III. ECONOMIC TRENDS AND OUTLOOK MAJOR TRENDS AND OUTLOOK The resurgence of the British economy in the 1980's roughly paralleled the return of the Conservative Party to power in 1979. The recovery began in 1981 and continued for nine years, the longest running growth period in British postwar history. Labor productivity in manufacturing rose 4.8 percent a year from 1979 to 1989, and the 2.2 percent rate of real GDP growth achieved in that period was among the highest rates in EU countries. After successfully emerging from its 1979-81 recession, the United Kingdom was able to avoid the slowdown in economic growth in Western Europe in the early 1980's that resulted, in part, from high interest rates. UK government policy was to maintain a tight control over domestic demand while engineering a competitive devaluation of the pound. Signs of economic overheating began to emerge in 1988 and were unmistakable by 1990, as retail price inflation reached a rate of approximately 11 percent and average annual wages were growing at nearly 10 percent. The government response to overheating and inflation employed several strategies. A tight monetary policy featuring higher interest rates was established to rein in the momentum of the economy. Base (prime) rates were raised incrementally from 7.5 in mid-1988 to 15 percent by the end of 1989. To help curb inflation, the United Kingdom shifted from a floating exchange rate system and entered the fixed Exchange Rate Mechanism (ERM) of the European Monetary System in October 1990. Joining the ERM required the government to maintain a fixed exchange rate of sterling against the Deutsche mark (DM) at DM 2.95, a rate which proved increasingly difficult to maintain. By early 1990, the effects of monetary restraint were producing a slowdown in the economy. Consumer spending declined sharply as households paid off personal and mortgage debt incurred during the earlier period of low interest rates. Concurrently, companies' fixed investments declined, and inventories were drawn down. The resulting recession, which was the longest since the 1930's, caused widespread business failures and unemployment, and significantly increased the public sector borrowing requirement. Both consumer and business confidence were seriously undermined. Small firms were particularly hard hit as larger companies stayed afloat by cutting costs , postponing investment and by delaying payments to creditors. From a high of 10.9 percent at the beginning of the recession in September 1990, the underlying rate of inflation dropped to 2.5 percent in May of 1994, its lowest rate in almost three decades. (The UK Treasury prefers to monitor the "underlying" rate of inflation instead of the "headline" rate which includes mortgage interest payments exaggerating inflationary trends. The latter was 1.6 percent.) Steep declines in domestic demand early in the recession drove down inflation; high levels of unemployment and restrained wage growth have sustained the inflation rate at historically low levels well into the recovery. Interest rates were maintained at relatively high levels until September 1992, when intense speculative pressure on the currency exchange markets caused the United Kingdom to withdraw from the ERM and allowed the pound sterling to float. Freed from the constraints of the ERM, the UK Treasury brought down the base rate from 10 percent in September 1992 to 5.25 percent in June 1994. Subsequent widening of the ERM bands has enabled interest rate reductions by other major European countries, making the prospect of a prolonged period of competitively low rates in the United Kingdom more likely. The economic recovery, which began in mid-1992 has already lasted 8 quarters, longer than the immediately preceding recession. However, it has been restrained by persistently low levels of consumer confidence, and by uncertainty over export growth. The effective devaluation of sterling upon leaving the ERM, and the return of economic growth in the United States, had a positive impact on UK exports during 1993. However, since over half the United Kingdom's trade is now with other members of the EU, the sluggishness of the major economies of continental Europe is holding back demand for British exports. At the same time, the relatively buoyant British market is attracting imports from the Continent, and the United States, and is squeezing profit margins for domestic producers. Real GDP grew at 2.0 percent in 1993, and in Q1 1994 GDP finally reclaimed its pre-recessionary peak of four years previous. The UK Treasury predicts that this will rise to 2.3 percent throughout 1994, a forecast which many economists believe to be conservative. This contrasts with the negative growth rates of 0.5 per cent in 1992 and 2.2 percent in 1991. The United Kingdom is thus likely to be the only major European economy to experience significant growth through the middle of the decade. Unemployment, which had been rising since mid-1990, peaked in January 1993 at 10.6 percent. The manufacturing sector was significantly disrupted, and many white-collar jobs have been permanently lost. Although employment has fallen, output has climbed back to near early- 1990 levels, indicating that firms are finding ways to operate more productively with reduced staffing levels. Although the