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WT/TPR/S/16719 June 2006
(06-2809)

Trade Policy Review Body


TRADE POLICY REVIEWReport by the SecretariatNICARAGUA



This report, prepared for the second Trade Policy Review of Nicaragua, 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 Nicaragua on its trade policies and practices.Any technical questions arising from this report may be addressed to Mr Ricardo Barba (tel. 022.739.50.88).Document WT/TPR/G/167 contains the policy statement submitted by Nicaragua.

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

CONTENTS

Page
SUMMARY OBSERVATIONS vii
(1) INTRODUCTION vii
(2) ECONOMIC ENVIRONMENT vii
(3) TRADE POLICY AND INVESTMENT FRAMEWORK viii
(4) MARKET ACCESS FOR GOODS ix
(5) OTHER MEASURES AFFECTING TRADE ix
(6) SECTORAL POLICIES x
I. ECONOMIC ENVIRONMENT 1
(1) MAIN FEATURES OF THE ECONOMY 1
(2) RECENT ECONOMIC RESULTS 2
(3) TRADE AND INVESTMENT RESULTS 4
(i) Trade in goods and services 4
(ii) Foreign direct investment 10
(4) PROSPECTS 11
II. TRADE AND INVESTMENT REGIME 13
(1) GENERAL FRAMEWORK 13
(2) TRADE POLICY GOALS 14
(3) TRADE LAWS AND REGULATIONS 14
(4) INTERNATIONAL TRADE RELATIONS 15
(i) World Trade Organization (WTO) 15
(ii) Preferential agreements 18
(iii) Other preferential trade agreements 22
(5) INVESTMENT FRAMEWORK 23
(6) TRADE-RELATED TECHNICAL ASSISTANCE 24
III. TRADE POLICIES BY MEASURE 25
(1) OVERVIEW 25
(2) MEASURES DIRECTLY AFFECTING IMPORTS 25
(i) Registration and documentation 25
(ii) Customs procedures, clearance and customs valuation 27
(iii) Rules of origin 28
(iv) Tariffs, other duties and taxes 29
(v) Import prohibitions, restrictions and licensing 41
(vi) Contingency measures 42
(vii) Standards and other technical requirements 43
(viii) Government procurement 45
(ix) Local content requirements 46
(3) MEASURES DIRECTLY AFFECTING EXPORTS 47
(i) Registration and documentation 47
(ii) Export taxes and minimum prices 47
(iii) Export prohibitions, restrictions, licensing and quotas 47
(iv) Export subsidies, financing, support and promotion 48
(v) Free zones 48
(4) MEASURES AFFECTING PRODUCTION AND TRADE 49
(i) Incentives 49
(ii) State-owned enterprises and privatization 50
(iii) Competition policy and price controls 51
(iv) Intellectual property rights 52
IV. TRADE POLICIES BY SECTOR 57
(1) OVERVIEW 57
(2) AGRICULTURE AND RELATED ACTIVITIES 57
(i) Main features 57
(ii) Policy developments 59
(iii) Crops 63
(iv) Livestock 65
(v) Fisheries 66
(vi) Forestry 67
(3) MINING AND ENERGY 69
(i) Mining 69
(ii) Energy 70
(4) MANUFACTURING SECTOR 73
(i) Main features 73
(ii) Selected industries 77
(5) SERVICES 78
(i) Main features 78
(ii) Financial services 80
(iii) Telecommunications and postal services 82
(iv) Transport 84
(v) Tourism 87

REFERENCES 91

APPENDIX TABLES 93


CHARTS

Page
I. ECONOMIC ENVIRONMENT
I.1 Nicaragua: exports, 1997-2005 6
I.2 Structure of merchandise exports and imports, 1995-2004 8
I.3 Direction of merchandise trade, 1995-2004 9
III. TRADE POLICIES BY MEASURE
III.1 Breakdown of applied MFN tariffs, 2005 32
III.2 Breakdown of MFN tariffs by ISIC sector, 2005 33
III.3 Tariff escalation at the ISIC 2-digit level, 2005 34
IV. TRADE POLICIES BY SECTOR
IV.1 Nicaragua's MFN tariffs by ISIC heading, 2005 76


