RESTRICTED
WORLD TRADE WT/TPR/S/23
24October 1996
ORGANIZATION(96-4438)
TRADE POLICY REVIEW
ElSalvador
Report bytheSecretariat
This report, prepared forthefirstTrade Policy Review ofElSalvador, hasbeen
drawn upbytheWTO Secretariat onitsownresponsibility. TheSecretariat has,as
required bytheAgreement establishing theTrade Policy Review Mechanism (Annex 3
oftheMarrakesh Agreement Establishing theWorld Trade Organization), sought
clarification from theGovernment ofElSalvador onitstrade policies andpractices.
Document WT/TPR/G/23 contains the policy statement submitted bythe
Government ofElSalvador.
Note: Thisreport issubject torestricted circulation andpress embargo untiltheendofthemeeting
oftheTrade Policy Review Body onElSalvador.ElSalvador WT/TPR/S/23
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS x
(1) Introduction ix
(2) General Economic Developments ix
(3) ElSalvador inWorld Trade x
(4) Trade Policy Objectives x
(5) Institutional Framework xi
(6) Evolution ofTrade Policies andInstruments xi
(i) Sectoral Developments xii
(7) Conclusion xii
I. THE ECONOMIC AND TRADE ENVIRONMENT 1
(1) Major Features oftheEconomy 1
(2) Recent Economic Developments 5
(i) Thereform programme 5
(ii) Supply anddemand 7
(iii) Public finances 9
(iv) Monetary policy 10
(v) Exchange ratedevelopments 11
(vi) Balance ofpayments 12
(3) Composition andDirection ofTrade 15
(i) Composition oftrade 15
(ii) Direction ofmerchandise trade 16
(4) Outlook 18
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 19
(1) Trade Policy 19
(i) Trade policy objectives 19
(ii) Institutional andlegal framework 20
(iii) Trade policy formulation 20
(iv) Trade laws andregulations 22WT/TPR/S/23 Trade Policy Review
Page iv
Page
(v) Trade relations 22
(a) World Trade Organization 22
(b) Regional Agreements 27
(c) Preferences 29
(2) Investment Policy 30
(i) Investment policy objectives 30
(ii) Legal framework 31
III. TRADE POLICIES BYMEASURE 34
(1) Overview 34
(2) Measures Directly Affecting Imports 34
(i) Registration, documentation, andrules oforigin 34
(ii) Customs valuation 35
(iii) Tariffs 36
(a) Structure 36
(b) Average tariff levels andtariff range 37
(c) Tariff escalation 37
(d) Tariff bindings intheUruguay Round 38
(e) Seasonal tariffs 40
(f) Concessional entry 40
(g) Tariff preferences 41
(iv) Tariff quotas 41
(v) Variable import levies 41
(vi) Other levies andcharges 41
(vii) Import prohibitions 43
(viii) Import licensing andauthorization 43
(ix) Import quotas 44
(x) Import surveillance 45
(xi) Import cartels 45
(xii) State-owned enterprises 45
(xiii) Countertrade 46
(xiv) Standards andother technical requirements 46
(a) Standards, testing andcertification 46
(b) Sanitary andphytosanitary regulations 47
(c) Marketing, labelling andpackaging 49
(xv) Government procurement 49
(xvi) Local-content schemes 50
(xvii) Anti-dumping andcountervailing measures 50
(xviii) Safeguard actions 51
(xix) Measures implemented inexporting countries 52ElSalvador WT/TPR/S/23
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Page
(xx) Balance-of-payments measures 52
(xxi) Import privileges extended tofreezones 52
(3) Measures Directly Affecting Exports 53
(i) Registration anddocumentation 53
(ii) Export taxes, charges andlevies 54
(iii) Minimum prices 54
(iv) Export prohibitions andother controls 54
(v) Export licensing 54
(vi) Export quotas 54
(vii) Export cartels 55
(viii) Voluntary restraints, surveillance andsimilar measures 55
(ix) Measures maintained byimporting countries 55
