The bulk of accumulated foreign investment in Venezuela is from the United States. The United States remains Venezuela's chief trading partner, absorbing 55 percent of its exports and supplying 51 percent of its imports in 1993. In December 1994 ratified the G-3 Free Trade Agreement between Venezuela, Colombia and Mexico. Venezuela has also ratified the Uruguay Round agreements and became a founding member of the World Trade Organization (WTO) on January 1, 1995.

After three years of solid economic growth, Venezuela's economy went into recession in 1993 with real GDP falling by 1 percent. This contributed to a major financial sector collapse in early 1994, followed by an even more severe contraction of the economy. GDP is expected to drop by more than 5 percent in 1994.

The government recorded a fiscal deficit of about 3.6 percent of GDP for the consolidated public sector in 1993. Tax revenues from the petroleum sector as a share of GDP have declined substantially in recent years as international petroleum prices in real terms have fallen and non-oil revenues have increased. As a result, oil revenues are expected to provide less than 50 percent of total revenues in 1994. As a result of the federal government bailout of the banking sector, the government's fiscal deficit could climb to 15 percent for 1994.

Financing of the deficit has been accomplished primarily through the issuance of treasury bills ranging in maturity up to two years, but heavily weighted toward the short-term. Substantial financial support to the commercial banking sector in 1994 has principally been supplied through borrowing from the Central Bank. The government has forecast a modest rebound in output and a budget surplus for 1995. Economic and fiscal performance will depend on several factors, including ongoing application of price and exchange controls, continuing problems in the financial sector, proceeds from the privatization process, and international petroleum prices.

The Central Bank operated a tight monetary supply in 1993. In real terms, M2 lost 18.84 percent. However, in 1994 government assistance to the financial sector overwhelmed attempts to restrict liquidity. From the end of 1993 through August 1994, although M2 decreased 8 percent in real terms, it expanded by 33 percent in nominal terms. During 1993 and 1994, the government has relied primarily on 91and 181-day zero coupon bonds to soak up excess liquidity. Inflation has been on the rise the last several years, climbing from 32 percent in 1992 to 46 percent in 1993. Prices for items in the CPI basket increased by about 50 percent for the first eight months of 1994. For the year, inflation is expected to reach 60 percent.

The Caracas Stock Exchange has fluctuated in recent years. The broad market index decreased 32 percent in 1992, but climbed 10 points in 1993. Foreign investment in the stock market dropped in 1994 with the imposition of exchange controls in July, but the market index hit a new high in September 1994, bid up by local investors without dollar instrument investment alternatives.

2. Exchange Rate Policy

From November 1992 to April 1994, Venezuela's Central Bank implemented a crawling peg exchange rate regime of daily minidevaluations. In May, an auction system was introduced to stem capital flight prompted by a lack of confidence in the economy following a massive bailout of troubled banks and resignation of the Central Bank President. Central Bank reserves, which stood at $12.7 billion at the end of 1993, dropped to $9.0 billion by the end of June 1994. On July 11, 1994 a fixed exchange rate system was established with a single rate of 170 bolivars to the dollar, compared to an exchange rate of 115 at the beginning of April.

In addition to a fixed exchange rate, access to foreign currency is strictly controlled under the new regime. All requests for foreign currency must be submitted to the Technical Exchange Management Office (OTAC). An Exchange Control Board sets general policy. Importers, exporters, private debt holders, and foreign investors must register with OTAC prior to submitting an application for currency. Procedures under the new exchange control regime are still evolving. Currency transactions conducted outside the official system are illegal and legislation is pending that would impose heavy penalties for violations. The Venezuelan government has characterized the new controls as temporary, but after six months of controls has not yet set a date for their elimination.

3. Structural Policies

In 1994, the Venezuelan government adopted a mix of heterodox measures to respond to the economic recession and collapse of the financial sector. The government suspended constitutional economic guarantees, using this mechanism as the basic framework to implement foreign exchange and price controls on a variety of goods (primarily essential goods such as foods) and services (parking, funeral services, laundry and drycleaning, and cinemas). The stringent government regulations for obtaining foreign exchange have disrupted lines of credit for the private and public

sector. No progress has been made on raising the domestic price of gasoline, which is below the marginal cost of production; on reforming the severence pay system; or in trimming public sector participation in the economy through privatization of state enterprises.

