Czech Republic: October 2001

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Exports and foreign investment lead Czech republic's economic recovery on the way to EU integration  

Exports and a surge in foreign direct investment have led the Czech economy to a recovery from the 1997-99 recession, and, after three years of negative growth, GDP grew by 2.9% in 2000, according to a WTO report on the trade policies and practices of the Czech Republic. In addressing the recession, the Czech Government took significant steps to enhance the economic climate, both through domestic reform and by further trade and investment liberalization, the report says

The legal environment for economic and trade activities has substantially improved in the Czech Republic over the last five years. A broadly coherent body of commercial and trade law is now in place and much of the progress can be attributed to the Czech Republic's goal of accession to the European Union (EU). EU harmonization has proved to act as a catalyst to speed up the implementation of the reform agenda, says the report.

The Czech Republic remains highly integrated into the world economy. Merchandise trade (exports and imports) were the equivalent of 120% of GDP in 2000 (up from 105% in 1994), and the ratio of foreign investment to GDP was 5.3% (9% in 1999). The geographic distribution of merchandise trade has continued to move towards western Europe, reflecting the Czech Republic's continued integration with western Europe. In 2000, the EU accounted for almost 69% of total merchandise exports and 62% of total imports.

The report also notes that trade liberalization has been an important element in the reform agenda during the period under review. The average Czech MFN tariff rate has been lowered by two percentage points, to 6% in 2001. Moreover, both tariff dispersion and the number of rates have decreased since the previous review. With no specific, composite or other non-ad valorem rates, the Czech tariff system remains transparent. All tariff lines are bound (almost all at the applied MFN rates), fostering a more predictable trading environment for businesses.

Most agricultural goods, however, are protected by relatively high tariffs. The simple MNF tariff average for agriculture products (WTO definition) in 2001 was 13.4%, compared with an average rate of 4.3% for non-agricultural goods.

Given the large number of preferential trading agreements to which the Czech Republic participates, MFN rates apply only to a limited share of Czech imports (78% of total imports in 1999 were from free-trade agreement partners). The Czech Republic has continued to build up its network of preferential trade agreements. It has concluded several free-trade agreements during the period under review (Estonia, Latvia, Lithuania, Israel and Turkey), while continuing liberalization within the framework of previous preferential agreements. Although these have helped further open the Czech market, such arrangements may also distort trade and investment patterns as they involve different margins of preferences. The impact on net trade creation of the Czech's possible accession to the EU is not completely clear. Non-tariff barriers on an MFN basis are expected to fall. On the other hand, EU membership is most likely to raise the level of protection in agriculture as the current overall MFN tariff on agricultural goods is higher in the EU than in the Czech Republic; agricultural assistance is also likely to increase significantly. Nevertheless, integration with the EU should accelerate the Czech Republic's economic development and provide renewed opportunities for further economic and trade reforms.

The Czech import regime has relatively few non-tariff barriers. A non-automatic licence continues to apply to imports of, inter alia, certain: sugar, coal, explosives, and firearms. As part of the accession to the EU, the Czech Republic is harmonizing its standards and technical regulations with those of the EU. Towards that end, several new laws have been enacted, simplifying the testing and standardization process. The Czech Republic has also concluded mutual recognition agreements for the results of conformity assessments with several countries. Amendments to the government procurement legislation provide for enhanced transparency, but the system appears to discriminate, in some instances, against foreign firms. The Czech Republic became an observer to the WTO Agreement on Government Procurement in August 2000. Competition rules as well as intellectual property rights legislation have been strengthened during the period under review. Regarding contingency measures, the Czech Republic has recently enacted legislation pertaining to anti-dumping, countervailing and safeguard measures. It is yet to be seen if the Czech Republic will be an active user of contingency measures.

Along with liberalization of the foreign investment regime, total foreign investment (net) has jumped in recent years to around 9% of GDP in 1999. As part of its accession to the Organization of Economic Cooperation and Development (OECD) in December 1995, the Czech Republic agreed to meet, with a few exceptions, the OECD's standards for equal treatment of foreign and domestic investors, and on restrictions on special investment incentives. Foreign investment in a few sectors (mainly services) remain restricted or controlled, says the report.