rate of unemployment has fallen gradually, reaching 9.4 in April of 1994, it is expected to remain at relatively high levels for some time. Grappling with a growing fiscal deficit, which reached 7.25 percent of GDP in 1993-4 and expected to remain at 5.25 percent over the next year, Her Majesty's Government is seeking to cut public spending programs and has been forced to shelve plans to further reduce the base income tax rate for individuals. Much of this deficit was a consequence of reduced tax receipts and increased unemployment benefit payments during the recession. However, a portion of the deficit is considered structural, and thus will continue into the recovery. The government's budgets of April and November 1993 contained a package of revenue enhancement and spending control measures which, the UK's Treasury projects, will erase the fiscal deficit by the year 2000. These include an extension of goods subject to the value added tax, and a freeze on the total salary bill for the country's 5 million public sector employees through 1997. Any salary increases for public sector employees must be paid for through productivity gains, and by reductions in the administrative cost of providing public services. These fiscal measures were received favorably by the business community and financial markets, which appear to view them as a credible solution to the deficit problem. The UK Treasury has set a target of maintaining the underlying rate of inflation between one and four per cent. The rate remained well within the target range. Average earnings for the whole economy only rose 3.75 percent in the year to April 1994, influenced by a 1.5 percent pay ceiling imposed on public sector employees. Manufacturing sector rises for the same period were 4.75 percent. The expansion in indirect taxes, contained in recent budget statements, is expected to exert upward pressure on prices from the spring of 1994. These are estimated to add between 0.65 and one percent to the inflation rate. Many economists forecast that, if modest economic growth continues, private sector wage demands will begin to rise, possibly pushing inflation towards 4 percent sometime in 1994, before it falls back to the middle of the government's target range (1-4 percent) over the medium term. Productivity, expressed as output per person employed for the whole economy, rose by 13 percent between 1984 and Q1 1993. However, the rise for manufacturing industries was 40 percent during the same period, an annualized rate of 4.5 percent. Productivity growth accelerated dramatically during the tail end of the recession and into the recovery, with manufacturing output surging by 6.7 percent in the three months to July 1993, before falling back to a more sustainable rate of 0.8 percent in the three months to February 1994. This has resulted in a rapid decline in real terms of unit labor costs, and has put the United Kingdom in the low-cost lead among the Group of Seven leading industrialized countries. Low rates of interest and inflation, a stabilization of unemploy-ment and a halt to the slide in house prices, and a surge in sales of all sectors of the vehicle market appear to reflect a return of consumer confidence. Consumer spending increased over six consecutive quarters to September 1993 at an annual rate of 1.6 percent, slowing to 0.9 percent for Q1 1994. These increases indicate that the recovery, although modest, is well-established. Reaching self-sufficiency in crude oil production in 1981, the economy has maintained its role as an exporter ever since. Output reached 2 million barrels per day (MMBD) in 1993 and is expected to rise over the ensuing 2 years to 2.5 MMBD before beginning a gradual decline. However, the recent soft world market for petroleum has resulted in a decline in national revenues. Natural gas production is rising and will account for an increasingly high proportion of the hydrocarbon resources produced. The state-owned coal industry recently lost its protected market when the electricity-generating industry became privatized in the late 1980's and British Coal's work force has been reduced accordingly. Further mine closures are anticipated in the near term. PRINCIPAL GROWTH SECTORS (E.G. MANUFACTURING, AGRICULTURE, MINING, AND SERVICES The service sector now accounts for approximately 70 percent of the United Kingdom's GDP, a share which has grown consistently over the last few decades. The financial services sector is particularly strong. Productivity growth in the manufacturing sector has increased at a rapid rate since the early 1980's, driven by a high degree of labor flexibility, acceptance of innovative technologies, and a supportive tax regime. See Appendix 'B' for detailed description of best prospect sectors for U.S. exports. See also Section I - 'Major Business Opportunities.' GOVERNMENT ROLE IN THE ECONOMY With its emphasis on deregulation of industry, free trade and minimal intervention in the marketplace, the economic philosophy of the current UK administration is perhaps closer to that of the United States than to those of any of its European trading partners. Since coming to power in 1979, the ruling Conservative governments specific policies have included the return to private ownership of state- owned industries, the reduction of both personal and