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El Salvador: November 1996

“ Members commended the stabilization and structural adjustment programmes adopted by El Salvador since 1989, which had resulted in markedly increased economic growth and a fall in inflation.”

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Summary of Secretariat report
  > Summary of Government report

27 November 1996

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The Trade Policy Review Body of the World Trade Organization (WTO) conducted its first review of El Salvador's trade policies on 25 and 26 November 1996. The text of the Chairperson's concluding remarks is attached as a summary of the salient points which emerged during the two-day discussion.

The review enables the TPRB to conduct a collective examination of the full range of trade policies and practices of each WTO member country at regular periodic intervals to monitor significant trends and developments which may have an impact on the global trading system.

The review is based on two reports which are prepared respectively by the WTO Secretariat and the government under review and which cover all aspects of the country's trade policies, including: its domestic laws and regulations; the institutional framework; bilateral, regional and other preferential agreements; the wider economic needs and the external environment.

A record of the discussions and the Chairperson's summing-up, together with these two reports, will be published in due course as the complete trade policy review of El Salvador and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992 & 1996), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991), Colombia (1990 & 1996), Costa Rica (1995), Côte d'Ivoire (1995), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), El Salvador (1996), 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 & 1995), Kenya (1993), Korea, Rep. of (1992 & 1996), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 & 1996), New Zealand (1990 & 1996), Nigeria (1991), Norway (1991 & 1996), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992, 1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

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Over the past two days, the Trade Policy Review Body has conducted the first review of El Salvador's trade policies and practices. These remarks, made on my own responsibility, are intended to summarize the salient points of the discussion; they do not substitute for the Body's collective evaluation and appreciation, which will be reflected in the minutes of the meeting.

The discussion developed under three main themes: (i) macroeconomic and structural developments, including policies relating to foreign investment; (ii) trade liberalization and its effects; and (iii) specific policy and sectoral questions.

Apart from questions raised during the meeting, four participants submitted a number of questions in writing. The representative of El Salvador provided extensive, substantive replies to the questions and also undertook in some instances to provide further details in writing.

Macroeconomic and structural developments, including policies relating to foreign investment

Members commended the stabilization and structural adjustment programmes adopted by El Salvador since 1989, which had resulted in markedly increased economic growth and a fall in inflation. They also welcomed the authorities' plans to continue the longer term restructuring of the economy through increasing investment in infrastructure and human capital. Members inquired about the sustainability of macroeconomic performance, noting that inflation had increased slightly in 1995. They suggested that, if growth was to be maintained, further investment would be required in the productive sector.

In this connection, members noted that both investment and savings in El Salvador were relatively low and enquired about measures to remedy the situation. Members also asked how El Salvador aimed to generate the resources required for its planned investments in infrastructure and human capital.

Members noted the importance of remittances in financing the current account deficit and pointed out the risks of relying on external resources as a source of financing. In addition, the difficulty of managing an economy in these conditions was emphasized: the monetary inflow resulting from remittances could increase inflationary pressures and push up the real exchange rate, with harmful effects on competitiveness.

Members welcomed the tax reform and privatization programmes undertaken by El Salvador; these had both helped to reduce the fiscal deficit and contributed to economic restructuring. Members noted that, with the simplification of the tax system, only a few taxes of general application remained in place; these changes had increased tax yield and gone some way to reducing evasion. Nevertheless, members asked how El Salvador would deal with the problem of tax evasion, given the importance of the informal sector.

Members welcomed the liberalization of El Salvador's investment régime. However, some concern was expressed about the possibility of discrimination remaining in registration procedures; for instance, free convertibility of capital was not reflected in the Foreign Investment and Promotion Law. Questions were also raised on plans to establish a one-stop window for foreign investment, whether there was any discrimination against the operation of foreign insurance companies in El Salvador, and whether there was a specific incentive programme to promote foreign investment.

In response, the representative of El Salvador said that average real growth in the period 1992-95 was 6.7 per cent, but only 3.5 to 4 per cent in 1996. Inflation was expected to fall to 9 per cent, lower than the level in 1995; with the deepening of the reforms and a fall in the cost of credit, it was hoped that growth would recover to 5 per cent in 1997. The challenge of macroeconomic management was to ensure stability and maintain the confidence of foreign and domestic investors. Foreign remittances, which had a number of benefits, also complicated economic management, generating inflationary pressures and an appreciation of the exchange rate. In the short term, measures had to be taken to sterilize the effect of inflows on the money supply, but the representative also gave details of a number of structural measures aimed at neutralizing negative effects in the longer term and re-orienting flows towards investment.