It notes that the Czech Republic has progressively changed its policy on foreign investment incentives during the period under review. In May 2000 a package of incentives was approved, changing the previous policy of offering investment incentives on a case-by-case basis (subject to governmental approval), a major change from the "no incentives" policy during 1992-98. The package appears to have been designed to bring the Czech Republic into line with its competitors for inward investment. However, it is not clear if the benefits of the incentive package outweigh the associated costs.

Regarding other areas of services, the Czech Republic has embraced competition in the telecommunications sector by gradually opening up its markets to national and foreign investors. The telecom monopoly company has been partly privatized, and, most recently, additional operators were allowed in the provision of international and long-distance services. Progress has been made in liberalizing transport services. As in 1996, the sector portrays a mixed picture. While the Czech Republic has a relatively competitive trucking industry and a non-subsidized airline company, passenger railway services and, to a lesser extent, bus services require large amounts of transfers to cover their losses.

 
Note to Editors

Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries’ trade and related policies are examined and evaluated at regular intervals. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTO’s full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRB’s meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.

For this review, the WTO’s Secretariat report, together with a policy statement prepared by the Government of the Czech Republic, will be discussed by the Trade Policy Review Body on 17 and 19 October 2001. The Secretariat report covers the development of all aspects of the Czech Republic's trade policies since the previous review, including domestic laws and regulations, the institutional framework, trade policies by measure, and developments in selected sectors.

Attached to this press release is the Overview to the Secretariat report and parts of the government policy statement. The Secretariat report and the government's policy statement are available for the press in the newsroom of the WTO internet site (www.wto.org). These two documents and the minutes 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 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bahrain (2000) Bangladesh (1992 and 2000), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992, 1996 and 2000), Brunei Darussalam (2001), Burkina Faso (1998), Cameroon (1995 and 2001), Canada (1990, 1992, 1994, 1996, 1998 and 2000), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995 and 2001), Côte d’Ivoire (1995), Cyprus (1997), the Czech Republic (1996 and 2001), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995, 1997 and 2000), Fiji (1997), Finland (1992), Gabon (2001), Ghana (1992 and 2001), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994 and 2000), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995,1998 and 2000), Kenya (1993 and 2000), Korea, Rep. of (1992, 1996 and 2000), Lesotho (1998), Macao (1994 and 2001), Madagascar (2001), Malaysia (1993 and 1997), Mali (1998), Mauritius (1995), Mexico (1993 and 1997), Morocco (1989 and 1996), Mozambique (2001), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991, 1996 and 2000), OECS (2001), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru (1994 and 2000), the Philippines (1993 and 1999), Poland (1993 and 2000), Romania (1992 and 1999), Senegal (1994), Singapore (1992, 1996 and 2000), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka (1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991, 1996 and 2000 (jointly with Liechtenstein)), Tanzania (2000), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996, 1999 and 2001), Uganda (1995), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

 

The Secretariat’s report:  back to top

summary 

TRADE POLICY REVIEW BODY: CZECH REPUBLIC
Report by the Secretariat — Summary Observations

The Czech economy is recovering from the 1997-99 recession: led by exports and a surge in foreign direct investment, GDP grew by 2.9% in 2000 following three years of negative growth. The recession was caused by both microeconomic factors, such as an insufficient restructuring of the corporate and banking sectors, and macroeconomic imbalances, including a deterioration in the General Government accounts.

In addressing the recession, the Czech Government took significant steps to enhance the economic climate, both through domestic reform and by further trade and investment liberalization. The legal environment for economic and trade activities has also substantially improved since the Czech Republic's previous Trade Policy Review in 1996. A broadly coherent body of commercial and trade law is now in place. Much of the progress can be attributed to the Czech Republic's goal of accession to the European Union (EU). EU harmonization, which requires absorption of the EU acquis communautaire, has proved to act as a catalyst to speed up the implementation of the reform agenda. While the legal environment is good on paper, it appears that weaknesses in the dispute resolution system continue to be a problem. The slow functioning of the overburdened commercial courts and weak enforcement has been identified as a factors hampering the business environment.

