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PRESS RELEASE
PRESS/TPRB/77
2 July 1998 Reforms
in Hungary attract foreign investment and lead to more open trade policies as eu
membership efforts intensify Back to top
Hungary has undergone major
macroeconomic and structural adjustment in its transition to a market economy. Under
extremely difficult economic and social circumstances, notably the collapse of trade with
the former east-block countries and the consequent initial job losses, the Government has
largely resisted protectionist pressures - even in the face of large twin fiscal and trade
deficits in 1995 and high levels of government (internal and external) debt. Instead,
Hungary has pursued new trade opportunities, especially with the European Union, the
European Free Trade Association (EFTA) and partners in the Central European Free Trade
Agreement (CEFTA). A new WTO Secretariat report on Hungary's trade and investment policies
states that Hungary's preparations for accession to the EU will lead to more structural
and institutional adjustment. Some of the reforms, particularly in the areas of
intellectual property rights and competition policy, go beyond Hungary's WTO obligations.
The WTO Secretariat report and a
policy statement prepared by the Government of Hungary will provide the basis for a review
at the WTO of Hungary's trade and investment policies on 7 and 8 July 1998. The report
states that the most dramatic feature of Hungary's structural adjustment has been the
re-orientation of its trade towards the EU and CEFTA members. The Europe Agreement removed
most tariff and quantitative restrictions on trade between Hungary and the EU, with the
exception of agricultural products, textiles and steel. The report notes that because of
Hungary's preferential trade arrangements, MFN tariffs apply to less than a quarter of
Hungary's imports. Between 1990 and 1996, the share of Hungary's trade with former
socialist countries (other than CEFTA partners) roughly halved. By contrast, the EU's
share of Hungary's total exports grew from 45% to nearly 63%, while its share of imports
from the EU increased from 49% to almost 60%. Imports rose from nearly 34% of GDP in 1991
to 41% in 1996, while exports increased from almost 33% of GDP to approximately 40%.
According to the report, the increase in the share of Hungary's trade in GDP has been much
greater in relation to EU and CEFTA members than to others. The report states that this
suggests a degree of diversion of actual and potential trade as a result of Hungary's
preferential agreements.
All tariffs applied by Hungary are ad
valorem. Almost 96% of tariff lines are currently bound, compared to 83% in 1991. All
other trade-related charges, including the 8% import surcharge put in place during the
1995 debt crisis, have recently been eliminated. The simple average applied MFN tariff
rate rose from 11% in 1991 to 14.3% in 1997, as a consequence of tarrification (the 1997
rates for industrial products and agricultural and processed food products were 8.2% and
37.1% respectively). Average MFN tariffs remain relatively high for imports of
agricultural products and prepared food. There is no preferential access for EU and EFTA
countries in these areas and all external sources are treated on an equal footing. Higher
than average MFN tariffs (but with preferential access for EU, EFTA and CEFTA members)
also apply to textiles, clothing and footwear, and to automobiles.
Much of Hungary's legislation
concerning internal measures (notably regulations and standards, intellectual property
rights, government procurement and competition policy) is being adapted to conform with EU
legislation. In some instances, Hungary will assume obligations exceeding those of the
WTO. Changes in agricultural policy, however, could well lead to a less liberal trade
regime as, at present, Hungary's support to agricultural represents is only about
one-quarter of the EU's overall level of support.
Foreign direct investment (FDI) in
1997 amounted to $2 billion, or nearly 5% of GDP. Since 1990, Hungary has attracted $18
billion and now accounts for roughly 40% of the total investment stock in Central and
Eastern Europe. Foreign investors have been attracted to Hungary mainly because of its
skilled labour force, relatively low wage costs and growing orientation towards European
markets. The Europe Agreement and the similar free-trade agreement with EFTA has
encouraged foreign manufacturers to locate in Hungary so as to export throughout the
European Economic Area (EEA) under common rules of origin. The main sources of FDI are
Germany, the United States and Austria. Two-thirds of the 200 largest companies now have
foreign participation; companies with foreign participation account for 14% of GDP and for
70% of total industrial exports.
As a result of the privatization of
three-quarters of state assets since 1990, the private sector now accounts for 75 to 80%
of GDP, compared to 10% a decade ago. The privatization and liberalization of banking,
insurance and telecommunications - the fastest growing sector of the economy - has taken
place on an Most-Favoured-Nation (MFN) basis, with substantial concessions by Hungary
under the relevant WTO Agreements and protocols. This has encouraged substantial foreign
direct investment in these sectors. The report notes that strong foreign participation in
the privatization of the banking sector has helped to place banks on a sound footing,
encouraging a more efficient allocation of capital.
