Venezuela: February 1996
Serious economic problems in recent years, including a major banking crisis in 1994, have resulted in a loss of momentum in Venezuela's trade and economic reform programme begun in 1989.
Economic problems should not keep Venezuela from focusing on trade reform
Serious economic problems in recent years, including a major banking crisis in 1994, have resulted in a loss of momentum in Venezuela's trade and economic reform programme begun in 1989. According to a WTO Secretariat report on Venezuela's trade policies and practices, Venezuela has largely avoided reversing the reforms, but foreign exchange controls, introduced in 1994 to stem capital flight, may have significant effects on the country's trade régime. The report will be the subject of two days of discussion at the WTO on 12 and 13 February 1996.
Venezuela's efforts to liberalize its economy were spurred by lower prices in the world oil market. The petroleum industry has a dominant position in Venezuela's economy and oil, despite the significant impact of the production quotas maintained by Venezuela within the framework of OPEC, accounts for the lion's share of the country's exports. Petroleum also supplies inexpensive energy to domestic industries and represents a large source of government revenues, used not only to finance major advances in education and welfare, but also to support the extensive state involvement in the economy.
According to the report, economic liberalization was accompanied by a significant opening of the trade régime. This process was complemented by the security of access and improved transparency resulting from Venezuela's accession to the GATT in 1990 and by its subsequent membership in the WTO. The report states that Venezuela, a founding member of the WTO, agreed to further reduce its overall bound rate to 35 per cent by 2004, down by 15 per cent from the general ceiling level negotiated during its accession to GATT. Since 1992, Venezuela's applied tariff schedule has been based on the Common External Tariff of the Andean Group,(1) with most ad valorem rates being 5, 10, 15 and 20 per cent. A new tariff, introduced in July 1995, reduced tariff peaks affecting certain automotive items from 40 to 35 per cent.
The report notes that some agricultural items, i.e. meat, dairy products, sugar, various cereals, fats and processed foods, are subject since 1995 to the Andean Price Band system, a price system where floor and ceiling prices are linked to the moving average and spread over the previous five years of world prices. This raises questions about the predictability of such a form of border protection which exhibits many of the properties associated with variable levies. Venezuela maintains special safeguard provisions for 76 agricultural products.
According to the report, considerable progress has been made to liberalize Venezuela's services sector, which in 1993 represented 62 per cent of GDP. In the past, shielding services from foreign competition resulted in high costs and inefficiencies. The financial sector was further weakened by major shortcomings in the supervisory and regulatory framework. The banking crisis of 1994, which spilled over to the insurance industry, resulted in the government again having to acquire a large number of companies. Steps taken since 1994 have largely liberalized the sector and resulted in significant changes in its operations and structure.
State involvement in telecommunications services is now limited. The largely privatized national telephone company has a monopoly of basic services; however, competition is free in all non-basic services, with private operators having expanded rapidly since the opening of the sector in 1991. The report states that the introduction of a new telecommunications law and greater reliance on market mechanisms are seen as important steps for further improvements in the sector.
Since the late 1980s, Venezuela has entered into numerous bilateral and regional trading arrangements with its neighbours or with other countries in Central and South America. Venezuela is also involved in longer term, regional trade projects such as the free trade area for the Americas and the Latin American Integration Association. The report emphasises the need for such agreements to remain open and liberal.
While Venezuela's most pressing need is to overcome its macro-economic problems, it also needs to advance its trade reform programme. The report states that such changes are seen as a condition to allow Venezuela to respond to the challenges and opportunities presented by the Uruguay Round results.
Notes to Editors:
The WTO Secretariat's report, together with a report prepared by Venezuela will be discussed by the WTO Trade Policy Review Body (TPRB) on 12 and 13 February 1996. The WTO's TPRB conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system.
Two reports, together with a report of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete Trade Policy Review of Venezuela and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover development of all aspects of Venezuela's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the "new areas" of services trade and trade-related aspects of intellectual property rights are also covered. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992), Cameroon (1995), Canada (1990, 1992 & 1994), Chile (1991), Colombia (1990), Costa Rica (1995), Côte d'Ivoire (1995), Egypt (1992), the European Communities (1991, 1993 & 1995), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 and 1995), Kenya (1993), Korea, Rep. of (1992), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 & 1996), New Zealand (1990), Nigeria (1991), Norway (1991), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992 & 1994), Uganda (1995), Uruguay (1992) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: VENEZUELA
Report by the Secretariat Summary Observations
Despite serious economic problems in recent years, Venezuela has largely avoided reversal of the important trade reforms initiated in 1989 together with a major macro-economic reform programme. However, foreign exchange controls, introduced in 1994 to stem capital flight, may have significant trade effects.
The 1989 reform programme, undertaken in response to a deteriorating trade balance and major foreign exchange problems, entailed fiscal adjustments, tightening of monetary policy and a lifting of controls on prices and interest rates. A unified, flexible exchange rate was adopted. The economic reforms brought some visible signs of success in 1990-92, helped by the recovery of oil prices in 1990; GDP growth accelerated and inflation fell rapidly. In 1991, both Government finances and the trade account turned to surplus, while the external debt was completely restructured. However, the stringency of the fiscal measures contributed to a serious political crisis, and the pace of adjustment has slackened since 1992. The economy also suffered a series of setbacks, including a major banking crisis; real GDP fell in 1993 and 1994; inflation reached some 6 per cent in 1995.
