VZCZCXYZ0001
PP RUEHWEB

DE RUEHSN #2344/01 3381917
ZNR UUUUU ZZH
P 041917Z DEC 07
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC PRIORITY 8660
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC

UNCLAS SAN SALVADOR 002344 
 
SIPDIS 
 
STATE PASS USTR 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD EFIN ECON ES
SUBJECT: EL SALVADOR 2008 NATIONAL TRADE ESTIMATE SUBMISSION 
 
REF: STATE 00119765 
 
TRADE SUMMARY 
------------- 
 
¶1. According to the Central Bank of El Salvador, the U.S. goods 
trade balance with El Salvador went from a trade surplus of $872.6 
million in 2005 to a trade surplus of $1,080 million in 2006 
(Central Bank data).  U.S. goods exports in 2006 were $3.1 billion, 
up 5.34 percent from the previous year.  Corresponding U.S. imports 
from El Salvador were $2 billion, down 2.37 percent.  El Salvador is 
currently the 51st largest export market for U.S. goods. 
 
¶2. The stock of U.S. foreign direct investment in El Salvador in 
2006 was $1,059.4 million (latest data available), up from $1,049.5 
million in 2005. 
 
IMPORT POLICIES 
--------------- 
 
¶3. Free Trade Agreement: The United States concluded free trade 
agreement 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 integrated the Dominican Republic 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). 
 
¶4. All of the signatory countries have ratified the agreement with 
the exception of Costa Rica which is in the process of ratifying it 
before March of 2008.  The agreement entered into force for El 
Salvador on March 1, 2006.  The agreement also has entered into 
force for the Dominican Republic, Guatemala, Honduras and 
Nicaragua. 
 
¶5. The agreement removes barriers to trade and investment in the 
region and will strengthen regional economic integration.  The 
CAFTA-DR also requires the Central American countries and the 
Dominican Republic to undertake needed reforms to provide market 
liberalization as well as greater transparency and certainty in a 
number of areas, including: customs administration, protection of 
intellectual property rights, services, investment, financial 
services, government procurement, and sanitary and phytosanitary 
(SPS) measures. 
 
¶6. Tariffs: As a member of the Central American Common Market, El 
Salvador agreed in 1995 to reduce its common external tariff to a 
maximum of 15 percent.  Under the CAFTA-DR, about 80 percent of U.S. 
industrial and consumer goods now enter El Salvador 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 are now 
traded duty-free and quota-free, promoting new opportunities for 
U.S. and regional fiber, yarn, fabric and apparel manufacturing 
companies.  However, there are several exceptions.  Some goods, such 
as new and used automobiles, are subject to much higher tariffs. 
Vehicles are currently assessed a 28.8 percent duty, which will 
gradually decrease.  Agricultural products face the highest tariffs. 
 Dairy, rice, pork and poultry products are assessed a 40 percent 
duty.  Under CAFTA-DR, dairy and rice have a ten year grace period, 
with free trade under a growing quota afterwards. Pork has a grace 
period of six years followed by free trade under a growing quota and 
the application of special safeguards. Poultry has a grace period of 
ten years with free trade for under a growing quota of 464 metric 
tons after the third year and special safeguard provisions.  In 
addition to a value-added tax of 13 percent paid on all goods and 
services, alcoholic beverages are subject to a 20 percent to 40 
percent duty, as well as domestic taxes that include a specific tax 
based on alcoholic content and a 20 percent sales tax. 
 
 
¶7. Under the CAFTA-DR, more than half of U.S. agricultural exports 
now enter El Salvador duty-free.  El Salvador will eliminate its 
remaining 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 (TRQs) will permit some immediate duty-free access for 
specified quantities during the tariff phase-out period, with the 
duty-free amount expanding during that period.  El Salvador will 
liberalize trade in white corn through expansion of a TRQ, rather 
than by tariff reductions. 
 