corporate tax rates, and the abolition of capital controls and labor law reform. In addition, the Conservatives deregulated financial services, telecommunications, and transportation, liberalized mortgage regulations and transformed much of the public housing stock into owner-occupied dwellings. These changes have increased the efficiency and growth potential of the economy, and made the United Kingdom more competitive in world markets. Since 1979, HMG has privatized the telephone, water, gas and electric utilities. It also sold its majority interest in the country's major automobile and aerospace companies, and in its national airline. Moreover, it has encouraged contracting, to private sector firms, many of the services provided by national and local government. Future candidates for privatization include the rail system, coal mining, the prison and postal services, and air traffic control system. HMG perceives its primary role as developing a stable macroeconomic environment, with low inflation and sound public finances as the cornerstone, as well as ensuring a physical infrastructure adequate to sustain business development. A high degree of labor flexibility is also seen as essential to national competitiveness. HMG has also demonstrated a firm commitment to the goals of the European Single Market. However, plans for the UK's participation in a politically and financially-united "federal" Europe are less clear. "Euro- skeptics" from both the ruling Conservative Party and the opposition Labour Party assert the unease among much of the country's population over the effects the "New Europe" will have on the country's political and economic sovereignty. Although the current Conservative government holds a small majority in Parliament, it is nonetheless confident that it has the political means to carry out its policies. The current administration views the near collapse of the ERM in mid- 1993 as a vindication of its earlier decision to withdraw from the mechanism, and it appears unlikely that the United Kingdom will soon participate in any form of monetary union. The problems of the ERM and the difficulties experienced by several EU members ratifying Maastricht have also reduced the momentum for greater political union, which built up in the late 1980's. There are clear indications that, in the short term, European "pro-marketeers" will shift their efforts towards the more achievable goals of strengthening commercial cooperation between member countries. The Conservative government also favors the rapid integration of Eastern Europe into the Union. The Social Chapter of the Treaty on European Union (Maastricht Treaty) codifies, across the European Union, issues of employees' rights in the work place, equitable wages, communal bargaining and employee consultation. By securing for the United Kingdom the right to "opt-out" of the Social Chapter, HMG wishes to sustain the climate of minimal intervention in labor markets which has prevailed during its administration. It hopes to facilitate job-creation and maintain the UK's position as a competitively attractive destination for foreign investment. It is generally supported in this endeavor by the private sector, which fears the increased business costs experienced on the Continent by conformance to the Social Chapter's provisions. HMG does not have a formal policy to protect its defense industrial base. The MoD's "best value for money" procurement policy has forced UK defense companies to rationalize the industrial base in order to remain competitive internationally. Some senior UK MoD officials have indicated that certain sectors of the defense industrial base (aerospace, tanks, shipbuilding, and nuclear technology) will not be allowed to perish. Additionally, the increased emphasis on UK "industrial participation" (offsets) in contracts awarded to offshore firms bolsters the economy by maintaining quality jobs. The MoD preferred procurement policy is to purchase "off-the-shelf" via a direct commercial contract with industry. "Off-the-shelf" normally entails long, complex development programs, and the MoD usually expects the prime contractor to assume all risks. Occasionally, DoD officials will limit U.S. defense equipment sales to FMS only. MoD officials continue to question this policy when pursuing U.S. systems designated "FMS" only. Perceived bureaucratic delays in the U.S. export licensing process are often cited as an impediment to successful competition by U.S. companies. These complaints come from both MoD procurement managers and U.S. industry. Taxation and Fiscal Policy: The government seeks to minimize the tax burden on both individuals and corporations, and direct tax rates are among the lowest in the EU. The highest personal tax rate of 40 percent is applicable to only the top 6 percent of income earners. The majority fall within the lower 25 percent tax rate, known as the base rate. It is the stated intention of the current government to reduce the base rate to 20 percent, when economic conditions permit. A start has already been made in that direction with the 20 percent rate applying to the first tranche of zero to 3,000 British pounds sterling (BPS) of taxable income. The full corporate tax rate of 33 percent applies to companies with profits in excess of BPS 1.25 million. Partial