The authorities have tried to counteract inflationary pressures through new controls on prices of basic goods and services. Because of concerns about social consequences, the Government has been reluctant to take new severe measures to reduce the fiscal deficit, which was exacerbated by the need to provide support for the failing banks. In June 1994, seeking to stem the fall in international reserves, the authorities imposed exchange controls on all transactions and fixed the nominal exchange rate (against the U.S. dollar), leading to a real appreciation and loss of competitiveness for many Venezuelan exports. The bolivar was devalued by some 70 per cent against the U.S. dollar in December 1995.
The liberalization of the trade régime, initiated in 1989, was complemented by the security of access and improved transparency resulting from Venezuela's accession to the GATT in 1990. The process involved a rationalization and binding of tariffs, as well as the lowering of both the maximum and average applied rates. However, escalation of applied tariffs, intended to promote local processing of domestic raw materials, remains a feature of the tariff structure, and some reductions on the rates on imported inputs for automobile assembly are conditional on compliance with local content requirements. Import prohibitions and licensing have generally been reduced to the extent necessary for security or health reasons or in keeping with international commitments; current exceptions include certain important consumer goods. Agriculture remains relatively protected. There have been advances in intellectual property protection and in competition policy.
Liberalization measures have also included steps to attract private investment and provide a more secure, level playing field for domestic and foreign capital. This process has resulted in the extension of the public debt conversion programme to foreign investors as well as a comprehensive opening of the banking and insurance industries and certain public works and services. Nevertheless, constitutional constraints continue to limit foreign participation in a number of key industries and services; access of foreign investors to activities such as the mass media, maritime transport and certain professional services is either prohibited or restricted, while mining (including hydrocarbons) is reserved to the State.
The State is thus still a key player in mining, manufacturing and services, including the supply of fuels and electricity, banking, insurance, transport and tourist facilities. However, steps are being taken to allow the participation of private capital, for example, through joint ventures and operational agreements in petroleum and the privatization of all state-owned hotels and tourist developments. This may go some way to open up Venezuela's market structure, in which vertically integrated groups, many state-controlled, are still prevalent. In 1993, manufacturing other than oil refining generated about 15 per cent of Venezuela's GDP, agriculture about 5 per cent and the services sector 62 per cent; the share of the petroleum sector in GDP was close to 18 per cent. This figure understates the rôle of petroleum as the cornerstone of the Venezuelan economy and the key to understanding major economic developments in the last 20 years. Oil accounts for the lion's share of Venezuelan exports, in spite of the significant impact of the production quotas maintained by Venezuela within the framework of the Organization of Petroleum Exporting Countries (OPEC). The sector also provides an abundant source of inexpensive energy for domestic industries and accounts for 60 per cent of government revenues, used to finance major advances in education and welfare as well as extensive State involvement in the economy. The appropriate balance between oil and other sectors is part of a broader debate on policies to manage highly variable oil revenues while fostering a more diverse economic structure that also reflects the long-term comparative advantage of non-oil activities.
Venezuela in world trade
Fuels and other mining products made up 76 per cent of exports of goods and services in 1993, down from 94 per cent in 1980; manufactures accounted for about 12 per cent. Key exports other than fuels are aluminium, motor vehicles (mainly to the Andean1 Group), iron and steel products, coal and coke, and canned and simply preserved fish.
The shares of manufactures and minerals in imports of goods and services, at about 59 and 3 per cent respectively, changed little between 1980 and 1993. Agricultural and tourism imports fell slightly to some 10 and 13 per cent, while transport services increased to 12 per cent. The main manufactures imported are automotive products and non-electrical machinery, each representing some 13 per cent of total merchandise imports in 1993.
The United States is Venezuela's most important trade partner; between 1980 and 1993 its share of imports decreased slightly to 46 per cent, while that of exports increased to about 56 per cent. The European Union is the second largest partner, imports having grown to reach 32 per cent in 1993 and exports remaining relatively stable at about 22 per cent. Imports from other Latin American countries have also grown, reaching some 18 per cent in 1993; exports, however, fell to around 32 per cent. Merchandise trade with MERCOSUR and Colombia, in particular, showed especially large increases.
Venezuela has no basic trade law; trade measures are based mainly on a series of laws, implemented through decrees and regulations. A number of modifications made in recent years to trade-related laws have resulted from commitments in regional fora, especially the Andean Group, and in the GATT and WTO. Such changes have affected laws on anti-dumping, standards and competition matters; new legislation is under preparation in areas such as customs valuation, export credit insurance, the free-zones régime and the protection of industrial property rights.
The Foreign Trade Institute (ICE), currently part of the Ministry of External Relations, is responsible for trade policy formulation and implementation, including sectoral coordination. It also provides representation in multilateral fora such as the WTO and regional or bilateral negotiations. The Ministry of Finance is responsible for tariff policy. Foreign exchange and monetary policies are formulated by the Central Bank of Venezuela. Policies affecting services are the responsibility of several public sector institutions, with the ICE coordinating international negotiations. Under legislation awaiting approval, ICE and the Ministry of Development are to be replaced by a Ministry of Industry and Commerce.
