EUROPEAN COMMISSION Brussels, 5.4.2017 COM(2017) 160 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Third Annual Report on the Implementation of Part IV of the Agreement establishing an Association between the European Union and its Member States, on the one hand, and Central America on the other



REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Third Annual Report on the Implementation of Part IV of the Agreement establishing an Association between the European Union and its Member States, on the one hand, and Central America on the other 1.Introduction 2016 was the third year of implementation of the the Trade Pillar (Part IV) of the EU-Central America Association Agreement which establishes an Association between the European Union and its Member States, on the one hand, and Central America on the other (hereinafter, “the Agreement”) . Under Article 13 of Regulation (EU) No 20/2013 of the European Parliament and of the Council of 15 January 2013 implementing the bilateral safeguard clause and the stabilisation mechanism for bananas of the Agreement establishing an Association between the European Union and its Member States, on the one hand, and Central America on the other (hereinafter, “the Regulation”), the Commission is to present an annual report to the European Parliament and the Council. The present report is presented following this requirement. 2.OVERALL ASSESSMENT: EVOLUTION OF TRADE 2.1. Methodology In line with the methodology used in previous reports on the implementation of the Agreement , EU imports are calculated on the basis of EUROSTAT data extracted in October 2016 whereas EU exports to Central America are based on Central American statistics. Since Central American statistics are provided in US dollars these have been converted into Euros by applying the annual exchange rate used by EUROSTAT . Naturally, the causes for the fluctuation of trade flows reflect a multitude of factors and cannot be attributed solely to the existence or degree of advancement in the implementation of the Agreement. 2.2. Evolution of overall trade flows with Central America (goods) On the basis of the statistics presented by the Secretariat for Central American Economic Integration (SIECA), from 2014 to 2015 trade flows on the one hand between Central American countries and the rest of the world decreased by 6%. On the other hand, EU trade flows with the rest of the world increased 3.6% during the same period (EUROSTAT). In the context of this broader pattern, bilateral trade between the EU and Central America proved quite resilient: Total trade flow between the two regions decreased only moderately (by 0.7%) to €10.5 billion. The EU's trade balance with Central America presented a positive balance of €162 million in 2015 (after showing a deficit of €853 million the previous year). Trade flow between EU and Central America and annual growth (in million Euros - 2015) Country EU Exports(*) EU Imports(**) Total flow Costa Rica 1,312 23.1% 2,250 -40.4% 3562 -35% Guatemala 1,194 22.3% 865 25% 2059 23.3% Honduras 592 29.1% 1,015 20.5% 1606 24% Nicaragua 379 54.2% 326 14.5% 705 32% Panama 1,278 8.2% 555 26.1% 1833 13% El Salvador 603 29.8% 195 5.5% 798 23% TOTAL 5358 22% 5,196 -16.8% 10,526 -0.7% *Export data based on statistics reported by each country in the region **Import data based on EUROSTAT Source: EUROSTAT and SIECA 2015 saw an overall increase of 22% in EU exports to Central America, according to Regional Central American statistics, whereas EU imports by value from Central America fell by 16.8%. However, overall positive trends should be noted in the trade flows between the EU and each individual Central American country, except Costa Rica, for which trade decreased from €3.77 billion to €2.25 billion, due to the virtual disappearence of office and telecomunication equipment manufactures exports by a large ITC multinational in the country. For a second year in a row, the relocation to South East Asia of its previously major exporter of IT components has had a significant negative impact on the total value of its exports to the EU. Imports into the EU from Costa Rica of office and telecomunication equipment decreased by almost 94% in 2015. Total exports of IT equipments went down from €2,372 million in 2013 to only €147 million in 2015.