tax relief is available to firms with profits of less than BPS 250,000 to bring their effective tax rate to 25 percent. Profits between these limits are taxed on a formula basis which results in a total tax rate between 25 and 33 percent. A central theme of the current government's fiscal policy has been its emphasis on taxing spending rather than earnings. Since coming to office, it has increased indirect taxes while reducing direct income taxes to the levels outlined above. The United Kingdom now levies a value- added tax (VAT) of 17.5 percent on the purchase price of most goods, a rate which is comparable to those charged by other EU countries. BALANCE OF PAYMENTS SITUATION Following a modern trend for the United Kingdom, the recent deficit in "visible" trade, that is trade in tangible goods, has been partially offset by a surplus in "invisible" trade, the gains from financial transactions and the provision of services. In 1992 visible exports of U.S.$ 189 billion and visible imports of U.S.$ 212.7 billion produced a UK merchandise trade deficit of U.S.$ 23.7 billion (1991: U.S.$ 18.2 billion). However, invisible credits of U.S.$ 108.4 billion exceeded debits by U.S.$ 8.5 billion (1991: U.S.$ 4.7 billion.), resulting in an overall current account deficit of U.S.$ 15.2 billion for the year. This widened in the six months to June 1993, as the recession in continental Europe weakened demand for British goods in the United Kingdom's largest export market. The economy has run a deficit in visible trade since 1983. This surged during the "boom" of the late 1980's, as consumer demand for imported goods ballooned. Once the recession took hold, imports dropped, reducing the visible trade deficit dramatically in 1991. The devaluation of the pound, following the UK's late 1992 withdrawal from the ERM, has increased the cost of imports . Exports might subsequently have been expected to rise as competitively priced UK goods found overseas markets. However, Europe's sluggish economic performance and the recent strengthening of sterling against other EU currencies have constrained exports, which grew only moderately through Q2 1993. The United Kingdom is a major investor overseas (especially in the United States) and has an extremely important service sector, of which banking and insurance account for the major share. These have consistently generated invisible trade credits for the country. IMPLICATIONS FOR THE UNITED STATES The high levels of bilateral trade and investment between the United States and the United Kingdom have meant that, to some extent, the two economies move in tandem, and that the current American economic recovery has buoyed that of the United Kingdom. U.S. firms planning to export to Europe in order to establish a foothold within the European Union will want to explore the improved UK domestic market now. As the only major European economy likely to experience significant growth in the near term, the United Kingdom offers the advantages of an expanding market which is particularly receptive to U.S. goods. This approach will enable U.S. firms to gain experience with the European commercial environment in readiness for an eventual economic upturn in continental Europe. U.S. firms are highly competitive in this attractive and accessible market, although domestic and third country supplier competition can be expected to intensify in the near future. To U.S. firms seeking to establish a European commercial presence, the United Kingdom offers certain immediate cost advantages. The recent recession has depressed the price of many inputs, including real estate, and has created a pool of skilled labor and management available at competitive wage and salary rates. The current government's commitment to open markets, deregulation and privatization of industry will continue to offer opportunities for competitive U.S. firms. Increasingly, public sector procurement policy emphasizes "best value for money," regardless of origin, and 'outsourcing' is encouraged as a means of improving the quality of public services, while containing cost. As a means of involving the private sector in financing the construction and managing the operation of selected highways, HMG intends to introduce tolls. These changes will present significant opportunities to U.S. businesses, particularly as joint-venture partners of UK firms on major projects. By operating initially in the UK market, such partnerships will have an advantage as bidders for potential future privatization in other EU countries. U.S. firms will also find opportunities supplying products and services to privatized industries. TRADE AND INVESTMENT BARRIERS (IDENTIFICATION AND BRIEF DESCRIPTION) The United Kingdom has international trading obligations under its membership in the European Union (EU), the General Agreement on Tariffs and Trade (GATT), the Organization for Economic Cooperation and Development (OECD),the International Monetary Fund (IMF), and the United Nations Conference on Trade and Development (UNCTAD). Specific Issues: Bilateral trade disputes between the United States and the United Kingdom are rare. There have been recent instances where British authorities have been reluctant to provide expanded access to the UK market sought by U.S. firms in telecommunications, and a presence at Heathrow Airport for U.S.