Venezuela became a formal participant in the Uruguay Round four years after the launching of the negotiations. It ratified the Marrakesh Agreement on 29 December 1994 to become a founder member of the WTO. For the time being, Venezuela does not plan to sign any Plurilateral Agreement. The authorities considered the results of the Uruguay Round particularly beneficial in areas such as textiles and clothing, anti-dumping, countervailing measures and professional and financial services, while issues concerning environmental and workers' rights protection are being approached cautiously.
Since the late 1980s, the strengthening and expansion of regional and bilateral agreements have been important elements in Venezuela's trade policy. At present, Venezuela participates in free trade area commitments in the Andean Group, where it applies the Common External Tariff (CET), and the Group of Three (with Colombia and Mexico). Bilateral arrangements exist with individual Central American Common Market (CACM) members, LAIA partners, MERCOSUR countries and Cuba, while Venezuela provides unilateral preferential treatment to certain imports from CACM and Caribbean Common Market (CARICOM) countries. Venezuela is also involved in longer term projects such as the negotiations for a Free Trade Area for the Americas and the Latin American Integration Association (LAIA).
Trade policy features and trends
Evolution of trade policies and instruments
Venezuela's trade policies changed direction in 1989, when an import-substitution policy began to be replaced by a more open régime, whose objective was to reduce anti-export bias and integrate the Venezuelan economy more closely into world markets. Under this policy, tariffs, import restrictions and export incentives have all been reduced.
On accession to the GATT, Venezuela bound its tariff at a general ceiling level of 50 per cent. These commitments were strengthened in the Uruguay Round by agreeing to reduce the overall bound rate to 35 per cent by 2004.
Since 1992, Venezuela's applied tariff schedule has been based on the Common External Tariff of the Andean Group, with ad valorem rates of 5, 10, 15 and 20 per cent (with certain exceptions). Tariff escalation is intended to promote industrial development, encouraging the further processing of regional raw materials in Andean countries. A new tariff, introduced in July 1995, reduced tariff peaks affecting certain automotive items from 40 to 35 per cent. Most rates are ad valorem, but specific and compound duties are levied on certain items.
Tariff concessions have been rationalized; concessional entry is limited to imports covered by preferential agreements or entering free zones, temporary admission, admission for improvement and stock replacement. Reduced or zero tariffs apply to inputs, raw materials and capital goods not produced or available in the Andean sub-region. Reduced rates also apply to completely-knocked-down (CKD) motor vehicle kits for assembly, subject to compliance by assemblers with local content requirements. Effective protection for the assembly industry is thus substantially higher than is evident from nominal rates.
In 1995, Venezuela adopted the Andean Price Band system to replace a similar national scheme in place since 1991. The Andean system applies to imports of certain agricultural items (including meat, dairy products, sugar, and various cereals, fats and processed foods) originating outside the region. Its stated objective is to stabilize the domestic price of those products in a manner consistent with the implementation of the Common External Tariff by all Andean Group countries. The system operates by adding an ad valorem levy to the CET rate whenever a reference price falls under a floor, or subtracting from such rate if the reference price exceeds a ceiling; floor and ceiling prices are linked both to the moving average and the spread of prices prevailing in world markets during the previous five years. As under this system applied rates could increase, in principle, beyond bound levels, questions arise about the predictability of such a form of border protection which exhibits many of the properties associated with variable levies.
In May 1995 customs clearance fees were abolished. Since April 1992, tariff surcharges have been applied to imports of 15 ten-digit NANDINA agricultural products, including certain types of cheese, maize and mineral waters. According to the authorities, these surcharges were to be eliminated by January 1996.
Since September 1994, a VAT-type wholesale and (luxury) consumption tax has been applied at rates ranging from 12.5 to 32.5 per cent on all goods, except some basic foods; on services; and on royalties from the exploitation of all types of intellectual property rights. Additional internal taxes on alcoholic beverages exclusively affect imported items; details of applied rates were not available to the Secretariat at the time of completion of its report.
Import prohibitions are limited to used or old model road vehicles, used clothing, used tyres and gambling games. Restrictive import licensing seems generally to have been eliminated, while import permit requirements are maintained on several items for environmental, health and security reasons. Exclusive import rights are maintained for a few items requiring prior import authorization. In recent years efforts have been made to modernize legislation and institutional arrangements in standards; in June 1993, new compulsory regulations were introduced affecting, inter alia, automotive parts, chemicals, foodstuffs, health products and toys.
Absence of comprehensive data on the extent of state-owned enterprises does not permit a full appraisal of the degree of state involvement in production and trade. Government procurement legislation permits, but does not require, preferential treatment for domestic suppliers; no data on procurement operations other than that of the State oil company, PDVSA, was available from the authorities.
As promised on its accession to the GATT, Venezuela has introduced an injury test, applicable on a reciprocal basis, in its anti-dumping and countervailing legislation. Between 1992 and 1995 anti-dumping duties have been imposed on three occasions on manufactured goods while countervailing duties have been used against cheese imports.
