of 25% has replaced the variable profit tax of 25% to 45%. In accord with the new tax package, the law on foreign investment was amended to abolish the tax holidays for foreign investments established after April 1, 1995. The social security tax is collected on all wages, fees, royalties and rewards for work; the general social security tax rate is 37% for employers and 1% for employees. As of January 1, 1995, workers will be paid social security benefits based on their contributions to the social security system, thus shifting the burden of payment from the employer to the employee. According to the new law on customs tariffs, import duties on some agricultural products are as high as 55% (for countries without MFN status). However, duties on industrial products are minimal or zero for countries in a free trade agreement. Latvia collects an export duty on timber, metals, leather, paper and a few other products. The United States and Latvia are negotiating a double taxation treaty. Regulatory Policies: Latvia is still in the process of creating a modern regulatory system. The Bank of Latvia is responsible for regulating the banking industry and has created a supervisory structure. An antimonopoly committee supervises monopolies and examines the tariffs set by public utilities. It can recommend the breakup of large enterprises with high market power and can investigate claims of unfair competition and false advertising. A recent law envisages the establishment of a regulatory body to oversee the activities of the energy sector, including price setting. However, implementing legislation for this entity has not yet been drafted. In January 1995, the Latvian government promulgated regulations on securities trading. Until the securities market commission is in operation, the Ministry of Finance supervises the securities market. Privatization: Privatization of large scale industry and revival of the manufacturing sector has not yet been very successful. Privatization has progressed the furthest in agriculture and agribusiness, followed by very small scale manufacturing and retail trade previously under the direction of local governments. Privatization of large state enterprises, which has lagged other reform measures, picked up steam with the creation in April 1994 of the Latvian Privatization Agency. This entity assumed responsibility for all privatization procedures, previously disbursed among various ministries. In early 1995, the first wave of enterprises were offered for "mass" or "public" privatization, i.e., auctioning of shares for privatization certificates (vouchers). This event kicked-off full operation of the Riga Stock Exchange. In 1995 state enterprises were advertised internationally three times for privatization by tender. To date there has been little foreign interest in these companies. However, the last offering featured most of the largest enterprises which are more likely to be of international interest. The government is also in the process of privatizing one of the largest money earning state enterprises, Latvian Shipping Agency, and the state gas utility. In July 1995, the Riga Stock Exchange began operations. Owned by the major Latvian banks and investment funds, the Exchange operates according to the continental European market. The number of stocks trading on the exchange is gradually increasing as the public privatization process moves forward. 4. Debt Management Policies As of September 30, 1995, the Government of Latvia's external debt was 414.4 million dollars. Latvia has concluded a second standby agreement with the IMF (SDR 22.9 million) and two structural transformation facility agreements (SDR 45.7 million). Latvian compliance with IMF programs has been strong until the summer of 1995. The above mentioned budgetary problems resulted in the suspension of the standby agreement pending the conclusion of a new letter of intent. (On September 30, 1995, Latvia's official foreign exchange and gold reserves were valued at 588.8 million dollars. The ratio of debt service to exports is a very modest 1.60%.) 5. Significant Barriers to U.S. Exports The main barriers to U.S. exports to Latvia are structural. While considerably improved, Latvia's business, banking and legal infrastructures are not yet up to Western standards. However, banking procedures were tightened considerably in 1995 following the collapse of the largest commercial bank. Under the 1991 investment law, the laws of the Republic of Latvia apply equally to domestic and foreign investors. However, there are some restrictions on foreign investment. The Cabinet of Ministers must approve acquisition of controlling shares in a Latvian enterprise with assets exceeding one million dollars. Foreign investors may engage in, but not obtain control over, enterprises engaged in activities related to national defense; the manufacture and sale of narcotics, weapons and explosives, securities, banknotes, coins and stamps; the mass media; national education; acquisition of renewable and nonrenewable national resources; internal fisheries; hunting; and port management. Latvia does not restrict the repatriation of profits. The Bank of Latvia must approve the establishment of a foreign bank branch. The United States and Latvia signed a bilateral investment treaty in January 1995. Latvia requires a license for the import of grain, sugar, and alcohol to protect domestic production. In the case of grain, the importer is required to demonstrate purchases from domestic producers. The sugar licensing restrictions poses problems for foreign (or domestic) producers of high quality food products which use sugar, as the domestic product is of inferior quality. A special permit granted by the Cabinet is required for the import or transit of weapons, explosives or pornographic materials. Latvia is still formulating food safety standards. Meat imports are subject to inspection by the State Veterinary Department for infectious diseases. As of June 1, 1994, imported food products are required to have conformity certificates to guarantee quality and wholesomeness of food products. 