Czech Republic: March 1996
The establishment of a liberal and transparent international trade regime has been a key ingredient in the Czech Republic's transformation to a market economy. This transformation, which has also included such market-oriented reforms as price liberalization and the privatization of state enterprises, has been facilitated by prudent macroeconomic management.
Liberal trade policies fundamental to the Czech economic transformation
The establishment of a liberal and transparent international trade regime has been a key ingredient in the Czech Republic's transformation to a market economy. This transformation, which has also included such market-oriented reforms as price liberalization and the privatization of state enterprises, has been facilitated by prudent macroeconomic management. After a severe economic downturn during which GDP declined by some 21 per cent between 1990 and 1993, the Czech Republic has managed to stabilize its economy, reduce inflation to 9 per cent and maintain low unemployment. Real GDP growth in 1995, due mainly to increased private consumption and investment, accelerated to an estimated five per cent from 2.6 per cent in 1994.
Czech trade policies will be discussed at a meeting of the WTO's Trade Policy Review Body on 6-7 March. According to the WTO Secretariat report which will serve as the focus of the discussion, the Czech trade regime is a transparent one. Import policies are characterized by most-favoured-nation (m.f.n.) tariffs applied at moderate rates on an ad valorem basis. There are no specific, composite or other non-ad valorem tariffs, and non-tariff measures are used infrequently. However, even though the 1995 simple average m.f.n. tariff of 8 per cent is moderate, average tariffs rise from four per cent for primary products to six per cent for semi-processed goods and to 10 per cent for fully processed goods. Agricultural products have particularly high tariffs on a few items while food products and beverages have tariffs averaging 19 per cent. The report states that countries with which the Czech Republic has regional trade agreements account for 80 per cent of total merchandise trade. Such agreements encompass all major trading partners except Russia,(1) and agreements with other countries are being considered. The countries with which the Czech Republic has preferential agreements would also likely be its major trading partners even in the absence of such agreements. However, in combination with generally low m.f.n. tariffs this suggests, according to the report, that the Czech Republic's network of trade agreements is, on balance, net trade-creating. Simple average tariffs applied to imports from preferential trading partners in 1995 ranged from an average of 3.3 per cent for Slovenia to 6 per cent for Poland. Tariffs on imports from the European Union, to which the Czech Republic recently applied for membership, averaged 5.5 per cent. The Czech Republic counts imports made at preferential tariff rates against the m.f.n tariff quota levels established under the minimum market access provisions of the Uruguay Round Agreement on Agriculture, a practice that the report notes reduces market access for non-preferential suppliers.
An original member of both GATT and the WTO, the Czech Republic has been successful in attracting foreign investment, receiving one fourth of the total foreign direct investment made to date in central and eastern Europe. Foreign investors may transfer their share of after-tax profits to their country of origin and foreign-owned capital may be fully repatriated. Privatization has proceeded rapidly. Before starting with economic reforms, four per cent of GDP was privately owned. By 1995, some 80 per cent of the economy's assets were privately owned and well over 60 per cent of GDP was accounted for by the private sector.
The Czech Republic has no anti-dumping, countervailing duty or safeguards legislation in force and has never applied such measures; legislation is being prepared in these areas and is expected to be implemented later this year. The report states that the Czech Republic has resorted to monitoring the exports of some products partly to avoid the imposition of anti-dumping measures by importing countries. It notes that certain provisions could be included in the legislation to reduce the risk of established domestic firms abusing anti-dumping law to stifle import competition. For example, the new legislation could include a public interest clause requiring that the potentially harmful effects of anti-dumping measures on consumers and downstream industries be considered in the decision process.
Under the General Agreement on Trade in Services (GATS) the Czech Republic has made commitments to allow foreign firms to establish a commercial presence in the country in order to provide a variety of services. The Czech Republic has taken m.f.n exemptions in four service sectors: audio-visual services and passenger and freight transport services on internal waterways, rail traffic, and road transport. External services receipts range between 13 and 15 per cent of GDP. Recently, the Czech Republic has had external services trade surpluses equivalent to two to six per cent of GDP.
The Czech Republic is party to all major multilateral agreements in the field of intellectual property rights. Foreign right-holders receive the same treatment as Czech legal or natural persons. In the area of industrial designs and patents the Czech Republic grants national treatment only on a reciprocal basis; however, acceptance by other governments of the WTO TRIPS (intellectual property) Agreement is considered to satisfy requirements of reciprocity.