Export licensing applies to a few items including fertilizers, certain metals and radioactive substances. A surcharge, to be phased out in 1996, affects petroleum exports. The scope of export assistance for agricultural products, at a rate of 10 per cent of the f.o.b. value, has been reduced over recent years. In the Uruguay Round, Venezuela committed itself to cutting budgetary outlays for export subsidies by 24 per cent and eligible quantities by 15 per cent. Manufactured goods benefit from a duty drawback system on imports of inputs [and capital goods]. Export finance in domestic currency is provided on preferential terms, while foreign currency loans for this purpose are made on commercial terms.
The free zone régime, in existence for over twenty years, is the only regional development instrument; its incidence on the domestic economy remains limited.
Venezuela has met its WTO notification requirements in the areas of TRIMs, SPS (national enquiry points), rules of origin, anti-dumping, subsidies and countervailing measures, safeguards and textiles and clothing. Notifications have yet to be made on import restrictions, import prohibitions, licensing requirements and State trading, as well as on the fiscal credit and export finance programmes. Also not yet notified is the Andean Price Band system introduced in 1995.
Assistance to domestic production is provided through the supply of refined petroleum products at below world prices and through various other subsidies. For example, agriculture benefits from certain tax incentives, input subsidies on irrigation, electricity, and fixed producer prices on certain items. While the monitoring and fixing of maximum retail prices of certain food and services may disadvantage certain local firms, imported tobacco and cigarettes cannot be sold at a price lower than that of domestic brands. Competition policy introduced in 1992 has allowed for the examination of practices such as cartelization, mergers, boycotts and abuse of dominant position and could lead in the long run to stronger competition in the domestic market.
Under the minimum access opportunities of the WTO Agreement on Agriculture, the quantity of most agricultural imports subject to tariff quota commitments is to increase progressively by around 67 per cent by 2004; however, there will be no increases for a number of items including milk, grains and sugar. The mechanism for the administration of tariff quotas was to enter into force in 1996. Venezuela maintains Special Safeguards Provisions on 76 agricultural items. Under its obligations relating to the Aggregate Measurement of Support (AMS), Venezuela is expected to reduce support to domestic producers through price fixing and input subsidies, by 13.3 per cent.
Protection of intellectual property rights is based on domestic legislation introduced in 1993 and complementary Andean Group measures of 1994. The new legislation covers a broad range of works but problems allegedly exist with its enforcement. Venezuela is a signatory to almost all major international conventions on intellectual property, trademarks, copyrights and patent protection, and is a member of the World Intellectual Property Organization. The authorities consider that the implementation of the Agreement on TRIPS should require no significant changes, except for some border measures where modifications are under way.
Under the reforms initiated in 1989, serious efforts were made to reduce the anti-export bias of earlier policies, including through privatization and deregulation of the economy. However, such a bias persists through the continued application of sectoral policies favouring "activity leader" groups. The misallocation of domestic resources implied by such measures may not be offset by positive externalities generated by the sectors concerned.
Mining and petroleum, which receive little import protection, are most likely negatively affected by the present régime. While assistance to agriculture appears moderate compared with some major world agricultural producers, protection and domestic supports have fostered a high-cost agricultural sector isolated from international markets. The sector was greatly affected by the initial implementation of the liberalization programme; more recently, new supports have been introduced, mainly through the measures described earlier (the Andean Price Band system, preferential credit, etc.). Currently under study are a draft law on agricultural development and food security as well as a trade defence system and production incentives to counteract perceived distortions in world agricultural markets.
The current thrust of industrial policies is the promotion of selected industrial groups and domestic value added, mainly through tariff escalation. Some sub-sectors, such as petroleum refineries, iron and steel and aluminium, are major exporters. Apart from these, the manufacturing sector (particularly, food processing and the vehicle industry) has been inward-oriented and not particularly competitive in world markets beyond the Andean region . Low efficiency has been compensated in part by State subsidies through inexpensive inputs, especially under-priced fuels and other refined petroleum products. Assistance has more recently been provided through government-supported debt rescheduling and recapitalizations.
Liberalization has gone relatively far in the services sector, with further advances expected. In the past, high costs and inefficiencies resulted from the shielding of services from foreign competition; many services, particularly banking, were subject to powerful distortionary forces. Competition in the financial sector was hampered by severe restrictions on the entry of foreign banks and major weaknesses in the supervisory and regulatory framework. A major banking crisis erupted in 1994, when the authorities were compelled to nationalize or close a significant percentage of the banks in operation. The crisis spilled over to the insurance industry, with the Government again having to acquire a large number of companies. Steps taken since 1994 have resulted in a series of consolidations and the introduction of new or revised laws which are expected to change significantly the operation and structure of the financial sector.
Inefficient labour practices in ports also represented a serious handicap to non-mineral exporters; to address these problems the authorities initiated a restructuring process in 1991 which has seen port services privatized or transferred to state governments. Reforms undertaken to increase competition in shipping appear to have resulted in a significant fall in the number of shipyards and vessels under Venezuelan flag.
State involvement in the operation of telecommunications services is now limited. The largely privatized national telephone company has a monopoly of basic services; however, competition is free in all non-basic services, with private operators having expanded rapidly since the opening of the sector in 1991. The introduction of a new telecommunications law and greater reliance on market mechanisms are seen as important steps for further improvements in the sector.