-flag carriers. However, most trade barriers of concern to the U.S. are the result of EU regulations, rather than actions by the British government or UK companies Product Standards: The ongoing EU harmonization of product standards, labelling, testing and certification requirements will substantially simplify U.S. exporters' ability to offer a suitable choice of products across the Union, while reducing costs significantly. However, the potential exists to use product standards as a means of restricting market access to non-EU Manufacturers. Government Procurement: The EU's "Utilities Directive" covering purchases in the water, transport, energy and telecommunications sectors came into effect in January 1993. While the directive required open, objective bidding procedures--a benefit to U.S. firms--it discriminated against non-EU bids, except in the electric power sector, absent an international or bilateral agreement. EU procuring utilities may exclude bids with less than 50 percent EU value without additional justification. In addition, accepted bids with a majority of EU content must receive a three percent price preference over non-EU bids. In April 1994, U.S. and EU negotiators reached an agreement under the GATT government procurement code covering the electrical utility sector. As a result, exports of heavy electrical equipment are no longer subject to the discriminatory provisions of the Utilities Directive. The United States and European Union were unable to reach agreement on procurement by telecommunications utilities, however, but pledged to continue negotiations. In the United Kingdom, only British Telecom and Kingston Communications are subject to the EU directive; other UK companies are exempt. Because of the failure to reach agreement on telecommunications procurement, U.S. sanctions imposed under Title VII of the 1988 Trade Act, imposed on certain EU member states, will remain in effect. Broadcast Quotas: HMG's Department of National Heritage is charged with enforcing the quota provisions of the 1989 EU Broadcast Directive. As mandated by the directive, it requires that channel providers broadcast a majority of European-origin programming "where practicable." HMG has generally interpreted the "where practicable" language liberally. In response to pressure from the European Commission, HMG recently entered into discussions with individual channel providers about setting mileposts for increasing their European content, and about the practicability of showing more European programs. Telecommunications: HMG opened the UK domestic market for competition in 1991. However, some market barriers persist. OFTEL, the telecom regulatory agency, is in the process of addressing a number of these issues--most significantly, interconnection with British Telecom. In March 1994, OFTEL issued a policy statement establishing a standard price list for interconnection services, and established an agenda for further action. While this did not resolve all interconnection issues, it is a step in the right direction. U.S. companies have been successful in obtaining domestic public telecom operator and international simple resale licenses from the Department of Trade and Industry, although the process can be quite lengthy. HMG has stated that, in the near term, it is not prepared to permit U.S. entrants to operate international long-distance service using their own facilities (facilities- based international service). Government Support for Airbus: The Airbus consortium, of which British Aerospace is a member, has benefitted in the past from government financial support programs. A U.S.-EU bilateral agreement reached in July 1992 imposed limitations on future support provided to the Airbus program by governments of the Airbus consortium members, along with an obligation for the consortium to repay past state aid. An effort is currently being made under GATT auspices to extend this bilateral agreement to encompass other countries that are currently or potentially major players in the international aerospace marketplace. Defense: There are no major barriers to U.S. contractors in the UK defense sector, other than national preference security exclusions, and the industrial participation requirements previously mentioned. Major Investment Barriers: The UK Government welcomes investment from overseas, and such foreign-owned companies are treated no differently than UK companies. Persons resident outside of the country are generally able to invest in the United Kingdom on the same terms as those available to residents, and there are no exchange controls on the transfer of funds into or out of the United Kingdom. Restrictions to which investments might be subject are general ones, such as whether a particular acquisition would give rise to monopoly considerations. The UK Secretary of State for Trade and Industry, who is also the President of the Board of Trade, has powers under: The Mergers and Industry Act 1986, to prohibit the takeover by non- residents of certain manufacturing operations which might be deemed vital to national interests. Assets or shares of such entities, threatened from takeover by non-residents, may be compulsorily acquired by the Secretary of State for Trade and Industry. The Financial Services Act 1986 outlines UK policy