PRESS/TPRB/52
27November 1996
TRADE POLICY REVIEW BODY
Review ofElSalvador
TPRB 'sEvaluation
TheTrade Policy Review Body oftheWorld Trade Organization (WTO) conducted itsfirst
review ofElSalvador 'strade policies on25and26November 1996. ThetextoftheChairperson 's
concluding remarks isattached asasummary ofthesalient points which emerged during thetwo-day
discussion.
Thereview enables theTPRB toconduct acollective examination ofthefullrange oftrade
policies andpractices ofeachWTO member country atregular periodic intervals tomonitor significant
trends anddevelopments which mayhaveanimpact ontheglobal trading system.
Thereview isbased ontworeports which areprepared respectively bytheWTO Secretariat
andthegovernment under review andwhich cover allaspects ofthecountry 'stradepolicies, including:
itsdomestic lawsandregulations; theinstitutional framework; bilateral, regional andother preferential
agreements; thewider economic needs andtheexternal environment.
Arecord ofthediscussions andtheChairperson 'ssumming-up, together withthesetworeports,
willbepublished induecourse asthecomplete tradepolicy review ofElSalvador andwillbeavailable
from theWTO Secretariat, Centre William Rappard, 154ruedeLausanne, 1211 Geneva 21.
Since December 1989, thefollowing reports havebeencompleted: 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),
Côted'Ivoire (1995), theCzech Republic (1996), theDominican Republic (1996), Egypt (1992), El
Salvador (1996), theEuropean Communities (1991, 1993 &1995), Finland (1992), Ghana (1992),
Hong Kong (1990 &1994), Hungary (1991), Iceland (1994), India(1993), Indonesia (1991 and1994),
Israel (1994), Japan (1990, 1992&1995), Kenya (1993), Korea, Rep.of(1992 &1996), Macau (1994),
Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 &1996), NewZealand (1990 &
1996), Nigeria (1991), Norway (1991 &1996), Pakistan (1995), Peru(1994), thePhilippines (1993),
Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 &1996), Slovak Republic (1995),
South Africa (1993), SriLanka (1995), Sweden (1990 &1994), Switzerland (1991 &1996), Thailand
(1991 &1995), Tunisia (1994), Turkey (1994), theUnited States (1989, 1992, 1994&1996), Uganda
(1995), Uruguay (1992), Venezuela (1996), Zambia (1996) andZimbabwe (1994).
MORE 96-5035PRESS/TPRB/52
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TRADE POLICY REVIEW BODY
Review ofElSalvador
CONCLUDING REMARKS BYTHE CHAIRPERSON
Over thepasttwodays, theTrade Policy Review Body hasconducted thefirstreview of
ElSalvador 'stradepolicies andpractices. These remarks, made onmyownresponsibility, areintended
tosummarize thesalient points ofthediscussion; theydonotsubstitute fortheBody'scollective
evaluation andappreciation, which willbereflected intheminutes ofthemeeting.
Thediscussion developed under three main themes: (i)macroeconomic andstructural
developments, including policies relating toforeign investment; (ii)tradeliberalization anditseffects;
and(iii)specific policy andsectoral questions.
Apartfromquestionsraisedduringthemeeting,fourparticipantssubmittedanumberofquestions
inwriting. Therepresentative ofElSalvador provided extensive, substantive replies tothequestions
andalsoundertook insome instances toprovide further details inwriting.
Macroeconomic andstructural developments, including policies relating toforeign investment
Members commended thestabilization andstructural adjustment programmes adopted by
ElSalvadorsince1989,whichhadresultedinmarkedlyincreasedeconomicgrowthandafallininflation.
They alsowelcomed theauthorities 'plans tocontinue thelonger termrestructuring oftheeconomy
through increasing investment ininfrastructure andhuman capital. Members inquired about the
sustainability ofmacroeconomic performance, noting thatinflation hadincreased slightly in1995.
They suggested that,ifgrowth wastobemaintained, further investment would berequired inthe
productive sector.
Inthisconnection,membersnotedthatbothinvestmentandsavingsinElSalvadorwererelatively
lowandenquired about measures toremedy thesituation. Members alsoasked howElSalvador aimed
togenerate theresources required foritsplanned investments ininfrastructure andhuman capital.
Membersnotedtheimportanceofremittancesinfinancingthecurrentaccountdeficitandpointed
outtherisksofrelying onexternal resources asasource offinancing. Inaddition, thedifficulty of
managing aneconomy inthese conditions wasemphasized: themonetary inflow resulting from
remittances could increase inflationary pressures andpushuptherealexchange rate,withharmful
effects oncompetitiveness.
