Privatization and stable business environment to help Romania reap benefits from reforms  Back to top

While Romania has made good progress in the transition to a market economy, decisive action on state-owned enterprises and greater stability in key business-related policies would help Romania realize the full benefits of the reforms, says a new WTO report on the trade policies of Romania.

The report states that in 1999, Romania is experiencing its third consecutive year of recession. Industrial production continues to drop and real net exports are down. The persistent and growing current account deficit of recent years has been financed mainly by short-term external debt. A difficult debt-management situation is compounded by the repercussions of the Russian debt crisis and the effects of the conflict in Kosovo on neighbouring countries.

The new WTO Secretariat report, along with a policy statement by the Romanian government, will serve as a basis for the second trade policy review of Romania which will be conducted by the Trade Policy Review Body of the WTO on 4 and 5 October 1999.

Romania has an open and liberal investment regime, the report says. Romania substantially improved its regime with the introduction of external account convertibility in March 1998 and the principle of equality between foreign and domestic investors. Other improvements of note in the business environment include a comprehensive framework for the protection of intellectual property rights. The report notes, however, that legislative instability in key areas - taxation, investment, privatization - increases the risk of doing business and thus discourages investment. Currently, the relatively low level of foreign investment in Romania is an obstacle to economic development.

The report notes that the basic reform of Romania's trade regime was in place at the time of its first review in 1992: the end of the state's monopoly on trade, and the use of the customs tariff as the main instrument of commercial policy. These reforms have been anchored by the commitment to bind all tariffs in the WTO. Romania has also agreements to eliminate tariffs on bilateral trade in industrial products with the European Communities, the European Free Trade Association (EFTA), the Central European Free-trade Area (CEFTA), Moldova and Turkey. Most of its exports to European countries already benefit from duty-free treatment. For the future, Romania's paramount national goal is to join the European Union (EU), its most important trading partner, and it is working towards this goal by adopting key elements of Community legislation. Romania hopes to get the green light for the start of accession negotiations in the near future.

The report states that Romania has kept the applied most-favoured-nation (MFN) rates on industrial products steady at 16%, well below the bound level of some 35%. Applied tariffs on agricultural products are generally much higher, but Romania did reduce applied rates in 1997, bringing the average on such products from 134.1% in 1995 to 33.9% in 1999. The report notes the importance of other taxes assessed at the border, which include an import surcharge (4% in 1999), a customs commission (0.5%), excise taxes on certain products (including tobacco products, alcoholic beverages, coffee and automobiles), on top of which a basic VAT rate of 22% applies. The report notes that importers may face complex and time-consuming customs clearance procedures.

The report also notes that in spite of the importance of tax collection to government revenue, a large number of laws provide local enterprises with exemptions from the payment of customs duties and taxes collected at the border, as part of investment incentives, which also may include profits tax holidays. The authorities have also periodically used a tax incentive to stimulate domestic production for export. The plethora of these special tax incentives reduces the transparency of the business environment.

Despite considerable progress made by Romania in laying the foundations for the market economy, state-owned enterprises still account for the major share of recorded economic activity, the report states. Such figures are best treated with caution since estimates of unrecorded economic activity range from 25% to 60%. Privatization effectively began only in 1995, some six years after the start of the transition, and progress has been slower than anticipated. The authorities are concerned with containing the social consequences of closure, particularly in regions of the country dominated by a single activity, such as coal-mining or steel production. Keeping state-owned enterprises open as arrears accumulate or rescuing banks whose balance sheets are burdened by non-performing loans is behind the government's fiscal management difficulties.

A bright spot is the dynamism of the emerging private sector. Taking advantage of the duty-free treatment of Romania's exports of industrial products on major European markets, and the elimination of longstanding quantitative restrictions by the European Union and Norway, small and medium-sized enterprises are active in the export of clothing, the most dynamic sector in Romania's trade. The report also notes that Canada and the United States are two potentially large markets, but still restrict imports from Romania.

In services, the authorities have given the priority to regulatory change, privatization and appropriate competition policies in services. To this end, Romania assumed substantial market-opening commitments under the GATS. On financial services, in particular, Romania has a policy of open non-discriminatory access for the establishment of banks, subject to prudential regulations. As of 2003, Romania's market for basic telecommunication services will be open to competition.

Notes to Editors

The WTO's Secretariat report, together with a policy statement prepared by Romania, will be discussed by the WTO Trade Policy Review Body (TPRB) on 4 and 5 October 1999. The WTO's TPRB conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular intervals and monitors significant trends and developments which may have an impact on the global trading system. The Secretariat report covers the development of all aspects of each of Romania's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the areas of services and trade-related aspects of intellectual property rights are also covered.