The importance of foreign trade to the Czech economy is indicated by the fact that the value of goods and services trade exceeded GDP in 1994. The significance of trade is one reason why the Czech Republic takes great interest in the trade policies of its partner countries and has been active in GATT and WTO efforts to strengthen multilateral trade rules. At home, the Czech Republic has fully recognized the importance of trade in promoting effective economic competition, which lies at the heart of the transition to a market economy. The country's liberal trade regime, according to the report, has a positive and important role in this transition.
Notes to Editors:
The WTO Secretariat's report, together with a report prepared by the Czech Republic will be discussed by the WTO Trade Policy Review Body (TPRB) on 6 and 7 March 1996. 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.
Two reports, together with a report of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete Trade Policy Review of the Czech Republic and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover development of all aspects of the Czech Republic'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. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992), Cameroon (1995), Canada (1990, 1992 & 1994), Chile (1991), Colombia (1990), Costa Rica (1995), Côte d'Ivoire (1995), Dominican Republic (1996), Egypt (1992), the European Communities (1991, 1993 & 1995), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 and 1995), Kenya (1993), Korea, Rep. of (1992), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 & 1996), New Zealand (1990), Nigeria (1991), Norway (1991), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992 & 1994), Uganda (1995), Uruguay (1992), Venezuela (1996) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: THE CZECH
Report by the Secretariat Summary Observations
The Czech Republic became a sovereign State on 1 January 1993 following the dissolution of the Czech and Slovak Federal Republic (CSFR). The dismantling of the former central planning régime and movement toward a market economy were begun under the CSFR in 1990 and have been continued by the Czech Republic. Market-oriented reforms have encompassed the decontrol of prices, the privatization of State enterprises, the opening of the economy to foreign investment, the liberalization of the foreign exchange régime, and the relaxation or elimination of foreign trade restrictions. Prudent macroeconomic management during the reform period has facilitated the implementation of reforms. Nevertheless, led by the collapse of export demand from former key trading partners, and with a decline in domestic demand, the economy underwent a severe economic contraction during the early 1990s.
The Czech Republic has liberal and transparent international trade policies. Its trade régime is characterized by m.f.n. tariffs applied at moderate rates on an ad valorem basis and by the infrequent use of non-tariff barriers. The resulting openness has contributed to the economic growth and stability that have been experienced to this point in the economic transformation. The multilateral obligations that the Czech Republic has accepted in many areas, such as its comprehensive tariff bindings, help to ensure the continuation of this openness.
The Czech Republic in World Trade
Led by a 17 per cent increase in fixed capital formation and a 5 per cent increase in private consumption, Czech real GDP grew by 2.6 per cent in 1994; inflation was in the order of 10 per cent and unemployment, at 3 per cent, remained low. Per capita income increased to the equivalent of US$3,490. Growth accelerated in 1995 to an estimated 5 per cent, largely consequent upon further increases in private consumption and investment, including stock building. Inflation moderated to around 9 per cent and unemployment remained at about 3 per cent.
Growth in investment exceeded that of savings by the equivalent of 2.2 per cent of GDP in 1994; this was reflected in a shift of the current account from a surplus of 2.2 per cent of GDP in 1993 to approximate balance in 1994. The merchandise trade deficit widened from 1 per cent in 1993 to 2.4 per cent of GDP in 1994 while the services trade surplus declined from 3.2 per cent to 2.1 per cent of GDP. Substantial capital inflows nevertheless led to a balance-of-payments surplus of nearly 10 per cent of GDP; as a result there was an increase in official reserves to the equivalent of four months of goods and services imports.
Continued substantial inflows of foreign capital during 1995 led to a further sharp increase in foreign exchange reserves, complicating monetary management. Concurrently, the current account deficit widened to about 4 per cent of GDP, led by a sharp deterioration of the trade account, which recorded a deficit of some 8 per cent of GDP. Strong domestic demand, especially for investment goods, and an appreciation of the real (inflation adjusted) effective exchange rate of the koruna contributed to this opening of the trade deficit. These factors may indicate the need for a tightening of financial policies to reduce inflationary pressures and forestall losses in competitiveness. Such policies would help safeguard the transition process and act against any possible build up of demands for protection.
Services accounted for almost 53 per cent of GDP in 1994, with industry, including construction, responsible for 41 per cent, and agriculture and forestry for somewhat under 6 per cent. The Czech Republic is a net importer of fuels and related products, chemicals, and machinery and transport equipment. It is a net exporter of other manufactured products.