¶8. The agreement also requires transparency and efficiency in 
administering customs procedures, including the CAFTA-DR rules of 
origin.  Under the CAFTA-DR, El Salvador committed to ensuring 
greater procedural certainty and fairness in the administration of 
these procedures, and all CAFTA-DR countries agreed to share 
information to combat illegal transshipment of goods.  In addition, 
El Salvador has negotiated agreements with express-delivery 
companies to allow for faster handling of their packages. 
 
STANDARDS, TESTING, LABELING, AND CERTIFICATION 
--------------------------------------------- -- 
 
¶9. Although sanitary standards have generally not been a barrier in 
El Salvador, practices with respect to raw poultry and eggs are 
notable exceptions.  Since 1992, the Ministry of Agriculture has 
imposed restrictions on U.S. raw poultry and egg imports.  El 
Salvador has yet to provide a scientific justification for these 
measures, which do not appear to be based on relevant international 
standards.  Furthermore, the Salvadoran government does not appear 
to apply these same restrictions on domestic production, raising 
potential national treatment concerns.  As a result of these 
measures, the United States has been unable to export raw poultry or 
eggs to El Salvador.  U.S. industry estimates the value of lost U.S. 
poultry and eggs exports at $5 million to $10 million per year. 
Resolution of this issue is a priority for the United States. 
 
¶10. The Salvadoran government requires that rice shipments be 
fumigated at the importers' cost unless they are accompanied by a 
U.S. Department of Agriculture (USDA) certificate stating that the 
rice is free of Tilletia barclayana.  However, since there is no 
chemical treatment that is both practical and effective against 
Tilletia barclayana, USDA cannot issue these certificates.  El 
Salvador failed to notify this measure to the World Trade 
Organization (WTO) SPS Committee. 
 
¶11. All imports of fresh food, agricultural commodities and live 
animals must have a sanitary certificate from the Ministry of 
Agriculture and the Ministry of Public Health.  Basic grains must 
have import licenses from the Ministry of Agriculture, while dairy 
products require import licenses from the Ministry of Public Health. 
 Consumer products require a certificate showing approval by U.S. 
health authorities for public sale. 
 
¶12. Importers must deliver samples of all foods for laboratory 
testing to the Ministry of Public Health, which, upon approval, 
issues the product registration numbers that allow them to be sold 
at retail outlets.  At present, there is no standard regulation 
allowing entry of U.S.-approved products.  Some processed foods 
approved for use in the United States were rejected after further 
analysis in El Salvador, thereby barring their sale.  The United 
States has obtained access for U.S. products rejected by the 
Ministry of Public Health testing on a case-by-case basis. 
 
¶13. The United States and the Ministry of Public Health initiated 
discussions on this issue in 2002.  Through the CAFTA-DR, the United 
States continues to engage El Salvador on this issue in venues such 
as the SPS and Trade Capacity Building Committees.  In addition, in 
connection with the CAFTA-DR, El Salvador agreed to recognize the 
equivalence of the U.S. food safety and inspection system for meat, 
poultry and dairy products, thereby eliminating the need for 
plant-by-plant inspection. 
 
¶14. The five Central American countries, including El Salvador, are 
in the process of developing common standards for the importation of 
several products, including distilled spirits, which should 
facilitate trade.  Also, El Salvador has withdrawn a previous 
proposed standard for alcoholic beverages that was opposed by U.S. 
industry. 
 
GOVERNMENT PROCUREMENT 
---------------------- 
 
¶15. El Salvador is not a signatory to the WTO Agreement on 
Government Procurement.  However, government purchases and 
construction contracts are usually open to foreign bidders. 
 
