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finnmark's value may stabilize near present levels. The slightly strengthened finnmark has eased Finland's external debt burden and has partially offset the inflationary impact of higher commodities prices, but has not had a measurable impact on export competitiveness.
3. Structural Policies
Finland replaced its turnover tax with a value added tax in June 1994. While the change is expected to have little effect on overall revenues, several areas not now taxed or taxed at a lower rate, including many corporate and consumer services and construction, are now subject to the new VAT in conformity with EU practice. The government decided to keep the basic VAT rate at the same rate as the turnover tax, 22 percent. Some goods and services, including transportation services, accommodations, films, pharmaceuticals and books, will be taxed at a 12 percent rate and other services, including health care, education, insurance, and rentals are not subject to the VAT. Agricultural and forestry products will continue to be subject to different forms of taxation outside the VAT. At the beginning of 1993, a uniform tax rate of 25 percent on capital income took effect, including dividends, capital gains, rental income, insurance, savings, forestry income, and corporate profits. The sole exception was bank interest, where the tax rate was increased from 20 to 25 percent at the beginning of 1994.
The change in capital taxation, along with a sharp decline in interest rates and liberalization of foreign investment legislation, has resulted in a strong revival of the Finnish stock market and greater corporate use of equity rather than debt financing. It has also substantially increased the foreign ownership share of many of Finland's leading companies, and may become the vehicle for the privatization or partial privatization of state-owned or dominated companies. The government has moved slowly on privatization, but has been reducing the government stake in several state-dominated companies. Currently, four of Finland's 10 largest companies are majority state-owned, and the government is heavily involved in several key industrial sectors, including energy, forestry products, mining and chemicals.
The volume of government subsidies provided to Finnish industry has increased markedly as the Finnish economy has deteriorated. In real terms, industrial subsidies have increased by about 80 percent since 1988 and now constitute about 1.2 percent of GDP. The government has begun to reduce subsidies in line with falling government revenue and the requirements of EU membership. The government has set the goal of reducing direct subsidies and replacing them with more general measures to improve the business climate.
4. Debt Management Policies
Finland has rapidly accumulated external debt in order to finance recession-induced budget deficits. Gross public debt (EMU definition) continues to rise, and is projected in the 1995 budget at 78.5 percent (in 1990 gross public sector debt stood at only 27 percent of GDP). Finnish corporations, formerly heavy users of foreign capital, are now reducing their foreign obligations. However, financing requirements of the central government have not diminished. In response to the rapid increase in foreign borrowing, Moody's lowered its rating on Finnish long-term government bonds from its second to its fourth highest category (AA-) in March 1993. Finnish debt issues continue to sell easily (albeit at slightly higher risk premiums) in international financial markets, however.
Finland is an active participant in the Paris Club, the Group of 24 countries providing assistance to East and Central Europe, and in efforts to assist the former Soviet Union. In response to budgetary problems, Finland has reduced foreign assistance from approximately 0.7 to 0.4 percent of GDP in the past three years.
5. Significant Barriers to U.S. Exports
In most cases, effective January 1, 1995 Finland will adopt the EU's overall trade regime, including the EU tariff schedule. The agricultural sector will remain the most heavily protected area of the Finnish economy. In 1993 Finland changed its basic system of protection from an import licensing system to a system of variable levies similar to the EU. The net effect is essentially the same, which is to protect domestic production from cheaper foreign imports. Surpluses of agricultural products are usually disposed of on world markets through government and producerfinanced export subsidies. The government will end direct government financing of export subsidies as part of its EU accession terms. Import licenses are no longer required for any products, although some textile imports from Far Eastern suppliers are covered by quotas. Finland will phase in EU textiles tariffs over a 3-year period starting in January 1995.
Finland's adoption of the EU tariff schedule will result in increased barriers to U.S. exporters in several key categories including agriculture, chemicals, and elec
tronics. Preliminary analysis indicates that semiconductors will be the U.S. export category most adversely affected. Tariffs for several key semiconductor types will increase from the present 0 percent to 14 percent under the EU tariff schedule. In late 1994 the U.S. Government entered into negotiations with the EU under Article 24:6 of the GATT, seeking compensation for lost exports as a consequence of Finland's EU accession.
The Finnish service sector is undergoing considerable liberalization in connection with EU membership. Legislation implementing EU insurance directives has gone into effect. Finland will have exceptions in insurance covering medical and drug malpractice and nuclear power supply. Restrictions placed on statutory labor pension funds, which are administered by insurance companies, will in effect require that companies establish an office in Finland. It is unclear whether such restrictions will cover workers' compensation as well. Auto insurance companies will not be required to establish a representative office in Finland, but will have to have a claims representative there. In 1994 the government opened up long distance telephone service within Finland to competition. The government requires that the Finnish Broadcasting Company devote a "sufficient" amount of broadcasting time to domestic production, although in practical terms this has not resulted in discrimination against foreign productions. Upon accession to the EU, Finland will adopt the EU broadcast directive, which has a 50 percent European programming target for nonnews and sports programming. Finland does not intend to impose specific quotas and has indicated its opposition to quotas to the EU.