The report concludes that Hungary
will face new trade policy challenges as it intensifies its efforts to join the EU while
still participating in the WTO and engaging in regional trade agreements with other CEFTA
member countries.
Notes to Editors
The WTO's Secretariat's report,
together with a policy statement prepared by the Hungarian government, will be discussed
by the WTO Trade Policy Review Body (TPRB) on 7 and 8 July 1998. The WTO's TPRB conducts a
collective evaluation of the full range of trade policies and practices of each WTO member
at regular periodic intervals and monitors significant trends and developments which may
have an impact on the global trading system. The report, together with a report of the
TPRB's discussion and of the Chairman's summing up, will be published in due course and
will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne,
1211 Geneva 21.
The report covers the development of
all aspects of each of Hungary'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 "new areas" of services trade and trade-related aspects of
intellectual property rights are also covered. Full reports are available for journalists
from the WTO Secretariat on request. The full text of the WTO Secretariat report is also
available for the press in the newsroom of the WTO website.
Since December 1989, the following
reports have been completed: Argentina (1992), Australia (1989, 1994 & 1998), Austria (1992), Bangladesh
(1992), Benin (1997), Bolivia (1993), Botswana (1998), Brazil (1992 & 1996), Cameroon
(1995), Canada (1990, 1992, 1994 & 1996), 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), El Salvador (1996), the European
Communities (1991, 1993, 1995 & 1997), Fiji (1997), Finland (1992), Ghana (1992), Hong
Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993 & 1998), Indonesia
(1991 and 1994), Israel (1994), Japan (1990, 1992, 1995 & 1998), Kenya (1993), Korea,
Rep. of (1992 & 1996), Lesotho (1998), Macau (1994), Malaysia (1993 & 1997),
Mauritius (1995), Mexico (1993 & 1997), Morocco (1989 & 1996), New Zealand (1990
& 1996), Namibia (1998), Nigeria (1991), Norway (1991 & 1996), Pakistan (1995),
Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992),
Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), South Africa (1993
& 1998), Sri Lanka (1995), Swaziland (1998), Sweden (1990 & 1994), Switzerland
(1991 & 1996), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United
States (1989, 1992, 1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996),
Zambia (1996) and Zimbabwe (1994).
The Secretariats report: summary Back to top
TRADE POLICY REVIEW BODY: HUNGARY
Report by the Secretariat Summary Observations
Hungary's rapid transition to a
market economy has taken place under extremely difficult economic and social
circumstances. These included the collapse of the CMEA, which resulted in the
disappearance of almost half of Hungary's previous export markets, and the bankruptcy of a
large number of companies, with a consequent temporary loss of jobs. Notwithstanding these
formidable difficulties, the Hungarian Government has largely resisted protectionist
pressures. In fact, since the previous Trade Policy Review in 1991, it has taken steps to
curtail, and, in some instances, remove, border and internal restrictions, thereby greatly
increasing Hungary's openness to international trade, especially vis-à-vis the European
Union as well as its EFTA and CEFTA partners. In addition, the Government has continued to
encourage foreign direct investment (FDI) in Hungary.
Recent Economic Performance
Between 1991 and 1993, Hungary's
real GDP shrank by a cumulative amount of roughly 15%, before growing by 2.9% in 1994.
Real domestic demand also declined in 1991-92, before growing by 9.9% and 2.2% in 1993 and
1994, largely associated with a surge in imports. At the same time, although on the
decline, inflation remained within the range of 20-30%. Officially registered unemployment
rose from 7.5% in 1991 to 12.1% in 1993 before falling back to 10.4% in 1994.
Furthermore, a large and rapidly
increasing budget deficit emerged, reaching 8.4% of GDP in 1994. By contributing to the
saving-investment gap, which had greatly widened in 1993-94 owing to a fall in gross
national saving and rise in gross investment, the increase in the budget deficit also
resulted in a growing current account deficit, which rose to over 9% of GDP in 1994. At
the same time, gross government debt was in the range of 85-90% of GDP, while net external
debt was around 46% of GDP. In early 1995, therefore, the Hungarian economy appeared to be
on the brink of a domestic and foreign debt trap, as interest payments on government debt
outstripped revenues.
Faced with this prospect, the
Hungarian Government introduced a major stabilization package in March 1995. The package
contained several key macroeconomic elements, including cuts in government consumption,
wage restraint, particularly in the public sector, and a 9% devaluation of the forint
along with the institution of a crawling peg exchange rate regime. In addition, a
temporary import surcharge of 8% was imposed. (The surcharge was reviewed in the WTO
Balance-of-Payments Committee and removed in July 1997.)