TABLES

I. ECONOMIC ENVIRONMENT
I.1 Main economic indicators, 2000-2005 2
I.2 Balance of payments, 2000-2005 4
I.3 Foreign direct investment, 2000-2004 10
I.4 Nicaragua: economic prospects, 2006-2010 11
II. TRADE AND INVESTMENT REGIME
II.1 Nicaragua's main trade legislation, 2006 15
II.2 Main notifications made by Nicaragua to the WTO, as at 30 April 2006 16
III. TRADE POLICIES BY MEASURE
III.1 Import documentation requirements according to the origin of the goods, 2006 26
III.2 Comparison of documentation requirements for exports and imports, 2005 27
III.3 Structure of MFN tariffs in Nicaragua, 1999-2005 29
III.4 Summary analysis of Nicaragua's MFN tariffs, 2005 30
III.5 Exceptions to the bound ceiling of 40% 35
III.6 Tariff quotas determined by Nicaragua, 2001-2005 37
III.7 Breakdown of MFN and preferential rates in Nicaragua's tariff 39
III.8 Main intellectual property legislation 52
IV. TRADE POLICIES BY SECTOR
IV.1 Agriculture: area, production and yields, 1999-2004 58
IV.2 Agricultural support programmes, 1999-2004 61
IV.3 Livestock, 1999-2005 65
IV.4 Fisheries production, 2000-2004 66
IV.5 Volume authorized for commercial forestry, 2000-2004 68
IV.6 Value added, formal jobs generated and payment of mining royalties, 1999-2004 69
IV.7 Gold and silver production and exports, 2000-2005 69
IV.8 Relative levels of electricity production and consumption, 1999-2004 72
IV.9 Size of the manufacturing sector, 2002 73
IV.10 Cost structure for cotton trousers imported into the United States, 2005 78
Page


IV.11 Services and central government, 2004 79
IV.12 Selected telecommunications indicators, 1999-2005 82
IV.13 Port traffic in Nicaragua, 1999-2004 84
IV.14 Comparative costs of shipping goods to the United States from Central America, 2005 85
IV.15 Tourist arrivals in Nicaragua by geographical region, 2001-2005 87


APPENDIX TABLES

I. ECONOMIC ENVIRONMENT
AI.1 Structure of exports, 1995-2004 95
AI.2 Destination of exports, 1995-2004 96
AI.3 Structure of imports, 1995-2004 97
AI.4 Origin of imports, 1995-2004 99
III. TRADE POLICIES BY MEASURE
AIII.1 Applied MFN tariff averages by HS chapter, 2005 100
IV. TRADE POLICIES BY SECTOR
AIV.1 Applied MFN tariffs, by ISIC Rev.2 category, 2005 104
AIV.2 Summary of Nicaragua's sector specific commitments under the GATS 108



