stipulates that essential services remain in operation during a strike and that workers notify employers at least 48 hours before beginning a walkout. The Constitution prohibits government interference in labor unions but provides that "abuse" of the right to strike (such as not maintaining essential services, or failure to end a strike after a labor court decision) is punishable by law.

b. The Right to Organize and Bargain Collectively.-The right to organize is provided by the Constitution, and unions are legally mandated to represent workers. With some government assistance, businesses and unions are working to expand and improve mechanisms of collective bargaining. Under current Brazilian law, however, the scope of issues subject to collective bargaining is narrow and the labor court system exercises normative powers with regard to the settlement of labor disputes, thereby discouraging direct negotiation. Existing law charges these same courts, as well as the Labor Ministry, with mediation responsibility in the preliminary stages of dispute settlement. Wages are set by free negotiation in many cases, and in others by labor court decision. There is a movement for extensive revisions in the Labor Code which would broaden the scope of collective bargaining and restrict the role of the labor courts, but such changes appear unlikely in the near future.

The Constitution incorporates a provision from the Labor Code which prohibits the dismissal of employees who are candidates for or holders of union leadership positions. Nonetheless, dismissals take place, with those dismissed required to resort to a usually lengthy court process for relief. In general, enforcement of laws protecting union members from discrimination lacks effectiveness.

Labor law applies uniformly throughout Brazil, including the free trade zones. However, unions in the Manaus free trade zone, rural unions and many unions in smaller cities are relatively weaker vis-a-vis industry compared to unions in the major industrial cities of the southeast.

c. Prohibition of Forced or Compulsory Labor.-Although the Constitution prohibits forced labor, there have been credible citations of cases of forced labor in Brazil. The federal government asserts that it is taking steps to halt the practice and prosecute perpetrators, but admits that existing enforcement resources are inadequate. The largest number of reports of forced labor originate in rural areas. A provision in the agricultural reform law passed in 1993 provides for the confiscation of property in cases of forced labor. The law by itself is unlikely to have significant impact without extensive improvements in enforcement activity.

d. Minimum Age of Employment of Children.-The minimum working age under the Constitution is 14, except for apprentices, and legal restrictions are also set in the Constitution to protect working minors under age 18. There are credible reports indicating problems with enforcement. Further, judges can authorize employment for children under 14 when they believe it appropriate. (The ILO noted in 1992 that the constitutional provision for apprenticeships under age 14 is not in accordance with ILO Convention No. 5 on minimum age in industry.) By law, the permission of the parents or guardians is required for minors to work, and provision must be made for them to attend school through the primary grades. All minors are barred from night work and from work that constitutes a physical strain. Minors are also prohibited from employment in unhealthful, dangerous, or morally harmful conditions.

Despite these legal restrictions, however, official figures indicate that nearly three million children 10 to 14 years of age are employed. Of these, 46 percent work eight hours or more per day, with most earning no more than one minimum salary ($70 to $100 per month).

e. Acceptable Conditions of Work.-Unsafe working conditions are prevalent throughout Brazil. Enforcement of the occupational health and safety standards established by the Ministry of Labor is weak due to insufficient resources for inspection. There are credible allegations of corruption within the enforcement system. Workers, or their union, can file a claim with the regional labor court if a workplace safety or health problem is not resolved directly with the employer, although in practice this is frequently a cumbersome, protracted process.

f. Rights in Sectors with U.S. Investment.-U.S. investment is concentrated heavily in the transportation equipment, food, chemicals, petroleum distribution and electric/electronic equipment industries. Labor conditions in industries owned by foreign investors generally meet or exceed the minimum legal standards established under Brazil's Labor Code.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993

Real (i.e., in addition to inflation) annualized rate for 90-365 day loans.
Fiscal years, including all of FY-1994. All grants.

*Estimate. Includes non central government debts (e.g., Central Bank, public corporations) and private debts with public guarantees.

1. General Policy Framework

Chile's economic expansion is now into its twelfth year. The most notable developments over the last several years have been the diversification of the export base and the renewed ability of Chilean firms to obtain capital from international markets. Although copper remains the country's largest export earner and foreign investment pours into the mining sector, exports of fish, forestry products, and fresh fruit are important as well. Chile's credit rating is the highest in Latin America; since Chile received an investment-grade rating in 1992, Chilean firms have financed investment with foreign capital by borrowing, issuing bonds, and selling stock abroad. Domestically financed investment is also significant and growing, and many Chilean firms are expanding abroad.

The democratic governments of Patricio Aylwin (1990-1994) and Eduardo Frei (1994-present) have emphasized the need to maintain macroeconomic stability and the economy's export orientation. The government has generated fiscal surpluses in each of the years 1990-1993, and it is projected to do so in 1994. In the last few years, the government and the independent Central Bank have privatized some firms and gradually loosened foreign exchange restrictions, although they remain concerned about the potential effects on the exchange rate of rapid foreign currency inflows. In 1994, new laws liberalized capital markets, fixed a framework for environmental regulation, and made money laundering a crime. A bill pending in Congress would allow banks to enter new businesses. Chile has ratified the Uruguay Round agreements and became a founding member of the World Trade Organization (WTO) on January 1, 1995.