The Czech Republic's geographic pattern of trade has changed fundamentally since 1989, when most trade was with the Soviet Union and other central and eastern European countries. Excluding trade with Slovakia, the share of Czech merchandise exports to (western) industrial countries increased from 37 per cent in 1989 to 71 per cent in 1994. Czech trade is concentrated in Europe, with some 88 per cent of both merchandise imports and exports exchanged with European countries, including Russia. Some 56 per cent of imports are from the European Union (particularly Germany and Austria), with other large import sources being Slovakia and Russia. The largest share of exports, 54 per cent, go to the European Union (again, particularly Germany and Austria), followed by Slovakia, Russia and Poland.
Trade Policy Framework
Czechoslovakia was an original member of the GATT, and the Czech Republic acceded to the GATT in 1993 with no lapse in its application of the General Agreement. The Czech Republic ratified the Uruguay Round Agreements in December 1994 and is an original member of the WTO. All WTO members and GATT contracting parties receive at least m.f.n. treatment, as do several other countries with which bilateral agreements containing m.f.n. treatment have been completed and others to which such m.f.n. treatment has been granted autonomously.
Regional trade agreements account for 80 per cent of the Czech Republic's total merchandise trade and encompass all major trading partners except Russia. The six agreements are the Czech-Slovak Customs Union, the EU Association Agreement, the Central European Free Trade Agreement (CEFTA, which includes the Czech Republic, Hungary and Poland), and free-trade agreements with Romania, Slovenia, and the countries of the European Free Trade Area (EFTA). Agreements with other countries are being considered or are under negotiation.
The Czech-Slovak Customs Union took effect on 1 January 1993, upon the dissolution of the CSFR. The countries share a common external tariff, though goods from third countries do not circulate freely between them. Most other trade-related policies, such as import licensing and preferences under the Generalized System of Preferences (GSP), are harmonized. Upon the termination of monetary union between the Czech and Slovak Republics in February 1993, a bilateral clearance arrangement went into effect for most commercial transactions between the countries. This arrangement was eliminated at end-September 1995, with the Czech koruna fully convertible for current account transactions as of 1 October 1995.
The Czech Republic is expected to apply for membership in the EU in early 1996. Much of its trade-related legislation has already been harmonized to that of the EU, and this process of harmonization continues. The Czech-Slovak common external tariff, with a simple average of 8 per cent, averages some 2 percentage points less than the EU tariff.
The countries with which the Czech Republic has preferential agreements would likely be its major trading partners even in the absence of such agreements. Together with relatively low m.f.n. tariffs, this limits trade diversion and suggests that the Czech Republic's network of trade agreements is, on balance, net trade-creating. So long as tariffs on imports from third countries are not raised, these features increase the likelihood that the Czech Republic's network of trade agreements is economically beneficial from a global perspective.
The Czech Republic's liberal trade rules are complemented by its generally open direct investment régime. Foreign direct investment is encouraged and the Czech Republic has been successful in attracting investment, receiving one fourth of the foreign direct investment in the central and eastern European region. Under most circumstances investments are not subject to approval. Following registration, foreign firms and individuals may conduct business under the same conditions and to the same extent as domestic firms, with few exceptions. Foreign investors may transfer their share of after-tax profits to their country of origin, and foreign-owned capital may be fully repatriated in the event of the dissolution of an enterprise. Under the General Agreement on Trade in Services (GATS), the Czech Republic has undertaken horizontal and specific commitments that help to ensure that foreign firms are able to establish a commercial presence in order to provide many types of services.
Privatization of former State enterprises has proceeded rapidly. Before the start of the economic transformation, 4 per cent of GDP was privately produced; by 1995 some 80 per cent of the economy's assets were privately owned and well over 60 per cent of GDP was accounted for by the private sector. The privatization of small enterprises from 1990 to 1992 resulted in more than 20,000 enterprises being sold at public auction. Large enterprises were privatized in two waves beginning in 1991 and 1993 using a mixture of standard methods, such as direct sales, and voucher privatization. Some industrial and public utility enterprises had not yet been privatized as of October 1995. Privatization is expected to be completed with the future sale of these enterprises. Voucher privatization, under which Czech citizens could purchase vouchers at low prices and use them to bid on shares in enterprises undergoing privatization, was successful because of its rapid pace and the public support it helped to develop for the privatization process. However, voucher privatization was implemented without the prior restructuring of State-owned enterprises, perhaps delaying the process of industrial restructuring.
Trade policy features and trends
Type and incidence of policy instruments
Overall, the Czech import régime has relatively few non-tariff import barriers or export measures. Non-automatic import licensing requirements are used occasionally, sometimes for environmental reasons. Automatic licensing requirements, apparently motivated by health and safety considerations, exist for the exporting or importing of many products. In some cases, such as for textiles and clothing, exports are restricted or monitored in accordance with bilateral trade agreements. Export subsidies are limited to the agricultural sector.