To this press release are attached the summary observations from the Secretariat report and a summary of the government report. The full Secretariat and government reports are available for the press in the newsroom of the WTO internet site (www.wto.org). The Secretariat report, together with the government policy statement, a report of the TPRB's discussion and the Chairman's summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992 & 1999), Australia (1989, 1994 & 1998), Austria (1992), Bangladesh (1992), Benin (1997), Bolivia (1993 & 1999), Botswana (1998), Brazil (1992 & 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994, 1996 & 1998), Chile (1991 & 1997), Colombia (1990 & 1996), Costa Rica (1995), Côte d'Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992 & 1999), El Salvador (1996), the European Communities (1991, 1993, 1995 & 1997), Fiji (1997), Finland (1992), Ghana (1992), Guinea (1999), Hong Kong (1990, 1994 & 1998), Hungary (1991 & 1998), Iceland (1994), India (1993 & 1998), Indonesia (1991, 1994 & 1998), Israel (1994 & 1999), Jamaica (1998), Japan (1990, 1992, 1995 & 1998), Kenya (1993), Korea, Rep. of (1992 & 1996), Lesotho (1998), Macau (1994), Malaysia (1993 & 1997), Mali (1998), Mauritius (1995), Mexico (1993 & 1997), Morocco (1989 & 1996), New Zealand (1990 & 1996), Namibia (1998), Nigeria (1991 & 1998), Norway (1991 & 1996), Pakistan (1995), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 & 1998), Sri Lanka(1995), Swaziland (1998), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 & 1998), the United States (1989, 1992, 1994, 1996 & 1999), Uganda (1995), Uruguay (1992 & 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

The Secretariat’s report: summary Back to top

TRADE POLICY REVIEW BODY: ROMANIA
Report by the Secretariat – Summary Observations

Overview

Romania's transformation to a market economy began in December 1989 in a very difficult economic, social and political context, with little history of market-based economic reform. The regime in power throughout the post-war period nationalized land and industry, and instituted strict central control of economic decisions. By the time of its first Trade Policy Review in December 1992, Romania was in a severe recession, facing an incipient balance-of-payments crisis, provoked in part by the collapse of trade within the Council for Mutual Economic Assistance (CMEA). The shift to the private sector had begun, however, with Romania liberalizing trade, prices and the exchange rate. Romania had also established the regulatory foundations for a market economy, provided open and liberal access to foreign investors, and had begun restructuring state-owned enterprises.

Almost ten years into the transition, Romania's second Trade Policy Review provides an opportunity to assess the progress to date. Romania has maintained its liberal investment regime and completed the regulatory framework for private sector development. The initial progress on trade liberalization has been anchored in binding commitments under the WTO and regional trade agreements. Price and exchange rate liberalization is complete. Unfortunately, Romania has had more difficulty in completing the shift to the private sector of state-owned enterprises, still dominant in industry and financial services. Privatization remains the preferred option, rather than closure, and policy is consequently geared mainly to the objective of keeping enterprises open and rescuing failing banks. This priority has made it difficult to finance worker adjustment programmes to ease closure, and also complicated other goals of government policy, such as maintaining social services, renewing the infrastructure or reducing the tax burden on small and medium-sized enterprises.

In 1999, Romania is experiencing its third consecutive year of recession. Industrial production continues to drop and real net exports are down. The persistent and growing current account deficit of recent years has been financed mainly by an accumulation of short-term external debt; foreign direct investment inflows have been disappointing, although on an improving trend since 1996. A difficult debt-management situation in 1999 is compounded by the repercussions of the Russian debt crisis and the conflict in Kosovo. Romania is discussing financial support for its adjustment programme with multilateral financial institutions.

Main Economic Developments and Outlook, 1993-99

In spite of the more difficult external environment resulting from the collapse of CMEA trade and payments arrangements, Romania's merchandise exports recovered early, in mid-1992, supporting industrial production and real income. Growth occurred mainly in state-owned enterprises. Substantial real wage growth undercut the competitiveness of Romania's exports and fuelled an import boom. The current account deficit increased from 1.7% of GDP in 1994 to 6.6% in 1996. The deficit was financed mainly by accumulating external debt, up 50% in 1994-96, as foreign direct investment remained low.

After the 1996 change of Government, Romania renewed its efforts at structural reform and macroeconomic stabilization, supported by multilateral financial institutions. Fiscal and monetary policies were tightened and real GDP fell 6.9% in 1997. Net exports rose and the current account deficit fell slightly. The political resolve to sustain the reform programme weakened in the autumn 1997, and looser monetary and fiscal policies then prevailed. The rate of inflation was 155%, partly reflecting price measures due to the final stage of price de-controls in early 1997.

