(2) Trade and Investment Policy Framework Viii

Honduras WT/TPR/S/234
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World Trade
Organization / RESTRICTED
WT/TPR/S/234
16 August 2010
(104208)
Trade Policy Review Body
TRADE POLICY REVIEW
Report by the Secretariat
HONDURAS
This report, prepared for the Second Trade Policy Review of Honduras, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from Honduras on its trade policies and practices.
Any technical questions arising from this report may be addressed to Mr Ricardo Barba (Tel.: 022 739 5088) or Mrs Eugenia Lizano (Tel.: 022 739 6578).
Document WT/TPR/G/234 contains the policy statement submitted by Honduras.

Note: This report is subject to restricted circulation and press embargo until the end of the firstsession of the meeting of the Trade Policy Review Body on Honduras.

Honduras WT/TPR/S/234
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CONTENTS

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SUMMARY vii

(1) Economic Environment vii

(2) Trade and Investment Policy Framework viii

(3) Measures Affecting Imports viii

(4) Other Measures Affecting Trade ix

(5) Sectoral Policies x

I. Economic environment 1

(1) Overview 1

(2) Macroeconomic Development 1

(3) Trade Performance and Investment 4

(i) Trade in goods and services 4

(ii) Foreign direct investment 6

(4) Outlook 8

II. TRADE AND INVESTMENT REGIME 10

(1) General Framework 10

(2) Trade Policy Objectives and Formulation 11

(3) Trade Laws and Regulations 12

(4) International Trade Relations 13

(i) World Trade Organization (WTO) 13

(ii) Preferential agreements 16

(5) Investment Framework 20

Annex II.1: Aid for Trade 23

III. trade policies by measure 29

(1) Introduction 29

(i) Registration, documentation and procedures 29

(ii) Customs valuation 31

(iii) Rules of origin 31

(iv) Tariffs 32

(v) Tariff quotas 38

(vi) Other charges affecting imports 38

(vii) Import licensing, permits and other import requirements 38

(viii) Import prohibitions 41

(ix) Antidumping and countervailing measures 42

(x) Safeguard measures 43

(xi) Standards and technical regulations 44

(xii) Sanitary and phytosanitary measures 47

(2) Measures Affecting Exports 51

(i) Registration, documentation and procedures 51

(ii) Export taxes 52

(iii) Prohibitions, licensing and other restrictions 53

(iv) Export subsidies and incentives 53

(v) Financing, insurance, and guarantees 55

(vi) Export promotion and marketing assistance 55

(3) Other Measures Affecting Production and Trade 56

(i) Incentives 56

(ii) Competition policy and price controls 57

(iii) Government procurement 63

(iv) State trading and State enterprises 66

(v) Traderelated investment measures 66

(vi) Intellectual property rights 66

IV. trade policies by sector 72

(1) Agriculture 72

(i) Main features 72

(ii) Measures affecting imports 76

(iii) Measures affecting exports 78

(iv) Measures affecting production 78

(2) Manufacturing Sector 81

(i) Main features 81

(ii) Maquila industry 84

(3) SERVICES 86

(i) Main features 86

(ii) Financial services 89

(iii) Telecommunications 96

(iv) Transport 101

REFERENCES 107

APPENDIX TABLES 109

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CHARTS

IV. TRADE POLICIES BY SECTOR

IV.1 MFN tariffs applied by Honduras in 2009, by ISIC major groups 83

IV.2 GDP share of the various service subsectors, 2003 and 2009 86

IV.3 Trade in services, 2003 and 2008 88

TABLES

I. ECONOMIC ENVIRONMENT

I.1 Main economic indicators, 20032009 2

I.2 Balance of payments, 20032009 4

I.3 Foreign direct investment flows, 20042009 7

II. TRADE AND INVESTMENT REGIME

II.1 Main trade legislation, 2010 12

II.2 Principal notifications submitted by Honduras pursuant to the WTO Agreements,

June 2010 13

II.3 WTO dispute settlement cases to which Honduras is or has been a party, June 2010 15

