I. COMMERCIAL OVERVIEW (EXECUTIVE SUMMARY) OVERVIEW OF IMPORT MARKET The United Kingdom (UK), currently the fastest growing economy in the European Single Market, remains solidly entrenched as the United States' largest European market and fourth largest worldwide (after Canada, Japan and Mexico). In 1993, UK imports from the United States reached $26.4 billion, generating a $4.6 billion U.S. trade surplus. Given just its size and growth potential, the United Kingdom represents a uniquely important overseas market. Total UK imports of goods are projected to grow in real terms by between 3 and 6 percent through mid- decade. Over the next few years, new and established U.S. exporters can expect to find exceptional trading opportunities. The UK market is based on a commitment to the principles of free enterprise and open competition. International trade is vital to its economy. The absence of major trade barriers, and the relative ease of doing business, ensure that the United Kingdom remains an attractive marketplace. Twice as many U.S. firms sell to the United Kingdom than to the next most important U.S. export market in Europe. Demand for U.S. goods is growing as the recovery in the United Kingdom's industrial sector strengthens and as corporate investment is stepped up to meet the competitive challenges of an integrated European Union (as the former European Community has been called since November 1993). Establishing an initial trading relationship with the United Kingdom is an effective means to gain access to, and experience in, the European Single Market. From the United Kingdom, U.S. firms are well-positioned to take advantage of the full range of opportunities that regional integration and a return to economic growth in Europe are providing. Excellent transport and communications infrastructure, and accommodating political and commercial environment have already established the United Kingdom as a gateway to Europe for many companies. The potential represented by 340 million European consumers (372 million including the four new member states which are likely join the Union on January 1, 1995) has significant implications for U.S. firms. The abolition of many internal trade barriers within the Single Market increasingly enables European-based firms to operate relatively freely, and thereby achieve the economies of scale necessary to compete on a regional and international basis. The European trend towards corporate mergers and acquisitions, and the rationalization of industrial production and distribution systems, will serve to create an even more competitive commercial environment. BRIEF SYNOPSIS OF COMMERCIAL ENVIRONMENT Political stability, low rates of direct taxation, assured property rights, a flexible labor market, first-class financial markets and a geographic location in close proximity to the continental European markets make the United Kingdom especially attractive to U.S. exporters and investors. Entry into the market by U.S. firms is greatly facilitated by a common language, legal heritage and similar business institutions and practices. Traditionally, the United Kingdom has been a trading nation, and as such has developed a large and sophisticated services sector in support of its trade activities. There are no impediments to foreign ownership, nor restrictions to the free-flow of capital. Its regulatory environment is pragmatic, featuring a deregulatory trend consistent with the government's intention to provide a stable and unfettered commercial environment in which private enterprise can flourish. The current Conservative Party government came into office in 1979 committed to reforming an economy characterized by extensive state- ownership of manufacturing industries, powerful labor unions, high rates of both personal and business taxation, and direct controls on pay, prices, foreign exchange and dividend payments. Throughout the 1980's, the "Thatcher" government moved to expose the economy to the invigorating influence of market forces and to encourage freer movement of capital and labor, policies which have since been continued by Prime Minister John Major's administration. During this fifteen-year period, the central themes of the government's economic policy have been to reduce the role of the state in the economy, cut public spending, and to revive UK industry. Specific measures taken include tax reform, abolition of capital controls, privatization of national industries, deregulation of financial services, and labor law reform. These steps have generated significant structural changes in the economy, therefore increasing its productivity and competitiveness in the European Union (EU) and other major world markets. Following nearly a decade of sustained economic growth, the country entered a downturn in 1990. This recession, from which the UK began emerging at the end of 1992, was the longest and most painful since the 1930's. It forced a significant rationalization and re-deployment of resources within UK industry. As a result, the United Kingdom has entered a period of modest economic expansion with a leaner, more competitive business sector. Soaring productivity growth, low inflation and interest rates, and the reputation as a hospitable and relatively low- cost commercial environment, have enabled the United Kingdom to maintain its position as the preferred investment location in Europe for U.S., Japanese and other firms based outside this region. HOST COUNTRY BUSINESS ATTITUDE TOWARD THE US The United Kingdom shares a long cultural heritage with the United States, and the great sense of affinity which the British generally feel toward Americans translates into a high level of receptivity to U.S. goods and services. Bilateral trade and investment relations between our two countries are generally harmonious, if not exemplary, reflecting a shared commitment to the principles of an open and expansive multilateral trade system. Where we encounter friction, it usually involves UK concerns regarding a U.S. legislative or regulatory initiative that could impact on its strong investment position in our economy, or issues related to achieving a reciprocal balance in access to our respective markets in sectors such as civil aviation and telecommunications. An important strand in our bilateral commercial relationship is the investment each nation has made in the other's economy. The United Kingdom is the largest investor in the United States, and has traditionally been the most important destination of U.S. direct investment in Europe. One in eight of the United Kingdom's five hundred largest companies is an affiliate of a U.S. company. This economy provides a unique commercial base for gaining entry to the markets of the European Union (EU) and beyond through direct sales and investments, or through strategic alliances formed with UK firms. In 1992, the UK economy attracted 40 percent of all U.S. investment into