Members welcomed thetaxreform andprivatization programmes undertaken byElSalvador;
these hadbothhelped toreduce thefiscal deficit andcontributed toeconomic restructuring. Members
noted that,withthesimplification ofthetaxsystem, onlyafewtaxes ofgeneral application remained
inplace; thesechanges hadincreased taxyieldandgonesome waytoreducing evasion. Nevertheless,
members asked howElSalvador would dealwiththeproblem oftaxevasion, given theimportance
oftheinformal sector.
Members welcomed theliberalization ofElSalvador 'sinvestment régime. However, some
concern wasexpressed about thepossibility ofdiscrimination remaining inregistration procedures;
forinstance, freeconvertibility ofcapital wasnotreflected intheForeign Investment andPromotion
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Law. Questions were alsoraised onplans toestablish aone-stop window forforeign investment,
whethertherewasanydiscriminationagainsttheoperationofforeigninsurancecompaniesinElSalvador,
andwhether there wasaspecific incentive programme topromote foreign investment.
Inresponse, therepresentative ofElSalvador saidthataverage realgrowth intheperiod 1992-95
was6.7percent,butonly3.5to4percentin1996. Inflation wasexpected tofallto9percent,lower
thanthelevelin1995; withthedeepening ofthereforms andafallinthecostofcredit, itwashoped
thatgrowth would recover to5percentin1997. Thechallenge ofmacroeconomic management was
toensure stability andmaintain theconfidence offoreign anddomestic investors. Foreign remittances,
which hadanumber ofbenefits, alsocomplicated economic management, generating inflationary
pressures andanappreciation oftheexchange rate. Intheshort term, measures hadtobetaken to
sterilize theeffect ofinflows onthemoney supply, buttherepresentative alsogavedetails ofanumber
ofstructural measures aimed atneutralizing negative effects inthelonger termandre-orienting flows
towards investment.
TherepresentativeoutlinedElSalvador'sprivatizationprogramme,coveringtelecommunications,
electricity, water, portsandairports, highways andpensions, andgaveconsiderable detail ontheplanned
liberalization ofthetelecommunications sector. HisGovernment wasconscious thatdomestic savings
were insufficient tofinance essential social andeconomic investment inhuman capital andphysical
infrastructure. TheGovernment wasre-directing resources tothesocial sector, withtheaimofreaching
50percentofpublic expenditure by1999, andhadreceived loans fromtheWorld Bank andIDBfor
education andinfrastructure development. Receipts fromprivatization andthereform ofpension funds
would alsobeusedforthese purposes.
Therepresentative ofElSalvador emphasized thatthere wasnodiscrimination intheforeign
investment régime, butthespeed ofliberalization sometimes hadbeenmore rapid thantheevolution
ofthelegalframework. Therégime wasoneofthemostopenintheworld; therewerenoperformance
requirements orexchange control restrictions, thusitwas,inpractice, openinallsectors. Theonly
exceptions applied tosmall-scale investments oflessthanUS$23,000. HesaidthatElSalvador 's
economic andsocial development strategy wasintended toattract foreign investment, andthus
complementnationalsavingsandinvestment.Anewinvestmentlaw,intendedforparliamentaryapproval
inthefirstquarter of1997, would ensure legalrights, including access todomestic courts anddomestic
orforeign arbitration, promote transparency andsimplify registration procedures, including the
eliminationofpriorauthorization.Inadditiontoexistinggovernmentalinstitutions,aprivatefoundation,
FUSADES, provided advisory services fornewinvestors. Hereassured Members regarding thesecurity
situation inthecountry. Heclarified thatadvantages given toinvestment infree-zones, towhich export
performance requirements applied, were notlinked tothegeneral investment law. Inrespect of
insurance, which wasnotbound under GATS, anewlegalframework wasbelow Parliament anddetails
would beprovided oncethiswasadopted.
Trade liberalization andeffects
Membersrecognizedthattradeliberalization,togetherwiththederegulationofdomesticmarkets,
hadbeenakeyelement inElSalvador 'seconomic growth, although thetrade toGDP ratiohadnot
yetrecovered to1980 levels. Inaddition, members noted theconcentration oftrade bothinterms
ofpartnersandingoods.Membersaskedwhetherexportscurrentlybenefitingfrompreferentialrégimes
would becompetitive without these preferences.