In 1998, policy priority shifted to curbing inflation. To give credibility to this effort, the exchange rate was used as an external anchor for price stability. Tight monetary policy, in combination with an unexpectedly expansionary fiscal policy, led to sharply higher real interest rates, contributing to a drop of 7.3% in GDP. Inflation declined to about 40%. At the same time, the real appreciation of the currency contributed to a decline of 34.4% in real net exports, and the current account deficit rose to 7.2% of GDP. As an emergency measure, Romania introduced an import surcharge of 6% in October 1998, reduced to 4% for 1999; it is scheduled to be eliminated in 2000. Following consultations, the WTO Committee on Balance-of-Payments Restrictions concluded that Romania's imposition of the surcharge was in conformity with its WTO obligations.

In 1999, Romania has exercised fiscal constraint and accelerated privatization, both to raise revenue and foster structural reform. A reduced budget deficit of 2.5% is targeted for 1999, two-thirds of the level of 1998; the elections in 2000 however constrain the scope for difficult economic policy decisions, should they become necessary. GDP is expected to decline by some 4% in 1999, inflation is expected to remain modest, and the current account deficit to drop to 5.5% of GDP.

Institutional Developments: 1993-99

The transition to a democratic system was consolidated during the period under review. The first elections were held under the new Constitution in 1992, followed by the change-over of Government after the 1996 elections; elections for Parliament and the Presidency are scheduled for the autumn 2000. The Government, which is chosen from a coalition of political parties, proposes legislative initiatives to Parliament and implements the resulting laws. In Romania, no law or government decision can be enforced without publication. Romania intends to respond to the challenge of more effective governance by increasing public access to information, passing an anti-corruption law, and reforming the civil service.

A challenge for the authorities is the need to establish a more stable and less complex policy regime. In recent years, the Government has invoked the economic crisis to implement, through the instrument of the "emergency ordinance", virtually all reform-related initiatives in advance of legislative approval. Subsequently, Parliament has often turned such initiatives into quite different laws, sometimes modified again by the Government through an emergency ordinance. The resulting to-and-fro between Romania's political bodies indicates the difficulty of establishing consensus on reform. For economic operators, a succession of measures on key business-related areas – taxation, investment, privatization – creates a volatile and uncertain environment, increasing the risk of doing business and discouraging investment. Greater stability of Romania's policies in these key areas could moderate the risk of adverse developments for economic operators, provide a more favourable regime for investment and an anchor for further structural reform.

Developments in Trade Agreements

Romania was a founding member of the WTO in 1995. All tariffs are bound at ceiling rates, and Romania is eliminating tariffs on products covered by the information technology agreement (ITA). Adding to its Uruguay Round commitments on services, Romania is a party to the WTO Agreements on Financial Services and Basic Telecommunication Services. Romania actively participates in the WTO, regularly notifying Members of policy developments. In particular, standards for intellectual property protection and their enforcement were notified in advance of 2000, when Romania's transitional arrangements end, and reviewed by the WTO Council for the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Romania also concluded free-trade agreements with the European Communities, EFTA, CEFTA, Moldova and Turkey. For the future, Romania's paramount national goal is to join the European Union (EU), its most important trading partner. Accession negotiations have not begun, the European Commission having urged Romania to make more progress towards satisfying the conditions of membership. Romania intends to accelerate the pace of political and economic reform, as well as the transposition of the acquis into domestic law. The Commission is supporting these efforts through an "Accession Partnership", which identifies priority areas for further work and eligible for financial assistance from the EU.

Trade and Trade-related Policy Developments

The basic reform of the trade regime was in place at the time of Romania's first Review in December 1992: the end of the State's monopoly on trade, and the use of the customs tariff as the main instrument of commercial policy. During 1997-98, Romania ended the practice, which had intensified in 1995-96, of temporary tariff exemptions subject to quotas; this practice had been queried at the first Review. All remaining quantitative restrictions on exports were eliminated, replaced with automatic licensing for statistical purposes. No anti-dumping, countervailing or safeguard measures have been taken under the WTO Agreements during the period under review.

At the border, Romania levies customs duties, an import surcharge (4% in 1999), a customs commission (0.5%), specific or ad valorem excise taxes on certain products (including tobacco products, alcoholic beverages, coffee, and automobiles), on top of which a basic VAT rate of 22% applies. Due to the growing importance of indirect taxes in government revenue (38% in 1998), priority is given to the collection of taxes at the border. On excisable products, in particular, relatively high levels of duties and taxes have contributed to smuggling, customs fraud and allegations of improper conduct by customs personnel. In response, border controls have been strengthened, although importers may find the resulting customs procedures complex, cumbersome or time-consuming.

The new Customs Code of 1997 unified the regime for importers and exporters in a single framework, and approximated the EU's Customs Code. The principles of customs valuation are largely the same. Comparison values were used until 1998 for products subject to excise taxes, but were replaced in 1999 with a database of prices. Other features of the Code are the availability of duty-suspension regimes (with the authorization of Customs) to facilitate inward and outward processing activities; Romania also has five "free zones".