with respect to other countries' treatment of UK financial institutions. It permits the application of the principle of reciprocity, rather than that of national treatment. The Act confers sweeping powers on HMG's officials in responding to cases where UK persons are deemed not to have received reciprocal treatment overseas in their conduct of investment, insurance and banking business. The United Kingdom does not operate any investment screening mechanisms. LABOR FORCE The population of the United Kingdom was 57.9 million in 1994, an increase of only 2.4 percent since the mid-1970's. In Q1-1994 the work force was 28.041 million of whom 25.266 million were employed. While the work force has grown modestly since the 1960's, the number employed has fallen. The resulting unemployment peaked in 1986 at 3.29 million, a rate of 11.8 percent. During a period of economic expansion in the late 1980's, unemployment declined steadily until mid-year 1990 when it bottomed at 1.56, million or 5.5 percent. During the 1990-92 recession, unemployment rose at a rapid rate, reaching a seasonally adjusted 2.99 million (10.6 percent) in January 1993, before falling back steadily to 2.66 million (9.4 percent) in April 1994. Job losses were across the board, with large companies shedding jobs at a faster rate than their smaller counterparts. Output initially fell but has since begun to rise, implying that productivity gains have allowed larger firms to operate with reduced staffing levels. The country thus emerged from recession with leaner, more competitive industries. However many economists predict that unemployment will decline only very gradually during the recovery, and that by 1997 some 2.5 million people will still be out of work. A recent survey indicated a closing of the gap between wage rates in the three major global markets. The United Kingdom's hourly average wage rate for 1993 was estimated at US$ 12.90, compared with $25.34 for Germany and $18.64 for the European Union (EU) as a whole. This puts the EU average hourly wage below that of Japan ($19.05) for the first time, but ahead of that of the United States at $16.58. European rates declined by 6.5 percent in 1993, while U.S. rates increased by 7 percent and Japanese rates by 18 percent. Days of work lost due to work stoppages have fallen dramatically in the United Kingdom over the last four years, and currently only one half of one percent of the work force is involved in such activities. In 1992, a total of 526,000 work days were lost compared to 761,000 the year previous and 3.7 million in 1988. The figure crept up slightly to 600,000 in 1993, due partly to strikes by miners protesting massive pit-closures in the state-owned coal industry. Indeed, the majority of losses are in the public sector, which accounts for 5 million employees, and approximately half of all work stoppages are due to protests over redundancies (layoffs). In line with the policies of the current government, there has been a shift in employment towards the private sector. The proportion of the work force engaged in the private sector was 76 percent in 1992, almost the same level as in 1961 but well above the 1976 rate of 70 percent. However, the number of people employed in manufacturing industries has been in constant decline. During the first quarter of 1993, there were only 4.17 million persons, 20 percent of the work force, employed in this sector, down from 25 percent in 1985. Service sector employment increased from 66 to 73 percent over the same period. The composition of the work force is changing. The 6.6 percent growth in the total work force throughout the 1980's was entirely due to increases in female employment. The last recession also produced large- scale unemployment among white-collar staff, especially middle managers. Many of these positions will never be replaced as enterprises find ways to adjust to reduced levels of management. Commonly expressed concerns in the United Kingdom over the direction and quality of education parallel attitudes in the United States. HMG is responding with an elaborate program aimed at raising the educational and technical skills of the work force. The teaching of basic skills and technology is being reinforced through a national curriculum and the adoption of uniform testing standards. A national system of vocational qualifications is being developed, and employers are being encouraged to provide more training to their staff. The country's universities are ranked among the best in the world, and successfully attract a high proportion of overseas students. U.S. and other multinational corporations generally find the UK work force to be well-educated, skilled and productive. MAJOR LOCAL AND THIRD COUNTRY COMPETITORS IN SPECIFIC SECTORS As an advanced industrial economy, the United Kingdom boasts domestic suppliers capable of competing over a full range of products and services. Industrial Sectors: Some major UK industrial companies are: Royal Dutch/Shell, British Petroleum (oil and energy); Unilever, ICI (chemicals); Glaxo, Zeneca, Wellcome, Smithkline Beecham (pharmaceuticals); BAT, Rothmans (tobacco); aerospace General Electric Company, Cable & Wireless, Thorn EMI (electrical); Rover, Layland DAF (automotive); Grand Metropolitan, Guinness, Cadbury-Schweppes, Bass, Whitbread (foods). Services: The UK's major service companies include: British Telecom, Vodafone (telecommunications); PowerGen, National Power, Scottish Power, British Gas, Thames Water, Anglia Water (utilities); Marks & Spenser, Sainsbury, Boots, Tesco, Argyll, (retailing), National Westminster, Barclays, HSBC Holdings, Lloyds, Abbey National, TSB (banking); Pruential, General Accident, Commercial Union, Sun Alliance, Legal & General(insurance/financial services). Defense Sectors: The major UK defense companies are: British Aerospace Ltd (fighters, maritime patrol and cargo aircraft, missile systems); GEC-Marconi (electronics, helicopters, precision guided munitions); Rolls-Royce Plc (aircraft and marine engines); Vickers Shipbuilding and Engineering Ltd (submarines, surface combatants, tanks, artillery); and Westland Helicopters Ltd (helicopters). Continental European firms routinely bid for contracts in all areas of the UK defense sector. Agriculture and Food: This sector accounts for 14 percent of UK's GDP (of which agriculture represents 1.4%) and employs 9 percent of the UK's work force (agriculture 2.1%). Livestock and livestock products comprise 62% of total agricultural output; cereals for 16%; other crops for 7% and horticulture 13%. Food accounts for 11 percent of total consumer expenditure, and alcohol and tobacco a further 9 percent. The United Kingdom is 58 percent self-sufficient in food and 74 percent self- sufficient in temperate products. Tourism: Spain remains the most popular short-haul overseas destination with British travelers, and the only one to increase its summer holiday market share between 1993 and 1994 (up from 37 percent to 45 percent), enhanced by three devaluations of the peseta last year. Following Spain in popularity were Greece, with a decline in market share from 16 percent to 15 percent; the US; Cyprus, down from 6 percent to 5 percent; Turkey, down from 6 percent to 4 percent; and Portugal, down from 5 percent to 4 percent. INFRASTRUCTURE SITUATION RE: GOODS/SERVICE DISTRIBUTION Sea Transport: Excellent transportation facilities exist between the United States and the United Kingdom. There are daily sailings of cargo vessels and scheduled air freight services from U.S. ports and major cities. The United Kingdom has 80 ports of commercial significance. Major development projects have recently been completed at eastern and southern ports. The most important for container traffic are London, Felixstowe, and Southampton. The major ports for roll-on/roll-off are Dover, Harwich, Felixstowe, and Grimsby/Immingham. New facilities are being developed to accommodate bulk and container shipments on the Medway, and for bulk and roll-on cargoes on the Humber. Terminals and supply bases for offshore oil and gas installations have been built at a number of ports in Scotland. Air Transport: There are reportedly 137 licensed commercial airports in the United Kingdom, of which 7 are owned and operated by BAA plc, the successor company to the statutory British Airports Authority. The seven airports owned by BAA include Heathrow, Gatwick and Stanstead in England, and Glasgow, Edinburgh, Prestwick and Aberdeen in Scotland. These airports handle 72 percent of air passengers and 83 percent of airfreight in the United Kingdom. Heathrow Airport, located 15 miles from London, is one of the busiest airports in the world. Gatwick Airport, 25 miles south of London, was developed as a second airport serving the city. The main airports used by international scheduled airlines are Heathrow, Gatwick, and Prestwick. Highways: Road haulage accounts for nearly 80 percent of all inland freight movement with most of the traffic carried in vehicles of over 25 tons gross laden weight. International road haulage has grown rapidly, and nearly 7 million tons of freight are transported annually by UK vehicles to and from Continental Europe and Ireland. There are 363,000 kilometers of well-maintained highways, and population centers are connected by an excellent system of 'motorways.' Plans are currently being implemented to widen large stretches of motorway to relieve congestion, particularly in the London area. Railroads: The state-owned railroad system provides excellent service between major cities and towns. A system of express freight trains, called freight liners, has been developed and serves a freight rail system having more than 20 major freight terminals. As of March 1988, British Rail had 23,557 miles of standard gauge lines and sidings in use. Channel Tunnel: The Channel Tunnel project provides twin rail tunnels between the United Kingdom at Folkestone and France near Calais with full services due to begin in the fall of 1994. Separate passenger and freight shuttles operate in the 31-mile tunnel between the two terminals. In addition, a high-speed rail link will be constructed over the next few years to connect the Tunnel to London and beyond. This will service the increased freight and passenger traffic expected. MAJOR INFRASTRUCTURE PROJECTS UNDERWAY Major projects include the Cross-London Rail Link, the extension of London Underground's Jubilee Line to Canary Wharf, the construction of the High-Speed rail Link to the Channel Tunnel, revitalization of the main west-coast rail line and the planned construction of another runway for Heathrow Airport.