I. Commercial Overview A. Overview of the Import Market Over the last three years, U.S. trade with Poland has been on the rise as import markets have opened for almost all goods. Importantly, 1993 was a banner year for U.S. trade with Poland. U.S. exports in 1993 ($916 million) were up 200 percent over 1991 when, as markets opened, the face of U.S. exports to Poland changed. Prior to 1989, the bulk of U.S. exports to Poland were in the agricultural sector (e.g. maize, wheat). Beginning in 1990, U.S. exports began to change to more standard U.S. manufactured goods such as machinery, computers, telecommunications equipment and automobiles, not to mention large scale sales of U.S. aircraft. If trends continue, U.S. direct exports to Poland could reach $1 billion in 1994. The U.S. is chipping away at import market share. Since 1990, total imports from U.S. firms into Poland have ranked the U.S. between 10th to 15th on the list of Poland's largest import partners, compiling between 2 and 3 percent of the total import market. Germany, Russia and Italy were Poland's largest trading partners in 1993, according to Polish trade data. In the first four months of 1994, Germany again topped the list with 28 percent of the import market (Italy, the U.K., Russia and France were next in line) and the United States ranked 6th with about 4.5 percent of the total import market. U.S. agricultural exports account for about 11 percent of the total Polish agricultural import market, a jump from 2 percent in 1991. It is estimated that the import of services in Poland accounts for more than 20% of total Polish imports, though Poland is running a trade surplus in services (mostly to Central and Eastern Europe). The U.S. Government has picked Poland as one of the top ten "Big Emerging Markets" (BEM) in the world for U.S. exports, with the likes of China, Brazil, Mexico, and Turkey (the only other European country selected). Given this distinction, the U.S. Government will assist U.S. companies in targeting these markets with aggressive export strategies. B. Brief Synopsis of the Commercial Environment Going into 1994, the rate of economic reform and the stability of Poland's political system were underlying concerns for companies doing business in Poland. Polish firms in particular were concerned that the economic environment for expanding or starting new business, which they believed stabilized in late 1993, would worsen in 1994. In fact, the environment remained relatively stable. A survey in mid-1994 indicated that five years after economic and political reform, slightly more than half of all Poles believed they were worse off than before the reforms took place. However, more than 70 percent emphasized that the current commercial environment allowed them opportunities to show individual business initiative, and nearly 90 percent appreciated the fact that they lived in a country with political and economic freedom. The prospect for real economic growth and the size of the Polish market are the two top reasons U.S. and other foreign companies do business in Poland. Most believe that Poland is the best market in Central and Eastern Europe for their products and/or investments. While lingering concerns about the uncertainty of the regulations on foreign investment in Poland may limit the capital firms are willing to invest, most multinationals in 1994 continued with their plans to expand their businesses. U.S. companies doing business in Poland believe that their concerns about regulations and the business environment can be addressed. Reasons for doing business in Poland far outweigh current difficulties in the market. One strong indication of the current stability in the market and the potential for growth is that many U.S. companies are reinvesting their profits in Poland, even though the profits can be repatriated. C. Host-Country Business Attitude toward the U.S. Polish government officials have offered encouraging remarks regarding the desire to cooperate with foreign and U.S. investors. In his first speech to foreign business in January 1994 at the American Chamber of Commerce in Poland (AmCham), Prime Minister Waldemar Pawlak said that Poland was open to free trade. He congratulated the United States as being the largest foreign investor in Poland and urged U.S. companies to increase their trade with Poland and help open new markets for Polish products. In a subsequent address in April 1994, Minister of Industry Marek Pol told the AmCham that encouragement of foreign investment was Polish "government policy." He encouraged U.S. business to envision Poland as the "base camp" for expansion of their activities to the East. By way of dispelling perceptions of increasing Polish xenophobia, Pol commented that it was his belief that no political entities of note--in or out of government--were against foreign investment. D. Major Business Opportunities Opportunities for trade and investment exist across virtually all industrial and consumer sectors in Poland. Opportunities will continue to emerge as privatization of state industry, which has been slow to-date, continues. Major projects will develop in industries with problems related to the environment, including the power and coal sectors. Aspects of Poland's infra-structure that are beginning the slow process of modernization include: roads and bridges, airports, seaports and railways. Opportunities will expand in these areas in all corners of Poland. The aircraft and automotive sectors are currently modernizing, and suppler opportunities for parts and components, including transfers of technology, will develop rapidly. The Ministry of Industry has outlined the following five sectors where major restructuring is planned or underway: defense, metallurgy, petroleum, power generation, and ship building. E. Major Roadblocks to Doing Business Poland's movement toward European Union (EU) membership is natural and welcome to many U.S. companies looking to expand from Poland into the EU. However, under Poland's current tariff structure with the European Union, a result of a bilateral association agreement with the EU in early 1992, U.S. imports are discriminated against by significantly higher customs duties. This tariff discrimination affects U.S. investments as well, as customs duties add unnecessary costs to imported capital goods used in production. The Polish government has sent both positive and negative signals to companies doing business in Poland. The new law on copyrights was a very positive step toward correcting a major problem for U.S. companies. In some cases, however, legislation has been amended and business plans disrupted. Tax benefits previously allowed by law to foreign investors expired, and new requirements were set. In the minds of some U.S. companies, this was a reversal of the law on foreign investment. Incentives that would promote new business in Poland are often talked about, but less often put into practice. Reducing tax rates or providing new tax holidays or tax credits would be welcome by U.S. and foreign business in Poland. However, these do not appear palatable to the Polish government at this time. A compromise incentive would be to accelerate depreciation rates on new capital investments, as recently suggested by the AmCham. The Polish government is aware of these and other obstacles to foreign investment in Poland, and the signals they have been sending on this regard are encouraging. F. The Nature of Local and Third Country Competition U.S. companies doing business in Poland face strong foreign competition, particularly from Europe. Other countries, including Japan, are currently minor players in trade and investment in Poland. Poland's domestic industry is developing slowly and is still at a stage where U.S. companies can assist with its development. For the foreseeable future, Poland will be a net importer of manufactured goods, particularly those that will help it develop and generate class exports. In July 1994, President Clinton called for Germany (Poland's largest trading partner) and the United States (Poland's largest foreign investor) to work together to help Poland become a part of the Western world.