6. Export Subsidies Policies The Latvian government provides modest subsidies for export of butter and cheese. 7. Protection of U.S. Intellectual Property The Government of Latvia is committed to attaining a level of protection for intellectual property rights comparable to that provided under international conventions. Pursuant to that commitment, the Latvian Parliament in 1993 passed legislation to protect copyrights, trademarks and patents. While the legal basis for intellectual property rights has been established, Latvian law has not defined penalties for violation of these rights nor established a judicial or administrative mechanism through which foreign owners may seek effective redress for violation of their intellectual property rights. In July 1994, President Clinton signed an Agreement on Trade Relations and Intellectual Property Rights Protection with Latvia. Latvia has been a member of the World Intellectual Property Organization since January 1993 and the Paris Convention from September 1993. Latvia joined the Madrid, Nice and Budapest Conventions in late 1994 and early 1995 and the Berne Convention in May 1995. Unauthorized reproductions of copyrighted video recordings imported from Russia are widely distributed in Latvia. To halt the use of pirated films imported from Russia by private Latvian television stations, the Latvian Radio and Television Board on October 27, 1992, adopted a ruling under which the license of any domestic television company would be revoked if it is unable to show that it has legally acquired the rights to the films it broadcasts. The board does not apply this ruling to signals from the Russian television stations that are rebroadcast directly by Latvian television. Latvia's intellectual property practices have not had an serious impact on U.S. trade outside the film and video industry. a. The Right of Association.-Latvia's law on trade unions mandate that workers, except for uniformed military, have the right to form and join labor unions of their own choosing. Union membership, which had been about 50% of the work force in 1993, continued to fall as workers left soviet-era unions that include management or are laid off as soviet-style factories fail. Leaders of the two largest trade union confederations, the Confederation of Free Trade Unions and the Latvian Trade Unions' Alliance of Employees were among candidates of a "Labor and Justice" coalition which attained less than the minimal 5% of the vote in the 1995 parliamentary elections. Unions are free to affiliate internationally and are developing contacts with European labor unions and international labor union organizations. In general, the trade union movement is undeveloped and still in the transition from the socialist to the free market model. The law does not limit the right to strike, but no major strikes were actually held in 1994. Although many state-owned factories are on the verge of bankruptcy and seriously behind in wage payments, workers fear dismissal if they strike. While the law bans such dismissals, the government's ability to enforce these laws is weak. b. The Right to Organize and Bargain Collectively.-Large unions have the right to bargain collectively and are largely free of government interference in their negotiations with employers. The law prohibits discrimination against union members and organizers. No export processing zones exist in Latvia. c. Prohibition of Forced or Compulsory Labor.-Forced or compulsory labor is banned and is not practiced. d. Minimum Age for Employment of Children.-The statutory minimum age for employment of children is 15, though 13-year-olds can work in certain jobs outside school hours. Children are required to attend school for nine years. The law restricts employment of those under 18, such as by banning night shift or overtime work. State authorities are lax in their enforcement of child labor and school attendance laws. e. Acceptable Conditions of Work.-The labor code provides for a mandatory 40hour maximum work week with at least one 24-hour period of rest, four weeks of annual vacation, and a program of assistance to working mothers with small children. This labor code is in the process of being amended. Some provisions may become more favorable for employees, including an increase in paid vacation. In October 1995, the minimum monthly wage was set at about 50 dollars (28 lats). Latvian laws establish minimum occupational health and safety standards for the workplace, but these standards seem to be frequently ignored. f. Rights in Sectors With U.S. Investment.-The only significant U.S. investment is in the manufacture of food and related products and transportation. Conditions do not differ from those in other sectors of the economy. Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1994 [Millions of U.S. dollars] 11995 figures are all estimates based on available monthly data in September 1995. 2GDP at factor cost. 4Figures are actual, average interest rates, not changes in them. Merchandise trade. 