The representative outlined El Salvador's privatization programme, covering telecommunications, electricity, water, ports and airports, highways and pensions, and gave considerable detail on the planned liberalization of the telecommunications sector. His Government was conscious that domestic savings were insufficient to finance essential social and economic investment in human capital and physical infrastructure. The Government was re-directing resources to the social sector, with the aim of reaching 50 per cent of public expenditure by 1999, and had received loans from the World Bank and IDB for education and infrastructure development. Receipts from privatization and the reform of pension funds would also be used for these purposes.

The representative of El Salvador emphasized that there was no discrimination in the foreign investment régime, but the speed of liberalization sometimes had been more rapid than the evolution of the legal framework. The régime was one of the most open in the world; there were no performance requirements or exchange control restrictions, thus it was, in practice, open in all sectors. The only exceptions applied to small-scale investments of less than US$23,000. He said that El Salvador's economic and social development strategy was intended to attract foreign investment, and thus complement national savings and investment. A new investment law, intended for parliamentary approval in the first quarter of 1997, would ensure legal rights, including access to domestic courts and domestic or foreign arbitration, promote transparency and simplify registration procedures, including the elimination of prior authorization. In addition to existing governmental institutions, a private foundation, FUSADES, provided advisory services for new investors. He reassured Members regarding the security situation in the country. He clarified that advantages given to investment in free-zones, to which export performance requirements applied, were not linked to the general investment law. In respect of insurance, which was not bound under GATS, a new legal framework was below Parliament and details would be provided once this was adopted.

Trade liberalization and effects

Members recognized that trade liberalization, together with the deregulation of domestic markets, had been a key element in El Salvador's economic growth, although the trade to GDP ratio had not yet recovered to 1980 levels. In addition, members noted the concentration of trade both in terms of partners and in goods. Members asked whether exports currently benefiting from preferential régimes would be competitive without these preferences.

Members noted El Salvador's participation in the Central American Common Market (CACM) and inquired whether regional commitments had helped or hindered the process of trade liberalization at the national level. In addition, members commended the active rôle that El Salvador was playing in negotiations on the FTAA and asked about El Salvador's views on "global free trade".

Members noted that El Salvador had substantially reduced tariffs and that all rates had been bound, albeit at ceiling levels. Questions were raised regarding the persistence of tariff escalation and peaks in some sectors, as well as the spread between applied and bound rates. Members asked if there were plans to continue reducing tariffs for final goods and to reduce the WTO bound rates.

Members commended El Salvador's efforts to bring its national trade legislation into consistency with the WTO Agreements. However, it was noted that certain aspects of some laws were still outdated and in need of reform. Some members also asked about the implementation and enforcement of laws, particularly in the area of intellectual property, while others asked when the draft Competition Law would come into force and the effects that it might have on trade conditions.

In response, the representative of El Salvador said that trade policy was based on the coordinated Central American tariff reduction programme, designed to reduce costs and contribute to the development and modernization of production. This was essential to diversify exports and markets. To complement this programme, El Salvador also had a programme to increase national competitiveness in world markets. The Government would implement these reforms in a comprehensive, progressive manner, and was studying how best to incorporate sectors such as textiles, clothing, sensitive agricultural products and leather into the reform programme. He provided information on the six-monthly tariff reductions planned through to July 1999, when the ceiling would be reduced to 15 per cent for imports of most goods produced in Central America, with duties on most other goods eliminated or reduced to very low levels. However, at present it was not considered prudent to lower bound rates, given the vulnerability of the external sector to remittances. Nevertheless, he stressed that El Salvador was also committed to further improvement in its trade policy régime in the few areas where non-tariff measures remained, including administrative and registration procedures for imports of pharmaceuticals and saccharin.

The representative emphasized that El Salvador was in favour of worldwide free trade and the strengthening of the multilateral system. It was participating actively in the FTAA as well as in other bilateral and regional trade negotiations. They attached importance to the WTO-compatibility of these agreements; however, they recognized that regional agreements could lead to trade and investment diversion, as had happened in respect of textiles and clothing in the case of NAFTA.

The representative said that El Salvador placed an extremely strong emphasis on strengthening competition, including through trade liberalization. A new competition law was being developed to prevent anti-competitive practices. His Government was actively pursuing any violation of the intellectual property law through a special unit created for this purpose; he gave details of recent cases. Work was underway to ensure that El Salvador would fully meet its TRIPS obligations before the year 2000, as required, including in respect of border measures; details of civil and penal sanctions applicable would be provided to Members.