In 1995, legislation was under preparation to introduce a new customs valuation scheme, adjust the free zones legislation to the WTO Agreement on Subsidies, create a Bank of Foreign Trade, and amend the regulations on consumer protection and industrial property rights; the introduction of regulations on import cartel practices was under study.
Trade policies and trading partners
Venezuela was recently included in the group of Andean Group countries which will receive extended benefits under the European Union's GSP scheme until 1998. The authorities consider this measure as an important incentive for non-traditional exports to the EU market. A tariff quota affects banana exports to the EU. Venezuelan exports of certain manufactured items have been subject to anti-dumping or countervailing duties in the EU and the United States, while a similar case has recently been under examination in Mexico.
Venezuela, together with other contracting parties, has been a complainant in two GATT dispute settlement cases concerning EU and member State import measures affecting bananas. A case has been initiated under WTO dispute settlement procedures on standards applied by the United States on imports of conventional or reformulated gasoline.
While Venezuela's most pressing need is to overcome its macro-economic problems, it also needs to carry forward the reform of its trade and related polices. This is a condition for achieving greater adaptability in the domestic economy to respond to the challenges and opportunities presented by the implementation of the results of the Uruguay Round. Thus, there is a need to extend the process of liberalization initiated in 1989 and to ensure that the application of foreign exchange controls does not adversely affect the interests of Venezuela's trading partners.
While integration within the Andean Group, in particular, and other regional agreements may present opportunities for economies of scale in an enlarged regional market, it is important that such agreement retain an open, liberal character as part of the multilateral system. The escalating structure of the Andean Group's common external tariff and other arrangements within the group suggest that certain sectors will retain significantly higher levels of protection and that others, including export industries, will continue to be implicitly taxed by the trade régime.
Further liberalization, and a sustained attack on anti-export bias, would imply moving away from the current policy of promoting selected industrial groups and eliminating inter-sectoral distortions to a more neutral trade régime. Such an approach would also be assisted by eliminating distortions provided through inexpensive inputs, especially under-priced fuels and other refined petroleum products. Greater reliance on market prices and reductions in the State's rôle in the economy, accompanied by changes to the investment régime, would go a long way to generating a more resilient economy and solid export base.Back to top
TRADE POLICY REVIEW BODY: VENEZUELA
Report by the Government - Summary Extracts
Venezuela is a country endowed with great natural wealth; its vast petroleum, mineral, hydroelectric and other resources have made it a power in the energy sector in the Americas.
The present world economic situation, characterized by globalization and internationalization of economies, has obliged Venezuela to reorient production activity and redefine its trade policy.
Since early 1989, it has been extremely active in the area of trade policy, including in particular full participation in the multilateral trading system through its accession to GATT in 1990 and subsequent membership of the World Trade Organization (WTO) in January 1995.
It has intensified trade integration with its close neighbours, consolidating the Customs Union of the Andean Group (Cartagena Agreement), and concluding free trade agreements with Colombia, Mexico (Group of Three) and the Central American countries (Trade and Investment Agreement). It has also concluded a "lopsided" free trade agreement with the Caribbean Community, as well as a number of bilateral trade agreements with Caribbean countries.
In addition, the Latin American integration process has been speeded up (agreements with Chile, Brazil and Argentina), and there has been concrete progress in setting up the Free Trade Area for the Americas.
During the next few years, Venezuela will pursue its policy of negotiation and opening up of trade so as to establish a broader economic area that will enhance the competitiveness of its economy internationally.
Economic and trade environment
The period beginning in 1989 was one of structural reform and adjustment for Venezuela. It marked the launching of the Government's adjustment and stabilization programme, aimed at attenuating the financial, monetary, exchange and balance-of-payments imbalances that affected the country's economic growth and its ability to penetrate foreign markets.
The new focus of economic policy was mainly on opening up the economy to the outside, promoting greater diversification of exports and private investment in order to stimulate increased production, and redefining the State's role.
As a result of the economic policy measures adopted, economic activity shrank by 8.6 per cent that year. On the supply side, this was mainly due to increased costs resulting from a lower exchange rate, and, on the demand side, to stagnation in domestic markets as a result of the surge in inflation, which increased by 81 per cent following the liberalization of prices and unification of the exchange rate. The decline in domestic activity in turn had a negative impact on employment levels and resulted in an unemployment rate of 9.7 per cent.
Between 1990 and 1992, despite political difficulties that led to an unstable social climate and the global economic crisis that was mainly reflected in lower prices for Venezuela's major exports (petroleum, aluminium, steel, coal and chemicals), the structural adjustment programme and the economic reforms implemented since 1989 were intensified in order to move ahead with economic development. Action was therefore taken to speed up the opening of the economy, promote political and administrative decentralization, meet social commitments, and enhance democracy, privatization and the balanced management of public finances.
The privatization policy is a key instrument of economic policy and focuses mainly on the promotion of investment so as to revitalize the production of goods and services in a number of State-owned companies. Since 1989, Venezuela has transferred 29 enterprises and other assets, bringing in US$2.4 billion as the proceeds of transparent operations. In addition to the income yielded, these operations represent the transfer of 44,000 jobs to the private sector and a saving on operating costs and investment that would have had to be met by the State if it had retained ownership.