Finland is a GATT Standards Code signatory and has largely completed the process of harmonizing its technical standards to EU norms.
Finland removed most restrictions on foreign investment and ownership through a law which took effect at the beginning of 1993. The new law abolishes various restrictions placed on companies with foreign ownership and eliminates distinctions between foreign and domestic shareholders. A large increase in foreign portfolio investment has occurred since the law took effect. The new law provides for a screening mechanism for proposed foreign acquisitions involving a third or more of the stock of approximately 100 large companies. The provision will be in effect until the end of 1995, but the government has pledged that only in extreme circumstances would a foreign takeover of a Finnish company be prevented. New investments are not affected by the monitoring procedure. After 1995, only proposed investments involving the manufacturing of defense equipment will be monitored. A requirement to obtain the permission of local governments in order to purchase a vacation home in Finland will also remain. EU membership will eliminate most sectoral investment restrictions. Foreign investors instead will have to meet the obligations required of Finnish investors.
Finland is a signatory to the GATT Agreement on Government Procurement (Procurement Code) and has a good record in enforcing Code requirements in letter and spirit. In the excluded sectors, particularly defense, countertrade is actively practiced. Finland is purchasing fighter aircraft and associated equipment valued at $3 billion from U.S. suppliers. One hundred percent offsets are required as a condition of sale. In connection with the EEA agreement, Finland is implementing all EU procurement-related directives.
Finland has a streamlined customs procedure, reflecting the importance of foreign trade to its economy.
6. Export Subsidies Policy
The only significant Finnish direct export subsidies are for agricultural products, including grain, meat, butter, cheese, and eggs as well as for some processed agricultural products. Finland does not provide subsidies to promote shipbuilding exports, although a mechanism exists on paper to do so. Finland has advocated worldwide elimination of shipbuilding subsidies through the OECD's Working Party 6. Finland is a member of the GATT Subsidies Code.
7. Protection of U.S. Intellectual Property
Finland has a good record in passing effective laws to protect intellectual property. With the exception of software, where unauthorized copying is widespread, enforcement is very good. Finland and the Nordic group of countries have taken a constructive position on intellectual property in the GATT Uruguay Round negotiations and in other international discussions. Finland is a member of all principal multilateral intellectual property organizations.
Finland's copyright legislation has recently been modified to conform with EU practice, as required by the EEA agreement. The EU directive dealing with reselling videocassettes has been implemented, as has the EU software directive. The direc tive has made it easier to prosecute cases of unauthorized software copying. While
piracy of audio and video recordings is only a small problem in Finland, industry representatives estimate that over 50 percent of software installed for business use has been illegally copied. Finland will start granting product patent protection for pharmaceuticals at the beginning of 1995; currently process patent protection is applied.
8. Worker Rights
a. The Right of Association.-The Finnish constitution contains specific guarantees for the right of workers to form trade unions and assemble peacefully. The right to strike is guaranteed by law. These rights are honored in practice; trade unions are among the most powerful political forces in Finland. About 85 percent of the work force is unionized. Unions are free, independent, democratic and associate in three federations as well as internationally.
b. The Right to Organize and Bargain Collectively.-The right to organize and bargain collectively is protected both in law and in practice. Collective bargaining traditionally has been conducted according to national guidelines agreed among employers, the three central trade union organizations, and the government, but in the past two years wage negotiations have been more decentralized. Workers are effectively protected against antiunion discrimination which is prohibited by law.
c. Forced or Compulsory Labor.-Forced or compulsory labor is prohibited by the constitution and is not practiced.
d. Minimum Age for Employment of Children.-Sixteen is the minimum age for full-time employment (eight hours per day). Children that are fifteen years old may work up to six hours per day under certain restricted conditions. Finland has compulsory education laws. Child labor laws are effectively enforced.
e. Acceptable Conditions of Work.-Finland has no legislated minimum wage, but non-union employers are required to meet the minimum wages established by collective bargaining for unionized workers in each sector. The maximum standard legal work week is 40 hours; in practice most contracts call for standard work weeks of 37-38 hours. Finland's health and safety laws are among the strictest in the world. They are enforced effectively by government inspectors and actively monitored by the unions.
f. Rights in Sectors with U.S. Investment.-There is no difference in the application of worker rights between sectors with U.S. investment and those without.
Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993
[Millions of U.S. dollars]
1OECD forecasts unless otherwise indicated.
2 Excludes value added and other taxes.
3 June 1994 data.
41994 estimate based on first nine months average and assumption of fourth quarter equal to September average.