A major income tax reform designed to improve government tax collection and increase revenues in the nonpetroleum sector was implemented in mid-1994. The maximum rate for individuals and corporations increased from 30 to 34 percent. Venezuelan tax law does not differentiate between foreign-owned and Venezuelanowned companies, with the exception of the petroleum sector. Hydrocarbon revenues of the state petroleum company, PDVSA, are subject to a tax rate of 67.7 percent. However, joint-ventures between PDVSA and private companies in the production and processing of off-shore natural gas and extra-heavy crudes and bitumens are taxed at the lower 34-percent rate. Venezuela imposes a one percent assets tax, assessed on the gross value of assets (with no deduction for liabilities) after adjustments for depreciation and inflation. It is deductible for income tax purposes. An investment tax credit of 10 percent is available for the purchase of capital goods to be used in manufacturing processes.

The government also has implemented a temporary, controversial 0.75 percent financial debit tax on financial transactions that covers credit card charges, withdrawal of funds and other debits to checking accounts, saving accounts, trust funds, and other money market funds; it may be continued beyond the end of 1994. A value added tax, which was applied at the wholesale level in late 1993, was converted to a "wholesale" tax in August 1994 and applied to all goods and services, including imports. The wholesale tax rate is to be defined each year within a range of 5 to 20 percent. The rate through the end of 1994 is 10 percent. An additional luxury tax of 10 or 20 percent for certain items was also established in mid-1994.

The Venezuelan tariff schedule has been substantially liberalized, and quantitative restrictions have been almost completely removed (prohibitions remain on used vehicles, used tires and used clothing). With its accession to the General Agreement on Tariffs and Trade (GATT) on September 1, 1990, Venezuela agreed to bind its tariff rate to a 40-percent ceiling. Venezuela's present maximum tariff rate is 20 percent, with the exception of a 35-percent tariff rate applied to passenger vehicles as part of the Andean Pact Common Automotive Policy. The country's average import tariff on a trade-weighted basis is around 10 percent. Sensitive agricultural products (milk, meat, rice, wheat, feedgrains, oilseeds, and sugar) are subject to a price band system which imposes a variable surcharge in addition to the duty when the futures market for these commodities drops below trigger prices. In addition, the Venezuelan tariff legislation permits the duty to be temporarily increased by 60 percent (e.g., from 20 percent to 32 percent) should the Economic Cabinet determine that import of these products pose a particular threat.

4. Debt Management Policies

As of December 1993, Venezuela's public sector external debt totaled $27.3 billion, which included $6.7 billion in nonrestructured external debt (including commercial bank debt and military promissory notes). Medium-term private sector debt totaled an estimated $5.3 billion. External debt represents about 54 percent of GDP. In 1993, Venezuela's debt service payments totaled about $2.7 billion, or 19 percent of total exports. Debt service payments for 1994 are estimated to reach $3.2 billion, or 21 percent of total exports.

Relations with commercial creditors have deteriorated because the high inflation rate has increased the cost of servicing external debt obligations. In addition, stringent foreign exchange controls have slowed debt payments to official and commercial creditors. Due to higher US interest rates and downgrading of Venezuelan debt, the cost of borrowing has also risen.

In December 1990, the government rescheduled $19.8 billion in commercial bank debt within the context of the Brady Plan. Current government policy does not include an adjustment program with the IMF; The World Bank and Inter-American Development Bank are providing multi-year sectoral loans to assist with economic restructuring and infrastructure programs.

5. Significant Barriers to U.S. Exports

Import Licenses: Venezuela no longer has an import licensing regime. Sanitary and phytosanitary certificates from the Ministries of Health (Nota 3) and Agriculture (Nota 6), however, are required for most agricultural and pharmaceutical imports. The nota 6 requirement is used aggressively by the Ministry of Agriculture, in effect banning U.S. poultry and pork imports.