Tariff policy on industrial products has been stable. Average applied MFN rates have remained steady at 16%, well below the bound level of some 35%. Their scope of application is narrowed by the free-trade agreements with partners in the region, as well as by GSTP preferences for developing countries. Romania's free-trade agreements with the EU and EFTA require the elimination of remaining tariffs on non-agricultural imports from these origins by 2002; this is likely to lead to more intense competition on the domestic market for sensitive products such as footwear, textile and clothing products, where tariff elimination was back-loaded. On agricultural products, Romania applied in mid-1995 the levels of MFN tariff rates bound in its WTO Schedule. Reductions have been made on a temporary basis starting in 1997, and largely maintained in 1998 and 1999. These reductions brought the simple average applied MFN tariff on agricultural products down to 33.9%, compared with an average bound rate of 134.1%; if the authorities find it necessary, this gap leaves ample room for tariff increases within bindings, and may impart a certain degree of uncertainty to the tariff system.

In spite of the importance of tax collection to government revenue, a large number of laws provide local enterprises with exemptions from the payment of customs duties and taxes collected at the border. In 1999, exemptions were available under various regimes for investment (notably for in-kind contributions of equipment and vehicles), for products imported under leasing contracts and for "complex" exports (notably plants and ships). Excise tax reductions apply to tobacco products and motor vehicles produced with local content. The authorities have also periodically used a tax incentive in an effort to stimulate domestic production for export; the latest such measure, a reduction of 50% on the tax on profits from exports of goods and services, was in force in 1997, suspended in 1998, reintroduced on 1 January 1999, but suspended once again in March 1999 for budgetary reasons.

The investment regime has been open and liberal during the period under review, containing guarantees against nationalization or expropriation without sufficient compensation. Key improvements in the investment regime are external current account convertibility and the principle of equality between foreign and domestic investors, thus establishing a uniform business framework for all companies established in Romania. Foreign direct investment played only a minor role in Romania's transition between 1989 and 1996, with levels becoming more significant only in 1997 and 1998. The relatively low level of foreign direct investment to date is an obstacle to economic development, in terms of the modernization of the capital base and creation of jobs in the private sector.

Romanian companies are subject to a profit tax (basic rate of 38%), local taxes and withholding taxes, as well as employee taxes on wages (on average 23%), the latter in lieu of a personal income tax. At the same time, profit tax holidays are available, in 1999, for investment in disadvantaged regions, oil and gas exploration or designated investments of at least $50 million with a major impact on economic activity. Small and medium-sized enterprises thus carry a relatively heavier burden of taxation than large companies; reducing their tax burden and simplifying the regime would seem a priority to foster their development. Although the practice of granting investment incentives is very widespread among WTO Members, their cost-effectiveness in encouraging investment is open to question.

Transposition of the acquis to approximate the EU laws has been the driving force of Romania's recent legislative efforts for private sector development. The EU approach was used for the new framework on regulations and standards. Romania's competition policy is also modelled on the EU approach, although no corresponding law on state aids exists. A draft law is under consideration by the Romanian Parliament, however; once in effect, it will facilitate an inventory of state aids, on which comprehensive information is not yet available. On government procurement, foreign suppliers may participate in auctions provided Romanian suppliers are granted reciprocity or if no domestic supplier is available. Within this framework, Romania introduced a national preference of 20% in 1995, which was dropped in 1998, to more fully realize the benefits of competition and achieve a better fiscal balance.

Under the Europe Agreement, Romania made the commitment to provide by 2000 a level of protection of intellectual property rights, and a means of enforcement, similar to that in the EU, and the process is almost complete. Romania has added to its 1991 Patents Law by, inter alia, new standards for the protection of copyright, trade marks, industrial designs, topographies of integrated circuits and new plant varieties; a number of major international conventions on the protection of intellectual property rights have also been ratified. Romania intends to close the remaining gaps between the domestic legislative framework and the TRIPS Agreement by passing a law to enforce intellectual property rights at the border. More effective enforcement remains an outstanding challenge, mainly due to the lack of resources necessary to investigate infringements, and the diminished deterrent effect of fines eroded by high levels of inflation.

Sectoral Developments

In spite of the considerable progress made by Romania in laying the foundations for the market economy, state-owned enterprises still account for the major share of recorded economic activity (estimates of the size of the informal sector range from 25% to 60%). The continuing importance of state-owned enterprises is a legacy of Romania's late start on privatization, and also the relatively low level of foreign direct investment. Privatization effectively began only in 1995, and proceeded at a slower pace than anticipated. The trend improved in 1998 and 1999, also attracting higher levels of foreign direct investment in Romania.

