RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/111
6 January 2003
(03-0002)
Trade Policy Review Body
TRADE POLICY REVIEW
EL SALV ADOR
Report by the Secretariat
This report, prepared for the second Trade Policy Review of El Salvador, has
been drawn up by the WTO Secretariat on its own responsibility.  The
Secretariat has, as required by the Agreement establishing the Trade Policy
Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the
World Trade Organization), sought clarification from the Government of
El Salvador on its trade policies and practices.
Any technical questions arising from this report may be addressed to
Mr Angelo Silvy (tel. 739 5249), Mr Karsten Steinfatt (tel. 739 6759) or
Mr R. Valdés (tel. 739 5346).
Document WT/TPR/G/111 contains the policy statement submitted by the
Government of El Salvador.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on El Salvador.El Salvador WT/TPR/S/111
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CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) I NTRODUCTION vii
(2) E CONOMIC ENVIRONMENT vii
(3) T RADE AND INVESTMENT POLICIES viii
(4) M ARKET ACCESS IN GOODS viii
(5) O THER MEASURES AFFECTING TRADE ix
(6) S ECTORAL POLICIES ix
I. ECONOMIC ENVIRONMENT 1
(1) INTRODUCTION 1
(2) STRUCTURE OF THE ECONOMY 1
(3) MAIN ECONOMIC INDICATORS 2
(i) Production and employment 2(ii) Fiscal policy 6
(iii) Monetary and exchange rate policy 7
(iv) Balance-of-payments 9
(4) M
ERCHANDISE TRADE AND INVESTMENT FLOWS 11
(i) Composition of trade 11(ii) Geographical distribution of trade 13(iii) Foreign direct investment 13
(5) O
UTLOOK 15
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 16
(1) INTRODUCTION 16
(2) FORMULATION AND IMPLEMENTATION OF TRADE POLICY 16
(i) General legal and institutional framework 16
(ii) Trade policy objectives and formulation 17
(iii) Main trade laws and regulations 18
(3) FOREIGN INVESTMENT REGIME 18
(4) INTERNATIONAL RELATIONS 21
(ii) Preferential agreements 25(iii) Other agreements 29
III. TRADE POLICIES BY MEASURE 31
(1)
OVERVIEW 31
(2) MEASURES AFFECTING IMPORTS 32
(i) Procedures 32
(ii) Customs valuation and rules of origin 33WT/TPR/S/111 Trade Policy Review
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(iii) Tariffs 34
(iv) Tariff quotas 40
(v) Other charges affecting imports 40(vi) Import licensing, permits and other import requirements 42
(vii) Prohibitions and other restrictions 43
(viii) Anti-dumping and countervailing measures 44(ix) Safeguard actions 45(x) Technical regulations and standards 45(xi) Sanitary and phytosanitary requirements 49
(xii) Government procurement 51
(3)
MEASURES AFFECTING EXPORTS 52
(i) Registration and documentation 52
(ii) Taxes and minimum prices 53(iii) Prohibitions, licences and other restrictions 53(iv) Export cartels 53
(v) Export performance requirements 53
(vi) Subsidies 53
(vii) Export processing zones 54(viii) Finance, insurance and guarantees 56(ix) Export promotion and marketing assistance 57
(4) O
THER MEASURES AFFECTING PRODUCTION AND TRADE 58
(i) Competition policy 58
(ii) Price regulation, production controls, marketing agreements 59(iii) State trading and State enterprises 59(iv) Local content and trade-related investment measures 59(v) Incentives 60
(vi) Assistance for industrial adjustment and research and development 61
(vii) Intellectual property rights 62
IV. TRADE POLICIES BY SECTOR 68(1)
OVERVIEW 68
(2) AGRICULTURAL SECTOR 68
(i) Market structure and results 68
(ii) Policy objectives and instruments 73
(iii) Support indicators 74
(3) MANUFACTURING INDUSTRY 75
(4) ELECTRICAL SECTOR 79
(5) SERVICES 81
(i) Main characteristics 81
(ii) Financial services 84
(iii) Telecommunications 92(iv) Transport 96
REFERENCES 101
APPENDIX TABLES 103El Salvador WT/TPR/S/111
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CHARTS
Page
I. ECONOMIC ENVIRONMENT
I.1 Merchandise trade by product, 1995 and 2001 12
I.2 Merchandise trade by partner, 1995 and 2001 14
III. TRADE POLICIES BY MEASURE
III.1 Tariff escalation for manufactured products, 2002 37
IV. TRADE POLICIES BY SECTORIV.1 Tariff protection in the industrial sector, 2002 77
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Basic economic indicators 1996-01 3
I.2 Employment indicators, 1996-2001 5
I.3 Central Government Finances 1996-2001 6I.4 Balance-of-payments 1996-2001 9I.5 Trade in services 1997-2001 10I.6 Accumulated Foreign Direct Investment by Sector, 1997-2002 15
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Reciprocal promotion and protection agreements signed by El Salvador, October 2002 19
II.2 Notifications submitted by El Salvador under the WTO Agreements, September 2002 21II.3 WTO dispute settlement cases in which El Salvador is or was involved, 1996-September 2002 24