(x) Export subsidies 55
(xi) Duty andtaxconcessions 56
(xii) Export finance 56
(xiii) Export insurance andguarantees 56
(xiv) Export promotion andmarketing assistance 56
(xv) Export performance requirements 57
(xvi) Free zones andtax-free areas 57
(4) Measures Affecting Production andTrade 59
(i) Adjustment assistance 59
(ii) Assistance forresearch anddevelopment 60
(iii) Production subsidies andtaxconcessions 60
(iv) Competition rules 60
(v) Pricing andmarketing arrangements 60
(vi) Trade-related investment measures (TRIMs) 61
(vii) Intellectual property protection 61
IV. TRADE POLICIES AND PRACTICES BYSECTOR 63
(1) Overview 63
(2) Agriculture, Forestry andFishing 65
(i) Main features 65
(ii) Crop production andlivestock 71
(a) Coffee 71
(b) Sugar 75
(c) Basic grains andother crops 78
(d) Livestock anddairy products 81
(iii) Fishing 83
(3) Manufacturing 84WT/TPR/S/23 Trade Policy Review
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(4) Services 90
(i) Financial services 92
(ii) Transportation 94
(a) Roads 94
(b) Ports 94
(c) Airports 95
(d) Railways 96
(iii) Telecommunications 97
REFERENCES 98ElSalvador WT/TPR/S/23
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CHARTS
Page
I.1 Growth inrealGDP andconsumer price index, 1985-94 3
I.2 Sectoral distribution ofGDP, 1990 and1995 4
I.3 Selected indicators ofmacroeconomic development, 1971-94 8
I.4 REER index andtrade ingoods andnon-factor services, 1985-94 12
I.5 Balance ofpayments, 1985-93 14
I.6 Foreign direct investment cumulative inflows bysector, 1975-90 15
I.7 Trade ingoods andnon-factor services asshares ofGDP, 1970-94 16
I.8 Composition anddirection oftrade, 1975-94 17
III.1 Distribution oftariff rates, 1991/92 and1995 38
III.2 Average tariff levels andbindings bysectors andselected sub-sectors, 1995 39
III.3 Distribution ofbanking rates attheendoftheimplementation period 40
IV.1 Average tariffs byISIC classification, 1995 64
IV.2 Agricultural GDP bysector, 1990 and1995 65
IV.3 Distribution ofcultivated land, 1985, 1989 and1993 66
IV.4 Coffee andsugar production, exports andprices, 1985-94 67
IV.5 Coffee production, exports andworld prices, 1985-95 72
IV.6 Sugar production, exports andprices, 1985-94 76
IV.7 Sugar prices, 1985-94 78
IV.8 Volume ofproduction inselected crops, 1985-95 79
IV.9 Shrimp production, exports andworld prices, 1985-95 83
IV.10 Industrial GDP bysector, 1990 and1995 85
IV.11 Services GDP bysector, 1990 and1995 91WT/TPR/S/23 Trade Policy Review
Page viii
TABLES
Page
I.1 Basic economic andsocial indicators, 1970-95 1
I.2 Relative shares oftheformal andinformal sectors inproductive activities, 1989 and1994 4
I.3 Economic performance, 1985-94 6
I.4 Central Government current revenue, 1986-94 10
I.5 External performance, 1989-95 13
II.1 Trade-related legislation inElSalvador 23
II.2 Notifications made byElSalvador under theWTO Agreement, September 1996 24
II.3 Notification obligations under theWTO Agreement where nonotification ofmeasures
ortheabsence ofmeasures hasbeen received bySeptember 1996 26
II.4 Exports benefiting from unilateral trade preferences, 1991-95 29
II.5 Areas inwhich FDIandnational investment arelimited 33
III.1 Structure ofcharges levied onimports ofselected products, 1995 42
III.2 Sanitary andphytosanitary regulations 48
III.3 Free-zone activity, May 1996 57
III.4 ElSalvador exports bytype, 1991-95 58
III.5 Exemptions granted tofreezones andtax-free areas 58
IV.1 Major agricultural imports andexports 68
IV.2 Major policies adopted inthecoffee market, 1989-95 73
