SECTION I -COMMERCIAL OVERVIEW - Overview of Import Market El Salvador's import market has exploded in the last four years, a predictable consequence of the free market economic reforms of the Cristiani Administration. A complex, protectionist web of high import duties and non-tariff barriers was replaced by a straightforward tariff regime with most tariffs at 5-20 percent, although there are a few categories at 25 and 30 percent. As a result of the opening of trade, and healthy levels of economic growth imports increased from $1.161 billion in 1989 to $1.919 billion in 1993. Imports of consumer goods increased rapidly during the first years of the trade liberalization, but now the most rapid growth rates are in capital goods. For instance, the importation of capital goods for the manufacturing sector rose 40 percent in 1993, to $170 million from $121 million in 1992. Transportation sector imports, which include used Japanese passenger cars from the U.S. as well as the used school buses popular for urban transport, also showed a healthy growth rate of 25 percent, from $205 million in 1992 to $257 million in 1993. The boom in construction fueled demand for imports of construction goods, both intermediate products and capital goods; total imports of construction goods reached $140 million in 1993. Imports of durable goods also recorded a healthy growth rate of 14 percent for a total of $81 million during this time period. - Commercial Environment: Several factors combine to make the commercial environment in El Salvador highly attractive for experienced U.S. exporters. The proximity of Central America to the U.S. market eases logistics. Several airlines have daily direct flights to Miami, Houston, and Los Angeles, and the Caribbean shipping routes are well-served. It is common that more sophisticated Salvadoran businesspeople speak English, as many were educated in the U.S. and travel there frequently for business and tourism. Consumer tastes in El Salvador more and more are oriented toward U.S. products. U.S. dominance of El Salvador's foreign trade, with a 43.9 percent share of the import market, demonstrates the strong commercial relationship between the two countries. As of June 1994, all commercial banks except one are privately owned. Loan rates start at 20 percent, which some economic observers view as high considering that the annual inflation rate from April 1993 to April 1994 was 13.6 percent. The colon trades at about 8.7 colones to one dollar. El Salvador's legal system is undergoing reform, including important assistance from the U.S. Agency for International Development's Administration of Justice project. The commercial code will soon be updated. Currently, commercial cases go to a mercantile court. Intellectual property rights (IPR) cases also go to mercantile court. Much of contract law is covered by the commercial code. - Host Country Business Attitude Toward the U.S. Most Salvadoran businesspeople are at ease with U.S. business practices. During the Civil War, many Salvadoran families, both from the elite and from the middle class, sent their children to the U.S. for security reasons, so it is common to find local businesspeople who were educated in the U.S., speak good English and perhaps even worked in the U.S. That familiarity, as well as the growing dominance of U.S. media in markets such as cable television, also creates a taste for U.S. consumer goods. Evidence of this acceptance is the strong demand for U.S. franchises and the success of U.S. consumer-ready food products. Trading patterns have been formed by the proximity to the U.S. market, with many Salvadoran firms enjoying longstanding relationships with U.S. suppliers. Most Salvadoran businesses consider U.S. companies and U.S. products reliable. - Major Business Opportunities El Salvador's compelling need to repair war damage and address years of neglect of its infrastructure creates major opportunities in the construction of highways, airports, power plants and other projects. Funding for addressing these needs is available because El Salvador has been successful in securing major loans from the Inter-American Development Bank, the World Bank, the Central American Bank for Economic Integration and bilateral donors. CEPA, the autonomous ports authority, has developed a master plan envisioning a $100 million expansion of El Salvador International Airport. The national railroad, also run by CEPA, is in desperate need of new rolling stock and track repairs. CEL, the state-owned electricity monopoly, confronts a rapidly increasing demand for power as well as long-delayed maintenance and rehabilitation requirements. The company has reacted by turning to the private sector for an 80-megawatt diesel-fired plant. The government plans to approve new legislation that will make it easier for private operators to sell power to CEL, thereby creating opportunities in biomass and other sectors. Biomass is particularly attractive because the sugar industry produces significant quantities of waste that is suitable for power generation. Telecommunications also presents new prospects. The legislature has given preliminary approval to constitutional reforms that will allow privatization of telephone services. This opening, along with the pent-up demand for service in a country that has only about 21 telephones per 1,000 persons, will create a vast new market. The telecommunications monopoly, ANTEL, currently operates several services, such as cellular, data transmission, trunking and packet switching, through concessions to private companies. The most attractive prospect for foreign investors has proven to be the textile industry. A productive labor force, liberal foreign investment regulations and free trade zone laws; plus an almost total absence of quotas have drawn heavy investments in apparel assembly from Korean, Taiwanese and U.S. investors. Value-added in apparel exports jumped from $42 million in 1992 to $71 million in 1993 and is projected to reach $97 million in 1994. - Major Roadblocks to Doing Business The Cristiani government removed the most serious obstacles to commerce when it transformed the exchange arrangement to a market-based system free of any exchange restrictions. The exchange rate has been remarkably stable for the past two years at 8.7 colones to the dollar. The registration system for opening a business in El Salvador still requires completion of extensive procedures, but the government is committed to simplifying the process. A remaining barrier to business efficiency is the legal system, which can be slow and unreliable. Unless the exporter has already developed a good, long-term business relationship, exporters should ship to El Salvador only on an irrevocable letter of credit basis. Also, a contract that contains an arbitration clause should specify a third-country or international forum. - Nature of Local and Third Country Competition Competition varies on a sector-by-sector basis. European competition can be strong in certain sectors, such as wheat, consumer-ready food products, or telecommunications, but developing countries challenge U.S. exporters in other sectors. For instance, a recent sale of 250 new buses to a transportation cooperative went to a Brazilian company selling Mercedes chassis and engines on which a Guatemalan company installed carriages. Japanese vehicles still dominate the new car market, but U.S. manufacturers are making their first serious effort to sell cars here in more than a decade. Both Japanese and European firms are strong in medical products and telecommunications. Japanese companies are also strong in construction equipment and consumer electronics.