The 2000 Public Sector Procurement and Contracting Law applies to 
the central government as well as to autonomous agencies and 
municipalities.  The Ministry of Finance's Public Administration 
Procurement and Contracting Regulatory Unit establishes procurement 
and contracting policy, but all government agencies have their own 
procurement and contracting units to implement that policy.  Under 
the law, government purchases worth more than approximately $108,000 
must be announced publicly and are subject to open bidding; those 
worth approximately $13,600 or more must also be announced, but may 
be subject to bidding by invitation only; and for smaller purchases, 
government agencies must evaluate at least three offers for quality 
and price.  If a domestic offer is assessed as equal to a foreign 
offer, the government must give preference to the domestic offer. 
Under certain provisions of the law, including "urgent" or 
"emergency" procurements, the head of a government agency or 
ministry may intervene to award procurement or a contract to a 
seller who may not have otherwise been selected.  For government 
procurement made using external financing or donations, separate 
procurement procedures may apply. 
 
¶16. The CAFTA-DR requires the use of fair and transparent 
procurement procedures, including advance notice of purchases and 
timely and effective bid review procedures, for procurement covered 
by the agreement.  Under the CAFTA-DR, U.S. suppliers will be 
permitted to bid on procurements of most Salvadoran government 
entities, including key ministries and state-owned enterprises, on 
the same basis as Salvadoran suppliers.  The anti-corruption 
provisions in the agreement require each government to ensure under 
its domestic law that bribery in trade-related matters, including in 
government procurement, is treated as a criminal offense, or is 
subject to comparable penalties. 
 
EXPORT SUBSIDIES 
---------------- 
 
¶17. El Salvador gives a 6 percent tax rebate on exports shipped 
outside Central America if they have undergone a transformation 
process that adds at least 30 percent to the original value.  Firms 
operating in free trade zones enjoy a 10-year exemption from income 
tax as well as duty-free privileges. Services firms operating under 
the benefits of the Services Law are exempted from income and 
municipal taxes as well from the tariffs for the imports of capital 
and intermediate goods. 
 
Under the CAFTA-DR, El Salvador 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).  El Salvador may maintain existing duty waiver 
measures through 2009 provided such measures are consistent with its 
WTO obligations. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
--------------------------------------------- 
 
¶18. In December 2005, El Salvador amended the Intellectual Property 
Promotion and Protection Law, Law of Trademarks and Other 
Distinctive Signs, and Penal Code to implement its CAFTA-DR 
obligations on intellectual property rights (IPR).  The CAFTA-DR 
provides for improved standards for the protection and enforcement 
of a broad range of intellectual property rights, which are 
consistent with U.S. standards of protection and enforcement and 
with emerging international standards.  Such improvements include 
state-of-the-art protections for digital products such as U.S. 
software, music, text and videos; stronger protection for U.S. 
patents, trademarks and test data, including an electronic system 
for the registration and maintenance of trademarks; and further 
deterrence of piracy and counterfeiting. 
 
¶19. The piracy of optical media, both music and video, remains a 
concern in El Salvador.  Optical media imported from the United 
States by pirates are being used as duplication masters.  There has 
also been concern expressed about inadequate enforcement of cable 
broadcast rights and the competitive disadvantage it places on 
legitimate providers of this service.  In the first 10 months of 
2007, the police and Attorney General's Office seized optical media 
valued at $1.5 million and made 30 arrests. 
 
SERVICES BARRIERS 
----------------- 
 
¶20. El Salvador maintains few barriers to services trade.  El 
Salvador has accepted the Fifth Protocol to the WTO General 
Agreement on Trade in Services, which was necessary to bring its 
CAFTA-DR commitments on financial services into effect.  Foreign 
investors are limited to 49 percent of equity ownership in free 
reception television and AM/FM radio broadcasting.  There are no 
such restrictions on cable television ownership.  Notaries must be 
Salvadoran citizens.  The CAFTA-DR granted substantial market access 
across the entire services regime, offering new access in sectors 
such as telecommunications, express delivery, computer and related 
services, tourism, energy, transport, construction and engineering, 
financial services, insurance, audio/visual and entertainment, 
professional, environment, and other sectors. 
 
¶21. A U.S. long distance telephone service provider has alleged that 
the dominant fixed-line telephone company refuses to sign an 
interconnection agreement with it on terms already extended to 
another market entrant, as required by Salvadoran law.  A decision 
on this case is still pending before the Supreme Court of El 
Salvador.  Separately, in January 2006, the government amended the 
telecommunications law to implement its CAFTA-DR obligations on 
interconnection, bundling, resale and other issues important to 
opening the sector to U.S. companies. These reforms went into effect 
January 1, 2007. 
 