IV.3 Share ofcoffee export taxintotaltaxcollection, 1985-93 74
IV.4 Income taxoncoffee 75
IV.5 Economic classification ofimports, 1991-95 88
IV.6 Main features oftheSalvadorian tariff schedule, 1995 89ElSalvador WT/TPR/S/23
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APPENDIX TABLES
Page
AI.1 Imports bygroups ofproducts, 1975-94 103
AI.2 Exports bygroups ofproducts, 1975-94 104
AI.3 Merchandise exports bymajor region andcountries ofdestination, 1975-94 105
AI.4 Merchandise imports bymajor region andcountries oforigin, 1975-94 106
AIII.1 Tariff escalation andtariff ranges, 1996 107
AIV.1 Tariff rates forElSalvador, byISIC category, 1995 110WT/TPR/S/23 Trade Policy Review
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SUMMARY OBSERVATIONS
(1) Introduction
1. Since 1989, attheendoftenyears of
internalconflict,ElSalvadorhasbeenfollowing
macro-economic stabilization andstructural
adjustmentprogrammes,whichhaveseengrowth
increase to6.5percentandinflation falling to
around 11percentin1995. Theeconomy has
been liberalized through trade reforms and
domesticde-regulation,reducingtheanti-export
biasoftheprevious trade andindustrial policy
régime. Thenew economic environment,
togetherwiththeongoingmodernizationoftrade
lawsandregulations,havecreatedopportunities
forinvestment which arenecessary topavethe
wayforstable long-term growth.
(2) General Economic Developments
2. Theprogress achieved under thereform
programme hasallowed ElSalvador tostart
rebuilding itseconomy after theconflict.
Increased investment ininfrastructure andin
human capital hasbeenachieved, interalia,by
therationalization ofexpenditures, aspartof
awide-ranging fiscal reform aimed atcutting
government expenditure andincreasing tax
collection. These measures haveresulted ina
reduction ofthefiscal deficit from4.7percent
in1989tolessthan1percentofGDPin1995.
3. Under thefiscal reform, thetaxsystem
hasbeensimplified sothatonlyafewtaxes of
general application remain inplace (VAT,
income taxandthetariff). TheVAThasbecome
themost important tax. Export taxes and
sectoral taxincentives havebeenabolished; the
onlyremaining taxincentives arethoseprovided
under thefree-trade andtax-free areas régime
anddrawback system.
4. Cut-backs inexpenditure have been
achieved principally byreducing therôleofthe
State. Thus, keysectors oftheeconomy havebeen, orareintheprocess ofbeing, privatized.
Themarketing boards incharge ofcoffee, sugar
andcotton, thethree traditional agricultural
exports, havelosttheirmonopoly power; inthe
financial sector allbutonebank hasbeen
privatized; andAntel, theprofitable public
telecommunications monopoly, isintheprocess
ofbeing privatized, asaresome services atthe
main airport andport.
5. Aspart ofthewider economic
deregulation, theexchange rate hasbeen
unified, exchange controls havebeeneliminated
andthecapital account hasbeenliberalized.
Interest rates arenowessentially setbythe
market andcredit rationing hasbeenabolished.
TheCentral Reserve Bank'smain objective is
tocontrol inflation, ataskwhich iscomplicated
bylarge inflows ofremittances from
Salvadorians working intheUnited States.
While inflation hasbeensubstantially reduced,
itstillexceeds international levels sothat,taken
together withthepolicy tomaintain astable
nominal rateofexchange withtheU.S.dollar,
therehasbeenarealexchangerateappreciation
since thebeginning ofthe1990s. Persistent
trade deficits aremore than offset bythe
remittances and, more recently, byprivate
capital inflows.