Specific policy and sectoral questions

Members noted that, despite the efforts made to liberalize the import régime, import and customs formalities were still cumbersome, lacked transparency and remained an obstacle to trade. Members asked whether there were plans to simplify these requirements and to modernize customs. There was a question on the time-frame for creating a one-stop window for import procedures.

Members commended the simplification of export procedures through the creation of the one-stop window for export formalities. One member asked about the scope for further simplification. Members commented on the programmes in place to promote exports beyond Central America, including the free zone régime and the duty drawback system. The growth of the free zones was noted and it was inquired to what extent there had been a relocation of industry to the free zones. Some Members thought that the duty drawback system could act as an export subsidy since, while tariffs were being progressively reduced, the drawback was fixed at 6 per cent of the f.o.b. value of exports.

Members noted the importance of the agricultural sector in the economy and the positive effects of the reforms on its performance. However, some members referred to the negative impact of the real appreciation of the currency on agricultural exports. In addition, one member asked whether there were plans to liberalize the sugar market. Several members inquired about the administration of tariff quotas and their notification to the WTO.

Noting that the present system of customs valuation was based on the Brussels Definition of Value (BDV), members urged that new legislation be made consistent with the WTO Agreement. Members expressed their concern about a lack of transparency in the award of Government contracts and sought clarification on such procedures.

One member commended El Salvador for having submitted its safeguards legislation for review by the Safeguards Committee; this appeared to be consistent with WTO requirements. Another sought clarification on the operation of anti-dumping duties and countervailing measures, including which laws applied in these areas and the rôle of the CACM Secretariat in this regard.

Some members considered that standards, sanitary and phytosanitary regulations could operate as barriers to trade. One member noted that El Salvador had not submitted a Statement of Implementation as required under the TBT Agreement.

In response, the representative of El Salvador said that, since 1995, the Government had accelerated the reform and simplification of customs procedures, including through the implementation of the Central American Uniform Customs Code and its regulations, which had entered into force in June 1996. These reforms would be complemented with a single window for imports and the privatization of some customs services. Work had already begun at the Central American level to bring customs valuation procedures into line with Article VII of GATT 1994 within the required timeframe. No pre-shipment inspection mechanism applied.

The representative said that El Salvador's export support and promotion schemes did not constitute export subsidies. Total support, amounting to some US$7 million in 1995, did not apply to trade within Central America or to export of traditional products. There were six free zones in El Salvador, with 45 firms, of which 80 per cent were involved in clothing production. Four more zones were in construction; it was hoped they would attract operations with higher value added and modern technology.

The representative indicated that a draft law had been prepared to manage tariff quotas negotiated in the Uruguay Round and it was hoped this would soon be approved. It was difficult to think about unilateral liberalization of sugar imports while so many subsidy schemes distorted world markets; however, El Salvador was considering the opening of tariff quotas, with an out-of-quota rate of 55 per cent.

Central American legislation did not provide for safeguards on intra-regional trade; WTO rules were applied but there had been no such cases since the early 1960s. Dumping and subsidization were covered by Central American legislation and the WTO Agreement, which was part of national law. The representative clarified certain operational aspects of the law, including the investigative rôle played by the CACM Secretariat (SIECA).

The representative explained that the National Science and Technology Council (CONACYT) was responsible for standards, the evaluation of conformity, and metrology. The elaboration of standards and regulations was coordinated with other agencies. El Salvador would shortly notify its acceptance of the WTO Code of Good Conduct in this area.

Finally, the representative noted that El Salvador was not a member of the Government Procurement Agreement. Almost all agencies had autonomy in this area, but the central Government was obliged to call for tenders when planned purchases exceeded a certain amount. It was planned to consolidate the various regulations in a single law with the objective of increasing transparency and guaranteeing equal treatment for national and foreign bids.

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Delegations welcomed El Salvador's wide-ranging structural reform programme of recent years, including the significant steps taken in trade liberalization, fiscal reform and privatization. They noted and encouraged El Salvador's intention to continue the process with further reductions in applied tariffs, measures to bring about greater competition, modernization of customs procedures and further steps to promote foreign investment.

A cautionary note was sounded on the need for diversification of exports, in relation to both goods and markets. It was also recognized that real exchange rate appreciation, fuelled in particular by the high level of emigrants' remittances, makes the task of export development more difficult. Overall, it was emphasized that maintenance of the current export-led growth pattern will require a continued strong commitment to trade liberalization, as well as sustained efforts to ensure a stable macroeconomic environment.