II.4 Salvadoran exports under the CBI and the GSP, 1996-2001 29
III. TRADE POLICIES BY MEASUREIII.1 Summary analysis of the Salvadoran tariff 35
III.2 Average tariffs according to El Salvador's main preferential agreements, December 2002 38
III.3 Goods subject to special import arrangements under the CACM 39
III.4 Specific import procedures and documents 43III.5 Prohibited imports 44
III.6 Mandatory Salvadoran standards, October 2002 47III.7 Exports under special regimes, 1998-2001 54III.8 Loans granted by the Multisectoral Investment Bank 57
III.9 Registration of IPR, 2002 63
IV. TRADE POLICIES BY SECTORIV.1 Contribution of the agricultural and agro-industrial sector to GDP, 1996-2000 69
IV.2 Main crop production indicators, 1996-2001 70WT/TPR/S/111 Trade Policy Review
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IV.3 Volume and value of coffee and sugar exports, 1996-2000 71IV.4 Breakdown of industrial sector value added, 1996-2001 76IV.5 Main indicators for the electrical sector, 1994-2002 80IV.6 Contribution of the principal services sectors to GDP, 1996-2001 82
IV.7 Summary of El Salvador's commitments under the GATS 83
IV.8 Evolution of net loan portfolio and deposit taking, 1997-June 2002 86IV.9 Main financial system legislation 88IV.10 Telecommunications indicators 92IV.11 Activity indicators for El Salvador International Airport, 1996-00 99
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 El Salvador:  Exprts by product 104
AI.2 El Salvador:  Imports by product 105AI.3 El Salvador:  Exports by country 106
AI.4 El Salvador:  Imports by country 107
III. TRADE POLICIES BY MEASURE
AIII.1 Participation of El Salvador in international IPR agreements 108
AIII.2 El Salvador's IPR enforcement regime 109
AIII.3 IPR Legislation 111El Salvador WT/TPR/S/111
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SUMMARY OBSERVATIONS
(1) INTRODUCTION
1. Since its previous Trade Policy
Review in 1996, El Salvador has continued to
liberalize and modernize its trade and
investment regimes, in the context ofinstitutional stability and steady economic
growth.  Tariffs have been lowered and limited
use is made of non-tariff measures.  Export
processing zones (EPZs) have been used to
help counter the anti-export bias still presentin the trade regime.  New laws have been
passed with respect to foreign investment,
customs procedures, government procurement,
and several key service activities;  competition
legislation is under consideration.  The U.S.dollar was introduced as legal tender in 2001,
which has left fiscal and incomes policies as
the main macroeconomic instruments.
2. El Salvador participates actively in
the multilateral trading system, and
increasingly so in preferential agreements.
Although it has become closely integrated inthe global economy, market and product
diversification are limited.  External balances
rely heavily on exports of clothing and
remittances from Salvadorans abroad, and on
the relationship with the United States.  Thus,it would be useful for El Salvador to increase
the predictability of its access to the U.S. and
other markets, and to lock in its own reforms
through new multilaterally agreed
commitments.  In due time, it will also becrucial to reconsider the role of EPZs which,
although large job generators, distort the
structure of incentives between exporters and
other producers.  Addressing such distortions,
and inefficiencies in certain service activities,would help to accelerate the modest growth
rates of recent years;  this, in turn, would help
achieve the improvements in living standards
that El Salvador has striven for over the last
decade.
(2) E
CONOMIC ENVIRONMENT
3. GDP per capita in 2001 was someUS$2,150, while personal disposable income
stood at some US$2,420, reflecting the effect
of remittances.  Boosting GDP growth is of
utmost importance as close to 40% of the
population still lives in poverty. The
authorities are counting on growth beingsupported by continued economic reforms,
closer integration in Central America, and by
the conclusion of bilateral free-trade
agreements (FTAs) with other partners,
notably the United States.
4. Subsequent to the cessation of the
internal strife in the early 1990s, economic
reform has been successful in stabilizing the
economy and reducing inflation.  However,
GDP expanded at a relatively modest annualaverage rate of 2.8% between 1996 and 2001.
Moreover, the pace of GDP growth has tended
to fall:  in the first half of 2002, annualized
growth was 1.7%.  Growth in 2001 and 2002
was affected by natural disasters and by the
economic slowdown in the United States on
account of El Salvador's export exposure tothis market and of the reliance on remittances
from Salvadoran workers.
