VZCZCXRO2789
RR RUEHLMC
DE RUEHMU #0338/01 0841329
ZNR UUUUU ZZH
R 241329Z MAR 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2295
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC

UNCLAS SECTION 01 OF 03 MANAGUA 000338 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EINV PGOV NU
SUBJECT: NICARAGUA: COMMERCE U/S PADILLA HIGHLIGHTS CAFTA-DR 
 
REFS: A. MANAGUA 0254, B. MANAGUA 0225, C. 07 MANAGUA 1865 
 
Summary and Introduction 
------------------------ 

¶1. (SBU) During his February 28, 2008, visit to Nicaragua, 
Undersecretary of Commerce for International Trade Christopher A. 
Padilla emphasized the importance of the United States - Central 
America - Dominican Republic Free Trade Agreement (CAFTA-DR) to our 
bilateral relationship.  U/S Padilla toured a U.S.-owned textile 
mill that takes advantage of CAFTA-DR to weave denim from U.S.-grown 
cotton, and he heard from other U.S. businesses on challenges in the 
apparel sector.  U/S Padilla and Nicaraguan Minister of Trade, 
Industry, and Development (MIFIC) Orlando Solorzano participated in 
several media events that marked the only instances since Ortega 
took office where a senior Nicaraguan official has provided public 
support for the agreement.  With Nicaraguan business leaders, U/S 
Padilla exchanged views on competitiveness and on private sector 
efforts to strengthen democracy (Ref A).  In meetings with MIFIC and 
President Ortega, U/S Padilla discussed a number of trade issues. 
U/S Padilla also cautioned Ortega that his harsh rhetoric has a 
negative impact on the perception of Nicaragua in the minds of U.S. 
investors.  However, Ortega's strong ideological beliefs and desire 
to play to domestic and international audiences with criticism of 
the United States make it likely that his rhetoric will continue, to 
the detriment of the investment climate. 
 
Promoting CAFTA-DR 
------------------ 

¶2. (SBU) During his visit, U/S Padilla publicly described CAFTA-DR 
as the core of our bilateral economic relationship.  He noted that 
since the agreement went into effect on April 1, 2006, Nicaragua has 
benefited more than any other CAFTA-DR country.  Nicaraguan exports 
to the United States have increased from $1.18 billion in 2005 to 
$1.61 billion in 2007, a 36% increase according to USITC data.  Some 
industries have seen even higher growth.  For example, exports of 
fruits and vegetables are up 59% from 2005 to 2007, and exports of 
meat are up 42%. 
 
¶3. (U) Minister Solorzano joined U/S Padilla to tour an exhibition 
of Nicaraguan businesses and agricultural producers that are 
benefiting from CAFTA-DR.  Among those represented were an organic 
coffee grower and an exporter of high quality seafood.  Producers 
told U/S Padilla and Minister Solorzano about rising sales of sesame 
seeds, cassava, okra, and melons thanks to CAFTA-DR.  Companies 
exhibiting jellies, jams, and processed fruit pulp demonstrated the 
potential Nicaragua has to add value to its agricultural exports. 
Extensive press coverage of the exhibition, press conference, and 
subsequent remarks at a lunch hosted by AmCham highlighted 
Nicaragua's success in creating jobs, thanks to increased trade with 
the United States. 
 
¶4. (SBU) In a late-evening meeting, President Ortega complained that 
CAFTA-DR has not really resulted in free trade, citing as evidence 
the safeguard measure the United States may implement for Honduran 
socks.  In trade agreements between developed and less-developed 
countries, "the developed country can impose its will whenever it 
pleases," according to Ortega.  He asserted these asymmetries can 
only be resolved through agreements that focus on "fair trade." 
Ortega suggested that we need to maintain an open dialogue on trade 
issues "to make changes to CAFTA-DR as needed."  In response, U/S 
Padilla cautioned Ortega that U.S. domestic politics would likely 
complicate any renegotiation of CAFTA-DR. 
 
¶5. (SBU) Comment: The Ortega administration focuses on the 
Venezuelan-sponsored Bolivarian Alternative for the Americas (ALBA) 
to the exclusion of CAFTA-DR, despite the fact that trade with ALBA 
countries is almost negligible and trade with the United States 
totals nearly $2.5 billion in 2007.  At least for a few days, U/S 
Padilla's visit helped to focus attention on the benefits of 
CAFTA-DR and private-sector-led growth.  Minister Solorzano's 
participation in our trade exhibition, press conference, and further 
remarks at AmCham's lunch are the only instances since Ortega took 
office where a senior Nicaraguan official has provided public 
support for CAFTA-DR.  Ortega appears to have accepted U/S Padilla's 
counsel on renegotiating CAFTA-DR; in a March 3 meeting with 
representatives of the dairy industry, he repeated U/S Padilla's 
description of U.S. trade politics point for point.  End comment. 
 
Textiles and Apparel Trade Issues 
--------------------------------- 

¶6. (U) Nicaraguan exports of textiles and apparel have increased by 
35% since CAFTA-DR was implemented, from $716 million in 2005 to 
$968 million in 2007.  Emblematic of the growth of this industry is 
International Textile Group's (ITG) $100 million investment in a 
state-of-the-art textile mill, which will produce denim fabric from 
cotton grown in the United States.  U/S Padilla toured the plant, 
which employs 850 Nicaraguans and is already producing denim fabric 
for apparel manufacturers in Nicaragua and throughout Central 
America. 