It would appear that the March 1995
package, together with measures contained in subsequent budgets and a stand-by arrangement
with the International Monetary Fund, has been successful in restoring macroeconomic
balance. Subsequently, both the budget and current account deficits (as shares of GDP)
fell considerably; the former to 3.5% in 1996, before rising to 5.1% in 1997, and the
latter to 3.7% in 1997. Moreover, gross government debt dropped from 85% of GDP in 1995 to
66% in 1997 and is projected to fall to 60% by the end of 1998 (thereby satisfying one of
the Maastricht criteria for European Monetary Union), while net external debt fell from
around 46% of GDP in 1994 to 30% in 1997. As a result, associated interest payments have
fallen; the cost of servicing foreign debt as a percentage of export value halved from 42%
in 1995 to 21% in 1997. Much of the reduction in indebtedness has been the consequence of
privatization receipts, which have to date yielded approximately Ft 1,400 billion (almost
17% of 1997 GDP).
The restoration of macroeconomic
balance and radical restructuring of the economy have greatly improved Hungary's economic
performance in several respects. Although, as an immediate impact of the March 1995
package, domestic demand collapsed in both 1995 and 1996, leading to a marked slow-down in
GDP growth, the latter remained positive because of strong growth in net exports. The real
devaluation of the forint was instrumental in increasing exports, while the fall in
domestic demand in conjunction with the import surcharge was the main restraining
influence on imports. Real GDP growth subsequently recovered to 3.5% in 1997 and is
expected to be between 4% and 5% in 1998. After an initial surge following the
depreciation of the forint and sharp increases in regulated energy prices, inflation
dropped to 18.2% in 1997 and is forecast to fall to 12-13% in 1998. Unemployment edged
down to around 9% in 1997.
While manufacturing has experienced
double-digit growth rates in labour productivity since 1992, owing to investment in
state-of-the- art production facilities, productivity growth in the economy as a whole has
gradually declined, from 7.2% in 1992 to 1.6% in 1996. Although the causes of this
slow-down are unclear, the prospects for its reversal could be improved by dismantling
remaining impediments to the efficient allocation of resources, including internal
measures, notably tax incentives.
Trade and Investment Policy
Formulation
In addition to the restoration of
macroeconomic balance, the Hungarian economy has undergone phenomenal structural
adjustments in its transition to a market economy. Trade policies and those pertaining to
foreign direct investment (FDI), have played major roles in this transition.
Perhaps the most dramatic feature of
Hungary's structural adjustment has been the re-orientation of its trade towards the EU
and CEFTA partners, following the collapse of trade with former CMEA members, the entry
into force of the Europe Agreement, which removed tariffs and quantitative restrictions on
most trade between Hungary and the EU, and the creation of the CEFTA. Between 1990 and
1996, the share of Hungary's trade with former socialist countries (other than CEFTA
partners) roughly halved. By contrast, the EU's share of Hungary's total exports grew from
45% to nearly 63%, while its share in imports increased from 49% to almost 60%. During the
same period, CEFTA members' share of Hungary's exports and imports grew from 1.7% and
2.4%, respectively, to 8.7% and 7.2%.
Judging from the growing shares of
imports and exports in GDP, the Hungarian economy became considerably more open during the
period under review. Imports rose from nearly 34% of GDP in 1991 to 41% in 1996, while
exports increased from almost 33% of GDP to approximately 40%. However, the increase in
the share of trade in GDP has been much greater in relation to EU and CEFTA members than
to others. Exports to the EU and CEFTA rose from 15.5% to 28.6% of GDP between 1990 and
1996, while exports to other market economies fell from 5% to 4.1% of GDP; during the same
period, imports from the EU and CEFTA rose from 17.5% to 26.8% of GDP while imports from
other market economies increased marginally from 5.6% to 5.9%. Given that Hungary's real
GDP shrank by around 7% overall during the period 1990-97, this suggests that there has
been a degree of diversion of actual and potential trade as a result of Hungary's
preferential agreements.
In order to encourage foreign
investment in restructuring the economy, the Government has established a new legal and
regulatory framework conducive to FDI. Net FDI in 1997 amounted to $2 billion, or nearly
5% of GDP, thereby reaching a cumulative net stock of $18 billion (over 43% of 1997
GDP). FDI has been attracted by Hungary's skilled labour force, relatively low wage costs
and growing orientation towards European markets; Hungary now accounts for roughly 40% of
the total stock of FDI in central and eastern Europe. FDI has largely been undertaken in
processing industries, gas and electricity, retail trade and banking; the main sources are
Germany, the United States and Austria. Two thirds of the 200 largest companies are now
foreign-owned, and companies with foreign participation currently account for 14% of GDP
and 70% of industrial exports.