Agriculture has been important in absorbing workers displaced in the course of the transition. The sector accounts for 42.3% of the active labour force – 3.8 million of a total 9 million – but agriculture's share in GDP is just 19%, reflecting low labour productivity. The sector has potential due to the quality of the soil and the climate, both considered to be the most favourable in south-eastern Europe. Productivity is affected by the fragmented pattern of land tenure, with millions of family farms on small plots, cultivating mainly for subsistence. The efficiency of measures to support and protect agricultural producers has improved during the period under review due to the reduction in MFN tariffs starting in 1997 and the use of domestic support measures. Privatizing state farms and more competition in the provision of inputs and in food processing will contribute to the development of agriculture. Romania also has difficulty competing with products heavily subsidized by trading partners, either domestically or on world markets.

State-owned enterprises accounted for about 55% of industrial production in 1998, compared to 75% of industrial employment; privately held enterprises accounted for about 45% of production and 25% of employment in industry. The large difference in labour productivity indicates the dichotomy between the traditional basis for industrial activity in state-owned enterprises and the dynamism of the emerging private sector. The typically large, energy-intensive state-owned enterprise, employing thousands of workers, contrasts with the typically small and medium-sized private enterprise (SME), using state-of-the-art technology. Whereas the large state-owned enterprises have difficulty in maintaining and expanding export markets for its product, the SMEs dominate the production of garments, the most dynamic sector in Romania's exports and imports. In addition to private sector ownership, the development of textile and clothing exports has benefited from link-ups between Romanian production units and companies in France, Germany and Italy. The external environment also became more favourable due to the elimination of long-standing import restrictions by the European Union and Norway; Canada and the United States are two potentially large markets, but still restrict imports from Romania.

The financial condition of state-owned enterprises has deteriorated sharply in the absence of market discipline. Arrears to suppliers and of wage taxes have built up, and the volume of non-performing loans in the banking system is significant. The difficulties in the banking sector have, in turn, limited the access of the emerging private sector to affordable credit, undermining its development and capacity to create alternative employment for workers shed by state-owned enterprises. Fiscal policy is burdened by the provision of assistance to agriculture, industry, and banks, compromising the financing of infrastructure, education, and basic social services, as well as a reduction in the tax burden on enterprises. In this context, Romania has made privatization of viable enterprises a priority. The main stumbling-block to more rapid and decisive action on large loss-makers is concern over the social implications of unemployment, given the difficulties in designing, financing and implementing programmes of worker adjustment and social safety nets.

A vital component of private sector development is the more efficient provision of business-related services, a sector stifled under central planning. The authorities have given the priority to regulatory change, privatization and appropriate competition policies in services, so as to ensure that essential services are provided as efficiently as possible and that this efficiency is reflected in lower prices. To this end, Romania assumed substantial market-opening commitments under the GATS. On financial services, in particular, Romania has a policy of open non-discriminatory access for the establishment of banks, subject to prudential regulations. As of 2003, Romania's market for basic telecommunication services will be open to competition, and Romania has already opened the market for digital cellular mobile telephony. Privatization of state-owned service providers began in 1998, and Romania's programme for 1999 includes privatizing stakes in important state-owned banks, transportation and utilities. Decisive action on privatization in services, as well as agriculture and industry, or the closure of unsalvageable enterprises, will, combined with an improved macroeconomic balance, help Romania complete the transition to the market economy.

Government report  Back to top

TRADE POLICY REVIEW BODY: ROMANIA
Report by the Government - Part I and II

I. OVERVIEW

1. The period since Romania’s first trade policy review under GATT in December 1992, is characterized by a large number of events having a direct effect on international commercial relations, as well as on the multilateral trading system and, without doubt, on the social and economic development of Romania.

2. The successful conclusion of the Uruguay Round and the Decision of the Ministerial Conference in Marrakesh to establish the World Trade Organization are the prerequisites for globalizing the multilateral trading system. This new multilateral system was endowed with transparent and uniform rules, instruments and disciplines, able to govern trade policy mechanisms. The stated goal of this system is the development of commercial relations, while trade liberalization for goods and services committed by WTO Members is intended to have a positive impact on economic development.

3. The results of trade liberalization have appeared: world trade increased at a faster rate than industrial output, the most dynamic sector being that of services; progress has been registered for the economic development of several developing countries, which increased their weight in world trade and improved their export pattern.

4. However, these positive effects of liberalization were threatened by the financial and economic crises in several parts of the world. Aside from the dramatic contraction of certain markets, some of which being practically locked for Romanian products, temptations arose to reinforce commercial defence measures and to intensify the use of budgetary layouts to support the export of those products for which the market was significantly reduced.

5. During the same period of time, Romania’s economy and society have been developed within the continuous and more determined process of passing from an excessively centralized system to a market economy, from a totalitarian regime to a democratic society. The financial and economic crisis as well as political changes and events which occurred in several parts of the world adversely affected Romania’s foreign trade and increased the already high social costs of transition.