The Czech Republic applies the EU's Combined Nomenclature (CN) tariff classification, of 10,446 eight-digit tariff lines. At the end of 1994, only 3 per cent of tariff lines in the Czech-Slovak common external tariff remained unbound; all remaining unbound tariffs were bound upon the beginning of the implementation of the Uruguay Round, on 1 January 1995.
All tariffs are currently applied at their bound rates and no specific, composite or other non-ad valorem tariffs are used, making the external tariff very transparent. While the simple average m.f.n. tariff rate is relatively moderate, Czech m.f.n. tariffs are escalatory: average tariffs rise from 4 per cent on primary products to 6 per cent on semi-processed products and 10 per cent on fully processed products. The simple average tariff applied on imports from preferential trading partners ranges from 3.3 per cent for Slovenia to 6.0 per cent for Poland, and equals 5.5 per cent for the EU.
The Czech Republic is a party to all major multilateral agreements in the field of intellectual property. Foreign right-holders receive the same treatment as Czech legal or natural persons, except that in the areas of industrial designs and patents the Czech Republic grants national treatment only on a reciprocal basis. The authorities state that acceptance by other parties of the TRIPS Agreement, a requirement of WTO membership, will be considered to satisfy the reciprocity requirement.
The Czech Republic has no anti-dumping (AD), countervailing duty (CVD) or safeguards legislation in force and has never applied such measures. Legislation is being prepared in these areas and is expected to be implemented in 1996. Like other WTO members that choose to include such provisions in domestic law, the Czech Republic faces the problem of designing rules in such a way as to minimize the possibility that established domestic firms can abuse them to stifle economic competition. It has sometimes found itself on the other end of such practice and has adopted export monitoring (export licence requirements) partly to avoid AD or CVD actions being taken against Czech exporters. To help protect effective economic competition, the Czech Republic could consider including two provisions in its legislation. First, the use of anti-dumping measures could be restricted to those occasions when foreign firms can be shown to engage in predatory pricing with the intent of establishing a monopoly position in the Czech market. Similar standards are sometimes used in domestic competition law. Second, the legislation could include a public interest clause requiring the economic effects of potential AD and CVD measures on consumers and downstream industries to be considered in the decision process.
Sectoral policy patterns
The Czech Republic's m.f.n. tariffs are fairly uniform across economic sectors. Exceptions are agriculture, which, following Uruguay Round tariffication, has particularly high tariffs on a few items, and food products and beverages, which have tariffs averaging 19 per cent, nearly triple the level elsewhere in the economy. Tariff escalation with the level of processing is most noticeable in sectors such as food processing, textiles and clothing. The tariff structure provides import protection to higher-level processing activities in manufacturing sectors.
Active industrial policy is limited to the agriculture sector. The State is involved through setting intervention prices and granting export subsidies for some commodities and by providing concessionary loans and credit guarantees. Many measures, such as tariff quotas and seasonal tariffs, are applied to agricultural imports, as in many other countries; some of these replaced variable import levies as a result of the Uruguay Round. Notably, the Czech Republic counts imports made at preferential tariff rates against the m.f.n. tariff quota levels established as a result of the Uruguay Round minimum market access provisions; this reduces the market access for non-preferential suppliers.
The Czech Republic generates external services receipts equivalent to some 13 to 15 per cent of GDP, and in recent years has had services trade surpluses of 2 to 6 per cent of GDP. A strong advocate for the introduction of multilateral rules for services trade in the Uruguay Round, the Czech Republic made a comparatively large number of commitments under the General Agreement on Trade in Services (GATS). These include a horizontal commitment (with some sectors excepted) not to limit the ability of foreign firms to establish a commercial presence, thus providing a more secure environment for the establishment of foreign-owned service providers. The Czech Republic has listed five measures inconsistent with m.f.n. treatment. These measures affect four different services sectors and, under the GATS, should not be applied for more than ten years. They are subject to future negotiations.
Trade policies and trading partners
International trade is extremely important to the Czech Republic, with the ratio of merchandise and services trade to GDP equal to some 105 per cent in 1994. Recognizing this importance, the Czech Republic has constructed a relatively open trading régime that underpins its transition to a full market economy. Trade promotes effective economic competition, which lies at the heart of the economic transition. Able to purchase inputs from abroad without, in most cases, substantial taxes or restrictions being imposed, Czech firms have so far proven able to maintain export volumes despite the increasing real value of the Czech koruna.