Trade and Related Structural
Policies
Tariff and non-tariff border measures
All tariffs applied by Hungary are
ad valorem. Almost 96% of tariff lines are currently bound, compared to 83% in 1991.
All other trade-related charges, including the import surcharge, have recently been
eliminated. The unweighted average applied MFN tariff rate rose from 11% in 1991 to 14.3%
in 1997, largely as a consequence of tariffication (the rates for industrial products and
agricultural and processed food products were 8.2% and 37.1%, respectively, in 1997).
Applied MFN tariffs tend to be relatively high for those tariff lines remaining unbound.
Among broad groups of industrial products, tariff protection is highest for transportation
equipment, textiles, clothing and footwear. In accordance with the Europe Agreement, most
tariffs on imports from the EU have been removed, although duties still apply to
agricultural products, textiles and steel. In practice, MFN tariffs apply to less than a
quarter of Hungary's imports, given the importance of preferential trade; consequently,
the collected (or effective) rate of duty on all imports is currently only 2.5%.
With the tariffication of quantitative
restrictions on agricultural products and relaxation of other non-tariff border measures
(NTMs), the proportion of tariff lines affected by principal NTMs declined from almost 20%
in 1991 to under 8% in 1997. Among these are the global quota on consumer goods, part of
which is allocated on a preferential basis to EU, EFTA and CEFTA countries, and the
prohibition of imports of used cars over four years old. The global quota is steadily
declining and the authorities plan to phase it out by 2001 on an erga omnes basis;
products still subject to the quota, and hence retaining additional protection, include
new and used automobiles, textiles, clothing and footwear. While Hungary does have
anti-dumping and countervailing legislation based on the WTO agreements, it has not
resorted to such actions.
Export promotion measures are also used
as instruments of trade policy, with exports encouraged by, among other things, exemptions
or drawbacks for import duties, customs-free zones as well as incentives resulting in
increased exports (see below) and agricultural export subsidies. Hungary recently obtained
a WTO waiver for certain agricultural export subsidies in excess of its Uruguay Round
commitments.
Internal measures
In accordance with its desire to
attract FDI, the Government has offered a wide array of tax and non-tax incentives.
Although many of these measures are being phased out, some have involved elements of
"positive" discrimination, that is, discrimination in favour of foreign
investors. (Examples are the duty-free status for equipment and other goods deemed to be
in-kind capital contributions, which was recently abolished, and the corporate tax
concession for companies with foreign participation, which is being phased out.) Certain
other investment incentives are conditional upon the scale of investment and export
performance; for example, corporate tax is halved for companies investing Ft 1 billion or
more and increasing exports by at least 25%. The generosity of tax and non-tax assistance
to companies is such that the small amount of corporate taxes they do pay has been largely
offset by subsidies. Thus, Hungary, like many other countries, has contributed to a
"bidding contest" for certain types of investment. One may question the
effectiveness of these measures as well as their impact on the allocation of capital and
fiscal balance. However, overall, subsidies (other than tax incentives) fell from 4% of
GDP in 1991 to under 2% in 1997.
Roughly one third of FDI in 1996 and
1997 involved the purchase of formerly state-owned enterprises under the Government's
privatization programme, which encompasses manufacturing, services and utilities including
telecommunications and electricity. As a result of the privatization of three quarters of
state assets since 1990, the private sector currently accounts for around 75-80% of GDP
compared to 10% ten years ago. Strong foreign participation in the privatization of the
banking sector has helped to place banks on a sound footing and thereby contributed to the
smooth functioning of financial markets, which is essential for the efficient allocation
of capital.
Considerable progress has been made in
bringing Hungarian standards and regulations into line with international, and
particularly European, norms. Protection is provided for patents, copyrights, trade marks
and other intellectual property rights. However, judging from the scale of the unofficial
economy and related tax evasion, enforcement of tax and other laws (including those
pertaining to intellectual property) remains an important problem.
Trade Policies by Sector
The pattern of production and trade
in Hungary has altered considerably since the last Review. Production in agriculture,
mining and quarrying has dropped in relation to manufacturing and especially to services;
between 1991 and 1995, the share of agriculture, mining and quarrying in GDP fell from
11.1% to 6.6%, while the share of manufacturing remained close to 20% and that of services
increased from 52.6% to 54%. This shift reflects several factors: the move away from a
structure of ownership and planned production, based on the former CMEA, towards western
European markets under the free-trade agreements with the EU and EFTA; redistribution of
land, leading at present to a sub-optimal structure of ownership and production, and
reduction of support to agriculture; liberalization of services, notably financial and
telecommunications services; and an active industrial policy, linked to the new pattern of
trade, which has encouraged some sectors at the expense of others.