Service Barriers: Foreign equity participation in enterprises engaged in television, radio, Spanish language press, and professional services subject to licensing legisla

tion, is limited to 19.9 percent. As of January 1, 1994, banks from countries that provide reciprocal access to Venezuelan institutions may establish branches and 100 percent foreign-owned subsidiaries or acquire 100 percent equity in existing banks. Foreign companies now receive national treatment in the insurance sector. The sector was opened to foreign investment through reforms to the Insurance and Reinsurance Law, which were gazetted on December 23, 1994 in the Extraordinary Gazette Number 4.822.

Standards, Testing, Labeling and Certification: The Venezuelan Commission of Industrial Standards (COVENIN) requires certification from COVENIN-approved laboratories for imports of over 300 agricultural and industrial products. U.S. exporters have experienced difficulties in complying with the documentary requirements for issuance of COVENIN certificates.

The Consumer Law, which went into effect in May 1992, contains provisions regulating labeling. All goods placed on sale must bear a label indicating price to the public and expiration date (where appropriate). In the event of future price increases, goods in stock with previous price labels must be sold at no more than the prior price.

Investment Barriers: Pursuant to Executive Decree 2095, published February 13, 1992, foreign equity participation is unlimited in all sectors of the economy, except those specifically restricted. Prior government approval is not required for investment in those sectors covered by the decree. Investors must simply register with the Superintendent of Foreign Investment within 60 days following the investment. Decree 2095 also guarantees the right of foreign investors to repatriate profits and permits shares of foreign companies to be publicly sold. The repatriation of capital has been complicated by the imposition of foereign exchange controls in June 1994. However, the Venezuelan govenment is attempting to resolve these difficulties through the publication of a series of specific relolutions by the Foreign Exchange Board.

In addition to the sectorial restrictions noted above under "Service Barriers," foreign investment is restricted in the petroleum sector. The exploration, exploitation, refining, transportation, storage, and foreign and domestic sales of hydrocarbons are reserved to the Venezuelan government or to its entities. When in the public interest, the government may enter into agreements with private companies, as long as the agreements guarantee state control of the operation, are of limited duration, and have the prior authorization of the legislature meeting in joint session.

The Andean Pact Common Automotive Policy, which entered into force on January 1, 1994, obligates auto assemblers in Venezuela to satisfy a minimum percentage foreign exchange contribution, to offset foreign exchange spent on imports, and a minimum precentage regional content. An addendum to the policy, which will take effect on January 1, 1995, eliminates the Venezuelan foreign exchange balancing requirement and modifies the formula for calculating regional content.

The Organic Labor Law, passed on May 1, 1991, limits foreign employment in companies with ten or more employees, to 10 percent of the payroll. Remuneration for foreign workers must not exceed 20 percent of total wages paid. Foreigners are prohibited from offering any of the professional services subject to licensing legisla tion (e.g. attorneys, architecture and engineering, medical professions, veterinary practice, economists, business administration/management, and accounting) unless they revalidate their title at a Venezuelan university.

Government Procurement Practices: The Law of Tenders, published on August 10, 1990 and subsequently modified though Decree 1906 on October 30, 1991, provides for three methods of procurement, depending mainly on the value of the goods and services being procured. For general or selective tenders which are within a reasonable range, this law permits, but does not require, preference to be given in awarding contracts to offers based on the extent to which they include national content, labor, investment, technology transfer, etc. PDVSA is required to purchase national materials and supplies; foreign purchases are permitted only if domestic firms cannot meet quantity, quality, or delivery requirements. Imported materials supplied by local representatives of foreign manufacturers are classified as "domestic purchases." Foreign firms that supply PDVSA must register with PDVSA's unified suppliers register or with the unified contractors registry. Venezuela is not a signatory of the GATT Government Procurement Code.

Customs Procedures: Customs clearance procedures are time consuming, and delays can occur if documents are not in order. Venezuela is not a signatory of the GATT Customs Valuation Code.