The Czech Republic remains highly integrated into the world economy. Merchandise trade (exports and imports) were the equivalent of 120% of GDP in 2000 (up from 105% in 1994), and the ratio of foreign investment to GDP was 5.3% (9% in 1999). The geographic distribution of merchandise trade has continued to move towards western Europe, reflecting the Czech Republic's continued integration with western Europe. In 2000, the EU accounted for almost 69% of total merchandise exports and 62% of total imports.

The Czech Republic participates actively in the work of the WTO. It grants at least MFN treatment to all WTO Members, as to several other countries with which bilateral agreements have been signed. During the period under review, the Czech Republic has continued to undertake major commitments within the multilateral framework, including in basic telecommunications and financial services. Under the WTO dispute settlement mechanism, the Czech Republic has been involved in two cases, one as a complainant and one as a respondent. In both cases, the disputes have been resolved through bilateral consultations.

Trade liberalization has been an important element in the reform agenda during the period under review. The average Czech MFN tariff rate has been lowered by two percentage points, to 6% in 2001. Moreover, both tariff dispersion and the number of rates have decreased since the previous review. With no specific, composite or other non-ad valorem rates, the Czech tariff system remains transparent. All tariff lines are bound (almost all at the applied MFN rates), fostering a more predictable trading environment for businesses.

Most agricultural goods, however, are protected by relatively high tariffs. The simple MNF tariff average for agriculture products (WTO definition) in 2001 was 13.4%, compared with an average rate of 4.3% for non-agricultural goods.

Given the large number of preferential trading agreements to which the Czech Republic participates, MFN rates apply only to a limited share of Czech imports (78% of total imports in 1999 were from free-trade agreement partners). The Czech Republic has continued to build up its network of preferential trade agreements. As part of its efforts to accede to the EU, the Czech Republic has to adopt all of the preferential agreements concluded by the EU with third countries. Towards this end, the Czech Republic has concluded several free-trade agreements during the period under review (Estonia, Latvia, Lithuania, Israel and Turkey), while continuing liberalization within the framework of previous agreements. Although these have helped further open the Czech market, such arrangements may also distort trade and investment patterns as they involve different margins of preferences. The impact on net trade creation of the Czech's possible accession to the EU is not completely clear. Non-tariff barriers on an MFN basis are expected to fall. On the other hand, EU membership is most likely to raise the level of protection in agriculture as the current overall MFN tariff on agricultural goods is higher in the EU than in the Czech Republic; agricultural assistance is also likely to increase significantly. Nevertheless, integration with the EU should accelerate the Czech Republic's economic development and provide renewed opportunities for further economic and trade reforms.

The Czech import regime has relatively few non-tariff barriers. Some items have been removed from the list of automatic licensing during the review period. A non-automatic licence continues to apply to imports of, inter alia, certain: sugar, coal, explosives, and firearms. As part of the accession to the EU, the Czech Republic is harmonizing its standards and technical regulations with those of the EU. Towards that end, several new laws have been enacted, simplifying the testing and standardization process. The Czech Republic has also concluded mutual recognition agreements for the results of conformity assessments with several countries. Amendments to the government procurement legislation provide for enhanced transparency, but the system appears to discriminate, in some instances, against foreign firms. The Czech Republic became an observer to the WTO Agreement on Government Procurement in August 2000. Competition rules as well as intellectual property rights legislation have been strengthened during the period under review. Regarding contingency measures, the Czech Republic has recently enacted legislation pertaining to anti-dumping, countervailing and safeguard measures. It is yet to be seen if the Czech Republic will be an active user of contingency measures.

Along with liberalization of the foreign investment regime, total foreign investment (net) has jumped in recent years to around 9% of GDP in 1999. As part of its accession to the Organization of Economic Cooperation and Development (OECD) in December 1995, the Czech Republic agreed to meet, with a few exceptions, the OECD's standards for equal treatment of foreign and domestic investors, and on restrictions on special investment incentives. Foreign investment in a few sectors (mainly services) remain restricted or controlled.