SUMMARY OBSERVATIONS

(1) INTRODUCTION
1. Since its first Trade Policy Review in 1999, Nicaragua has continued its transition to a more market-oriented economy. It eliminated the temporary import tariff introduced in 1994, and redrafted or amended its legislation in many areas, including the adoption of the Central American Regulations on Customs Valuation, the enactment of a new government procurement law, the approval of several laws and agreements relating to intellectual property rights, and the reform of the free zone regime. Moreover, a draft foreign trade law reorganizing the existing legislation, a new customs law and a law on competition are in preparation or ready for approval. With the exception of safeguards on certain agricultural products, Nicaragua has not resorted to any contingency measures since 1999, and non-tariff trade barriers appear to be limited. But although the average MFN tariff is relatively low, it has increased over the past years owing largely to the continued harmonization of the Common External Tariff (CET) of the Central American Common Market (CACM). Within the framework of the CACM, Nicaragua has also been active in negotiating a number of preferential trade agreements. In this respect it is particularly important, for the sake of efficiency and economic diversification, for Nicaragua to continue liberalizing its economy on an MFN basis and to anchor these efforts in multilateral commitments.
(2) ECONOMIC ENVIRONMENT
2. Nicaragua's recent macroeconomic performance has been broadly positive: the average annual real GDP growth rate was 3.7 per cent during the 1997-2005 period (up from -0.1 per cent for the period 1987-1996); inflation has been contained to some extent despite the increase in oil prices (9.6 per cent in 2005); its fiscal deficit (before foreign grants) went from 8.9 per cent of GDP in 2000 to 4.9 per cent in 2005; and the current account deficit as a percentage of GDP decreased from 20.1 per cent to 16 per cent in the same period. Nevertheless, about 40 per cent of Nicaragua's population lives below the poverty line, and the economy remains vulnerable, particularly because of the high public debt, extensive dollarization, and the weakness of the financial system. Furthermore, the difficult political environment in Nicaragua has complicated the steady implementation of its economic reforms, discouraging investment.
3. International trade in goods and services is increasingly important to the Nicaraguan economy, reaching 102.9 per cent of GDP in 2005 (as compared to 82.4 per cent in 2000), while the ratio of exports to imports of goods and services rose from 51.4 per cent to 56.5 per cent during the same period. The current account has traditionally recorded a deficit, but this has been financed by growing inflows of foreign direct investment and international assistance.
4. Since its previous Trade Policy Review, trade in goods in Nicaragua has recorded a growing deficit: from US$1.01 billion in 2000 (25.6 per cent of GDP), it rose to US$1.52 billion (30.4 per cent of GDP) chiefly as a result of the increase in fuel prices and the expansion of private consumption and investment.
5. Goods exports from Nicaragua increased from US$880.6 million in 2000 to US$1.552 billion in 2005. Meanwhile, exports under the special free zone regime grew from US$231 million in 2000 to US$682 million in 2005 while their share in total exports rose from 26.2 per cent to 43.9 per cent. This is partly the result of the increase in incentives granted under the free zone regime.
6. Nicaragua's export base is chiefly concentrated in agricultural goods (in particular coffee, peanuts, meat and crustaceans), which represent more than 80 per cent of total goods exports. Approximately one third of Nicaraguan goods exports go to the United States, a figure which is expected to increase with the entry into force for Nicaragua of the Central America–Dominican Republic Free Trade Agreement with the United States (CAFTA) on 1 April 2006. Practically two thirds of total goods imports are manufactures, chiefly machinery and transport equipment, and chemical products. Goods imports come mainly from the United States, which accounts for almost one fifth of the total.
(3) TRADE POLICY AND INVESTMENT FRAMEWORK
7. Nicaragua is an original Member of the WTO, and attaches considerable importance to its participation in the multilateral trading system. It considers the multilateral trading system to be a vital guarantee against discrimination and the use of unilateral trade measures. Nicaragua accords at least MFN treatment to all WTO Members. It has been an active participant in the Doha Development Agenda (DDA), having submitted numerous proposals individually or together with other WTO Members. Its main focus in the DDA has been on agricultural issues.
8. Under the GATS, Nicaragua has made commitments in practically all of the major services categories for the purpose of promoting investment, developing an appropriate services infrastructure, and improving the sector's trade balance. However, in line with its CACM obligations, Nicaragua listed in relation to financial services an MFN exemption under Article II of the GATS, as regards the free transfer of capital. Nicaragua participated in the WTO negotiations on financial services and the Fifth Protocol to the GATS; it maintained its observer status in the negotiations on basic telecommunications services. Nicaragua submitted an initial offer on services in the context of the DDA.