6. Export Subsidies Policies

Venezuela has reduced the number and type of export incentives, but has retained a duty drawback system which enables exporters to receive a rebate on duties paid

on imported inputs. The current system was established under Finance Ministry resolution 2603, dated June 10, 1994. Under the program, exporters must submit to Venezuelan customs information on the quantity of exports, imported and national inputs, and waste. The duty drawback is calculated by means of a formula which takes into account the exporter's production efficiency. Maximum rebates, which are expressed as a percentage of the export free-on-board (FOB) price, have been established by productive sector. Rebates are given in the form of Certificados de Reintegro Tributario (CERTs), which are denominated in local currency. CERTs are negotiable and transferrable, and can be used to cancel duty payments. The Wholesale and Luxury Tax Law, enacted August 1, 1994, also provides for a rebate of the wholesale tax paid on imports used in producing goods for export. The rebate is in the form of a tax credit, which is negotiable on the secondary market.

A joint resolution of the Foreign and Finance Ministries, published June 13, 1991, lists those agricultural products for which an export bonus is available. The program provides a credit against an exporters tax liability of one percent for certain agricultural items whose national value added is from 30 to 98 percent. For products whose value added is from 99 to 100 percent, exporters are eligible for a credit of 10 percent of the FOB value.

7. Protection of U.S. Intellectual Property

Venezuela does not yet provide an adequate and effective level of protection of intellectual property rights. Traditionally, Venezuela's intellectual property rights (IPR) regime has tended to protect national industries and firms. Nonetheless, recent changes have taken place which may benefit U.S. and other foreign firms by improving IPR protection. Specifically, on October 1, 1993, a new copyright law entered into force which strengthens copyright protection and increases sanctions for violation of the law. Andean Pact Decisions 344 and 345, which became effective January 1, 1994, have improved protection for patent and trademarks, and plant varieties, respectively.

Venezuela is a member of the World Industrial Property Organization (WIPO) and is a signatory to the Bern Convention for the Protection of Literary and Artistic Works, the Geneva Phonograms Convention, and the Universal Copyright Convention. The Chamber of Deputies approved legislation for Venezuela's accession to the Paris Convention for the Protection of Industrial Property on December 8, 1994, following Senate approval of the measure on October 31. President Caldera is expected to sign the law before the end of the year. Venezuala is not yet a signatory to the Patent Cooperation Treaty and the Brussels Convention Relating to the Distribution of Program-Carrying Signals Transmitted by Satellite. Venezuela signed the Uruguay Round TRIPS Agreement and plans to implement it, along with the World Trade Organization, from January 1, 1995. The U.S. Trade Representative has placed Venezeula on the Special 301 "Watch List" as a result of its annual assessment under Section 301 of the 1988 Omnibus Trade and Competitiveness Act, most recently, in April 1994.

Patents: Although Decision 344 extended the patent term to 20 years; narrowed compulsory licensing arrangements; and lifted the ban on patentability of pharmaceutical products (except for those included on the World Health Organization list of essential medicines), deficiencies remain. Among these, the Decision did not grant transitional or pipeline protection for technologies previously excluded from patent eligibility (particularly pharmaceuticals and agricultural chemicals), working requirements were retained (although importation can be used to satisfy the requirement), and parallel imports are allowed. Few patents have been enforced under past and current law.

Trademarks: Decision 344 strengthened protection for well-known trademarks, prohibits the coexistence of similar marks, and provides for cancellation of trademark registrations for "nonuse" within the Andean Pact for three years or on the basis of bad faith." However, problems remain with the registration process. Application procedures enable local pirates to continue producing and selling counterfeit products during lengthy opposition proceedings, often lasting for years. Trademark piracy is common in the clothing, toy, and sporting goods areas and enforcement remains poor.