With regard to the performance of macroeconomic variables over this period, it can be noted that between 1990 and 1992 the gross domestic product (GDP) increased at an annual rate of 6.5 per cent, 10.4 per cent and 6.8 per cent, respectively. The main reason for the slowing down in 1992 was the 1.9 per cent drop in GDP in the oil sector as a result of slacker demand; consumer needs were satisfied through higher utilization of stocks by industrialized countries and there was excess supply of crude on the international markets, thus affecting price levels, which fell to an average US$15.25/barrel.
After four years of the adjustment programme, political and social instability delayed the implementation of some of the planned reforms, especially those related to the financial system and to the fiscal sector and the Government's search for increased revenue in order to finance the high fiscal deficit and continue to combat inflation.
The transitional Government of Ramón J. Velásquez, using the special powers granted by the Congress of the Republic, therefore introduced a Value Added Tax at the end of 1993, as an important measure for obtaining fiscal resources and financing the deficit.
The tax was subsequently abolished by Rafael Caldera, when he became President of the Republic, and replaced by a tax on wholesale sales and luxury goods, so as not to tax consumers directly.
The difficulties encountered in implementing these reforms inter alia contributed to the most serious crisis ever experienced by the financial system, which reached a peak in early 1994. The monetary assistance provided by the Government to counter the inability of financial entities to meet their liabilities with the public drove up Venezuela's budgetary and external deficits, putting increasing pressure on its international reserves. This led the National Executive to take emergency measures to curb the pressure on price levels and exchange rates, and in mid-1994 it adopted exchange controls and price controls for basic goods.
At the same time, an emergency fiscal plan, known as the Sosa Plan, was implemented to reduce the high fiscal deficit that was aggravated by the Government's debt with the Central Bank of Venezuela. The Plan included a number of tax reforms and as well as a tax on business assets and bank debits for a period of only one year.
As a result, in 1994 economic activity shrank by 3.3 per cent and inflation reached 70.8 per cent (nevertheless lower than in 1989) while the fiscal deficit remained at the same level, as the reforms had not yet started to take effect.
It is expected that gross domestic product will increase by less than 1 per cent in 1995, mainly as a result of activity in the oil sector, which should offset the decline in domestic production. Cumulative inflation up to October 1995 was around 40 per cent, lower than in 1994, as a result of higher (non-oil) domestic tax revenues, and pegging the exchange rate at Bs 170/US$, the level prevailing when exchange controls were introduced. The open unemployment rate was 11 per cent during the first half of 1995, which is a reasonable figure taking into account the scale of the financial crisis in Venezuela in 1994 and its adverse impact on domestic production.
The maintenance of a fixed exchange rate has led to significant real appreciation of the bolivar and continuing pressure on the level of operational reserves, which in November amounted to US$4.5 billion, a figure which the Central Bank of Venezuela has fixed as the minimum. Nevertheless, restrictions on free convertibility have not hindered trade flows; on the contrary there was a 25 per cent increase in Venezuela's imports from the rest of the world between 1994 and 1995.
The improvement in the Government's tax revenue under the Integrated Tax Administration Scheme (SENIAT), together with programmes to reduce Government spending, have brought down the fiscal deficit, which it is hoped will provide a clear signal of the Government's intention to restore public financial balance.
Nevertheless, during all these years of recession, recovery and subsequent recession, foreign trade results have been positive. Oil exports peaked in 1991 and then fell between 1992 and 1994, only to recover again in 1995.
The salient feature in this area is the trend in non-traditional exports, i.e. other than oil and iron ore, which grew at an annual average rate of 6.2 per cent between 1989 and 1994, from US$2,994 million in 1989 to US$4,580 million in 1995. This trend shows the important diversification both of products exported by Venezuela and also of its markets, with Colombia taking over the first place previously occupied by the United States.
It should be emphasized that 66 per cent of these exports are generated by the private sector, thus diminishing dependence on exports of raw materials by State enterprises.
This performance is the result of the orientation of the trade policy pursued, which focuses on promoting non-traditional exports and intensifying participation in integration schemes and international negotiations.
The macroeconomic imbalances mentioned above mean that an adjustment programme has to be adopted to restore the macroeconomic balances and thus allow a sustained process of growth to begin from 1996 onwards, primarily based on private initiative and outward-looking growth. The Government is therefore negotiating a comprehensive adjustment programme with the International Monetary Fund that includes the following priorities: gradual reduction of the fiscal deficit; more flexible exchange controls; strengthening of the financial sector; structural reform of the social security system; expanded social programmes; reactivation of production; extension of the competitive price system; new interest rate policies; job training; reform of public administration; and privatization.
Trade policy developments 1990-1995
During the period 1990-1995 Venezuela's trade policy was implemented along the lines laid down in Decree No. 239 of 30 May 1989, which fixes the rules for trade policy.
Decree No. 239 establishes the following measures inter alia: tariff reform; the abolition of para-tariff restrictions; more flexible administrative procedures for exports; the establishment of mechanisms to deal with unfair competition; the outline of an integrated export promotion policy; adaptation of the commitments undertaken within the Andean Group; and Venezuela's accession to GATT.