6. TheGovernment hasacted tofacilitate
foreign investment intheeconomy. FDIis
allowed inallsectors inElSalvador, withvery
limited areas reserved fornationals. Anewlaw
isbeing drafted tosimplify andexpedite the
process ofregistration andlegalization of
investment, andtheopening upofaone-step
window tosimplify investment procedures is
envisaged inthenearfuture. ElSalvador does
notapplyanytrade-relatedinvestmentmeasures.ElSalvador WT/TPR/S/23
Page xi
(3) ElSalvador inWorld Trade
7. ElSalvador'stradeisconcentratedboth
ingoods andinmarkets. Itsmajor markets are
theUnited States, mainly foragricultural
products andclothing (thelatter generally
assembled infreezones); theEuropean Union
(EU), alsoforagricultural products; andthe
Central American countries, forindustrial
goods.
8. Theconcentration intrade canbe
attributed tothree factors. First, ElSalvador
benefits from duty-free privileges inthe
United States under theCaribbean Basin
Initiative andtheEUunder theGeneralized
System ofPreferences. Second, thefreezones
havespecialized intheassembly ofclothing to
beexported totheUnited States under the
off-shore assembly programme, another
preferential régime. Third, intra-regional trade
isimportant because oftheCentral American
Common Market (CACM).
9. Thereisconcernaboutthelackofexport
diversification. While theUnited States
preferential sugar quota andoff-shore assembly
régimeprovidebenefitstoElSalvador,theyalso
inhibit diversification inproduction andtrade;
resources thatmight beputtoother usesare
allocated totheproduction ofsugar andthe
clothing industries located inthefreezones.
Inaddition,therealappreciationofthecurrency
inrecent years hasalsobecome aconstraint on
broadening theexport basebecause oftheloss
incompetitiveness forSalvadorian exports.
(4) Trade Policy Objectives
10. ElSalvador 'strade policy objectives
includemovingtowardamoreoutward-oriented
trade régime, strengthening andincreasing
overseas market access forSalvadorian
products, anddeepening theintegration of
ElSalvador intheworld economy. Ithas
pursued these objectives through itsunilateral
reformprogramme,aswellasthroughregional,
bilateral andmultilateral trade andinvestmentnegotiations. Regional tradenegotiations atthe
Central American level and within the
framework oftheFree Trade Area forthe
Americas (FTAA) areseenasveryimportant,
butElSalvador has also intensified its
participation atthemultilateral levelthrough
theWTO.
11. ElSalvador acceded totheGATT in
1991, butdidnotparticipate inanyoftheTokyo
Round Agreements. Itbecame amember ofthe
WTO inMay 1995, participating inall
Multilateral Trade Agreements butnotinthe
Plurilateral Agreements. TheGovernment
intends toimplement theWTO Agreements
within thetimeperiods available todeveloping
countries.
12. As an international treaty in
ElSalvador,theWTOAgreements
constitutionally take precedence over any
conflicting domestic legislation; however, the
authorities are progressively introducing
amendmentsaimedatbringingspecificlawsinto
linewiththeprovisions totheWTO. For
example, newlegislation hasbeen approved
since theentry inforce oftheWTO intheareas
ofrulesoforigin, anti-dumping andsafeguard
procedures, while areas that stillrequire
attention include customs valuation.
13. TheCentral American Common Market
(CACM) isthecentrepiece ofElSalvador 's
regional trade relations, andElSalvador has
putspecial emphasis inrevitalizing theCACM.
Inthiscontext, aprocess ofconvergence has
been engaged towards theCACM common
external tariff, negotiated in1993, andcommon
legislation exists inseveral areas, including
customs valuation, intellectual property, and
dumping andcountervailing measures.
14. ElSalvador, together withGuatemala
andHonduras, isnegotiating afreetrade
agreement withMexico; itisalsoparticipating
inthenegotiations toestablish aFreeTrade
Area fortheAmericas, andhasalsosignedWT/TPR/S/23 Trade Policy Review
Page xii
bilateral investment agreements withseveral
countries.