Copyrights: Venezuela's Copyright Law is modern and comprehensive (Andean Pact Decision 351, which was adopted in December 1993, complements the Venezuelan law). Venezuela's law extended copyright protection to all creative works, including computer software. The law is currently in force and is being used aggressively by private concerns to combat piracy. However, the Venezuelan government has yet to pass regulations establishing a National Copyright Office, as mandated under the law. The National Copyright Office is to play a key role in enforcement efforts. Computer software and videotape piracy is still rampant and unauthorized

interception and retransmission of U.S. satellite signals and services is widespread. A local association of computer program companies estimates that 72 out of every 100 programs used in the country is pirated. According to the International Intellectual Property Alliance (IIPA), some of the largest pirate videotape manufacturing laboratories in South America are located in Venezuela. Pirate copies are sold on the domestic market as well as exported to a number of countries in the region, including the United States.

New Technologies: Computer software, satellite signals and cable television are covered under Venezuela's Copyright Law and Decision 351. Decision 344 excludes from patent protection diagnostic procedures, animals, genetic material obtained from humans, and many natural products. However, Decision 344 includes provisions for the protection of industrial secrets.

The IIPA estimated that U.S. trade losses due to inadequate copyright protection in Venezuela were approximately $123 million in 1993. Piracy of computer programs accounted for the largest losses ($51 million), followed by motion pictures ($40 million), books ($20 million), and records and music ($12 million). Comprehensive estimates for losses due to patent and trademark infringement were not available. However, at least one company has estimated its losses due to trademark piracy in Venezuela at $170 million between 1987 and 1993.

8. Worker Rights

a. The Right of Association.-Both Venezuela's Constitution and its labor law recognize and encourage the right of unions to exist. The comprehensive labor law enacted in 1990 extends to all public sector and private sector employees (except members of the armed forces) the right to form and join unions of their choosing. There are no restrictions on this right in practice and no special rules or laws governing labor relations in export processing zones. One major union confederation, the Venezuelan Confederation of Workers (CTV), and three small ones, as well as a number of independent unions, operate freely in Venezuela. About 25 percent of the national labor force is unionized.

b. The Right to Organize and Bargain Collectively. Collective bargaining is protected and encouraged by the 1990 labor law and is freely practiced throughout Venezuela. According to the law, employers "must negotiate" a collective contract with the union that represents the majority of their workers. It contains a provision stating wages may be raised by administrative decree, provided Congress approves the decree. The law prohibits employers from interfering with the formation of unions or with their activities and from stipulating as a condition of employment that new workers must abstain from union activity or must join a specified union.

c. Prohibition of Forced or Compulsory Labor.-There is no forced or compulsory labor in Venezuela. The 1990 labor law states that no one may "obligate others to work against their will."

d. Minimum Age for Employment of Children.-The 1990 labor law allows children between the ages of 12 and 14 to work if given special permission by the National Institute for Minors or the Labor Ministry. Children between the ages of 14 and 16 can work if given permission by their legal guardians. Minors may not work in mines, smelters, in occupations "that risk life or health" or in occupations that could damage intellectual or moral development, or in "public spectacles." For those under 16, the work day may not exceed six hours or the work week, 30 hours. Minors under 18 can work only during the hours between 6 a.m. and 7 p.m.

e. Acceptable Conditions of Work.-Venezuela has a national urban minimum wage rate ($90 monthly) and a national rural minimum wage rate ($60 monthly). (To this should be added mandatory fringe benefits that vary with the workers' individual circumstances but, in general, would increase wages by about one-third.) Only domestic workers and concierges are legally excluded from coverage under the minimum wage decrees. The 1990 labor law reduced the standard work week to a maximum of 44 hours. Overtime may not exceed two hours daily, ten hours weekly, or 100 hours annually and may not be paid at a rate less than time-and-a-half. Sundays are declared to be holidays, and those who must work on Sundays are entitled to a full day of rest during the following week. The 1990 labor law stated that employers are obligated to pay specified amounts (up to a maximum of 25 times the minimum monthly salary) to workers for accidents or occupational sicknesses regardless of who is responsible for negligence. It also declared work places must maintain "sufficient protection for health and life against sicknesses and accidents," and it imposed fines from one-quarter to two times the minimum salary for first infractions.

f. Rights in Sectors with U.S. Investment.—Labor rights and conditions of work in sectors in which there is U.S. investment are provided the same protection as