The Czech Republic's moderate size and high propensity to trade suggest its keen interest in the trade policies of partner countries. During the Uruguay Round, the Czech Republic sought more transparent conditions for the application of non-tariff measures in order to prevent protectionist abuses of such measures. It was hoped, for example, that rules could be developed that would lead to a substantial reduction in the number of anti-dumping actions. The Czech Republic supported reductions in production and export subsidies for agricultural products, the development of multilateral rules for services through the GATS, and the safeguarding of intellectual property rights under the TRIPS Agreement, while strongly opposing the linking of labour standards to trade policy.Back to top
TRADE POLICY REVIEW BODY: THE CZECH
Report by the Government - Summary Extracts
Since the political changes in former Czechoslovakia in November 1989, the Czech Republic has undergone rapid and deep transformation and democratization resulting in a new social and economic orientation of the country. Over the past five years, decisive reform steps have focused on liberalization of foreign trade and prices, radical privatization, demonopolization, internal convertibility of the national currency and rapid development of the institutions necessary to ensure an efficient fully-fledged market economy.
Significant changes in the Czech economy resulted in the political and economic stability. Sound and consistent macroeconomic policies have been implemented, microeconomic transformation has progressed and the social consensus on economic policy has not been endangered by excessive hardships or uneven distribution of burdens. An open and liberal trade policy based on internationally agreed rules and principles has been pursued. Political and economic changes in 1989 and subsequent liberalization of foreign trade enabled the Czech Republic to engage a meaningful role as a credible GATT contracting party.
Experience of the past five years indicates that the Czech economy overcame the unfavourable economic consequences of the transformation and that the elimination of the remaining negative factors, including the necessary adjustment of production base and certain systemic measures, is and will be outweighed by current positive developments. Recent results prove that the Czech Republic has already entered into the post-transformation stage since the basic reform objectives have already been accomplished and the rapid GDP growth guaranteed. As a result of these developments, the Czech Republic became an OECD member in December 1995.
After the changes in 1989, a fundamental shift in the evaluation of former political and trade priorities, and in the overall orientation of the Czech Republic took place. The current trade policy is based on the principles of market economy, free competition and respect for international rules and principles as embodied in the WTO Agreement and arrangements annexed thereto. The Czech Republic is a strong supporter of the open and liberal multilateral trading system.
The prime objectives of the Czech trade policy may be summarized, as follows:
A Pursuance of liberal and open trade policy, aimed at increasing security and predictability of market access, enhancing economic competition, implementing binding international trade agreements and completing the framework for domestic trade policy mechanism;
B Active participation in the multilateral trading system based on agreed rules and principles and on implementation of all agreements concluded during the Uruguay Round;
C Mutual reinforcement of multilateral, plurilateral and bilateral trade relations; gradual integration into the European Union leading to full membership.
The trade policy system inherited from former Czechoslovakia in 1992 has been further developed and liberalized by the Czech Republic. A key role is played by tariffs. A substantial reduction of the previously excessive number of quantitative restrictions and other barriers to trade has been realized. The list of products subject to import or export licensing procedures has decreased significantly and is limited to some specific categories of goods. The Czech Republic has not resorted to safeguard, anti-dumping or countervailing actions.
The average customs incidence of the Czech tariffs is low and it does not exceed the level of 5.9 per cent; on industrial products (Chapters 25-97) 5.2 per cent and on agricultural products (Chapters 1-24) 13 per cent.
As a result of tariff reduction commitments of the Uruguay Round, the new weighted tariff average will be 4.5 per cent. The weighted average tariff on industrial products and agricultural products will decline to 4.1 per cent and 9.3 per cent, respectively.
Most rates of customs duties range from 0 to 5 per cent and from 5 to 10 per cent (in total 70 per cent of all CN Codes). Fourteen per cent of all CN Codes are duty free. The rest of duties, particularly on agricultural products, is above 10 per cent. The Czech Republic applies ad valorem customs duties only.
The share of GATT-bound MFN duty rates has increased from 97 to 100 per cent as a result of the 1994 Uruguay Round commitments.
The Czech Republic provides GSP treatment to developing countries, the main purpose of which is to serve as an instrument for development of trade relations with those countries and to provide further improved market opportunities for a large number of products.
The new GSP scheme has secured continued application of duty-free treatment for all goods originating in the least-developed countries. For other beneficiary countries, duty reductions are modulated and are dependent upon the sensitivity of individual products.