9. Nicaragua maintains an active programme of notifications to the WTO, but there have been some delays in areas such as agriculture, subsidies and countervailing measures, and State trading enterprises. It has made relatively little use of the WTO dispute settlement mechanism since its last Trade Policy Review, having participated in only four disputes: two as respondent (with respect to a tax on goods and services from Honduras and Colombia), and two as claimant.
10. Nicaragua pursues an autonomous trade policy which, however, must be compatible with its membership in the CACM. In addition to the CACM and CAFTA, Nicaragua has a bilateral trade agreement with Mexico that dates back to 1998. Moreover, together with the other member countries of the CACM (Costa Rica, El Salvador, Guatemala and Honduras), over the past few years Nicaragua has initiated or completed the following negotiations: an FTA with the Dominican Republic which is already in force; an FTA which has been completed but has not yet been approved with Chinese Taipei; and three that are currently being negotiated with Canada, Chile and Panama. CACM members are also holding talks on possible extra-regional FTAs, inter alia with the EC and CARICOM. Preferential agreements have become an important component of trade liberalization in Nicaragua, but their growing number raises concerns as to their administrative cost, their impact on market access transparency, and the risk of trade diversion.
11. Through its Law on the Promotion of Foreign Investment, which entered into force in 2000, Nicaragua opened up its investment regime to private investment, including foreign investment, except in areas of activity that are reserved for the State (for example electric power transmission and the water and sewerage system) or that are subject to certain restrictions, such as the pension fund, border zones, and certain specific transport areas. Nicaragua accords national treatment in the granting of investment incentives. It has signed bilateral investment agreements with several countries which complement the general principles of non-discrimination and investment guarantees laid down in its Constitution.
(4) MARKET ACCESS FOR GOODS
12. The simple average of Nicaragua's MFN tariff rose from 4.2 per cent in 1999 to 5.8 per cent in 2005, owing largely to the continued harmonization of the CACM's Common External Tariff. According to the WTO definition, the average applied MFN tariff on agricultural products was 11.4 per cent in 2005 (7.9 per cent in 1999) compared to 4.8 per cent for non-agricultural products (3.4 per cent in 1999). Nicaragua has bound all its tariffs, most of them (with 64 exceptions) at a ceiling rate of 40 per cent. This creates a considerable discrepancy between the applied and the bound rates, generating uncertainty as to the applied rates. All applied and bound tariffs are ad valorem.
13. In addition to customs tariffs, Nicaragua levies certain additional taxes on imports. These include a selective consumption tax (ISC) that applies to a limited number of non-essential goods, whether domestic or imported; a goods import services tax (TSIM) consisting of a customs commission of US$0.50 or the local currency equivalent on each gross tonne or fraction thereof; and VAT at a standard rate of 15 per cent.
14. Nicaragua has legislation that allows the use of contingency measures to restrict imports, and activated the special safeguard provisions of the WTO Agreement on Agriculture for four types of rice during the period 2002-2003. It has not used any special safeguards for those products since 2004. Nicaragua has not had recourse to anti-dumping or countervailing measures since 1999.
15. Nicaragua applies import prohibitions to protect human health, animal and plant life, the environment, or essential security or military interests, in conformity with its legislation or international commitments. Imports of certain categories of product are subject to non-restrictive licensing in the form of prior authorization, which is imposed to protect the public and/or national interest. During the period under review, Nicaragua notified the WTO of a significant number of new sanitary and phytosanitary measures as well as technical regulations.
16. Nicaragua has adopted measures to streamline import procedures and adjust its import regime to multilateral rules, in particular by adopting the WTO Customs Valuation Agreement's transaction value definition and eliminating minimum import prices.
(5) OTHER MEASURES AFFECTING TRADE
17. Nicaragua grants fiscal incentives to exports essentially under the free zone regime. Enterprises operating under that regime are exempted from the following taxes: tariffs, levies and sales tax on imports of machinery, equipment (including transport equipment for in-zone use) and inputs; export taxes on goods produced in the zone; VAT; income tax, 100 per cent for the first 10 years and 60 per cent thereafter; capital gains tax on real estate in free zones; taxes on the establishment, transformation, merger or reorganization of a company as well as stamp duty; municipal taxes; and indirect, sales or selective consumption taxes.