2013 2014 2015 2013-15

% change Office and Telecom equipment 2,372 1,925 147 -93.8 % Breakdown of EU imports from Central America and their yearly evolution (in m Euros) Source: EUROSTAT and Directorate-General for Trade (DG TRADE) On the whole, in this third year of implementation of the Agreement - and discounting the significant decrease in exports of IT components from Costa Rica – EU exports and EU imports to and from each of the six countries in the region have increased by over 20% in 8 of the 12 export/import combinations possible. This is reflected in total trade flows which have increased by more than 20% for 4 of the 6 countries (and above 10% for the fifth). Costa Rica still being the outlier in 2016 due to specific and endogenous reasons which are unlikely to continue in future years. The concentration of Central American exports to the EU to a number of key export products continues even though, according to SIECA, the number of products exported to the EU increased in 2015 by 5.3% compared to the previous year. It now covers 1615 products (6 digit tariff lines CA HS). The following were the main import sectors from Central America (by HS section) for 2015: vegetable products (51%); foodstuffs, beverages and tobacco (11.1%); optical and photographic instruments (8.1%). The EU´s main exports sectors to the region were: machinery and appliances (23.8%), products of the chemical or allied industries (22.6%), transportation equipment (14.3%). The main destinations of EU exports to Central America in 2015 were Costa Rica (25%) followed by Panamá and Guatemala (24% and 22% respectively). The most exported products in 2015 were pharmaceuticals (11% of EU exports) followed by motor vehicles (7%), and articles made of steel (5%). At the same time, significant growth in Central American exports in 2015 was recorded for the following products : ·Optical and photographic instruments (HS 90) imports into the EU increased by 46% from € 284.8 million to €417 million. ·Medical devices, EU imports rose by 32% (from € 194 million to € 257 million). ·Coffee imports rose by 33% (from €702 million to €935 million). The region has been able to overcome the losses caused by the coffee rust epidemic that heavily impacted Central America`s coffee production and exports in 2014. Guatemala increased its exports to the EU from € 691 million in 2014 to € 865 million in 2015. Some of the exported goods that have shown important growth are: edible fruit and nuts (HS08) grew up to €70 million (over 130% growth), mineral ores (HS26) grew up to €69.2 million (168% growth) and edible vegetables (HS07) up to €50.3 million (up 30%). Nicaragua showed the highest percentage growth in trade flows (32% in 2015). This dynamism is marked by a strong increase of EU exports to the country (up 54%) as well as EU imports which showed a 14.5% increase from €285 million to €326.5 million. Increase of EU exports to Nicaragua were particularly intense in the following headings: 141% in Electrical machinery (HS85) up to €87 million, 202% in Stamps and Printed Books (HS 49) up to €11 million, and 63% in Rubber (HS 40). Similarly, increases of imports from Nicaragua were significant, in particular under the following headings Edible fruits and nuts (HS08) imports grew up to €6.5 million, coffee up to €94 million (up 47%) and oilseeds (HS12) from €25 million to €35 million (up 29%). Trade flows between Honduras and the EU also showed significant increase. EU exports grew mainly under the following headings: 88% in Electrical Machinery (HS85) up to €132 million, 154% in Pharmaceutical Products (HS30) and 98% in Chemical Products (HS38). Total imports into the EU grew from € 841 million in 2014 to € 1.01 billion the following year. Some of the traditional products that showed the highest growth were: coffee (HS09) from €447.3 million to €607.5 million (up 36%), tobacco (HS24) up 56% and edible vegetables (HS07) which grew from €11.6 million to €19.3 million (up 66%). EU imports from Panama increased 27% due to the growth in headings such as: tyres (HS4011) up to € 62.4 million (up 72%), Animal Fodder (HS23) up to € 7.6 million (123%) or more important transactions in the shipping industry, Ships and Boats (HS89) more than doubled up to € 201 million. The exports of coffee (HS09) – not a traditional commodity from Panama to the EU - also grew by 66% . Positive variations were also significant in EU exports to Costa Rica (up 23%) and El Salvador (up 30%). In Costa Rica, the following headings saw particular vigour: 21% in Pharmaceutical Products (HS30), 79% in Vehicles (HS 87) and 38% in Chemical Products (HS38). In El Salvador, the increases of 53% in Mecanical Machinery (HS84), 75% in Electrical Machinery (HS85) and 60% in Medical Devices (HS90) deserve special mention. 2.3. Use of tariff preferences under the Agreement The use of the tariff preferences granted by the Agreement can be estimated by assessing the fraction of the trade flow which is carried out within the framework of the Agreement. This requires detailed custom clearance data. Central America has informed the EU that the databases managed by their respective Customs authorities are not currently adapted for a regular exchange of detailed statistics to analyse the tariff preference, with the exception of Costa Rica which provided the EU with such data.