ANNEX II.1: AID FOR TRADE

II.1 SPS issues of interest to Honduran exporters 24

II.2 AidforTrade flows: CRS proxies 26

II.3 Support from donors 27

III. TRADE POLICIES BY MEASURE

III.1 Rules of origin, 2010 32

III.2 Structure of MFN tariffs, 2010 33

III.3 Summary of MFN tariffs, 2010 34

III.4 Products for which the applied tariffs are higher than the bound tariffs, 2010 35

III.5 Summary of preferential tariffs, 2010 36

III.6 Products subject to import licensing 40

III.7 Subsidies notified to the WTO 54

III.8 Activities of the CDPC, 20062009 58

III.9 Threshold values for the application of tendering procedures, 2010 64

IV. TRADE POLICIES BY SECTOR

IV.1 Agriculture, selected indicators, 20032009 72

IV.2 Summary of agricultural measures 75

IV.3 Products subject to price bands, 2010 77

IV.4 Main indicators relating to the maquila industry, 20032009 84

IV.5 Breakdown of gross production value of the maquila industry, 20032009 85

IV.6 Financial legislation, 2009 90

IV.7 Trends in the commercial banking sector's net loan portfolio and

deposits received, 20032010 93

IV.8 Total premiums by segment, 20032009 95

IV.9 Honduras, insurance market, 20032009 96

IV.10 Main legislation on telecommunications, 2010 97

IV.11 Requirements for the provision of telecommunications services 98

IV.12 Telecommunications indicators, 20032009 100

IV.13 General freight movements, 20072008 102

APPENDIX TABLES

I. ECONOMIC ENVIRONMENT

AI.1 General merchandise exports and reexports (f.o.b.) by product, 20032009 111

AI.2 General merchandise imports (c.i.f.) by product, 20032009 113

AI.3 General merchandise exports and reexports (f.o.b.) by trading partner, 20032009 116

AI.4 General merchandise imports (c.i.f.) by trading partner, 20032009 117

II. TRADE AND INVESTMENT REGIME

AII.1 Description of preferential trade agreements involving Honduras, 2010 118

III. TRADE POLICIES BY MEASURE

AIII.1 Main taxes on goods and services which may be applied to imports, October 2009 121

IV. TRADE POLICIES BY SECTOR

AIV.1 Agricultural support programmes 124

AIV.2 Summary of GATS commitments 128

AIV.3 Special domestic financial system requirements 130

Honduras WT/TPR/S/234
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SUMMARY

1. The Honduran trade regime is relatively open, with an average tariff of 6percent in 2010, minimal use of nontariff barriers and an absence of contingency measures. Moreover, the procedures for drafting technical regulations and sanitary and phytosanitary measures have been much simplified in recent years. Since its first Trade Policy Review in 2003, Honduras has also made progress in other areas that affect production and trade; for example, it has adopted legislation on competition policy establishing the Commission for the Defence and Promotion of Competition, and has modernized the government procurement system. During the period under review Honduras concluded new preferential trade agreements, notably the Dominican RepublicCentral AmericaUnited States Free Trade Agreement (DRCAFTA), and the further integration of the Central American Common Market (CACM) continues to be its great priority. Honduras has maintained its traditional strategy of granting refunds to exporters, as well as tax concessions via free zones aimed at developing the manufacturing sector.