Within this active policy, average MFN
tariffs remain relatively high for imports of agricultural products and prepared food;
preferential access for EU and EFTA sources is not accorded in these areas and all
external sources are treated on an equal footing. Higher than average MFN tariffs (but
with preferential access for EU, EFTA and CEFTA members) also apply to textiles, clothing
and footwear, and to automobiles, while NTMs in the form of non-automatic licensing and/or
the global quota on consumer goods have applied principally to textiles, clothing and
footwear, new and used cars and precious stones. Subsidies to agricultural exports are, as
noted above, covered by a waiver under the WTO Agreement; tax and non-tax incentives are
also targeted at particular activities; and other domestic measures, including regulations
conceding a certain degree of monopoly or monopsony power, still apply to certain service
sectors, particularly energy.
These measures give a mixed picture,
but one which emphasizes the Euro-centred stance of Hungary's current trade and industrial
policies. For example, relatively high MFN tariffs combine with quantitative restrictions
on new and used automobiles to favour Hungary's two domestic car producers (Opel Hungary
and Magyar Suzuki), which produce both for the domestic market and for export to the EU
and EFTA, and other European manufacturers selling in the Hungarian market. This is not
only to the detriment of producers of other imported cars, but also at the expense of
domestic industries that receive lower levels of protection. The application of the Europe
Agreement and the similar free-trade agreement with EFTA has encouraged foreign
manufacturers to locate in Hungary, with its low-cost, skilled labour force, so as to
export throughout the European Economic Area (EEA) under common rules of origin; these
trends can be seen particularly in the automotive, textiles, and chemical industries.
The redirection of Hungary's policies
has been assisted by the process of privatization and the liberalization of commercial
services such as banking, insurance and telecommunications, which have been among the most
rapidly growing sectors of the economy. Liberalization of these sectors has taken place on
an MFN basis, with substantial concessions by Hungary under the relevant WTO Agreements
and protocols. This has encouraged substantial FDI in, and consequent modernization of,
these sectors.
Trade Policy and Foreign Trading
Partners
As the Hungarian economy has entered an
advanced stage of transition, the Government has intensified its preparations for
accession to the EU. Clearly, such preparations will involve further far-reaching
structural and institutional adjustments. In this regard, much of Hungary's legislation
concerning internal measures (notably regulations and standards, intellectual property
rights, government procurement, competition) is being adapted to conform with EU
legislation. In some instances, such as the protection of intellectual property, this
adaptation involves Hungary assuming obligations exceeding those contained in WTO
Agreements. In other cases, however, such adaptation might lead to a less liberal trade
regime. In particular, the present level of government support to agriculture in Hungary,
as measured by the producer subsidy equivalent (PSE), is only about one quarter of the
corresponding level in the EU. The relationship between Hungary's steps towards EU
membership and its participation in the WTO and other multilateral fora will thus clearly
be a major determining factor in the formulation of future trade policies.
Government report Back to top
TRADE POLICY REVIEW BODY: HUNGARY
Report by the Government
The economic and trade
policy environment
Macroeconomic processes
The period that elapsed since the previous review brought the most
significant changes in the past fifty years of Hungary's economic life. induced and
assisted by the change of the political regime, Hungary has successfully embarked upon and
completed the transition to a free market economy system. The core and intertwined tasks
of the systemic change required resolute governmental actions for:
- the creation and consolidation of a stable and transparent legal framework for a market
economy through large scale deregulation and the necessary deregulation;
- the massive privatisation of formerly state held enterprises;
- the facilitation of structural adjustment;
- the facilitation of the re-orientation of Hungary's external trade and economic
relations towards the market economies, preparation for joining the European Union;
- the establishment of the economic and social conditions for long term sustainable
economic development.
Inevitably this process forced economic operators to undertake
unprecedented adjustment efforts. The support and understanding of the population to
accept the social costs of the transition has been a key factor, especially during the
first years of this process when real GDP as well as real wages contracted, unemployment
and inflation surged. The effects of strict domestic regulations for terminating
companies' loss making activities and adapting their production of goods and provision of
services to real market demand have been amplified by open trade policies that
substantially increased competition on the local market. Companies lost a large share of
their traditional markets not only at home, but also in neighbouring countries as a result
of the economic difficulties and shrinking demand in most parts of Central and Eastern
Europe.