For 2015, Costa Rican statistics show that 16.6% of total EU exports to Costa Rica were made under the benefits provided by the Agreement and additionally 13.2% of tarriff lines were fully liberalized. In so far as EU imports originating from Central America are concerned, 53% of this flow (in value) was made under the aegis of the Agreement. 2.4. Use of tariff rate quotas (TRQs) The Agreement provides for tariff rate quotas (TRQs) which grant the other party a preferential tariff treatment up to the quota’s quantitative threshold. Above this threshold, imports are subject to the applicable Most-Favoured Nation (MFN) tariff. The Association Agreement grants eight TRQs to Central America on products that did not have any preferential access to the EU market prior to the entry into force of the Agreement. In 2015, Central America used the available TRQs for products originating in Central America for only two categories (cane sugar and rum). Origin Products Unit TRQ volume EU Import Utilisation rate Central America Garlic ton 550 0 0% Rice 22,000 0 0% Bovine meat 10,450 0 0% Mushroom 275 0 0% Manioc starch 5,000 0 0% Sweetcorn 1,680 0 0% Central America except Panama Sugar 159,000 158,993 100% Rum in container > 2 l Litre Pure Alcohol 7,600 2,187 28.8% TRQs granted by the EU to Central America – Utilisation in 2015 In addition to TRQs, the EU also granted Central America a derogation to the rules of origin under specific quotas for 118 tariff lines. In the second year of application (2015) imports under these quotas remained very low. Some of the goods that benefitted from the preferential treatment were tuna loins (Central American quota) with a 18% utilization rate, briefs and panties from Costa Rica with 27%, brassieres from Costa Rica with a utilization rate of 100% and pantyhoses from El Salavador with 14%. Central America granted the EU TRQs on four specific products. EU exporters made use of the opportunities offered by these TRQs in 2015, although there continues to be a margin of growth given that current utilisation rates remain under 50% in the best of cases: Products Quota (tn) Annual increase Volume (tn) Utilisation rate Cured hams 990 45 260 26% Powdered milk 1,240 95 148 14% Cheese 2,345 150 1,155 44% Prepared swine meat 990 45 51 4.9% TRQs granted by Central America to the EU – Utilisation in 2015 2.5. Trade in Services At the time of writing, data for trade in services for 2015 was not available (the lag behind data for goods is well known), so figures for 2014 will be examined. These amounted to €5.9 billion (a decrease of 3% compared to 2013). In 2014, Panama remained the major trading partner in services (53% of total trade flow in services with the region) followed by Costa Rica (21%) and Guatemala (13%). Country 2013 2014 % Credit Debit Total Credit Debit Total Total Costa Rica 631,3 499,3 1130,6 678,1 563,2 1241,3 10% El Salvador 224,8 90,1 314,9 231,7 83,4 315,1 0% Guatemala 874,9 202,5 1077,4 535,2 225,8 761,0 -29% Honduras 195,0 187,4 382,4 160,3 89,6 249,9 -35% Nicaragua 204,7 48,7 253,4 153,7 91,1 244,8 -3% Panama 1456,4 1580,1 3036,5 1525,4 1644,4 3169,8 4% Total 3587,1 2608,1 6195,2 3284,4 2697,5 5981,9 -3% Trade in services between Central America and the EU in 2014 (In m Euros) Source: EUROSTAT Honduras and Nicaragua – under €300 million each in total flows - saw very significant fluctuations (in percentage terms) of their trade figures from 2013 to 2014 seeing a dramatic fall on the debit side (-52%) in the case of Honduras and an almost doubling of the same (87%) in the case of Nicaragua. The larger markets of Panama, Costa Rica and Guatemala saw more moderate variations (generally under 10%) as did El Salvador. 3.ACTIVITIES OF THE IMPLEMENTATION BODIES 3.1. Sub-Committee on Technical Barriers to Trade (TBT)

On 2 June 2016, the sub-committee on TBT reviewed the following topics via videoconference (VCR): ·The EU raised specific trade concerns on onerous registration processes required to put products on the market in in Central America, and lack of progress towards internal processes of technical harmonisation. ·The EU presented a specific trade concern on the introduction of technical regulations (ice cream, fruit juices, and alcoholic beverages) by Panama. ·The EU also expressed concern on "certificates of free sale" requested in Guatemala. Finally, Central America was invited to make further progress on the effective implementation of a series of region-wide technical regulations which are ready to be adopted to ensure follow up to Article 305 of the agreeement and to further regional economic integration. 3.2. Board on Trade and Sustainable Development From 14-16 June 2016, the EU and Central America held the meetings of the institutions in charge of monitoring the implementation of the Trade and Sustainable Development provisions of the Agreement (see part 4 below). 