6. Romanian exports have been directly affected by: the disappearance of several traditional markets; the observance of the UN embargoes for countries having an important weight for Romanian exports or debts to be reimbursed; the contraction of Asian and then Russian markets; intensification of commercial defence measures as a result of turmoil in international markets. At the same time, the contraction of internal industrial and agricultural output and insufficient development of the tertiary sector affected the export offer. Meanwhile, the high degree of export dependence on imports determined the continuous deterioration of the balance of payments, in addition to the consumer and enterprise demand for imported products under Romania’s liberal trade regime.

7. In spite of these difficult circumstances, it is commendable that Romania enforced one of the most liberal trade policies in Europe. This fact is proved by: all commitments regarding the bound rates of customs duties were observed; practically no export subsidies were granted; import restrictions were eliminated since 1992 while export restrictions were gradually relaxed and finally abolished as of 1998. During all this period of time, no commercial defence action has been taken on a multilateral level, preference being given to competition as a way of speeding up restructuring and improving economic efficiency.

8. When deciding to enforce such a trade policy, the Government took into consideration two major goals: to make the Romanian economy act in accordance with multilaterally agreed instruments, mechanisms and rules as well as to encourage the development of a competitive environment, capable to foster the enforcement of market rules. The entire commercial policy decision making process is aiming at transforming the Romanian economy into a market economy and ensuring that producers act in a competitive environment, aiming to ensure an active involvement of the Romanian economy in the globalization process. Among the most important steps taken to attain this objective, emphasis has been given to the transparency of trade policy and non-discrimination of the measures taken.

9. From a theoretical point of view, such an approach should have only positive impacts on the national economy but in reality effects were different in some respects. Thus, as the Romanian State lacked enough financial resources to support sectoral development and restructuring or did not maximize the effect of the existing ones, domestic producers had to compete with foreign products at prices distorted by domestic support and direct export subsidies. Under these circumstances, even if those exporting countries were not breaking their commitments under WTO, at least a part of their exports were causing serious difficulties to the Romanian producers.

10. The above remarks lead to the assertion that: the trade policy of Romania was conducted under rather difficult conditions as the international environment produced direct or indirect restriction of the international market, thus leaving little room for continuing trade liberalization.

I. ROMANIA’S TRADE POLICY: AN INSTRUMENT OF DEVELOPMENT TOWARDS MARKET ECONOMY

Main Characteristics

A. Import Customs Tariff, the main trade policy instrument

11. As of 1992, Romania enforced a customs tariff based on the HS, approximated at the eight-digit level with the Combined Nomenclature of the European Union. For the current year, HS 1996 and the CN 1998 are applied. All tariff lines are bound under the WTO Agreement. This commitment was implemented starting in 1995, the applied customs duties being at the bound level or below.

12. In practice, starting with 1 July 1995, the Import Customs Tariff strengthened its role and importance as the main instrument of trade policy and of protection at the border. With a view to ensure more transparency, within the context of developments in regional integration, as well as in the process of restructuring, the Ministry of Industry and Commerce publishes, on a yearly basis, a Guide to the Import Customs Tariff. This Guide includes all important international agreements and national legislation, constituting the basis for the level of customs duties applied. Any economic operator can be thus informed on the level of customs duties to be applied during the year, the legal basis for that level, the rules of origin to be observed, any other important rules or regulations in force.

B. Elimination of quantitative restrictions

13. The previous trade policy review highlighted that Romania did not apply any quantitative restrictions on imports.

14. Starting with 1 January 1998, all remaining restrictions or quantitative limitations on exports have been completely eliminated. From that moment, all Romanian foreign trade is free of any prohibition or quantitative limitation. The process of the export liberalization registered a steady development: the number of goods temporarily prohibited to export diminished continuously while the products under export quota were gradually phased out. For prudential reasons, some products (raw materials, low manufactured goods) continue to be monitored through an automatic export licensing system. This system encompasses exhaustible natural resources or those affecting the environment. Automatic import licenses are also used for goods with an impact on human and plant health.

15. This facilitating Romanian trade regime has to be compared with those offered by some WTO Members to Romanian exports. Reference could especially be made to the continuous limitation of the access of Romanian textiles and clothing on two major destinations (USA and Canada). The real dimension of the concern is given by the fact that although textiles and clothing represent 34% of overall Romanian exports, Romania’s share on those important markets is still at the level of small suppliers.

C. Defence measures at the border

16. In accordance with international rules, in cases where imports produce or threaten to produce important prejudices to national industry, trade defence instruments can be enforced, irrespective of the protection ensured through customs duties. According to Romanian legislation, namely Law 133/1994 ratifying the WTO Agreement, such measures can be taken only in strict observance with the relevant GATT and WTO provisions. Up to the date of this Report, Romania did not take any trade defence measure on a multilateral level. Certain safeguard measures have been taken within some regional integration Agreements, in accordance with their respective provisions and without any prejudice to third parties.