5. Consumption expenditure is high,
almost equal to GDP, while investment
remains low.  Remittances from Salvadoranworkers abroad, in particular in the
United States, topped US$2 billion or 14% of
GDP in 2001.  Remittances have become ever
more important and finance a large share of
consumption.  They have also helped to keepnational savings stable.  A challenge for
El Salvador is to channel part of these
remittances to achieve a higher level of
savings that can then be used to finance higher
investment.
6. Trade has an increasingly important
role in the economy;  the share of exports and
imports to GDP has increased to about 70%
during the period under review.  Among the
main exports, those from the maquila (in-
bond) industry, mostly clothing, have been
increasing the fastest, while exports of keytraditional products such as coffee have
faltered.  The current account of the balanceWT/TPR/S/111 Trade Policy Review
Page viii
of payments has shown a deficit since 1996
due to a substantial merchandise trade deficit.
The trade deficit is traditionally accompanied
by a small investment income deficit, both of
which have been largely offset by remittances
from abroad.
7. Through the Law on Monetary
Integration, El Salvador introduced the U.S.
dollar as legal tender in January 2001, and
within a few months the economy was almost
completely dollarized.  This arrangementreplaced the fixed exchange rate system used
between 1993 and 2000, which was successful
in reducing inflation to 1.4% in 2001.  Interest
rates have fallen substantially, which is
expected to contribute to fostering GDPgrowth.
8. The fiscal deficit has been increasing
in the last few years, reaching 3.3% of GDP in
2001, partly linked to the reconstruction
efforts as a consequence of the natural
disasters.  In response, the authorities have
devised a strategy to gradually reduce thedeficit and to achieve balance by 2006.
(3) T
RADE AND INVESTMENT POLICIES
9. El Salvador attaches great importance
to the WTO, in part to bring stability and
predictability to its own liberalizationinitiatives, and participates actively in it.
Apart from numerous notifications,
El Salvador has submitted several
communications to WTO Members,
participated in the negotiations on financialservices and on telecommunications, and
accepted the Agreement on Information
Technology.  Under Article XIII of the
Marrakesh Agreement, El Salvador does not
apply the WTO Agreements to China;  nordoes it, in principle, grant China MFN
treatment.  Since 1996, El Salvador has been
directly involved in two disputes in the WTO,
both as a plaintiff, together with other
countries;  it has reserved its third party rights
on three occasions.
10. El Salvador participates increasinglyin preferential trade agreements.  It is a
member of the Central American Common
Market and, since 1996, has entered FTAs
with Chile, the Dominican Republic, Mexico,
and Panama.  El Salvador is negotiating an
FTA with Canada, plans to start negotiationsfor an FTA with the United States in 2003, and
is engaged in the FTAA initiative.
El Salvador's growing number of FTAs
complicates the formulation and management
of its trade policy, an important considerationgiven the limited human resources it has
available to handle these issues.
11. Since 1996, El Salvador's trade and
investment legal framework has undergone
significant change.  New laws have beenpassed with respect to customs procedures,
electricity, and services such as banking,
telecommunications, and air and maritime
transport.  An investment law passed in 1999
eliminated most restrictions to national
treatment.  Foreign investment seems to have
received a boost in particular fromliberalization in the telecommunications and
electricity sectors.  Other sectors benefiting
from substantial foreign investment inflows
are the maquila industry and financial
services.
(4) M
ARKET ACCESS IN GOODS
12. El Salvador has taken steps to simplify
and expedite customs procedures.  In addition,
it has applied the WTO Customs Valuation
Agreement since March 2002, except withrespect to the valuation of a limited number of
used products for which customs authorities
rely on minimum values, in accordance with a
waiver granted by the WTO.
13. El Salvador maintains a mostly liberal
market access regime for goods.  Tariffs are
the main instrument of border protection.  The
average applied MFN rate is 7.4%;  the
average for non-agricultural is 6.7%, while
for agricultural products (WTO definition) it is
12%.  The tariff structure exhibits significant
escalation.  All tariffs are bound;  most arebound at a ceiling rate of 40%, thus there is aEl Salvador WT/TPR/S/111
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large gap between applied and bound rates,
which can undermine the predictability of
market access conditions.
14. Under its Uruguay Round Schedule of
Concessions, El Salvador may use tariff
quotas with respect to several agriculturalproducts.  Up to 1999, imports of all such
products took place at the in-quota rate;  in
2000, a tariff quota was introduced for
cheddar cheese.
15. El Salvador administers a system of
"under-supply quotas" for certain goods (in
practice, agricultural products).  Under this
system, when domestic producers are unable
to meet internal demand for a product, firms
may import a certain quantity of the good inquestion duty free provided they also purchase
the same good from domestic producers.