3.3. Sub-Committee on Intellectual Property On 15 June 2016, the third meeting of the sub-committee on Intellectual Property Rights (IPR) took place to review in particular the following issues: ·The protection and enforcement of IPR in Central America and especially Geographical Indications (GIs), as well as studying ways in which to streamline registration procedures. ·Possible actions to foster an enabling environment for potential (essentially privately owned) technology transfer. On GIs, the EU expressed concerns on the on-going litigation in Guatemala between "Parmigiano Reggiano" and "Prosciutto di Parma" and the local trademark "Parma", as well as on the publication by Honduras of a list of alleged generic terms, some of which raised concerns with regard to their possible conflict with EU GIs protected via the Agreement. This meeting also provided the opportunity for an exchange of views on possible working arrangements to facilitate the updating of the list of protected GIs. 3.4. Sub-Committee on Sanitary and Phytosanitary Matters (SPS) In the third meeting of this sub-committee, held on 14-15 June 2016, the EU highlighted the following: ·The importance for Central America to fulfil procedures established in the Association Agreement to ensure that market access requests are handled in a timely and transparent manner, including the approval of lists of establishment and verifications; ·The importance of complying with standards, guidelines and recommendations of the international standard setting organisations; ·The need to present scientific information to support legislation and import requirements that deviate from international standards. ·The need for Central American countries to continue with the process of implementing the provisions on regional economic integration which will facilitate trade relations. 3.5. Sub-Committee on Customs Procedures, Trade Facilitation, and Rules of Origin

Topics discussed on 13 and 14 June 2016 during this sub-committee included: ·The fulfilment of Central America´s regional integration commitments in the area; and ·Draftingtwo explanatory notes in the area of rules of origin to solve practical problems encountered by Central America. The Parties worked towards agreement on the common interpretation of certain aspects of Annex II through Explanatory Notes on the filling out of EUR.1 movement certificates and the appropriate treatment of errors or minor mistakes. Moreover, the Parties agreed to update the classification system by the entry into force of the latest version of the WCO Harmonized System Nomenclature (HS 2012). The final list would be adopted by the Association Council by written procedure. Finally, Central America requested extending the possibility to cumulate tuna originating from Mexico and Chile. The EU agreed to analyse the issue subject to the necessary cooperation being in place between the countries. 3.6. Sub-Committee on Market Access for Goods On 13 June 2016, during the meeting of this sub-committee, the Parties reviewed commitments taken during previous meetings and discussed issues of EU interest, notably: ·Costa Rica´s commitment to review its excise duty system for beers; ·The commitment taken by Costa Rica to remove tax discrimination for spirits as of 1 October 2017 (as stipulated in the Agreement); ·Nicaragua charging a fee for the scanning of goods at border checkpoints; ·Honduras’ import licensing system for the importation of onions. The EU and Central America agreed that access to reliable, updated and detailed statistics was essential for trade policy and committed to continue exchanging statistics at the regional level. 3.7. Ad hoc meeting on Government Procurement The Parties agreed to create a temporary technical ad hoc working group on Government Procurement that met for the first time on 16 June 2016. While the Agreement does not establish a sub-committee on this topic, it has become clear that it is suitable to address government procurement under the agreement. Parties exchanged information on legislation in different Central American countries and their conformity with the provisions of the Agreement. The EU stressed in particular practices recently adopted by Panamanian authorities that needed revision in light of the Agreement. As provisions of its law on government procurement were currently under review, the EU urged Panama to introduce the necessary changes to its legislation. 3.8. Association Committee On 23 June 2016, the Association Committee held its third meeting to review the work carried out by the different subcommittees and to discuss other trade related issues. The EU explained the importance of full GI protection in Central America and expressed concerns in regard to recent practices in Guatemala and Honduras. Moreover, the EU recalled Central America´s commitments to make their best endeavours in the implementation of internationally agreed standards as regards, inter alia, financial services, the fight against money laundering, terrorism financing, and tax evasion. The EU presented its iniatiatives on corporate taxation (PAN-EU list, BEPS) and invited Central America to work jointly on these issues. The EU also urged Costa Rica to put an end to tax discrimination currently applied to beer and as agreed in their Joint Declaration, as well as Panama to comply with the Agreement´s chapter on government procurement. As regards regional economic integration, Central America explained that the fulfilment of the commitments taken towards the EU was followed very closely by Central American Trade ministers in their meetings as COMIECO in the framework of SIECA. The EU insisted on the importance of implementing certain technical regulations as soon as possible,