Members noted ElSalvador 'sparticipation intheCentral American Common Market (CACM)
andinquired whether regional commitments hadhelped orhindered theprocess oftradeliberalization
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atthenational level. Inaddition, members commended theactive rôlethatElSalvador wasplaying
innegotiations ontheFTAA andasked about ElSalvador 'sviews on"global freetrade".
Members noted thatElSalvador hadsubstantially reduced tariffs andthatallrateshadbeen
bound, albeit atceiling levels. Questions wereraised regarding thepersistence oftariffescalation and
peaks insome sectors, aswellasthespread between applied andbound rates. Members asked ifthere
were plans tocontinue reducing tariffs forfinalgoods andtoreduce theWTO bound rates.
MemberscommendedElSalvador'seffortstobringitsnationaltradelegislationintoconsistency
withtheWTO Agreements. However, itwasnoted thatcertain aspects ofsome lawswerestilloutdated
andinneedofreform. Some members alsoasked about theimplementation andenforcement oflaws,
particularly intheareaofintellectual property, while others asked when thedraftCompetition Law
would come intoforce andtheeffects thatitmight haveontrade conditions.
Inresponse, therepresentative ofElSalvador saidthattradepolicy wasbased onthecoordinated
CentralAmericantariffreductionprogramme,designedtoreducecostsandcontributetothedevelopment
andmodernization ofproduction. Thiswasessential todiversify exports andmarkets. Tocomplement
thisprogramme,ElSalvadoralsohadaprogrammetoincreasenationalcompetitivenessinworldmarkets.
TheGovernment would implement these reforms inacomprehensive, progressive manner, andwas
studying howbesttoincorporate sectors suchastextiles, clothing, sensitive agricultural products and
leatherintothereformprogramme.Heprovidedinformationonthesix-monthlytariffreductionsplanned
through toJuly1999, when theceiling would bereduced to15percentforimports ofmost goods
produced inCentral America, withduties onmostothergoods eliminated orreduced toverylowlevels.
However, atpresent itwasnotconsidered prudent tolower bound rates, given thevulnerability of
theexternal sector toremittances. Nevertheless, hestressed thatElSalvador wasalsocommitted to
further improvement initstrade policy régime inthefewareas where non-tariff measures remained,
including administrative andregistration procedures forimports ofpharmaceuticals andsaccharin.
Therepresentative emphasized thatElSalvador wasinfavour ofworldwide freetrade and
thestrengthening ofthemultilateral system. Itwasparticipating actively intheFTAA aswellasin
other bilateral andregional trade negotiations. They attached importance totheWTO-compatibility
ofthese agreements; however, theyrecognized thatregional agreements could leadtotrade and
investment diversion, ashadhappened inrespect oftextiles andclothing inthecaseofNAFTA.
Therepresentative saidthatElSalvador placed anextremely strong emphasis onstrengthening
competition, including through trade liberalization. Anewcompetition lawwasbeing developed to
preventanti-competitivepractices.HisGovernmentwasactivelypursuinganyviolationoftheintellectual
property lawthrough aspecial unitcreated forthispurpose; hegavedetails ofrecent cases. Work
wasunderway toensure thatElSalvador would fullymeetitsTRIPS obligations before theyear2000,
asrequired, including inrespect ofborder measures; details ofcivilandpenal sanctions applicable
would beprovided toMembers.
Specific policy andsectoral questions
Membersnotedthat,despitetheeffortsmadetoliberalizetheimportrégime,importandcustoms
formalities werestillcumbersome, lacked transparency andremained anobstacle totrade. Members
asked whether there wereplans tosimplify these requirements andtomodernize customs. There was
aquestion onthetime-frame forcreating aone-stop window forimport procedures.
Memberscommendedthesimplificationofexportproceduresthroughthecreationoftheone-stop
window forexport formalities. Onemember asked about thescope forfurther simplification. Members
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commented ontheprogrammes inplace topromote exports beyond Central America, including the
freezonerégime andthedutydrawback system. Thegrowth ofthefreezones wasnoted anditwas
inquired towhatextent therehadbeenarelocation ofindustry tothefreezones. Some Members thought
thatthedutydrawbacksystemcouldactasanexportsubsidysince,whiletariffswerebeingprogressively
reduced, thedrawback wasfixed at6percentofthef.o.b. value ofexports.