In 1993-94 industrial output and domestic demand recovered, while
unemployment decreased from 13,6 per cent to 10,4 per cent. Demand growth was to a large
part led by the increase in consumption, though investments also accelerated, mostly in
infrastructure. While profitability and labour productivity improved in the economy and
adjustment efforts started to exert positive influence in a number of industries,
unfavourable macroeconomic developments shadowed these encouraging signs. Imports
continued to grow at steadily high rates, consistently outperforming exports. The
significant deterioration of the trade balance was the major factor in the turn of the
current account position from small surpluses between 1990-92 to high deficits in 1993
(3.5 billion USD) and 1994 (3.9 billion USD). Despite substantial inflows of foreign
direct investments, the already high external indebtedness and debt service ratios grew
further. Simultaneously, high and growing consolidated interest payments and deficits in
the social security system and of local governments led to a budget deficit exceeding 9
per cent of GDP in 1994.
By 1995 it became evident that macroeconomic imbalances characterised by
the soaring twin deficit of the budget and current account needed urgent action. The
programme of economic stabilisation adopted by the government introduced austerity
measures to curb public expenditures, manage internal demand and improve the external
balances. These measures included a sharp one time devaluation of the currency followed by
a crawling peg exchange rate adjustment, the temporary imposition of an 8 per cent
surcharge on imports and major changes in the pension and social security systems. As a
result, macroeconomic indicators have considerably improved from 1996 and the basis for
putting the economy on a sustained growth path has been laid.
Developments in trade and investment flows
The process of transition entailed major economic and trade
liberalisation measures. The positive impact of the abolition of restrictions on foreign
exchange, imports and establishment manifested in the development of trade and investment
flows.
In the period of 1991-97 total Hungarian exports and imports doubled in
USD terms. Imports from the 15 member states of the European Union increased by 206 per
cent, a rate higher than the average but below import growth from ASEAN countries (558 %);
Canada (410 %); United States (266 %) and Japan (220 %). Increase in Hungarian exports was
most pronounced to CEFTA countries, followed by the EU and the US, with growth rates in
the range of 250-190 per cent.
The geographical composition of foreign trade shows differing trends in
imports and exports. While the share of Hungary's free trade partners (EU, EFTA, CEFTA
countries) remained stable around 70 per cent in imports, the share of exports to these
countries increased during the review period by about 10 percentage points to 78 per cent.
Hungarian exports to developing countries did not improve whereas their share in imports
showed continuous increase from 4,6 to 6,8 per cent.
The stock of foreign direct investment rose from the 2.8 billion USD level
in 1991 to 17.3 billion USD by the end of 1997. Of that, Germany and the United States
acquired a share of about one third each. Recently Japanese investors also show a growing
interest towards the Hungarian market. Contrary to the common expectations the bulk of FDI
went to capital intensive sectors, while the presence of foreign investors in labour
intensive industries, such as textiles, footwear or leather has been pretty limited.
Almost half of the FDI inflow targeted the manufacturing sector, in particular machinery,
food processing and chemical industries. The share of services sector is also high, due to
large scale privatisation undertaken in banking and insurance, telecommunications and
public utilities.
Trade policy developments
1991-97
Trade policy measures
Tariffs
The systemic changes in the turn of the 1990s led to the dissolution
of COMECON and its underlying non-market based trade regulations, thus making Hungarian
trade policies uniform vis-à-vis all partners. Starting from this new basis Hungary
undertook a number of autonomous liberalisation measures and entered into commitments
under multilateral and regional agreements that substantially lowered the level of
protection accorded to domestic operators.
The switchover to the HS based tariff nomenclature in 1992 and its
refinement in 1996 substantially increased (more than doubled) the number of tariff lines.
While the changes in the tariff nomenclature did not increase the duties on any single
product, the more detailed breakdown of goods inevitably distorts time series of nominal
tariff averages.
Hungary operates its GSP scheme since 1972 in favour of developing
countries. The Hungarian GSP system contains neither quantity limits nor a priori excluded
product groups. Full global cumulation of origin is permitted among beneficiaries. The
open nature and wide product coverage of the Hungarian GSP scheme explains the high share
(around 95 per cent) of imports from developing countries receiving preferential tariff
treatment. Though there is no predetermined uniform preferential margin, the nominal
average of GSP rates is less than half of the MFN tariffs both in agriculture and
industry.
This year marks the 20th anniversary of the introduction by Hungary of a
special and more favourable tariff treatment for least developed countries. Under this
scheme all agricultural and industrial imports from LLDCs (currently 42 countries) receive
total and unconditional duty free entry to the Hungarian market.