As regards amendments to the Agreement resulting from the accession of Croatia to the EU, the Parties recognised that, despite some progress, there was still a gap between the approaches as regards the methodology to assess possible compensation following Croatia’s accession. The EU urged Central America to adopt a constructive approach, especially given that the EU had already concluded discusions with all other preferential partners of the EU in Latin America with satisfactory solutions for both parties. It was agreed to continue the dialogue with a view to finding an agreement as soon as possible. 4. FULFILLMENT OF OBLIGATIONS ON TRADE AND SUSTAINABLE DEVELOPMENT 4.1 Institutional Aspects The third meeting of the Board on Trade and Sustainable Development was held in Honduras on 15-16 June 2016. The Board exchanged information on labour and environmental issues including topics such as social dialogue, non-discrmination, responsible value chains, circular economy, and wildlife trade. The "Trade for All" Communication was highlighted by the EU, with its values agenda being of particular relevance to the TSD Board. A meeting of the Civil Society Dialogue Forum – comprising representatives of EU and Central American civil society – was held on 17 June 2016. Civil society representatives from all Central American countries except Panama and from the EU were present. A workshop on Trade Schemes and Practices for Sustainable Development and a meeting of advisory group members from both regions were also held. Civil society representatives presented a joint declaration to the Board, to which the Board committed to respond at a later stage. For further information see http://www.eesc.europa.eu/?i=portal.en.events-and-activities-3rd-eu-central-america . 4.2 Implementation of International Labour Organization (ILO) Conventions During the meeting of the Board on Trade and Sustainable Development, the Parties reported on their implementation of ILO conventions, and on recent legislative developments. El Salvador and Guatemala responded to questions raised by the EU regarding ILO Convention on freedom of association, respectively discussed as serious case and extremely serious and urgents case in the International Labour Conference the preceding week. It was noted that El Salvador and Guatemala were discussed in the ILO Supervisory mechanisms in June 2016 regarding their implementation of Convention 87 on Freedom of Association and the Right to Organise, on cases of violence and murders of workers representatives. The EU will continue monitoring the situation and promote cooperation with the ILO in this regard. 4.3. Implementation of multilateral environmental agreements During the Board meeting, Parties also exchanged views on environmental issues and i.a. Costa Rica described its strategy of using its ambitious low-carbon targets to drive innovation in productive sectors such as coffee and livestock. The EU flagged developments including the Circular Economy package and Wildlife Trade Action Plan. Central American parties and the EU noted that they had cooperated on a number of issues in the CITES Conference of the Parties held in September 2016, including through EU support to a proposal from Guatemala and three other CITES members to regulate trade in all Dalbergia (rosewood) species. 4.4. Development of a positive agenda for trade and sustainable development Discussions continued on on the development of a positive agenda, with some divergent views on the main focus of such activities. A proposal to organise an event on responsible global value chains in early 2017 received general support. 5. IMPLEMENTATION OF REGULATION (STABILIZATION MECHANISM FOR BANANAS) The Agreement provides a preferential customs duty on bananas for each Central American country under heading 0803.00.19 (fresh bananas) since the date of entry of the Agreement until the year 2020 (indicated in a tariff reduction table by year and country). This special treatment is based on a stabilisation clause that sets out an annual trigger volume for imports from the countries of Central America during the transition period. If as a result of the reduction of customs duties the level of imports of bananas be such as to cause or threaten to cause serious injury to the EU banana sector, the Regulation establishes the appropriate procedures to be adopted to avoid serious harm to this sector. The Commission has been monitoring the evolution of imports of bananas from Central American countries (as per Articles 3 and 13 of the Regulation) to assess whether the conditions set out in the Regulation are met so as to initiate a safeguard investigation or introduce prior surveillance measures. Whilst banana imports from Guatemala did exceed their trigger level by 27% in 2015, the Commission did not initiate, nor received requests to initiate, any safeguard investigation or introduction of prior surveillance measures. These imports were not considered to threaten the EU banana sector. At the same time, the other Central American countries did not come near to reaching their trigger levels under the stabilisation mechanism. In fact, at the end of 2015 the overall total volume that had benefitted from preferential treatment in Central America was only 65% of the established threshold. Country Used Volume Trigger Level % GUATEMALA 79 068 834 62 500 000 127 HONDURAS 4 440 601 62 500 000 7 NICARAGUA 8 389 294 12 500 000 67 PANAMA 207 829 771 468 750 000 44 COSTA RICA 927 260 997 1 281 250 000 72 EL SALVADOR 0 2 500 000 0 TOTAL 1 226 989 497 1 890 000 000 65