1. General Policy Framework Since declaring independence in 1990, Lithuania has implemented reforms aimed at eliminating the vestiges of the former socialist system. In 1992, with the help of the IMF and other international institutions, Lithuania adopted a program to restrain inflation, reduce price controls, lower the budget deficit and privatize the economy. Lithuania has embarked on a series of price liberalizations, and most price controls have been abolished. Most businesses have been privatized and private citizens are allowed to own land. The government is eager to encourage foreign investments and open new trade ties with the West. In 1995 trade with Russia and other former Soviet Union republics fell from 78% in 1990 to 40%. Trade with the West increased from 15.3% to 60% respectively. Lithuania is seeking to further liberalize its foreign investment laws. The June 1995 foreign investment law has opened the energy and telecommunications sectors to foreign investment. The Lithuanian government is following a cautious, but Western-oriented program of economic reform in banking and monetary policies, price structure, tax laws, land ownership laws, fiscal policy and foreign trade legislation. Inflation subsided during 1994 as a result of tight monetary policies. The increase in prices for consumable goods and services fell from 35% in 1994 to 29.3% in 1995. However, Lithuania still lags behind its Baltic neighbors-Latvia and Estonia. In September 1995, Lithuania had the lowest minimal and average monthly incomes and pensions, the highest level of employment, and the highest level of annual inflation. In April 1994 Lithuania adopted a currency board arrangement under which central bank reserve money and liabilities denominated in the local currency are fully backed by foreign exchange at a fixed rate. Growth in the money supply is tied to growth in foreign exchange reserves. 2. Exchange Rate Policies On June 20, 1993, Lithuania introduced its own national currency, the Litas. In April 1994 the Lithuanian currency board fixed the rate of exchange at four litas to one U.S. dollar. 3. Structural Policies Price reform: The Lithuanian government has dismantled most of the centralized price controls formerly imposed by Moscow. Prices on most foodstuffs and manufac tured goods have been liberalized. However, due to market monopolies and oligopolies in several sectors, the Lithuanian government has imposed measures to control anti-competition price fixing. Tax policies: Lithuania has begun to reform its entire tax system. In May 1994, Lithuania introduced an 18 percent value added tax. The value added tax is applied to most imports. Taxes are levied on wages through the personal income tax and through employees' and employers' contributions to the social insurance fund. Enterprise profits are taxed at rates of between 20 and 30 percent. Reduced rates apply for agricultural enterprises, small-scale enterprises, and reinvested_profits. Joint ventures with foreign capital are exempt tax for up to three years. Profit taxes of joint ventures are determined by the amount of foreign investment in the authorized capital and its type of activity (industrial or commercial). Dividends to foreign investors received in Lithuania are exempt from taxes. Income received legally by foreign investors and upon which a profit tax has been paid may be repatriated without additional tax. Regulatory policies: There are no performance requirements imposed by law as a condition for foreign investments. However, in tendering bids for purchasing privatized companies or forming joint ventures with state companies, foreign companies are often required to offer employment guarantees or technology. Lithuanian law gives foreign investors the right to lease land for 99 years, but bars foreigners from owning land. However, as a condition for EU membership, Lithuania is required to lift the constitutional ban on foreign property ownership. The Lithuanian Parliament is expected to amend the Constitution to meet EU standards by 1996. 4. Debt Management Policies Lithuania has acknowledged only that portion of the Soviet debt incurred by Lithuanian entities for uses in Lithuania. Negotiations on this matter are in progress. Lithuania has received balance of payments support from the European Union and the G-24 countries. The IMF has provided a stand-by arrangement and a systematic transformation facility. The World Bank and the European Bank for Reconstruction and Development have contributed. Lithuania's budget deficit for 1995 is about two percent of the planned GDP, and is well within IMF targets. 5. Significant Barriers to U.S. Exports There are no direct barriers to U.S. exports. However, U.S. exports are hindered by a weak economy, rigid bureaucratic system, and the absence of a solid infrastructure for trade, such as telecommunications and banking facilities. U.S. exporters are also hampered by the lack of export financing and other credit facilities. Customs procedures at border crossings are time-consuming and burdensome owing to the lack of trained personnel and inconsistent application of customs regulations. The June 1995 Foreign Investment law determines the areas of economic activity where foreign investment is prohibited or limited. Foreign investment is allowed in all areas except defense, security and the manufacture of narcotics. 6. Export Subsidies Policies The government has exercised controls on exports of certain scarce commodities. There are no export subsidies. 7. Protection of Intellectual Property Laws for the protection of intellectual property are adequate, but enforcement mechanisms and implementing regulations are poorly developed. Lithuanian policy has been to observe international standards and to consider subscribing to international conventions beyond those accepted by the independent Lithuanian governments before World War II. Lithuania joined the World Intellectual Property Organization (WIPO) in 1990 and plans to sign the Paris Convention for the protection of industrial property. In April 1994, Lithuania signed an agreement with the U.S. pledging to protect U.S. intellectual property. The Lithuanian Parliament is considering laws to address copyright enforcement, including amendments to the criminal and civil codes. 8. Worker Rights a. The Right of Association.-The 1991 law on trade unions and the Constitution recognize the right of workers and employees to form and join trade unions and, with certain limitations, to strike. There are no restrictions on unions affiliating with international trade unions. b. The Right to Organize and Bargain Collectively.—The Lithuanian collective agreements law confirms the right to organize and bargain collectively. Lithuanian trade unions engage in direct collective bargaining at the workplace as wage decisions are increasingly being made at the enterprise level. The government issues |