(1)  Economic Environment

1. Recent macroeconomic results have been positive for Honduras: the average annual rate of growth of real GDP was 4.5percent between 2003 and 2009 (higher than the 3.2 per cent recorded in 1992-2001); the average annual rate of inflation was 7 per cent; the fiscal deficit fell from 5 per cent of GDP in 2003 to 3 per cent in 2009; and the total external debt balance decreased from 71percent of GDP to 23 per cent. Despite these positive results, about one third of the population still live below the poverty threshold, and the economy continues to be fragile and exposed to external shocks. RealGDP is estimated to have fallen by 2.1per cent in 2009, mainly due to the difficult internal political situation and the global economic crisis, which substantially reduced exports and remittances from Honduran workers (which accounted for about 17 per cent of GDP in 2009).
2. The Honduran economy is heavily dependent on international trade. The ratio of trade (exports and imports) to GDP is among the highest in the Central American region, with an annual average of 133 per cent during 20062008. The country's merchandise trade deficit quadrupled between 2003 and 2008 due, mainly because the nominal exchange rate remained fixed as from October 2005, which caused the real exchange rate to appreciate thereafter with a consequent loss of export competitiveness. The external current account deficit (as a percentage of GDP) rose from 7 per cent in 2003 to 13 per cent in 2008; it is estimated that this deficit fell to 4 per cent in 2009. To a large extent, the current account deficit has been financed by substantial inflows of remittances and foreign direct investment.
3. Honduran external trade is characterized by limited diversification, in terms of products and trading partners. The country's main export products are those of the maquila industry, which accounted for 55percent of total merchandise exports in 2009, followed by exports of general goods (44percent), and other products (1 per cent). Almost 90 per cent of maquila exports are textile products and these also account for about 80per cent of total maquila industry imports. The United States is the destination for almost 80per cent of Honduran maquila industry exports, and the origin of 80 per cent of imports.
4. The maquila industry excluded, the main exports are still coffee, bananas, and crustaceans; agricultural products account for about two thirds of general goods exports. Nearly three quarters of the country's total imports (excluding maquila) consist of manufactured products, particularly machinery and transport equipment. Since the entry into force of the DRCAFTA, the United States has consolidated its position as the main market for Honduran exports, absorbing about 40percent of general goods exports. Due to the intensification of the CACM's integration efforts, since 2007 El Salvador, Guatemala, Nicaragua, and Costa Rica have together ranked second as a destination for Honduran exports, relegating the European market to thirdplace. The United States has also consolidated its position as the main source of imports of general goods into Honduras, with more than one third of the total.
5. Honduras is a net importer of services, with an average annual deficit of about US$240 million during 20032009. Total income from services (mainly travel services) increased from US$591 million in 2003 to US$896 million in 2009, while total expenditure on services (largely transport and travel services) rose from US$753 million to over US$1.089 billion.

(2)  Trade and Investment Policy Framework

1. Honduras is a founding Member of the WTO and attaches great importance to its participation in the multilateral trading system. It regards this system as a fundamental guarantee of nondiscrimination and the nonutilization of unilateral trade measures. Honduras grants at least MFN treatment to all WTO Members. It has participated actively in the Doha Development Agenda (DDA), making proposals both individually and collectively with other Members. Honduran interest in the DDA is focused on issues relating to agriculture.
2. Honduras has accepted the Fifth Protocol to the General Agreement on Trade in Services (GATS). Although Honduras did not participate in the negotiations on basic telecommunications and has not signed the Fourth Protocol to the GATS, it adhered to the Basic Telecommunications Reference Paper in 2005 and unilaterally submitted new specific commitments in that subsector. None of its trade practices has been challenged under the WTO's dispute settlement mechanism. On the other hand, Honduras has been a complainant in six cases, two of them initiated during the review period, and has participated in other cases as a third party.
3. Preferential agreements have been converted into increasingly important elements of Honduran trade liberalization. In addition to participating in the CACM, Honduras hasfree trade agreements with Chile, Colombia, United States, Mexico, Panama, Dominican Republic, and Chinese Taipei. TheDRCAFTA entered into force during the review period, as did the agreements with Colombia, Panama, and Chinese Taipei. Moreover, in May 2010 Honduras and the other members of the CACM completed negotiations on the Association Agreement with the European Union. Honduras has also signed agreements with countries that participate in the Latin American Integration Association (LAIA), notably a Partial Scope Agreement with Venezuela, and together with the other members of the CACM is negotiating free trade agreements with Canada and CARICOM.
4. Honduran investment legislation guarantees national treatment for foreign investors; however, in order to invest in some sectors prior authorization is required from the Government. Prior authorization is also needed, for reasons of public interest, for foreign investment in agricultural and agro-industrial activity that exceeds certain limits, in financial services and insurance, and in educational services provided by the private sector. Honduras has signed several bilateral agreements on the promotion and reciprocal protection of investments; it has not signed any doubletaxation agreements.