Besides the reduction of customs duties, Hungary phased out between
1995-97 import related charges. The previously applied import licensing fee of 1 per cent
was abolished in 1995, while the customs clearance fee of 2 per cent and statistical fee
of 3 per cent has been lowered and finally eliminated by 1 January 1997 vis-à-vis all WTO
partners.
Non-tariff measures
Hungary has made considerable progress during the review period also
in dismantling its remaining quantitative restrictions. Agricultural imports were
previously - to a large extent - subject to non-tariff measures such as quotas and
discretionary import licensing. These measures have been fully liberalised as a result of
the Uruguay Round. Hungary removed import restrictions on a number of industrial goods,
e.g. on furniture, undergarments. As from 1 January 1998 quantitative restrictions have
been lifted for all textile and clothing products as well as for passenger cars with an
engine over 1500 cc.
In addition to the reduction of the product coverage of the global quota,
the value ceilings (denominated in US dollars) for the still restricted goods have been
increased by about 7 per cent yearly. These adjustments have ensured that the quota shares
allocated to Hungary's free trade partners under the respective free trade agreements does
not take away import opportunities from third country suppliers. Products affected by
non-tariff measures covered in 1991 some 10 per cent of imports. Successive steps of
liberalisation reduced the coverage below 5 per cent by now. Hungary undertook to
eliminate the global quota on consumer goods vis-à-vis its free trading partners by the
end of the year 2000. It is the intention of the Hungarian Government to continue the
present practice of extending this liberalisation to all WTO Members.
Import and export licensing is also used for certain goods where
international agreements (e.g. concerning hazardous wastes, psychotropic drugs) or
national security considerations (arms and ammunition) require the control over trade
flows. Separate from licensing of foreign trade transactions, operational licence is
needed for companies that wish to trade in specified products. The operational licence is
automatically provided to all operators that satisfy the objective criteria set out in the
relevant legislation.
While Hungary enacted the necessary regulations for the application of
antidumping and countervailing procedures, no such measures have been taken so far.
Implementation of the WTO agreements
As a result of the WTO agreements, in particular the tariff bindings
on all products falling under the Agreement on Agriculture, the overall bound level
increased from 83 to 95.7 per cent of all tariff rates. The nominal MFN tariff average
shall decrease by the end of the Uruguay Round implementation period below 7 per cent in
industry and to about 27 per cent in agricultural goods. The average rate of total duty
reduction is over 30 per cent.
The 1997 nominal MFN tariff average of industrial products stood at 8.2
per cent, while the average duty rate on MFN imports (trade weighted average) was only 4.5
per cent.
Prior to the Uruguay Round Hungary applied relatively low tariffs on
agricultural products, and quantitative restrictions served as a main protective tool
against imports. In accordance with the WTO Agreement on Agriculture, these measures were
completely abolished as of 1 January 1995 with a parallel increase in tariff protection.
Though agricultural tariffs have not been high in international comparison even after the
tariffication of QRs, Hungary opened preferential tariff quotas for more than 100 products
in order to provide appropriate market access opportunities. Hungary does not apply
specific or composite duties, all tariffs are ad valorem rates.
Under the Agreement on Subsidies and Countervailing Measures Hungary
notified its support programmes, inter alia those that need to be eliminated by 2002 in
accordance with Article 29 of the SCM Agreement. Notwithstanding this deadline Hungary
decided to discontinue from 1 January 1998 the export performance requirement that was
linked to the eligibility of tax allowances for investments exceeding 1 billion Hungarian
forints.
In the field of agriculture, subsidies until the 1990s were heavily
concentrated on exports. Though in the process of economic transformation the real value
of agricultural export subsidies decreased to one third of its previous level, the
seriously erroneous base period data on the product coverage and value of export support
presented at the Uruguay Round negotiations and the resulting schedule of commitments led
to a situation which required corrective action. According to the waiver obtained in 1997
from the General Council after lengthy consultations, Hungary has been provided with a
transition period until 2002 to gradually adjust its support programmes to the limits of
its schedule. In line with this arrangement the Hungarian government has started to
re-instrument the assistance to agriculture with an emphasis of green box type measures.
In the framework of the General Agreement on Trade in Services Hungary
made extensive commitments to allow for the commercial presence of foreign service
providers and the cross border supply of services in a large number of service sectors.
Hungary also participated in the negotiations and took obligations with respect to
financial and telecommunication services. As a further liberalisation step, in line with
the obligation Hungary has taken at the financial services negotiations, the establishment
in the form of branches has been allowed by a recently adopted law that entered into force
from 1 January 1998.