During the first two years of implementation of the aforementioned Decree, important results were achieved in the area of trade policy. Firstly, the customs tariff was thoroughly overhauled, bringing down the tariff ceilings from 40 per cent to 20 per cent by 1992 and fixing four tariff levels, based on the degree of processing of the goods concerned, of 5 per cent, 10 per cent, 15 per cent and 20 per cent, with a few exceptions at 35 per cent for automobiles. Non-tariff restrictions on imports were also reduced to a minimum, leaving only those allowed under the General Agreement on Tariffs and Trade for the protection of human, animal and plant health, public morals, the environment, security or national defence.
One fundamental aspect of Venezuela's trade policy has been the emphasis on multilateral and bilateral negotiations and trade integration, with the objective of broadening access to international markets, especially Latin American markets, for Venezuelan products. Actions taken in this regard include Venezuela's participation in the Uruguay Round negotiations and its accession to the World Trade Organization as an original member, the consolidation of the Cartagena Agreement, the signing of the Group of Three Agreement, participation in initiatives for the Summit of the Americas and other action within the Latin American integration scheme, for example, the signing of a Free Trade Agreement with Chile and Economic Complementarity Agreements with Brazil, Argentina, Central American countries and the Caribbean Community.
For Venezuela, the successful conclusion of the Uruguay Round was of extreme importance because if this complex round of negotiations had failed the future of the multilateral trading system would have been shrouded in uncertainty, and it would have been more difficult to halt the protectionist trends and unilateralism in world trade practised by some countries or groups of countries, which have a negative effect on developing countries in particular.
Venezuela is confident that implementation of the results of the Uruguay Round, which it believes are globally positive, will lead to more stable, reliable and predictable trade conditions based on the opening of markets and the strengthening of multilateral trade rules and disciplines. Of particular importance to Venezuela are the improvements made to the GATT dispute settlement mechanism, which Venezuela has invoked on several occasions. The systems's effectiveness has been reinforced by the automatic adoption of panel reports and the possibility of having recourse to the Appellate Body, whose conclusions and recommendations will be binding.
These aspects are all of particular importance to Venezuela, especially since its trade relations have greatly expanded in recent years. As part of the process of adjusting to the new circumstances of the global economy, Venezuela's participation first of all in GATT and then in the WTO is deemed to be an element of the utmost importance in a development strategy that includes the promotion of production sectors, growth of non-oil exports and modernization of Venezuela's legal framework for foreign trade. In December 1994, the Congress of the Republic ratified the Agreement Establishing the WTO, thus underlining the importance Venezuela attaches to this Agreement.
During this period, considerable headway was made in consolidating the Andean integration scheme. In 1992, despite the temporary withdrawal of Peru from all commitments relating to the free-trade area and the customs union, the liberalization programme for automatic tariff and para-tariff reduction was fully implemented. Ecuador's full membership of the free-trade area gave a boost to the consolidation of the Andean Group. A bilateral agreement was concluded with Peru on free trade in a large number of products on both sides, covering almost 80 per cent of reciprocal trade.
In addition, the following specific measures were adopted with a view to strengthening the integration process: adoption of a Common Industrial Property Regime; regulation of Andean Policy on the Elimination of Cargo Reservations; regulation of the Andean Open Skies Policy; adoption of the Andean Rules on Customs Valuation; establishment of the Andean Rules on Customs Transit; adoption of Andean Regulations on Livestock Health; and elimination of export subsidies for trade within the subregion.
Subsequently, in 1994, the Andean Group's Common External Tariff (AEC) entered into effect, marking an important step forward to a more advanced stage of integration, as well as enhancing the transparency in trading and providing further opportunities to increase trade and investment. In addition, the AEC gives Andean countries a stronger negotiating position vis-à-vis third countries.
It was also agreed to abolish, as of 1 January 1996, the use of special customs regimes in trade within the subregion, so as to prevent distortions in the customs union.
In the agricultural sector, the Andean System of Agricultural Price Bands was established with the aim of stabilizing the import costs of a specific group of agricultural products characterized by highly unstable prices.
The progress made in the Andean integration process has meant that relations with Andean countries in the areas of trade and investment are highly satisfactory. Venezuelan non-oil exports to member countries of the Andean Group in 1994 accounted for 31 per cent of its total exports, making them the biggest customer for these products.
Group of Three
In 1990, Venezuela, Colombia and Mexico initiated negotiations on an Economic Complementarity Agreement that would lead to the establishment of a free-trade area. On 1 January 1995, the Free Trade Agreement of the Group of Three entered into force, marking an important step forward in economic relations among the signatories and for the future of the Latin American integration processes.
The Agreement is not confined to trade in goods but is much broader and more ambitious. It covers other important areas of the economy, such as the so-called new subjects in international trade, orienting and regulating relations among the Group of Three in the areas of trade in services, investment and intellectual property. When the current negotiations on services and investment have been concluded, the entire Agreement will be notified to the WTO.
Participation in the Latin American Integration Scheme
Venezuela's participation in the Latin American integration scheme took a number of forms:
(a) Economic Complementarity Agreement with Chile: On 2 April 1993 an Economic Complementarity Agreement was signed with Chile; it entered into force in July 1993, with the objective of establishing an extended economic area within a period not exceeding six years.