¶7. (SBU) After the tour, U/S Padilla and Deputy Assistant Secretary 
for Textiles and Apparel Matthew Priest met with ITG's general 
manager and representatives of U.S. apparel manufacturers.  They 
discussed issues facing the sector, including difficulties with 
tariff preference levels (TPLs) of 100 million square meter 
equivalents (SMEs) for the use of third-party fabric.  Apparel 
manufacturers noted that the one-for-one agreement, requiring the 
use of U.S. fabric to qualify for TPLs, is problematic, because U.S. 
sources are dwindling and the cost of their fabric is rising.  They 
suggested that counting fabric made in Nicaragua from U.S. cotton as 
U.S. sourced fabric may be a solution.  They also noted that recent 
wage increases -- the Ortega administration raised textile workers' 
minimum wages by 36% in a six-month span -- are having a negative 
impact on Nicaraguan competitiveness in this price sensitive 
industry. 
 
¶8. (SBU) At a separate meeting with Nicaraguan officials led by 
MIFIC, Executive Director of the Free Trade Zone Commission (FTZC) 
Alfredo Colonel echoed the concerns of the private sector on meeting 
the one-for-one requirement.  In both meetings, U/S Padilla and DAS 
Priest agreed to carefully evaluate any one-for-one shortfall for 
2007 and consider the proposal that fabric made from U.S. cotton in 
Nicaragua count toward the one-for-one requirement.  They were 
careful to note that current domestic political considerations made 
it difficult to renegotiate the agreement to address this political 
issue. 
 
Trade Agreement Implementation 
------------------------------ 

¶9. (SBU) U/S Padilla discussed a number of other trade issues with 
Minister Solorzano, Executive Director of the FTZC Alfredo Colonel, 
and ProNicaragua Executive Director Javier Chamorro.  Solorzano 
voiced concern with U.S. legislation to raise the excise on tobacco 
products, a measure that President Bush vetoed for unrelated reasons 
in September 2007.  For cigars in particular, MIFIC officials view 
the excise as a potential trade barrier, because nearly all 
hand-made cigars are imported into the United States; they believe 
such a tax violates CAFTA-DR (Ref C).  Solorzano complained that 
Nicaraguans are unable to sell "rosquillas" (Central American 
biscuits) in New York State because a Salvadoran firm has 
trademarked the term "rosquillas."  Finally, Solorzano noted 
Nicaragua's interest in meeting its IPR commitments under CAFTA-DR, 
particularly those related to test data protection and patent 
linkage (Ref B).  On all of these issues, U/S Padilla indicated that 
the United States will work closely with Nicaragua to ensure that 
CAFTA-DR works for both Nicaragua and the United States. 
 
Delivering the Message on Harsh Rhetoric 
---------------------------------------- 

¶10. (SBU) In his meetings throughout the day, U/S Padilla recognized 
Nicaragua's efforts to attract $617 in foreign investment since 
implementing CAFTA-DR.  U/S Padilla made clear the importance of 
additional investment to build on this early success.  He cautioned 
his Nicaraguan interlocutors, including President Ortega, that 
potential investors have a negative perception of Nicaragua because 
of the president's harsh rhetoric concerning "global capitalism" and 
the United States.  He suggested that the government deliver a 
consistent, supportive message to foreign investors emphasizing 
Nicaragua's respect for democracy and free markets.  Padilla also 
explained the importance that investors place on a predictable 
political environment so they may make informed investment 
decisions. 
 
¶11. (SBU) President Ortega voiced his belief that inexpensive labor 
is what foreign investors want.  Nicaragua has cheap labor, and 
that, in addition to a low crime rate, is why investors are 
interested in locating here, according to Ortega.  Padilla countered 
that investors seek more than low wages; they look for a stable 
political climate and strong rule of law, and these factors would be 
important for Nicaragua's efforts to attract investment.   But 
Ortega dismissed U/S Padilla's warning that harsh rhetoric may be 
scaring away investors, claiming that rhetoric among politicians in 
the U.S. Congress is worse.  We note that just before his meeting 
with U/S Padilla, in an event with the National Police, Ortega 
accused foreign investors in free trade zones of exploiting 
Nicaraguan labor and plundering the Nicaraguan economy.  He again 
railed against capitalism and neoliberalism for making the poor 
poorer and the rich richer and called the current capitalist 
economic system unsustainable. 
 
¶12. (SBU) Comment: U/S Padilla's message to Ortega on the 
consequences of harsh rhetoric toward the United States and "global 
capitalism" appears to have had little immediate impact; for 
example, on March 7, Ortega labeled the United States a supporter of 
state-sponsored terrorism.  We doubt that Ortega will jettison his 
strong ideological beliefs when it comes to capitalism.  For 
example, in October 2007, Ortega cited Lenin extensively on the 
floor of the National Assembly simply to make a point on government 
debt.  This mindset, together with his desire to play to domestic 
and international audiences by criticizing the United States, means 
that Ortega's rhetoric will likely continue.  Nonetheless, it 
remains important for us to continue to reinforce U/S Padilla 
message on the damaging consequences of this rhetoric to the 
investment climate.  End comment. 
 
¶13. (U) U/S Padilla cleared this cable. 
 
TRIVELLI