The Czech Republic has progressively changed its policy on foreign investment incentives during the period under review. In May 2000 a package of incentives was approved, changing the previous policy of offering investment incentives on a case-by-case basis (subject to governmental approval), a major change from the “no incentives” policy during 1992-98. The package appears to have been designed to bring the Czech Republic into line with its competitors for inward investment. However, it is not clear if the benefits of the incentive package outweigh the associated costs. Investment incentives are typically not the best solution.

The deficiencies in the banking sector were among the factors behind the 1997 recession. Imprudent lending by state-owned banks enabled enterprises to postpone restructuring. The unreformed enterprise sector was also a result of the State involvement through indirect ownership (state-owned banks owned investment funds which in turn owned enterprises). Moreover, it was apparent that weaknesses in regulation and supervision of capital market institutions (investment funds, pension funds and insurance companies) would prevent the build up of strong governance structures and faster enterprise restructuring. Against this backdrop, a number of bank and capital market reforms were implemented in several steps. Many of the reforms were also implemented with the aim of harmonizing Czech law and regulations with those of the EU. In particular, the central bank strengthened the regulatory framework for bank supervision, moved towards a consolidated supervision, incorporated market risk into the capital adequacy requirement, tightened provisioning requirements, and revoked a number of bank licenses. The deficiencies in the banking sector were also addressed with privatization. With the privatization of three large state-owned banks during the review period, there is only one remaining state-owned commercial bank left, which is also slated for privatization for the second half of 2001.

In addressing enterprise restructuring, the Government set up a Revitalization Agency, with a mandate to prepare a limited number of heavily indebted companies for privatization. An inadequate bankruptcy legal framework was perceived as impeding enterprise restructuring. Thus, the bankruptcy law has been amended several times since 1996, aimed at facilitating and speeding up the bankruptcy process. Notwithstanding the recent changes to the bankruptcy law, the present law appears to still suffer from some weaknesses.

Regarding other areas of services, the Czech Republic has embraced competition in the telecommunications sector by gradually opening up its markets to national and foreign investors. The telecom monopoly company has been partly privatized, and, most recently, additional operators were allowed in the provision of international and long-distance services. Progress has been made in liberalizing transport services. As in 1996, the sector portrays a mixed picture. While the Czech Republic has a relatively competitive trucking industry and a non-subsidized airline company, passenger railway services and, to a lesser extent, bus services require large amounts of transfers to cover their losses.

 

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Government report  

TRADE POLICY REVIEW BODY: CZECH REPUBLIC
Report by the Government — Part IV

Future trade policy directions — The new WTO negotiations

The turn of the millennium is characterised by a rapid development of the world economy, its globalisation and changing conditions of international trade. All of these factors lead to great pressures on the WTO to adapt to the new developments, preserve its relevance and play a key role in positive channelling of globalisation and ensuring more even distribution of benefits resulting there from.

The Czech Republic believes that the best response to these challenges is to launch a new and comprehensive round of multilateral trade negotiations. It is only through such negotiations that the interests and needs of all WTO Members can be taken into account, while striving for a commonly beneficial result, based on the balance of the rights and obligations. A new Round is also a prerequisite for a more effective involvement of the developing countries and the countries in transition in the multilateral trading system. Moreover, a Round is needed to demonstrate the ability of the WTO and its Members to address concerns of the general public regarding the functioning of the multilateral trading system and in order to secure the public support for further trade liberalisation. Last but not least, a new round is the best contribution to the ongoing debate on the relationship between multilateralism and regionalism.

For all of these reasons the Czech authorities will spare no efforts to promote such a consensus that will enable to launch a new Round by the time of the forthcoming Fourth Ministerial Conference in Doha (9 – 13 November 2001).

The scope of a New Round has to go beyond the mandated negotiations on agriculture, services and intellectual property rights. Negotiations in these areas can only produce expected results if they are set in a wider framework, allowing trade-offs among various sectors. The market access element of the Round should be complemented by negotiations on non-agricultural products, which represent one of the core agenda of the then GATT and today’s WTO. In addition to measures focused on the improved market access, negotiations should be directed towards strengthening and clarifying the existing rules as well as developing new rules and disciplines to respond to the ever-changing features of international trade. The Czech Republic envisages that in all stages of the negotiations a key role will be played by issues related to economic development and that the process of undertaking new obligations will be supported by increased technical assistance to developing countries.