The Agreement provides for the gradual and differentiated liberalization of tariffs according to the sensitivity of the production sectors in both countries. It contains a list of products subject to an accelerated tariff-cutting process that will end in 1996, a list of products subject to a slower tariff-cutting process to end in 1999, and a list of exemptions for products considered to be especially sensitive.
Special mention should also be made of the agreements on investment and maritime transport, under which national treatment will be applied to investment by the other country and access to cargo will be free.
(b) Trade and investment agreements with the Central American countries and the Caribbean Community: The objective of these agreements is to strengthen Venezuela's cooperation with these countries. Under the agreement with the Caribbean Community, which was signed in October 1992 and entered into force on 1 January 1993, Venezuela grants non-reciprocal trade preferences.
Concerning the Central American countries, the first stage was completed in 1992 and consisted of special treatment for exports from these countries. Subsequently, in early 1993, a Framework Agreement on Trade and Investment was signed providing for negotiations on a free-trade area among Venezuela, Colombia and the five member countries of the Central American Common Market, but they have not yet been concluded.
(c) Economic Complementarity Agreements with Brazil and Argentina: In 1992, the various trade agreements with Argentina within the framework of LAIA were combined in a single legal instrument, Economic Complementarity Agreement No. 20. Subsequently, in 1993, the existing preferences were improved and the number of products covered by the Agreement and thus subject to preferential treatment in trade between the two countries was increased.
Economic Complementarity Agreement No. 27 with Brazil was renegotiated in 1994 so as to improve the existing preferences and increase the number of goods benefiting from preferential treatment.
Summit of the Americas
Venezuela's trade relations with North America have been important historically. For many years, the United States has been the main market for Venezuela's exports and, as in the case of Mexico and Canada, is potentially the major recipient of Venezuelan products in the Americas. This relationship, together with Venezuela's rapprochement and trade links with the Caribbean, Central America and Latin America, is an essential part of our foreign trade policy.
The initiatives taken to establish a Free Trade Area of the Americas (FTAA) by the year 2005 are consistent with Venezuela's integration objectives. In December 1994 the principles for the creation of the FTAA were laid down at the Summit of the Americas and since then the governmental bodies in Venezuela responsible for foreign trade relations have given priority to work in this area so as to ensure that, in accordance with the timetable fixed, the bases can be laid for negotiating an area free of trade barriers in the Americas, so that we will be able to increase our production capacity and strengthen trade relations with other countries of the continent.
Outlook for foreign trade
Venezuela's trade strategy focuses on the following three main spheres of action: (i) multilateral action in the broadest sense, for example, participation in the World Trade Organization; (ii) regional action in Latin America and the Caribbean; (iii) bilateral action with its main trade partners: the United States, the European Union and Japan.
Participation in the recently established WTO implies a serious commitment on the part of all its members as well as practical involvement in the activities of this important Organization by all government authorities and economic actors concerned with the various issues dealt with in the Organization. This is why one of the priorities of Venezuela's trade strategy is to foster awareness at all levels within the country both of the commitments undertaken by Venezuela in each of the agreements, so as to prevent any possible non-compliance, as well as of the rights under the agreements so as to benefit from them.
In addition, Venezuela's strategy will focus on adequate preparation for the programme of future negotiations, in regard both to the review and monitoring of the practical implementation of the agreements, and to the new issues that emerged at the end of the Uruguay Round negotiations and will be on the WTO'S future agenda.
Integration in the Americas
Since the Summit of the Americas held in Miami in December 1994, Venezuela has played an active role in the whole initial negotiating process with the aim of supporting action that it is hoped will lead to the establishment of the Free Trade Area for the Americas by the year 2005.
Latin America and the Caribbean
The establishment of trade links and agreements with countries and groups of countries in Latin America is also a priority for Venezuela. It intends to intensify intra-regional cooperation not only in trade but also in other areas according to its geographical, economic and cultural affinities. It also supports the definition of geopolitical and geoeconomic areas based on common identity features.
With the Andean Group, it will promote further integration in the subregion with the aim of harmonizing the macroeconomic policies of the member countries and deciding upon joint action in international negotiations. With MERCOSUR, it is taking part in talks to initiate negotiations on a free trade agreement in coordination with other Andean Group countries. It will also take further steps to improve the free-trade area with Chile.
Venezuela also intends to pursue its cooperation with countries in the Caribbean Basin and will strengthen links with them. In early 1996, the Trade and Investment Agreement between Venezuela and the Caribbean Community will be reviewed to monitor its functioning and strengthen it.
Venezuela will continue its cooperation activities within the recently established Association of Caribbean States (ACS), which includes all Caribbean Basin States, bringing together countries of Central America, South America and the Caribbean islands.
It is hoped that negotiations on the Free Trade Agreement with the Central American countries will be finalized in 1996, thus consolidating trade relations with this region.
Bilateral trade relations with other partners
Action will be taken at the bilateral level to strengthen existing links with Venezuela's trade partners and thus derive greater advantages from the possibilities offered by these countries in the areas of trade cooperation and investment. Back to top