Doing Business In El Salvador

An Expert's View about Business Environment in El Salvador

Posted on: 22 Feb 2012

 Chapter 1: Doing Business in El Salvador
Market Overview
Market Challenges
Market Opportunities
Market Entry Strategy

Market Overview
The U.S. is El Salvador’s leading trade partner. In 2009, El Salvador’s Central Bank (BCR) reported that the U.S. had a 36% import market share, and that 48% of Salvadoran exports go to the United States. Central America, Mexico, and China are other top bilateral trade partners.
El Salvador was not excluded from the world economic crisis and the country’s economy showed small signs of recovery in 2010. The Central Bank’s preliminary statistics indicate that in 2010 total imports of consumer goods, intermediate goods, capital goods, and textiles, increased 17.8% after facing a decrease of approximately 26% in 2009.
The U.S.-Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) will enter its 5th year of implementation with El Salvador on March, 1, 2011.
Costa Rica, Guatemala, Honduras, Nicaragua, and Dominican Republic, are also part of the CAFTA-DR treaty.
El Salvador belongs to the World Trade Organization. It has free trade agreements with Chile, Mexico, Dominican Republic, Panama, Taiwan, Colombia, and Central America. It also signed a free trade agreement (Association Agreement) that incorporates technical assistance with the European Union. A free trade agreement with Canada is under negotiation.
Like the rest of Central America, El Salvador offers an open market for U.S. goods and services. Tariffs are relatively low, and were reduced further with the implementation of CAFTA-DR. The value-added tax (VAT) rate is 13%.
There are few import restrictions. Standards are based on ISO standards, or Colombian, Mexican, and U.S. standards are used as reference points. Labeling and testing are not major issues.
El Salvador has close ties to the U.S and is only a 3-4 hour flight from key U.S. gateways. 3 U.S. carriers operate in the country, and the local airline TACA, has
code-share agreements with two additional U.S. airlines. Costs for air travel are relatively high for flights compared to other flights with similar distance.
• El Salvador’s location and free trade zones make it a platform for industrial and service investments aimed at re-exports.
• Openness to international trade, and privatization of the telecommunications and banking system in the 1990s, has contributed to the country’s progress and economic development.
• El Salvador’s economic freedom score is 68.8, and it ranks 39th on the 2011 Index of Economic Freedom. El Salvador is ranked 4th out of 29 countries in South and Central America, and the Caribbean region; surpassed only by Chile, Saint Lucia, and Uruguay.
• It is against the law to solicit, offer or accept a bribe.
• The U.S. dollar is the official currency. El Salvador enjoys fundamental macroeconomic stability, the lowest inflation in Central America, and one of the lowest interest rates in Latin America.
• Per capita income has risen during the last decade. Consumer demand is fueled both by the increase in income and the massive inflow of remittances from Salvadorans living in the United States.
• More than 2 million Salvadorans live in the U.S. The most outstanding feature of El Salvador's balance of payments is the country's dependence on remittances, by far the largest source of foreign income. In 2010, remittances were $3.5 billion, approximately 18% of the country GDP.
• El Salvador enjoys a democratically elected government and has an excellent bilateral relationship with the United States. Most Salvadorans view the United States favorably.
• The most efficient and largest companies in the textile sector are expanding through vertical integration. Investment decisions from foreign textile mills and textile finishing companies are moving forward.
• The Constitution guarantees the right of employees in the private sector to organize into associations and unions.
• Employers are free to hire union or non-union labor. Closed shops are illegal.

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Posted: 22 February 2012