¶22. In October  2007, an International Services Law was approved. 
The law regulates the establishment and operation of services parks 
and centers with incentives similar to those received by the free 
zones, including tax exemptions for developers, administrators, and 
service companies. The law covers international distribution, 
international logistics operations, call centers, information 
technology, development and research, marine vessels and airships 
repair and maintenance, entrepreneurial processes, hospital-medical 
services, and international financial services. 
 
INVESTMENT BARRIERS 
------------------- 
 
¶23. The CAFTA-DR establishes a more secure and predictable legal 
framework for U.S. investors operating in El Salvador.  Under the 
CAFTA-DR, all forms of investment are protected including 
enterprises, debt, concessions, contract and intellectual property. 
U.S. investors enjoy, in almost all circumstances, the right to 
establish, acquire and operate investments in El Salvador on an 
equal footing with local investors.  Among the rights afforded to 
U.S. investors are due process protection and the right to receive a 
fair market value for property in the event of an expropriation. 
Investor rights are protected under the CAFTA-DR by an effective, 
impartial procedure for dispute settlement that is fully transparent 
and open to the public.  Submissions to dispute panels and dispute 
panel hearings will be open to the public, and interested parties 
will have the opportunity to submit their views. 
 
¶24. There are few formal investment barriers in El Salvador. 
However, U.S. investors complain that judicial and regulatory 
weaknesses limit or inhibit their investment in El Salvador. 
 
El Salvador is developing a cost-based pricing model for the 
electricity sector to replace the existing competition-based system. 
 The new system would allow the adoption of long-term contracts and 
may alleviate current market-distorting regulations and intervention 
by the regulator, SIGET, as well as politicized management of 
hydro-electric resources by the state-owned autonomous hydropower 
generator CEL.  The United States has expressed its concerns 
regarding the impact of duplicative regulations and the regulator's 
seemingly arbitrary decision-making processes and how they are 
deterrents to U.S. electric energy investments in El Salvador. 
 
¶25. The first case of commercial arbitration in El Salvador involved 
a U.S. firm contracted by the parastatal water company for 
infrastructure work.  The water company refused to pay for work 
performed, claiming there were irregularities in the procurement 
process.  The arbitration panel ruled in favor of the U.S firm in 
2004, but in late 2006 the Supreme Court in El Salvador overturned 
the arbitral decision and ruled that the U.S. firm's contract with 
the water company was invalid. 
 
¶26. In a commercial arbitration case in the telecommunications 
sector, a U.S. long distance service provider was in a two year 
arbitration with another foreign- owned company.  The other company 
refused to comply with the terms of an interconnection agreement and 
provide the U.S. company with additional E-1s (long distance access 
lines).  In July 2007, the AAA tribunal awarded the U.S. company 
significant monetary damages and ordered the other company  to 
connect an additional 21 E-1s. After a two-year arbitration process, 
the other company   is now seeking to annul the arbitration award in 
the Salvadoran courts by claiming that the arbitration process is 
illegal under Salvadoran law.  Paradoxically, in a separate judicial 
proceeding, the same company used the pending arbitration case as a 
basis to prevent the telecommunications regulator from enforcing the 
interconnection agreement between the companies. 
 
ELECTRONIC COMMERCE 
------------------- 
 
¶27. The CAFTA-DR includes provisions on electronic commerce that 
reflect its importance to global trade.  Under the CAFTA-DR, El 
Salvador has committed to provide non-discriminatory treatment to 
U.S. digital products, not to impose customs duties on digital 
products transmitted electronically, and to work together with the 
United States in policy areas related to electronic commerce. 
 
 
¶28. A copy of this report has been sent via e-mail to WHA/CEN, 
WHA/EPSC, and USTR. 
 
Glazer