Hungarian legislation provides effective protection of intellectual
property in conformity with the provisions of the TRIPS Agreement. Breach of laws on the
protection of patents, copyright, industrial designs, topographies of integrated circuits,
utility models, trademarks and geographical indications may be sanctioned through civil
and criminal law procedures. By virtue of a government decree customs authorities are
empowered to prevent the importation of goods infringing intellectual property rights.
Regional integration
The Association Agreement between the European Communities and Hungary
was signed in 1991. It covers trade in goods and services and addresses areas outside the
scope of the WTO such as political dialogue and co-operation in various fields of the
economy. As a general rule, the agreement provides for a ten year transition period for
the full elimination of barriers to trade. Schedules for the implementation of
liberalisation measures are set in the Agreement and in its annexes, in some cases on an
asymmetric manner, reflecting the difference in the level of economic development between
the parties.
In 1994 Hungary officially submitted its application for membership in the
European Union. On the basis of the positive reaction given by the 1997 EU summit meeting
in Luxembourg, the accession negotiations have been commenced in April 1998.
As a part of the accession process of Hungary to the European Union,
intensive work is going on to harmonise the trade policy regulations of Hungary with those
of the EU. Accordingly, on the 1 July 1997 Hungary introduced the system of European
cumulation of origin, which means that Hungary applies the same rules of origin as the EU.
In the review period Hungary concluded a series of free trade agreements
with the EFTA, Central and Eastern European countries (the Czech Republic, Poland,
Slovakia, Slovenia, Romania) in the framework of the Central European Free Trade Agreement
(CEFTA), Israel and Turkey. All these agreements cover solely trade in goods, and foresee
the elimination of tariffs and non-tariff barriers by 2002 at latest. With the exception
of the EFTA agreement the liberalisation measures are to be implemented by the parties
with keeping to the principle of symmetry in market opening. Another specific feature may
be found in CEFTA where all parties apply uniform (zero or low) tariff rates without
quantitative limitations for a large number of agricultural products.
Hungary is currently negotiating further free trade agreements with
Estonia, Latvia and Lithuania. Negotiations with Bulgaria on its accession to CEFTA also
reached their final stage.
Domestic policy developments affecting trade
As mentioned above, privatisation of state held assets has been a key
task in the process of economic transformation. Between 1990-97 almost 1300 state owned
companies (85 per cent of the total) have been sold with a privatisation revenue of over
1400 billion HUF. With that, the share of private sector in GDP rose to 80 per cent. Only
180 companies (mostly regional transport companies, forestry and agricultural companies,
research institutions) are considered to remain under state control. In 32 out of the 180
firms the state practices its - limited - ownership rights through "golden
share".
The successful completion of the privatisation in the context of systemic
change would not have been possible without a liberal and favourable regulatory framework
for foreign investment. Since the government intended to involve "real owners",
cash sales through competitive tendering has been the major method of privatisation where
foreign investors could take part on a non-discriminative basis. Indeed, FDI accounted for
over 70 per cent of the privatisation revenues. Foreign investments are particularly
important in the banking sector, telecommunication and public utilities. Foreign investors
hold more than 60 per cent of the total capital in the banking sector, and acquired
majority shares in the national telecommunications company as well as in gas and
electricity distribution and power generation.
Effective competition rules are essential for the smooth functioning of a
market economy. The new Hungarian Competition Law of 1996 that replaced the 1990
legislation regulates company behaviour by prohibiting anti-competitive practices and the
abuse of dominant positions in the market.
Trade policy directions
The basic motivation of Hungarian trade policies has been the
advancement of full integration into the world economy. Indeed, as a small country,
heavily dependent on foreign economic relations and largely exposed to developments in
international markets, Hungary has been strongly supportive to co-operative efforts for
the strengthening of the multilateral trading system. This has been demonstrated by
Hungary's active participation in the Uruguay Round of multilateral trade negotiations and
by the commitments taken in respect of market access for goods and services and the
protection of intellectual property.
The priority task for Hungarian economic and trade policies in the coming
years is to fully prepare the economy for the accession to the European Union. The process
of the necessary legal harmonisation has been so far and shall be in the future in full
respect of the multilateral disciplines embodied in the WTO agreements. As these rules
constitute the basis of trade regulations both in the EU and Hungary, it is not likely
that alignment of legislation would produce any difficulties in Hungary's trade relations
with third countries. Hungary, while an active participant in regional integration
processes, remains firmly committed to the strengthening of the multilateral trading
system. In this spirit, Hungary implemented bilaterally agreed liberalisation measures on
an MFN basis, and is supportive to further multilateral negotiations under the aegis of
the WTO in traditional as well as new areas. Back to top |
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