16. As a member of the Central American
Common Market (CACM), El Salvador offers
duty-free treatment to the majority of imports
originating in other CACM member countries.
Imports from Chile, the Dominican Republic,and Mexico, with which El Salvador has
signed FTAs, also benefit from preferential
treatment.
17. The use of non-tariff measures as
instruments of protection appears to belimited.  With the exception of the licensing
regime that applies to imports of certain bags,
concerns about security, health, and
environmental protection appear to underlie
most other import controls and prohibitions.There are few technical regulations and their
development seems to be conducted under
conditions of transparency.  Two WTO
members have raised concerns about
El Salvador's sanitary and phytosanitarymeasures but no formal complaints have been
lodged.  El Salvador has never applied anti-
dumping or countervailing duties, nor has it
implemented safeguard measures.
(5) O
THER MEASURES AFFECTING TRADE
18. Two export promotion schemesoperate in El Salvador.  The first consists of a
"drawback" of 6% of the f.o.b. value of all
exports not destined for outside the CACM
area, except those of coffee, sugar and shrimp.
The second scheme exempts firms located in
EPZs from import duties and other taxes.Both schemes have been notified to the WTO
as export subsidy programmes eligible for an
extension of the transition period established
in Article 27.4 of the Agreement on Subsidies
and Countervailing Measures.
19. El Salvador does not have
government-sponsored export insurance or
guarantee programmes. Its development bank
offers several financing schemes aimed at
supporting private sector activities, includingexports.  El Salvador is not a party to the
Plurilateral Agreement on Government
Procurement.  A new law, which could
stimulate competition in the domestic
government-procurement market, came into
effect in 2000.  While the law does not grant
preferences to local suppliers, it leaves theparticipation of foreign firms in the bidding
process to the discretion of the contracting
entities.
20. Except in the telecommunications
sector, no significant changes have takenplace with respect to competition legislation
since El Salvador's last Review.  During the
past few years, the authorities have been
working on drafting a competition law;  such a
law might improve the level of competition inthe domestic market, which appears to be low.
(6) S
ECTORAL POLICIES
21. Agriculture's contribution to
El Salvador's GDP has been declining, to
some 12% in 2001, but the sector still employsaround 35% of the working population.  The
main agricultural exports, coffee and sugar,
have been exposed to adverse market
conditions and various natural phenomena.
This has triggered a particularly severe crisis
in the coffee industry with significant
concomitant social and economic effects inrural areas.  Although the stated aim ofWT/TPR/S/111 Trade Policy Review
Page x
El Salvador's agricultural policy is to increase
the sector's competitiveness and foster its
integration into the local and world
economies, the level of protection granted to
cheese, white corn, rice, and pork meat has
increased since 1996.
22. The share of manufacturing in GDP
had increased to 23%, fuelled largely by the
expansion of output in EPZs.  Although EPZs
have become important sources of foreign
exchange and employment their activity islargely concentrated around textile and
clothing production.  They have limited
backward linkages with local enterprises,
which diminishes the possibility of raising
levels of domestic value added.  In addition,the dependence of EPZ exports on the U.S.
market increases the vulnerability of the
Salvadoran economy, both to the U.S. business
cycle and to potential changes in unilateral
trade preferences.
23. Services contributed just under two
thirds of GDP in 2001;  with many suchactivities have undergone significant
liberalization and structural changes since
1996.  Liberalization has gone well beyond
El Salvador's WTO commitments, which are
relatively limited.  El Salvador's trade policyregime would gain in predictability if the
autonomous liberalization undertaken in
recent years were bound multilaterally.
Increased market access has not necessarily
resulted in a substantial increase of foreignparticipation, due in part to the small size of
the market and to limited investment
possibilities.24. Since 1996, the electricity industry has
undergone a process of structural reform and
privatization, although transmission remains a
state monopoly.  A new Electricity Law was
passed in 1996.  In the same year, a regulatory
body was created to oversee both theelectricity and the tel ecommunications sectors.
In telecommunications, a law adopted in 1997
also opened the market.  The state enterprise
was privatized and competition appears to
have increased markedly.
25. New laws with respect to banking,
financial intermediation and insurance were
introduced during the period under review.
The recent banking law brought more
stringent capital requirements andstrengthened supervision;  it also guaranteed
national treatment to foreign financial
institutions.  The introduction of the Law on
Monetary Integration in 2001 also had
implications with respect to the functioning of
the financial sector. Despite recent
liberalization, the participation of foreignfirms remains relatively limited, and steps
have had to be taken to minimize the exposure
of the banking system to under-performing
loans granted to coffee producers.
26. El Salvador introduced new laws with
respect to air and maritime transport in 2001
and 2002, respectively.  Both laws contain
elements of deregulation and reinforcement of
competition, and open up these activities to
foreign service providers.