The main purpose of the licensing system of the Czech Republic is to monitor imports and exports of certain products, to protect public health, safety and security and to administer measures such as those adopted pursuant to the relevant provisions of the GATT 1994.
In general, no quantitative limitations are applied to the importation of goods. The only exceptions relate to restrictions on imports of uranium or thorium ores, natural or enriched uranium and coal. Restrictions on these products are maintained for security and environmental reasons.
Most consumer subsidies, as well as subsidies allocated to industry and agriculture were removed or restructured. Subsidies were scaled down from 16 per cent of GDP in 1989 to 3 per cent in 1994. The total value of subsidies in 1994 amounted to Kc 31.211 million of which Kc 8.273 million were directed to agriculture. The agriculture programmes targeted at the restructuring of agriculture production, support of private farming, environment, other non-production functions of agriculture and at the market regulation of selected agricultural commodities.
State support was granted also to energy saving measures, research and development, restructuring of mining industry and to transport. Export promotion through insurance of export credits against commercial and political risks and compensation for differences between domestic and international interest rates were provided strictly in compliance with the international standards (OECD Consensus).
The Public Procurement Act entered into force on 1 January 1995. Procedures under the Act are based on the WTO Agreement on Government Procurement and are very similar to them. The Act provides for mandatory procedures to be followed in procurement by public contracting authorities, open competition of tenders in connection with public contracts and for its supervision. The Czech Republic is exploring the possibility of acceding to the WTO Agreement on Government Procurement.
The Czech Republic is a founding Member of the WTO as it has met all requirements of the WTO Agreement in time to be eligible to become an original Member. The Czech Republic ratified the Final Act on 15 December 1994 and deposited its instrument of ratification on 23 December 1994.
The Czech Republic acceded to the General Agreement on Tariffs and Trade, pursuant to Article XXXIII, on 15 April 1993, following the split-up of the former Czech and Slovak Federal Republic (CSFR) on 1 January 1993.
Accession procedures reflected the exceptional circumstances stemming from the dissolution of the State and determination of both successor States - the Czech Republic and the Slovak Republic - to fulfil the high level of commitments incumbent upon the CSFR and to accede to the GATT under the same terms as those applied by the CSFR. Transitional arrangements providing for the interim period until the necessary procedures had been fulfilled and the entry into force of the rights and obligations of the Czech Republic as from 1 January 1993 enabled the Czech Republic to maintain its GATT relations without any interruption.
Czechoslovakia was one of the 23 founding contracting parties to the GATT 1947. The Czech Republic participated actively in the Uruguay Round of multilateral trade negotiations and presented comprehensive and valuable offers both on goods and services. The offers consolidated the previous autonomous liberalization initiatives which were further improved to comply with the agreed parameters for trade liberalization under the Uruguay Round. These offers were made regardless of the difficulties caused by the split-up of Czechoslovakia.
As of 1 January 1995, the Czech Republic started to implement the Uruguay Round results. The most immediate phase was the implementation of market access commitments, including wide-range tariff reductions of MFN tariffs.
On 1 January 1995, the Czech Republic effected - in accordance with the terms of its Uruguay Round Schedule - the first part of the total reduction of tariffs on industrial products. Tariff cuts covered also pharmaceutical and chemical goods which had been committed under respective sectoral initiatives.
As a result of tariff commitments in industrial products, the Czech Republic's MFN tariffs products are fully bound. An average customs incidence is very low at the level of 5.2 per cent which will further decline to 4.1 per cent in 2000.
Under the Agreement on Agriculture, the Czech Republic has committed to tariff cuts of nearly 40 per cent on simple average (weighted average from 13 per cent to 9.3 per cent) and to maintenance or increase of current market access opportunities during the implementation period 1995-2000.
The Czech Republic abolished all variable levies applied on a number of products and converted them into ordinary customs duties which remain the only border measure protecting domestic producers. Since 1 January 1995, the first instalment amounting to one sixth of the total reduction in all agricultural tariffs was implemented. Market access opportunities have been expanded in equal proportion and tariff quotas opened, allowing imports under improved tariff conditions.
In textiles and clothing, the Czech Republic has started integrating into GATT 1994 the first part of products accounting for not less than 16 per cent of the total volume of the Czech Republic's imports in 1993.
Services obligations have been applied fully in accordance with agreed terms. The Czech Republic has played an active role in negotiation on financial services and joined an interim agreement in this area, thus contributing to reach a critical mass of participating countries. In the context of these negotiations, the Czech Republic has decided to improve substantially its schedule in financial services and to withdraw relevant MFN exemptions. The Czech Republic has participated in negotiations on movement of natural persons, basic telecommunications, maritime transport and on GATS rules.