(5) Institutional Framework
15. Principal responsibility fortradepolicy
lieswith theMinistry ofEconomy, which
absorbed theprevious Ministry ofTrade in
1989. Within theMinistry, theTrade Policy
Directorate, created in1994, hasresponsibility
forformulating, implementing andreviewing
trade policy, aswell asnegotiating trade
agreements. Initiatives inspecific areas
affecting trade maybeproposed byanyrelevant
ministry butmustbeapproved bytheEconomic
Committee, formed bythe President,
Vice-President, various Ministers and the
President oftheCentral Reserve Bank.
16. There isnoindependent bodytoprovide
theGovernment withformal advice regarding
trade policies. Nevertheless, theprivate sector,
through producer groups and research
institutions, provides advice totheGovernment
onaninformal basis.
(6) Evolution ofTrade Policies and
Instruments
17. Since1989,ElSalvadorhas
progressivelyrationalizedandreduceditstariffs.
Whereas, prior to1989, applied m.f.n. rates
ranged from5to290percent,theynowrange
from 1to30percent, with anunweighted
average of10.1percentin1995. Fewduties
arehigher than25percent. Itisplanned to
reduce therange ofapplied tariffs to0to
15percentby1999; thisseems feasible since,
asnoted above, ElSalvador doesnotrelyon
trade taxes tofinance itsfiscal deficit. Infact,
inspiteofthereductionintariffs,dutycollection
hasincreased because ofthewhole process of
liberalization andadecrease insmuggling.
Despite thereduction intariffs, escalation
persists,providingcertainSalvadorianindustries
withhigher effective protection thanisevident
fromthemoderate nominal rates.18. ElSalvador bound mostofitstariffs on
accession totheGATT in1990andextended its
bindingcoverageto100percentintheUruguay
Round, albeit at"ceiling" rates, generally at
40percent,which aresubstantially higher than
those currently being applied.
19. Most non-tariff barriers have been
eliminated. Authorization isrequired forthe
importation ofsugar, import licences remain
onlyforjutesacks andsalt,andimport controls
remain fortheduty-free entry ofsome sensitive
products from other members oftheCACM.
These procedures havenotbeennotified tothe
WTO Secretariat and appear tolack
transparency. Licence procedures haveyetto
bedeveloped fortheimplementation oftariff
quotas under ElSalvador 'sWTO tariffication
commitments foragriculture.
20. Anti-dumping, countervailing and
safeguardproceduresderivefrom
Central American legislation, which the
authorities believe tobeWTO-consistent. Only
onecountervailing action hasbeenreported in
thelastfiveyears.
21. Customsproceduresareatpresentbeing
modernized, but,while normal processing time
seems moderate, delays atcustoms are
reportedly aconcern toimports.
22. ElSalvadorcurrentlyapplies
international standards, butnational standards,
basedoninternationalstandards,arenowbeing
developed.
23. Topromoteproductionofnon-traditional
exports formarkets outside Central America,
adutydrawback system hasbeenestablished
andthefree-zoneandtax-freearearégimeshave
beenreformed. Thedutydrawback scheme is
based onafixedre-imbursement equivalent to
6percentofthef.o.b. value. There areno
explicit export subsidies.
24. Exportprocedureshavebeen
substantially streamlined bytheopening-up ofElSalvador WT/TPR/S/23
Page xiii
aone-stop window where alldocuments are
processed. Export taxes havebeeneliminated.
Exportcontrolsremainonlyforsubsidizeddiesel
andgasfordomestic consumption. Aspecial
export document showing aquota entitlement
isrequired forpreferential sugar exports tothe
United States andtextiles andclothing exports
subject toquotas inimporting countries. Export
permits arerequired forcertain products,
including Portland cement, clinker andsugar
cane toensure domestic availability. Coffee
exports arecovered bytheretention planofthe
Association ofCoffee Producing Countries.