Turning now to various negotiating topics, the Czech Republic is ready to take part in the process of further reductions in support and protection in agriculture, provided that an appropriate balance between the trade and non-trade concerns resulting from the Agreement on Agriculture is preserved. At the same time, the Government expects that negotiations will take account of specific conditions of countries like the Czech Republic, which underwent a radical and painful process of transformation of their agricultural sectors and have achieved a high level of market opening, and will therefore seek appropriate flexibility in the course of negotiations on modalities for further reduction commitments.

In negotiations aimed at achieving progressively higher levels of liberalisation in trade in services, the Czech Republic supports the view that no service sector and no method of service delivery should be a priori excluded. Appropriate procedures should be adopted to allow recognition of unilateral liberalisation measures. The Czech Republic applies a whole range of such measures and is ready – in negotiations on market access – to schedule their bindings, depending on the partners’ approaches and in exchange for their concessions.

The Czech Republic continues to hold the view that issues relating to additional protection for geographical indications are part of the mandated negotiations and that these negotiations also cover an extension of the additional protection to products other than wines and spirits. It is essential that ministers in Doha mandate the WTO to complete negotiations related to geographical indications at the same time as that applicable to other negotiating topics.

Liberalisation of trade in non-agricultural products should constitute, in addition to mandated negotiations, another important pillar of the agenda aimed at improved market access. The negotiations should comprise all products or groups of products without prioritising which of them would proceed more rapidly. Concrete procedures for establishing new commitments should result from negotiations after Doha.

In addition to market access, the Round should lead to developing new rules in areas of investment, competition, transparency in government procurement and trade facilitation. Since the beginning of the discussions on such issues in the WTO in 1996, considerable progress has been made, justifying to launch negotiations at present. The Czech Republic strongly supports such a launch.

In the areas of investment and competition, the Czech Republic’s support for negotiations is motivated by its specific experience as a country, which has completely restructured its system of ownership rights and deregulated its former centrally planned economy. Foreign direct investments, on which WTO negotiations should focus, have played a key role in the process of economic transformation, and their importance for further development of the economy is continuously growing. This explains why the Czech Republic is committed to creating a stable contractual framework which will provide a transparent, predictable and legally certain environment for foreign investors and concurrently will not undermine the regulatory powers of governments to pursue their legitimate economic objectives. An appropriate, a GATS-like bottom-up negotiating approach should be developed and applied to enable individual WTO Members to control the pace of liberalisation and thus to take into account the Members particular economic conditions.

In the area of competition, negotiations should aim at a framework agreement based on the principles of non-discrimination (national treatment and most-favoured nation approach) and transparency, while fully respecting the development objectives. It should focus on prevention of anti-competitive practices, having international dimension and hampering market access, and should promote co-operation among national competition authorities. Existing diversity in national approaches does not require harmonisation of domestic competition frameworks. It rather underlines the importance of flexibility and progressivity as integral elements of a new WTO agreement.

The Czech Republic further considers it useful that an agreement be negotiated to ensure transparency in government procurement procedures applied by Members, including the range of applicability of such an agreement depending on types of trade, administrative levels of management and other factors.

Negotiations should also be launched to establish a set of rules aimed at simplification and facilitation of trade procedures. Such rules must be based on the non-discrimination principle in respect of the administrative procedures and should lead to the substantial alleviation of customs procedures, adoption of electronic data transmissions and overall improvement of transparency.

The Czech Republic is also ready to take part in negotiations carried out with a view to strengthening and clarifying the already existing rules – for example, in the area of anti-dumping. It is interested in updating the Understanding on Rules and Procedures Governing the Settlement of Disputes that will take account of experience gained to date from implementing the dispute settlement system. Electronic commerce is another area in which the Czech Republic is ready to co-operate with other Members with a view to creating the most favourable framework promoting electronic transmissions.

Last but not least, the Czech Republic will support any effort enabling to inscribe the interface between trade and environment on the agenda of the Round. Further liberalisation of rules based international trade and protection of environment have to be tackled in a mutually supportive manner, without serving the purpose of green protectionism.