The Central Bank's monetary policy targets real interest rates. It has resisted calls to lower interest rates as growth rates fell in 1993 and 1994, emphasizing the need to prevent long-term domestic spending growth from outpacing that of the economy as a whole. The authorities have sought to maintain an exchange rate which provides incentives to invest in expert industries, although rapid capital inflows since 1991 have complicated their task by contributing to peso appreciation. Indicators for 1994 suggest that growth will be around four percent as a result of decelerating domestic spending. Growth is being led by exports, with domestic trade and construction (which boomed in 1993) facing difficulties. Inflation will be near the government's target range of 9-11 percent, while unemployment will average between five and six percent. Because of an unexpected increase in the price of copper, the trade balance will be very close to even, and the current account deficit will be around 2.5 percent of GDP. For 1995, preliminary Central Bank projections envision growth of over five percent, inflation of nine percent, a slightly positive trade balance, and a current account deficit of three percent of GDP. Keeping inflation on a downward path remains a high priority, but the authorities have cautioned that the indexation of the economy makes rapid gains unlikely in the short

term.

2. Exchange Rate Policy

The Central Bank pegs the peso to a basket composed of the U.S. dollar, the mark and the yen (weighted 50 percent, 30 percent and 20 percent, respectively). The peg is adjusted to reflect inflation differentials between Chile and its major trading partners. Although the path for the crawling peg is determined a month in advance, the individual cross rates are determined daily, depending on market rates for the dol

lar, mark and yen. The official interbank rate is allowed to move within a 20 percent band around the crawling peg.

Exporters must remit most (75 percent or all but $15 million, which ever is greater) of their foreign currency earnings through the interbank market. The Central Bank intervenes in the interbank market on different occasions to reduce short-term fluctuations. A legal parallel market operates, with rates typically within one percent of the interbank rate. The peso appreciated against the currencies of Chile's trading partners by around 20 percent in real terms between 1991 and 1993. The appreciation was in large part due to the strong capital inflows prompted by high Chilean interest rates and the perception abroad of reduced country risk. In the first half of 1994, the peso appreciated by another three percent as a result of the dollar's weakness in international markets.

3. Structural Policies

Pricing Policies: The government rarely sets specific prices. Exceptions are urban public transport and some public utility prices and port charges. State enterprises purchase at the lowest possible price, regardless of the source of the material. U.S. exports enter Chile and compete freely with other imports and Chilean products. Import decisions are typically related to price competitiveness and product availability. (Certain agricultural products are an exception. See section five.)

Tax Policies: An 18 percent value-added tax (VAT) applies to all sales transactions and accounts for 43 percent of total tax revenue. There is an 11 percent tariss on most imports. There are duty-free zones in Iquique and Punta Arenas and a limited duty-free zone in Arica; less than three percent of Chilean imports pass through these zones. Personal income tax rates will fall modestly in 1995; the top marginal rate will fall from 48 to 45 percent on annual income over approximately $75,000. Profits are taxed at flat rates of 15 percent for retained earnings and 35 percent for distributed profits, with incentives for business donations to educational institutions. Tax evasion is not a serious problem.

Regulatory Policies: Regulation of the Chilean economy is limited. The most heavily regulated areas are utilities, the banking sector, the securities markets, and pension funds. There are no government regulations that explicitly limit the market for U.S. exports to Chile (although other government programs, like the price band system for some agricultural commodities described below, displace U.S. exports). In recent years, the government has for the first time begun to allow private firms to invest in and operate public infrastructure projects. Most Chilean ports are administered by a state-owned firm, although stevedoring services are typically provided by the private sector.

4. Debt Management Policies

Chile's vigorous economic growth and careful debt management over the last decade have meant that foreign debt is no longer a major problem. The government restructured 1991-94 foreign debt maturities at market interest rates with its creditor banks in September 1990. As of mid-1994, Chile's public and private foreign debt stock stood at $19.9 billion. In every year since 1987, public sector debt has declined and private sector debt has risen, the latter a result of firms borrowing abroad to finance investment. Public sector debt is now less than private sector debt, and in the last few years the overall debt level as a percentage of GDP has remained relatively stable at around 40 percent. (In 1985, the debt-to-GDP ratio was 125 percent.)