18. Between 1990 and 1995, most of Nicaragua's State-run firms were privatized, leased, returned to former owners or liquidated by the General National Public Sector Corporations Board (CORNAP). However, some activities that were traditionally administered by the State were not privatized until recently: the Northern Electricity Distribution Company (DISNORTE) and the Southern Electricity Distribution Company (DISSUR) were privatized in 2000, and the privatization of the Nicaraguan Telecommunications Company (ENITEL) was completed in 2005.
19. Since 1999, Nicaragua has introduced a series of initiatives to boost competition in its domestic markets, including the approval in 2005 of the Agreement on the Promotion and Protection of Competition in the Telecommunications Market; and at the beginning of 2006, the General Assembly was examining a draft law on competition. This effort to boost competition is important, since, the Nicaraguan economy, partly owing to its small size, tends to generate market concentration as, for example, in the case of financial services.
20. Prices in Nicaragua are generally market-determined, although there are a certain number of administered prices such as electricity rates, profit margins for pharmaceuticals for human consumption, and the retail selling price of butane gas.
21. Nicaragua is not party to the WTO Plurilateral Agreement on Government Procurement. However, in January 2000 it replaced its former legislation with the Law on Government Procurement, which enhances the transparency of the procurement process. Nicaraguan law provides for procurement to take place chiefly through open public tendering. According to the authorities, no price preferences are given to Nicaraguan suppliers over foreign suppliers.
22. Nicaragua has significantly updated its intellectual property legislation in recent years. A number of laws have been adopted with a view to bringing the country's domestic regulations into conformity with the TRIPS Agreement. At the same time, as a prerequisite for the entry into force of CAFTA, in March 2006 Nicaragua strengthened its legislation on patents, copyright, marks and other distinctive signs, and industrial designs. But although Nicaragua has consolidated the legal framework for the protection of intellectual property rights, some concern has been expressed as to the enforcement of those rights.
(6) SECTORAL POLICIES
23. Agriculture remains a key sector, accounting for more than 80 per cent of goods exports and employing a third of the labour force. In recent years, producers of export-oriented crops (for example coffee, peanuts and sesame) have improved their productivity more than the producers of traditional crops such as maize, beans, sorghum and rice. The output and efficiency of Nicaraguan fishing has also been steadily on the rise. Average tariff protection in the agricultural sector (Major Division 1 of the ISIC, Revision 2) increased from 6.6 per cent in 1999 to 8.5 in 2005. However, in the case of certain poultry cuts, tariffs were as high as 170 per cent.
24. All of Nicaragua's natural resources are owned by the State, which grants concessions for their exploitation. Crude petroleum is Nicaragua's largest import, accounting for about 10 per cent of total goods imports. Slightly more than half the population has access to electricity. The mining industry, whose basic legal framework dates back to the 1950s and 1960s, is currently being restructured. MFN applied tariffs average 2.2 per cent in the mining and quarrying sector (Major Division 2 of the ISIC, Revision 2) as opposed to 2 per cent in 1999.
25. Most of Nicaragua's manufacturing sector produces food and beverages. Generally speaking, the country's textiles and clothing industry has competed successfully at the international level since the expiry of the Multifibre Arrangement. The expansion of Nicaragua's free zones over the past few years has benefited the manufacturing industries through tariff concessions and tax credits. The average applied MFN tariff on manufactures (Major Division 3 of the ISIC, Revision 2) is 5.7 per cent, or excluding food processing, 4.7 per cent.
26. Services are the most important sector in terms of their share of GDP (54.2 per cent in 2005) and employment (68.4 per cent in 2004). Among the services subsectors, tourism is the main source of foreign exchange, with earnings from tourism accounting for 3.7 per cent of GDP in 2005. Nicaragua has taken steps to overcome some of the structural problems in specific areas of services activity: the financial services supervisory framework has been strengthened, and the telecommunications sector is being opened up. Nevertheless, Nicaragua needs to substantially improve its infrastructure (particularly roads and ports); build up an efficient financial system with


reduced intermediation margins that would foster increased economic activity; and reduce telecommunications and transport costs in order to improve the competitiveness of its exports.