17. The trade regime applied by Romania with regard to dumping, subsidies or safeguards contrasts with that encountered by Romanian exporters on certain markets. Some exports are limited as a result of old measures taken many years ago. Those anti-dumping or safeguard measures have, in fact, stopped our exports on important markets; reviews, if any, did not remove the respective measures. Such anti-dumping measures affect certain Romanian exports on three important markets. In two other cases, exports did not produce prejudice as defined by the Anti-dumping Rules but according to Romania’s evaluation, the Romanian exporters did not have the best conditions to defend their interests and are now facing anti-dumping duties.

D. Licensing system

18. A steady improvement of the licensing system can be noticed, for the period after 1990. The process started from a system according to which all export or import operations were administered through licenses. A first relaxation occurred in 1992 and a further one in 1993, when the greatest part of licenses were issued for quantitatively restricted exports. Finally the process ended with a system of reduced compulsory automatic import and export licensing.

19. During the 1993-1998 period, when restrictions on export were still in force, these restrictions were administered through export licenses while imports were conducted without import license. During the same period, the temporary export prohibitions were reduced from 178 tariff lines in 1996 to 155 tariff lines in 1997. Starting with 1 January 1998 all remaining export prohibitions and quantitative restrictions were eliminated, this decision producing an important effect on foreign trade liberalization.

20. For the time being, only automatic export or import licenses are in force, their number is much reduced and the nature of these licenses is a statistical one. Thus, there are no restrictions on exports or imports, the licensing system being an automatic one and having a monitoring function.

21. As a general rule, the Ministry of Industry and Commerce issues automatic export or import licenses, without any other prior endorsement. Exceptions to this rule encompass products which might affect human health, environment protection or trade in precious metals, for which prior endorsement is required from the Ministry of Health, Ministry of Environment and the National Bank of Romania respectively.

E. Customs policy, a component of the trade policy

22. The customs policy – as one of the trade policy’s important component – can affect international trade. This is the reason for which a special attention has been given to the continuous improvement of the customs regulations and activity. The customs system scored an evident progress, shifting in mid-1998 from a manual treatment of customs operations to an electronic one. Another significant achievement related to the improvement of the customs activity was the setting-up of a customs database, providing customs officers an additional neutral and operative instrument in carrying out customs clearance in accordance with international commitments of Romania.

23. The Romanian legislation on customs matters has been improved and detailed through the new Customs Code (1997) and the Regulation for applying the Customs Code, both in accordance with the WTO relevant provisions.

24. Further aspects regarding the trade policy are included in Chapter 3, concerning Romania’s presence in the WTO.

F. Trade policy within the internal environment

25. During the years elapsed since the previous trade policy review, the young democracy in Romania developed in a steadily changing society and economy. The political changes in Romania determined important developments in the economic and social fields. The Governments, enjoying the support of electors, established as their goal the speeding up of the reform and restructuring of the Romanian economy, a special highlight being put on privatization.

Table 1

Dynamics of the main macroeconomic indicators

26.

27. Remark: For the evolution of the GDP, industrial and agricultural output, mobile basis indexes were used.

28.

29. Source: Computed on the basis of data supplied by the National Commission for Statistics.

30.

31. The economic reform proved to be a very complex one, with direct incidence on the Romanian economy and in this context on the volume and structure of the export offer. It has to be emphasized that despite the difficult and changing environment, foreign trade grew steadily, becoming the most dynamic sector of the economy.

32. The structure of exports did not change significantly in 1998, as compared to the average of the previous years; capital goods maintained the same level while consumption goods gained 4 percentage points from the intermediary ones. The share of consumption goods in exports of 40% and intermediary ones of almost 50% is the mirror of an economy characterized by medium to low technologies and limited resources to increase exports. As a positive sign, basic raw materials account only for 7% of exports, the medium manufactured goods representing the bulk: textiles and clothing 36.4%, steel products 15.8%, footwear 11.1% and machinery and equipment 10.2%, as for 1998.

33. The structure of imports for the same year reflects the dependence of the economy on the import of machinery, apparatus, equipment, transport means and energy. This structure is determined both by the lack of/or insufficient internal resources and by the efforts of restructuring and also by imports of new technologies for the emerging economy.

34. During the latest years, the contraction of certain markets, the reduction of domestic output as well as the continuous need to support national economic activity with imports both for restructuring, modernization and diversification of consumption (as the internal offer did not develop enough) had a negative impact on the balance of payments.

Table 2

Balance-of-payments

Remark: For 1998, provisional data.

35. The geographical structure of exports substantially changed: most of Romania’s foreign trade encompasses Europe, the highest share being that of the European Union. The dynamic evolution of foreign trade, presented in Annex 1, shows the objective to maintain an active worldwide presence of Romanian products. Another important feature is the steady increase of the volume of exports on all markets, certain few exceptions being the result of international short-term economic developments.