25. Most domestic price controls were
abolished in1989, and,inpractice, onlycertain
petroleum products arenowsubject toprice
controls.
26. Otherthantheconstitutionalprohibition
onmonopolies andregulatory provisions in
certain services areas, there isnoexplicit
legislation toregulate competition conditions
intheSalvadorian market andthere isno
competition authority.
27. In1993 alawregarding intellectual
property rights came intoforce. Enforcement
ofthislawhasbeen difficult because of
insufficient resources andalackofawareness
thatthelawisbeing infringed. However, the
Government hasbeenmaking efforts toenforce
thelaw,and,when cases havebeenbrought to
theirattention,theauthoritieshavetakenaction.
(i) Sectoral developments
28. Theagricultural,industrialandservices
sector have been undergoing aprocess of
adjustment inElSalvador asthepast
protectionist, state-controlled régime hasbeen
dismantledandmarketforceshavebecomemore
relevant. Theagricultural sector, traditionally
important, suffered badly inthe1980s asa
result ofthearmed conflict, anill-advised land
reform andthecreation ofmarketing boards.
Certain crops such ascotton, formerly an
important export, seems tohave totallydisappeared. However, agricultural production
isnowbeing re-activated asaresult ofreforms
undertakensince1992,suchastheguaranteeing
ofland property rights, theprivatization of
marketing boards andtheelimination ofexport
taxes. ElSalvador hasalsopromoted the
production ofnon-traditional export crops for
markets outside Central America.
29. Salvadorian industry, developed under
animport-substitution strategy toserve the
Central American market, hasfaced difficulties
inadjusting tothenewtrading environment.
Thoseindustries,includingtextilesandclothing,
thathavebeenabletodevelop andcompete in
markets outside theCentral American region,
continuetoreceivehigheffectivetariffprotection
inthehomemarket.Industriesthathaveavailed
themselves ofthebenefits provided bythe
free-zone andtax-free arearégimes havebeen
successful, andthenumber ofindustries under
thesetworégimes hasbeenincreasing. Exports
fromthefree-zonesandtax-freeareashaverisen
tosome 40percentofthetotalin1995, and
theycontinue toincrease.
30. Theservices sector isthelargest sector
inElSalvador,anditsimportancehasincreased
since thebeginning ofthe1990 because ofthe
growth inconstruction. Today, theGovernment
isengaged inaprocess ofreconstructing and
renovating infrastructure suchasroads, ports
andairports, which areessential fortrade. The
rôleoftheState inother services sectors has
become secondary because oftheprivatization
programme.
(7) Conclusion
31. Since 1989, theobjective ofthe
Salvadorian authorities hasbeentocreate an
efficient anddiversified economy, driven by
export-led growth. Thesolidgrowth since the
reform istestimony tothesuccess ofthe
macroeconomicstabilization,theextensivetrade
liberalization andthederegulation policies
pursued. However, therealappreciation ofthe
exchange rateinthefaceofsubstantial financialWT/TPR/S/23 Trade Policy Review
Page xiv
inflows (mainly remittances) creates difficulties
forexport development anddiversification.
32. Providing astable macroeconomic
environment isasinequanonforsustaining or
evenaccelerating growth anddevelopment, as
theauthorities would wish, butthisneeds tobe
supported bycontinuing theliberalization ofthe
economy. Inthisregard, efforts arebeing made
toupdatethelegalframework,speedupcustomsoperations, facilitate trade andinvestment and
enforce theintellectual property rights law.
Consideration should alsobegiven tothemore
active promotion ofcompetition inthedomestic
market. Efforts needtocontinue inrebuilding
andfurther developing thephysical andservices
infrastructure oftheeconomy, aswell as
deepening thehuman capital base, toeliminate
theconstraints thatweaknesses inthese areas
impose ondevelopment efforts.