the EU. Within the EU, Her Majesty's Government (HMG) has shown itself to be a staunch defender of the rights of any British- registered company, irrespective of national ownership. MAJOR BUSINESS OPPORTUNITIES (E.G. SECTORS, MAJOR PROJECTS, MARKET OPENINGS) The United Kingdom offers markets for the full gamut of U.S. exports. A return to sustained economic growth and HMG's emphasis on private- sector participation in infrastructure project development is creating significant trade and investment potential. Major domestic developments, notably recent pollution control legislation, further planned privatization of state-owned industries, reforms in the National Health Service, and further deregulation of the telecommunications market, have created outstanding commercial opportunities for U.S. exporters in such diverse sectors as healthcare, environment, telecommunications, utilities and transport. The post-Cold War reduction of U.S. export-controls, and the related restructuring of COCOM, will stimulate exports to British firms wishing to incorporate sophisticated U.S. technology into products which they manufacture for re-export to third countries. The UK Ministry of Defense (MoD) welcomes participation of U.S. companies in procurement competitions. The MoD's procurement policy is to secure "best value for money." In many competitions, U.S. companies bring management expertise and leading edge technology not available within the UK defense industrial base. Generally, the MoD's policy enables U.S. companies to compete on a level playing field, whether as prime contractor, or as a major sub-contractor to UK industry. The United Kingdom is a major market for agricultural products. Its current $900 million in agricultural imports from the U.S. include $241 million in forestry products and $144 million in seafood. Tourism is the only U.S. industry with a worldwide trade surplus, greatly contributed to by visitors from the United Kingdom. The United States remains the most popular long-haul destination for Britons. In 1994 the United Kingdom is forecast to be the second largest overseas provider of tourists to the United States, with 3,238,000 expected arrivals spending $9.5 billion on their U.S. trips. UK travel to the United States is projected to increase 8% over 1993. Britain's telecommunications sector is more liberal than that of any other European country, and presents significant opportunities for both equipment manufacturers and service providers. As an advanced economy, UK firms seek to apply the latest developments in information technology. Computer software in particular remains one of the fastest growing British market sectors. Plans to privatize all or part of the railroads, the postal system, the prison service, coal mining and air traffic control offer potential to exporters and joint-venture partners. The continued deregulation of the EU's air transport system will present further opportunities for suppliers of aircraft and parts, and ground- support equipment. The United Kingdom is becoming one of the most formidable automotive forces in Europe, offering growing sales prospects to aftermarket suppliers. The UK healthcare market, especially as the state-funded National Health Service (NHS) restructures, presents opportunities for U.S. suppliers of equipment and services, particularly where they can provide demonstrable productivity gains. In Europe, growing public awareness of the consequences of environmental pollution is creating higher EU and national environmental standards, and more rigorous enforcement of existing regulations. U.S. technological development has placed our environmental firms at a distinct competitive advantage. U.S. consumer products are very well-received in the United Kingdom, especially those which reflect the "American lifestyle." The U.S. Department of Defense (DOD) and UK's Ministry of Defence have a Reciprocal Procurement Memorandum of Understanding (MOU) for defense equipment. This MOU constitutes an effort by both governments to look at each other's existing weapons systems to satisfy their requirements, before considering those of third country suppliers. Of all our allies, the UK military enjoys the closest operational relationship with U.S. forces. Traditionally, this cooperation has resulted in many UK procurements of U.S., or U.S.-compatible defense equipment. MAJOR ROADBLOCKS TO DOING BUSINESS Our relations with the United Kingdom reflect a shared commitment to an open and expansive multilateral trade system. The UK presents no significant impediments to trade and investment or foreign ownership of corporate assets, nor restrictions on the free-flow of capital. However, there are several specific sectoral barriers: Bilateral Issues: - Air Services: The bilateral air services agreement restricts competitive opportunities for U.S. carriers between points in the United States and Great Britain. Limits on access to Heathrow Airport are a particular problem. - Telecommunications Services: While the UK telecom services market is the most open in Europe, regulatory and other barriers limit the ability of U.S. operators to compete, particularly in facilities-based international service. - The "Food Gap": Import substitution favors domestic production over U.S. imports. EU Issues: - EU Directives: Implementation of EU directives, notably the Broadcast and Utilities Directives, could create trade barriers in a previously open market. - Agriculture: Potential disapproval of dairy products containing BST, non-implementation of the U.S./EU agreement on corn gluten feed, EU requirement for food plant approvals, efforts to change standards for seasoned turkey meat imports, and other EU directives limit access. - Defense: While the UK is generally open to defense competition, economic and political commitments can advantage internal and EU contract awards in favor of UK and other European firms. - Product Standards, Testing and Certification: Formulation and implementation of EU standards and procedures can constitute a barrier to trade. - Tourism: Fear of violence in the U.S. is a concern of foreign visitors following several incidents involving international tourists to the U.S. UK summer holiday bookings declined from 8% of the market in 1993 to 5% in 1994. This adverse publicity also appears to be affecting late-1994 and early 1995 bookings. NATURE OF LOCAL AND THIRD COUNTRY COMPETITION As a large, sophisticated and substantially open market, the United Kingdom has a wide range of indigenous suppliers, some extremely well- entrenched. It also represents a target market for a similarly wide range of foreign exporters. A continuing trend is the increase of UK trading activity within the European Union, which now accounts for over one- half of the UK's exports and imports. The UK's major trading partners, in terms of total two-way trade, are Germany, the United States, France, and the Netherlands.