The Czech Republic has undertaken a substantial review of the national legislation to ensure its conformity with obligations resulting from the Agreements annexed to the WTO Agreement. A number of regulations and administrative procedures was modified, in particular in the areas of market access and subsidies. A decision to promulgate a new legislation on anti-dumping, countervailing and safeguards was taken and respective legislative process has been started. It is expected to be completed in 1996.
The Europe Agreement on Association between the European Communities and their member States and the Czech Republic was signed on 4 October 1993 and entered into force on 1 February 1995.
The objective of the Europe Agreement is to provide appropriate framework for the political dialogue and the Czech Republics gradual integration into the Communities and to provide basis for the Communities' financial and technical assistance to the Czech Republic. The Agreement recognizes that the association will assist to the Czech Republic's ultimate objective which is the accession to the Communities.
The most immediate objective of the Europe Agreement after its entry into force was to establish a free trade area within a transitional period of ten years through a gradual elimination of duties and other barriers in mutual trade based on multilaterally agreed rules and principles.
The Agreement establishing the Customs Union between the Czech Republic and the Slovak Republic was signed on 29 October 1992 as an important complementary part of a political decision to dissolve the former CSFR and with the aim to preserve, to the extent possible, the continuity of a broad range of past links from the single economic space. Conclusion of the Agreement which entered into force on 1 January 1993 was also motivated by the necessity to secure the continued implementation of international obligations of the former CSFR under other international agreements, especially the GATT, and of commitments in regard to third countries.
The main objective of the Agreement is to ensure the free movement of goods (Chapters 1-97) and services, the pursuance of conforming commercial and customs policies and the provision of favourable conditions for development of trade with third countries.
The Free Trade Agreement between the EFTA States and the former CSFR was signed in 1992. Following the split of the CSFR on 1 January 1993, the Agreement was applied on an interim basis.
The continued application of the Agreement was definitively settled on 19 April 1993 when the Czech Republic and the EFTA States signed the Protocol on the succession by the Czech Republic to the Agreement between the EFTA States and the CSFR. The separate, but identical, Protocol was signed between the Slovak Republic and the EFTA States.
The objective of the Agreement is to establish gradually a free trade area during a transitional period ending by 30 June 2002. The Agreement covers trade in industrial products, including fish and other marine products, and processed agricultural products.
With the aim to recover mutual trade and to further explore the potential of closer regional co-operation, the Czech Republic has concluded plurilateral free trade agreement with Hungary and Poland and bilateral free trade agreements with Slovenia and Romania.
Central European Free Trade Agreement (CEFTA) concluded by the Czech Republic, Hungary, Poland and Slovakia entered into force in March 1993. Agreements with Slovenia and Romania entered into force in January 1994 and in January 1995, respectively.
These agreements provide for establishment of free trade areas during different transitional periods ending not later than on January 2001 for the CEFTA Agreement, January 1996 and January 1998 for Slovenia and Romania, respectively.
The Czech Republic has concluded bilateral agreements with a large number of countries, both developed and developing and the CIS member States.
Fiscal and monetary policy
The basic objective of the macroeconomic policy of the Czech Republic has been to attain and strengthen macroeconomic stability through a tight fiscal and monetary policy.
Fiscal policy has been pursued in order to reach and maintain a balanced budget. A stringent budgetary policy was introduced, supplemented by substantial reform of public finance, both on the revenue and expenditures sides, and by a complete change of tax structures.
Since 1 January 1993, a new taxation system, based on value-added tax (VAT), consumer tax, income taxes and taxes on property, has been implemented with the purpose of creating a framework conforming with market economy conditions.
The monetary policy has been concentrating on reducing inflation since the initial complex liberalization of prices and considerable devaluation of the national currency brought about an important surge in prices. The currency exchange rate has been fixed for a long time at the same level in respect of free convertible currencies.
The ultimate goal of a fully convertible Czech crown has been reached in October 1995. Since 1991, the nominal exchange rate of the Czech crown fixed against a basket of five currencies and later on against two (USD and DEM) has remained stable and has been considered as a nominal anchor of the reform process.
The privatization scheme followed three important goals, namely speed, equity/fairness, and the enforcement of owners control over firms. To allow the private sector to develop rapidly, small-scale and large-scale privatisation schemes were adopted. They were further complemented by a restitution programme.
