthetic fibers more than tripled, growing 
from $1.2 million to $3.7 million. 
 
¶6. Light manufacturing also showed positive results. In the first 
year of CAFTA-DR, electrical machinery exports to the United States 
increased by 85%, from $3.7 to $7.1 million.  The Mexican-Japanese 
joint venture firm Arnecom accounted for most of this increase by 
exporting $4.7 million of automobile wiring harnesses during the 
first year of CAFTA-DR.  Exports of toys and decorations also 
increased, by 51% to $1 million. 
 
U.S. Gains 
---------- 
 
¶7.  The Central Bank reported that U.S. exports to El Salvador grew 
 
SAN SALVAD 00001484  002 OF 003 
 
 
by 6.4% during the first year of CAFTA-DR, from $2.9 billion to $3 
billion. Though U.S. exports of maquila inputs decreased by 13%, 
from $1.3 billion to $1.1 billion, nonmaquila exports significantly 
increased.  U.S. nonmaquila exports to El Salvador grew by 22.7%, to 
$1.9 billion. U.S. pork exports multiplied almost 7 times, from $240 
thousand to $1.6 million.  (Note.  Total national pork consumption 
has risen since CAFTA-DR entered into force.  The local pork 
association - ASPORC - said U.S. pork imports have also stimulated 
more and better quality local pork production.  ASPORC said 
consumers are also benefiting from the wider variety of pork 
products available.  End note.)  Rice exports to El Salvador 
increased by 19.6%, from $18.7 million to $22.4 million.  U.S. 
white-corn exports increased 24%, from $11.7 million to $14.5 
million and U.S. yellow corn exports were up 32%, to $70 million. 
Though, El Salvador is blocking the entry of U.S. poultry and eggs, 
an issue which is being addressed on several levels with the GOES. 
 
¶8.  U.S. exports of aluminum, sweeteners, shoes, steel and iron 
products, prepared/processed fruits and vegetables, and precious 
metals/jewelry experienced growth rates of over 50%.  Motors and 
electronics exports to El Salvador were up 43%, from $180 million to 
$257 million. 
 
Creating Jobs and Spurring Reform 
--------------------------------- 
 
¶9.  In June, on the third anniversary of his administration, 
President Saca noted that during his term El Salvador has attracted 
96 new foreign businesses, directly creating 18 thousand jobs 
(reftel D).  CAFTA-DR and sound economic policies put El Salvador on 
the investment map.  The GOES is committed to making it easier to do 
business in El Salvador, for instance through streamlined 
administrative procedures designed to make it easier to start a 
business. The GOES is also looking to update its civil and 
commercial codes to further improve the investment climate.  These 
efforts are paying off.  In 2006, El Salvador's economy grew by 
4.2%, the highest in a decade, with GDP growth projected to be 4.5% 
in 2007. 
 
Comment 
------- 
 
¶10.  It is worth noting again that CAFTA-DR is neither a quick fix 
nor a complete solution to El Salvador's poverty and sustainable 
development issues.  CAFTA-DR will not fulfill its promise unless 
other issues are adequately addressed by the Salvadorans.  First and 
foremost, the severe problem of violent crime must be resolved.  The 
highest homicide rate in the hemisphere and 30,000 gang members in 
the country are clear deterrents to investment, foreign and 
domestic.  We are working closely with the GOES on its efforts to 
take back its streets and there is some progress.  El Salvador must 
also find a way to end the political polarization in the country. 
Uncertainty about the future direction of the country continues to 
impede investment.  The three year election cycle (five for the 
president) means that an election is always just around the corner 
(the next in early 2009) and with it concerns that a FMLN government 
might be elected that would dismantle CAFTA-DR, dollarization and 
other sustainable economic policies.  Security problems make it 
easier for the FMLN to convince the public that a regime change is 
needed. 
 
¶11.  CAFTA-DR has had a positive impact and the Salvadoran economy 
appears to be headed in the right direction.  Even in these early 
stages, CAFTA-DR is providing opportunities for greater 
participation in the global market.  While ethanol exports have 
expanded the most, other exporters (Salvadoran and U.S.) have 
benefited from CAFTA-DR. Perhaps the clearest example for Salvadoran 
exports is the ethnic food market opportunities in the United 
States. 
 
¶12.  The less tangible benefits that CAFTA-DR and sound GOES 
economic policies have had on good governance and transparency 
should not be ignored when we calculate the impact of CAFTA-DR. 
These policies attract U.S. companies like Dell to the country. 
They in turn bring U.S. style management and business practices; 
where, for instance, exceptional employees are promoted within the 
company and not stuck in place where they might be in a traditional 
family-owned enterprise. (See reftel E for Dell's many contributions 
to El Salvador.) In the long run, some of these intangibles may 
prove to be CAFTA-DR's most important contribution to El Salvador's 
economic development.  El Salvador still works under a 'who you 
know' is more important than 'what you know' principle, but this is 
slowly changing.   Increased development of sound business practices 
and good governance, as promoted under CAFTA-DR, will be essential 
long term drivers of sustained growth in El Salvador. 
 
SAN SALVAD 00001484  003 OF 003 
 
 
 
Glazer