Members noted theimportance oftheagricultural sector intheeconomy andthepositive effects
ofthereforms onitsperformance. However, some members referred tothenegative impact ofthe
realappreciation ofthecurrency onagricultural exports. Inaddition, onemember asked whether there
wereplans toliberalize thesugar market. Several members inquired about theadministration oftariff
quotas andtheirnotification totheWTO.
Noting thatthepresent system ofcustoms valuation wasbased ontheBrussels Definition of
Value (BDV), members urged thatnewlegislation bemade consistent withtheWTO Agreement.
Members expressed theirconcern about alackoftransparency intheaward ofGovernment contracts
andsought clarification onsuchprocedures.
Onemember commended ElSalvador forhaving submitted itssafeguards legislation forreview
bytheSafeguards Committee; thisappeared tobeconsistent withWTO requirements. Another sought
clarification ontheoperation ofanti-dumping duties andcountervailing measures, including which
lawsapplied inthese areas andtherôleoftheCACM Secretariat inthisregard.
Some members considered thatstandards, sanitary andphytosanitary regulations could operate
asbarriers totrade. Onemember noted thatElSalvador hadnotsubmitted aStatement of
Implementation asrequired under theTBTAgreement.
Inresponse, therepresentative ofElSalvador saidthat,since 1995, theGovernment had
accelerated thereform andsimplification ofcustoms procedures, including through theimplementation
oftheCentral American Uniform Customs Code anditsregulations, which hadentered intoforce in
June 1996. These reforms would becomplemented withasingle window forimports andthe
privatization ofsome customs services. Work hadalready begun attheCentral American level to
bring customs valuation procedures intolinewithArticle VIIofGATT 1994 within therequired
timeframe. Nopre-shipment inspection mechanism applied.
Therepresentative saidthatElSalvador 'sexport support andpromotion schemes didnot
constitute export subsidies. Total support, amounting tosome US$7 million in1995, didnotapply
totrade within Central America ortoexport oftraditional products. There were sixfreezones in
ElSalvador, with45firms, ofwhich 80percentwereinvolved inclothing production. Fourmore
zones wereinconstruction; itwashoped theywould attract operations withhigher value added and
modern technology.
Therepresentativeindicatedthatadraftlawhadbeenpreparedtomanagetariffquotasnegotiated
intheUruguay Round anditwashoped thiswould soonbeapproved. Itwasdifficult tothink about
unilateral liberalization ofsugar imports while somany subsidy schemes distorted world markets;
however, ElSalvador wasconsidering theopening oftariff quotas, withanout-of-quota rateof
55percent.
Central American legislation didnotprovide forsafeguards onintra-regional trade; WTO
ruleswereapplied buttherehadbeennosuchcases sincetheearly1960s. Dumping andsubsidization
werecovered byCentral American legislation andtheWTO Agreement, which waspartofnational
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law. Therepresentative clarified certain operational aspects ofthelaw,including theinvestigative
rôleplayed bytheCACM Secretariat (SIECA).
Therepresentative explained thattheNational Science andTechnology Council (CONACYT)
wasresponsibleforstandards,theevaluationofconformity,andmetrology.Theelaborationofstandards
andregulations wascoordinated withother agencies. ElSalvador would shortly notify itsacceptance
oftheWTO Code ofGood Conduct inthisarea.
Finally, therepresentative noted thatElSalvador wasnotamember oftheGovernment
Procurement Agreement. Almost allagencies hadautonomy inthisarea,butthecentral Government
wasobliged tocallfortenders when planned purchases exceeded acertain amount. Itwasplanned
toconsolidate thevarious regulations inasingle lawwiththeobjective ofincreasing transparency and
guaranteeing equal treatment fornational andforeign bids.
*****
Overall
DelegationswelcomedElSalvador'swide-rangingstructuralreformprogrammeofrecentyears,
including thesignificant stepstaken intradeliberalization, fiscal reform andprivatization. They noted
andencouraged ElSalvador 'sintention tocontinue theprocess withfurther reductions inapplied tariffs,
measures tobring about greater competition, modernization ofcustoms procedures andfurther steps
topromote foreign investment.
Acautionary notewassounded ontheneedfordiversification ofexports, inrelation toboth
goods andmarkets. Itwasalsorecognized thatrealexchange rateappreciation, fuelled inparticular
bythehighlevel ofemigrants 'remittances, makes thetaskofexport development more difficult.
Overall, itwasemphasized thatmaintenance ofthecurrent export-led growth pattern willrequire a
continued strong commitment totrade liberalization, aswellassustained efforts toensure astable
macroeconomic environment.
END