36. During the period under review, reform programs determined the internal environment. The actual program took into consideration the need for macro-stabilization and to this end, the following main fields were emphasized:

(i) a severe budgetary policy, aiming at a better collection of the amounts due to the State Budget as well as the drastic cut of expenditures;

(ii) restructuring the regies autonomes, especially those in energy, and their transformation into commercial companies, acting under conditions of competition;

(iii) speeding up the process of privatization, by decentralizing it and including the banking and telecommunication sectors in the process;

(iv) institutional reform, having as an important component the central public administration reform;

(v) limiting, through firm measures, the losses generated by state owned companies;

(vi) continuing trade liberalization.

G. Regional integration

37. One of the main priority policy objectives after 1990 was the more active part to be played by Romania within regional and subregional cooperation in Europe, having as a very important component European economic integration. The process was launched by the conclusion of the Association Agreement with the European Union, implemented as an Interim Agreement starting on 1 May 1993. On the same date, the Free Trade Agreement with the EFTA Member States entered into force.

38. The Association Agreement aims at the European economic integration of Romania and includes, as its main provisions, the liberalization of trade in goods, rules regarding trade in services, general rules applicable to trade, aspects concerning bilateral political and social-economic dialogue. As far as trade in goods is concerned, the agreement encompasses all areas.

39. The basic principles of the association are:

(i) a free trade area to be achieved gradually, on an asymmetric basis; to this aim, the European Union eliminated, from the entry into force of the agreement, the customs duties on most industrial products, while Romania is gradually reducing up to elimination these customs duties, according to a calendar foreseeing progressive reductions in periods of three-five years. The remaining customs duties for industrial goods are to be eliminated by Romania in 2002;

(ii) mutual elimination of quantitative restrictions on imports, enforced from the entry into force of the Agreement;

(iii) eliminating quantitative restrictions on exports: they were eliminated by the European Union from the entry into force of the Agreement and from 1 January 1998 by Romania (according to the timetable included in the Agreement);

(iv) starting trade liberalization for agricultural goods on the basis of concessions granted to one another;

(v) continuing trade liberalization for agricultural goods through commercial negotiations.

40. An important component of the European integration process is the transposition into domestic law of the acquis communautaire, which requires, wherever necessary, completing or modifying the national legislation, in full accordance with the multilateral rules.

41. Romania’s European economic integration policy is complementing and reinforcing the process of taking part in the multilateral trading system. On the one hand, liberalization of trade relations on a regional level is a preparation for the speeding up of multilateral trade liberalization; on the other hand, observing the rules established within Romania’s regional integration agreements, as they are fully in conformity with the multilateral ones, enhances the enforcement of WTO rules. The Association agreement, as well as the free trade agreements concluded by Romania, include provisions stating the legal prevalence of GATT and WTO rules.

42. The functioning of the Association agreement allows the Romanian economy to prepare for the moment of accession. The asymmetry of the concessions provided the basis for an increase of industrial product exports to the EU, thus positively influencing the process of modernizing or using new technologies in our economy as well as the experience of acting in a more competitive environment. At the same time, the need to observe internationally accepted rules improved the commercial behaviour of the Romanian exporters.

43. The Free Trade Agreement with the EFTA States is also an asymmetric agreement, covering trade in goods.

44. The process of regional integration continued by the accession of Romania to CEFTA, on 1 July 1997. The Central European Free Trade Agreement aims at liberalizing trade among member states and can be considered as a useful exercise to prepare the entry of these countries in the single internal European market. This exercise is considered important as it takes into consideration the differences in the development of candidate countries as compared to that of the EU Member states. At the same time, enforcement of market instruments and mechanisms can speed up the dominance of the market economy in former centrally planned economies.

45. Starting with 1 January 1995, trade relations between Romania and the Republic of Moldova are governed by a free trade agreement, establishing a free trade area for all goods.

46. The Free Trade Agreement with Turkey entered into force in February 1998 is also aiming at the gradual creation of a free trade area for goods, the start being done more boldly for industrial products.

47. It is to be emphasized that all regional integration agreements concluded by Romania include provisions according to which trade relations between partners are governed by the multilateral principles and rules, each specific provision of these agreements being either a reiteration of those included in WTO legal texts or even a stronger rule.

48. Romania is considering the possibility of continuing the process of regional integration by further negotiating free trade agreements with the Baltic States (Lithuania, Latvia and Estonia), Morocco, Israel and Egypt.

49. Romania is a member of the Black Sea area Economic Cooperation (BSEC), where there are not yet conditions to envisage a free trade agreement. The members of this subregional cooperation are economically very heterogeneous; trade policy instruments differ too much, WTO membership is not yet a common characteristic, as well as the nature of the economic cooperation with other European regions. Taking into consideration this extreme diversity, some results are to be noted: institutional cooperation at the Parliamentary level as well as at the level of business environment; the BSEC Trade and Development Bank is to be operational soon. All these constitute a real progress towards economic cooperation in the subregional Black Sea area.