5. Significant Barriers to U.S. Exports

Chile has few barriers to U.S. exports. Nevertheless, treatment in some areas, especially agricultural commodities, diverges from this norm. Chile agreed in the GATT Uruguay Round not to raise its tariff rates above 25 percent (except for a few agricultural products, for which the rate is 31 percent). The uniform Chilean tariff rate is currently 11 percent. Chile has free trade agreements providing for duty-free trade in most products by the late 1990s with Mexico, Venezuela, and Colombia, and it was expected to complete another such agreement with Ecuador in late 1994. In 1994, Chile also began negotiations on a trade-liberalizing agreement with the Mercosur nations (Argentina, Brazil, Paraguay, and Uruguay). Tariffs also are lower than 11 percent for certain products from member countries of the Latin American Free Trade Association and products imported by diplomats and the Chilean military. A 50 percent surcharge, in addition to the 11 percent import tariff, is applied to all imports of used goods.

The 18 percent VAT is applied to the CIF value of imported products plus the 11 percent import duty. This compounding adds an effective two percent to the duty charged on the imported good. Duties may be deferred for a period of seven years

for capital goods imports purchased as inputs for products to be exported. (See section 2.)

Automobiles are subject to additional taxes based on value and engine size. The engine tax applies to vehicles with engines of over 1,500 cc., while the value tax is 85 percent of the CIF value over a certain level (around $9,700 in 1994). These taxes discourage sales of larger and more expensive vehicles, including most U.S.made automobiles. Despite these taxes, sales of U.S.-made vehicles are growing.

Another tax that has the effect of discouraging U.S. exports is the 70 percent tax on whiskey, which is produced in only small volumes domestically and which competes with other domestically produced liquors taxed at lower rates.

Import Licenses: According to legislation governing the Central Bank since 1990, there are no legal restrictions on licensing. Import licenses are granted as a routine procedure. Imports of used automobiles are prohibited.

Investment Barriers: Chile's foreign investment statute, Decree Law 600, sets a standard of treatment of foreign investors in the same manner as Chilean investors. Foreign investors using D.L. 600 sign a contract with the government's Foreign Investment Committee guaranteeing the terms of their investments. These terms include the rights to repatriate profits immediately and capital after one year, to exchange currency at the official interbank exchange rate, and to choose between either national tax treatment or a guaranteed rate for the first ten years of an investment. Approval by the Foreign Investment Committee is routine. Since 1991, investors have been required to deposit some (currently 30 percent) of the capital obtained from foreign loans in a non-interest bearing Central Bank account (known as the “encaje”) for one year. There is no tax treaty between Chile and the United States, so profits of U.S. companies operating in Chile are taxed by both governments, although U.S. firms generally can claim credits for taxes paid in Chile.

Firms may invest without using D.L. 600 or registering with the Foreign Investment Committee by bringing capital in through foreign exchange dealers or private banks. Few firms use this means of investment, as it lacks the guarantees provided by the contract with the Foreign Investment Committee.

There are some deviations, both positive and negative, from the nondiscrimination standard. Foreign investors receive better than national treatment on taxation, as they have the option of fixing the tax rate they will pay at 42 percent for ten years or paying the prevailing domestic rate, which is at present lower. Unlike domestic firms, foreign investors may also keep all of their export earnings abroad.

There are also examples of less than national treatment. In an emergency, D.L. 600 allows the Central Bank to restrict the access of foreign investors to domestic borrowing in order to prevent distortion of local financial markets. The Central Bank has never exercised this power.

Other examples of less than national treatment are the restrictions on foreign investment in some sectors. With few exceptions, fishing in the country's 200-mile exclusive economic zone is reserved for Chilean-flag vessels with majority Chilean ownership. Such vessels also are the only ones allowed to transport by river or sea between two points in Chile ("cabotage”) cargo shipments of less than 900 tons or

passengers.

Full foreign ownership of radio and television stations is allowed, but the principal officers of the firm must be Chilean.

A freeze in force for the last decade on the issuance of new bank licenses means that would-be foreign (or domestic) entrants must acquire existing banks.

The automobile and light truck industry is the subject of trade-related investment measures, although U.S. firms are among those helped as well as those harmed. Manufacturers from the United States (GM) and France (Peugeot/Renault) receive import protection in the form of the taxes noted above, which protect their Chilean production. The manufacturers also receive tax benefits for the use of local inputs and for exporting auto components. Despite these measures, imports make up around 85 percent of the market.

Oil and gas deposits are reserved for the state. Private investors are allowed concessions, however, and foreign and domestic nationals are accorded equal treatment. Principal Nontariff Barriers: The main trade remedies available to the Chilean Government are surcharges, minimum customs values, countervailing duties, antidumping duties, and import price bands. Chile's most significant nontariff barrier is the import price band system for certain agricultural commodities, which currently applies to wheat, wheat flour, vegetable oils, and sugar. Surtaxes are levied on imports of these commodities on top of the across-the-board 11 percent tariff in order to bring import prices up to an average of international prices over previous years.

The Chilean Government may apply country-specific duties on products that it determines to have received subsidies from exporting countries and on products that