(3)  Measures Affecting Imports

1. Since its last Review, Honduras has not made any significant changes in its import regime. Honduran customs procedures are governed by the Central American Customs Code, its regulations, and the National Customs Law. Honduras has adopted measures to modernize customs through the introduction of authorized economic operators (AEO) and the adoption of a new automated system for the administration of customs procedures, which has made it possible not only to reduce clearance times but also to increase revenue. Honduras reserved the right to apply minimum values to imports of several categories of goods until the WTO exemptions expired in 2003. Honduras uses reference prices where there is reasonable doubt concerning the value declared.
2. The average MFN rate applied was 6per cent in 2009, almost the same as that recorded in the last Honduran Review (6.1percent in 2003). Agricultural products (WTOdefinition) were subject to an average tariff of 11.1 per cent, while the average tariff for nonagricultural products was 5.1 per cent. The price band system continues to be applied for certain staple grains. The tariff rates range from 0 to 164 per cent, but most are less than 40per cent. All tariffs are bound: about 85per cent of all tariff lines are bound at 35per cent, with less than 1 per cent at higher levels and the rest at levels below 35 per cent. The Secretariat has identified seven tariff lines on which the applied rate is higher than the corresponding bound rate.
3. The Central American Regulations on Unfair Trade Practices and on Safeguard Measures, adopted by Honduras in 2007, constitute the relevant legal framework for these measures. Honduras did not apply antidumping or countervailing duties or safeguard measures during the review period.
4. Since its last Review, Honduras has taken steps to make the formulation and application of technical regulations and sanitary and phytosanitary measures more transparent. Honduras guarantees the application of sanitary regimes and technical regulations that do not constitute technical barriers to trade and are intended to ensure the quality and safety of products and services, and has continued with the process of harmonization of sanitary and phytosanitary measures at Central American level.

(4)  Other Measures Affecting Trade

1. Honduras has notified the WTO of three subsidy programmes under which it grants tariff and tax concessions. It may maintain these programmes until its per capita gross national product (GNP) reaches US$1,000 in constant 1990 dollars for threeconsecutive years. Exporters are still entitled to refunds under the drawback system.
2. Honduras has notified the WTO that between 2004 and 2008 there were no subsidies for exports of agricultural products. However, one enterprise continues to benefit from the (now suspended) Agricultural Export Zones (ZADE) regime, established in 2001, and exports 100 per cent of its production. The ZADE are intended to promote exclusively exportoriented agricultural production, through the establishment of "agricultural export enterprises". The enterprises included in this regime are exempt from the payment of all customs duties and other internal taxes on the goods they import and/or export; these enterprises are also exempt from the payment of income tax. Honduras does not tax exports; coffee is subject to an export levy.
3. In addition to incentives for promoting exports, Honduras has support programmes for exporters. These are intended to improve competitiveness and access to international markets and are aimed primarily at agro-industrial products. Despite the emphasis placed by Honduras on promoting exports and supporting the small exporter, the country has no official export financing or insurance programmes.
4. A major change in Honduran trade policy since its last Review in 2003 has been the adoption of legislation on competition policy and the establishment of institutions for its implementation. This is an important initiative since there is a high degree of concentration in the Honduran market. The legal framework for government procurement has not changed substantially since 2003 and the same procurement procedures are still in place. The Honduran government procurement system has mechanisms designed to favour domestic enterprises and goods.
5. Mainly due to the entry into force of the DRCAFTA, the Honduran legal framework for intellectual property rights has been amended, primarily with a view to providing greater protection. Honduras has changed the terms of protection while modernizing the institutions responsible for administering intellectual property law and training their staff, with a view to facilitating and streamlining the registration procedure.

(5)  Sectoral Policies

1. The agriculture sector's share of GDPdeclined during the review period and its growth was erratic. Nevertheless, it continues to be of great importance for the development of the Honduran economy, absorbing about one third of the economically active population and generating more than 50percent of the foreign currency earned from merchandise exports, maquila excluded. Honduras therefore considers it necessary to maintain protection and offers this sector greater tariff protection than other sectors. Ithas retained the price band system and the "absorption agreements", which permit the importation of certain grains with tariff preferences if the processors also purchase a specific percentage of the national production of these grains. The country has a number of agricultural support programmes that have been notified to the WTO. Despite the measures to promote the sector, it continues to be characterized by low productivity and modest rates of growth.
2. The manufacturing sector's share of GDP, like that of agriculture, declined during the review period. The sector's tariff protection is below the average applied