5 Merchandise trade-1994 data are for first seven months. Department of Commerce figures.
1. General Policy Framework
France is the fourth largest industrial economy in the world, with an economy about one-fifth the size of that of the United States'. The service sector, including government and financial services, accounted for 54 percent of output in 1993. Industry and agriculture provided 38 percent and 3 percent, respectively.
Economic growth slowed considerably between 1991 and 1993, after a period of healthy expansion between 1988 and 1990. Growth began to pick up significantly beginning in 1994, with real gross domestic product (GDP) expanding 0.7 percent and 1.0 percent during the first and second quarters, respectively. Imports have increased as well, with real imports of goods and services increasing 3.2 percent and 2.8 percent during the first and second quarters, respectively. Nominal merchandise imports from the United States grew over five percent during the first quarter of 1994 and remained steady during the second quarter, after falling by seven percent
each year in 1992 and 1993. Real GDP is likely to grow about two percent in 1994 and three percent in 1995; the Organization for Economic Cooperation and Develop ment (OECD) forecast in June 1994 that real imports of goods and services would increase close to three percent in 1994 and six percent in 1995. Unemployment, on the other hand, is expected to remain high, hovering around 12.5 percent for 1994. Inflationary pressures remain well contained. The annual inflation rate for consumer prices fell from 3.6 percent in 1989 to 1.6 percent by September 1994, the lowest rate in France in 37 years. Continued wage restraint due to high unemployment is likely to keep inflation from increasing, despite stronger growth.
Low inflation has given French producers a price advantage in overseas and domestic markets. Due in part to this phenomenon, France's merchandise trade balance (cif/fob basis) changed from a deficit of FF 20 billion in 1992 to a record FF42 billion surplus in 1993, according to French customs statistics. Trade in manufactured goods registered the largest increase, from a surplus of FF7 billion to FF54 billion. France's surplus with other European Union (EU) countries increased from FF17 billion to FF32 billion. With non-EU OECD countries, France reduced its deficit from FF60 billion to FF31 billion, primarily due to a decrease in its deficit with the United States, which fell to FF16 billion from FF26 billion in 1992 because of strong U.S. growth. Much of the overall trade surplus can be attributed to weak domestic demand, and in particular, to persistently weak corporate investment in imported capital goods. France is likely to run another large merchandise trade surplus in 1994, although slightly lower than the 1993 figure.
Due primarily to the merchandise trade surplus, France ran a current account surplus of FF59 billion in 1993. The surplus in tourism receipts was a record FF60 billion. In contrast, the deficit on net investment income increased to FF45 billion in 1993 from FF41 billion in 1992, due to the continued inflow of foreign portfolio investment and higher interest rates relative to rates in other industrialized countries. Due to a lower merchandise trade balance and lower interest payments to foreigners (resulting from a large outflow of foreign portfolio investment at the beginning of 1994), the current account surplus is likely to fall in 1994.
Since France is a member of the EU, its imports are subject to a common external tariff and to the restrictions of the Common Agricultural Policy. As the EU continues to implement its "single market" program to remove all barriers to the free internal circulation of goods, services, capital and labor, jurisdiction over a growing number of economic areas, including certain aspects of tax and investment policy, will be transferred to Brussels from Paris.
Since 1991, the sharp drop in economic activity has led to a dramatic decline in government revenues. This, coupled with increased spending on unemployment, retirement, health care, and interest payments, has resulted in soaring budget deficits. The central government budget deficit as a percentage of GDP rose from 1.9 percent in 1991 to 4.5 percent in 1993, and is expected to be close to four percent in 1994. The general government budget deficit, which includes federal, local, and social security budgets, rose from 2.2 percent of GDP in 1991 to 5.8 percent in 1993, and is expected to be 5.6 percent in 1994.
Like its G-7 counterparts, the Bank of France conducts its monetary policy primarily by adjusting official rates and through open market operations. During most of 1993, French money supply (M3) grew far less than the Bank of France's target growth rate of 4-6.5 percent, and fell almost one percent between the fourth quarters of 1992 and 1993. The Bank of France estimated that had it not been for the large transfer of assets from money market funds (which are included in M3) to stocks and long-term bonds, in response to tax incentives and declining interest rates, M3 would have increased 1.5-2 percent during this time, still far below its target.
2. Exchange Rate Policies
Within the established limits of the European Exchange Rate Mechanism (ERM), whose bands were significantly widened in August 1993, the value of the French franc is set by market forces. It is also influenced by macroeconomic policy actions or central bank interventions. These actions are usually coordinated with those of other governments, both within the ERM and as part of broader international economic policy a series of exchange rate crises to maintain high short term interest rates to keep the franc within its ERM bands. Even after the bands were widened in August 1993, the Bank maintained high rates while it replenished the foreign exchange reserves it spent in July to defend the franc. Beginning February 1994, the Bank followed the German Bundesbank in gradually lowering official rates. It is expected to continue coordination efforts among industrialized countries, including the United States.