Under the small-scale privatization scheme, launched in January 1991, small businesses such as retail stores, restaurants and service facilities were sold to private individuals primarily through public auctions. These businesses usually had an average book value of US$35,000. The total sales volume of assets from small-scale privatization reached US$1.1 billion by mid-1993 when small-scale privatization terminated.
Large-scale privatization was designed primarily to privatize large industrial enterprises. These enterprises have either been sold directly to pre-approved buyers or transformed into joint-stock companies whose shares were sold either directly to investors or through voucher privatization. Enterprises have been sold both to domestic and to foreign investors. In large-scale privatization, 4,227 privatization projects representing property worth approximately US$30 billion were forwarded to the National Property Fund (NPF).
The trade balance ended in a deficit for the year as a whole. This deficit was almost offset by a surplus in trade in services and a surplus of the balance of unrequited transfers. The overall position of the current account operations was principally the result of transactions in convertible currencies.
Current Account in Convertible Currencies (US$ in Million)
|Balance of trade||-1,901 .6||-609 .2||-849 .6|
|Balance of services||1,485 .9||1,040 .7||1,035 .6|
|Balance of incomes||5 .6||-128 .4||-20 .5|
|Unrequited transfers||105 .0||130 .0||124 .3|
|Total||-305 .1||433 .1||289 .8|
(Czech National Bank Annual Report, 1994)
The current account surplus in convertible currencies was highest in the first half of 1994. The growing trade deficit gradually led to a reduction of the current account surplus to a level of US$290 million by the end of the year. The favourable outcome in the services account covering the balances of trade and of incomes was the reason for the current account surplus. In 1994 incomes from tourism amounted to Kc 56.6 billion (US$2.0 billion) and expenditures to Kc 30.9 billion (US$1.1 billion).
The multiple devaluation of the crown in 1990 (on 1 and 8 January, 15 October and 28 December), created a "cushion" for domestic exporters in terms of price competitiveness. Since January 1991, the nominal exchange rate of the crown has remained stable, while the real effective exchange rate of the crown has increased due to a faster growth in domestic price level compared to that of the Czech Republic's trade partners (in some cases also because of devaluation of their currencies). The effects of the devaluation are gradually fading. Consequently, the exchange rate is beginning to put increased pressure on exporters, in particular those whose costs and quality of production still have much to improve, when compared to the competition.
The advantages of an undervalued exchange rate were gradually reduced and offset by an increase in the prices of exported production.
A gradual strengthening of capital inflows and increasing foreign exchange reserves are the main features of the balance-of-payments development since 1992. The factors of the growing capital inflow can be found on both the demand and supply sides. The growing demand for foreign capital was particularly due to the need for long-term capital resources brought about by the privatization process and by the subsequent restructuring of enterprises, and the lower prices of such resources compared to the domestic level.
On the supply side, the continuing interest of foreign investors mainly reflected the comparative advantages of the Czech economy (particularly lower wage costs) the interest rate differential, the macroeconomic stability, and, connected to this, the stability of the foreign exchange rate, the substantial scope for portfolio investment and the expanding room for direct investments.
The factors on the demand side were determinant for the capital inflow. The bulk of net capital inflow in 1994, totalling US$2.3 billion was directed towards large enterprises and joint ventures. To a significant extent, the make-up of portfolio investment mirrored direct investment in the most important domestic enterprises.
While capital inflow from official foreign sources dominated during the first two years of transformation (from the IMF, European Union, World Bank and G24 governments), the private capital component in the foreign resources inflow became important in subsequent years. In 1994 the capital inflow from official sources was minimal (only US$8 million was drawn from the European Investment Bank). The growing foreign exchange reserves led to a decision to repay ahead of schedule US$1.110 million lent to the CNB by the International Monetary Fund, thus substantially reducing the indebtedness towards international financial institutions. In 1994, a reduction of the net capital inflow, expressed by a total capital account surplus of Kc 97.0 billion (US$3.371 million), including Slovakia, has been reported.
The development of the capital account in convertible currencies (Slovakia excluded) is illustrated in the following table.
Kc in billion
|Direct investments||27 .8||15 .1||24 .2|
|Portfolio investments||-0 .7||30 .9||23 .6|
|Other long-term capital||9 .1||15 .4||24 .7|
|Short-term capital||-36 .1||15 .6||-2 .1|
|Total||0 .1||77 .0||70 .4|
(Czech National Bank Annual Report, 1994)
The foreign capital inflow led to a surplus in the overall balance of payments. Gradually growing capital flows (particularly foreign financial credits to enterprises, direct and portfolio investments) were mainly initiated by internal changes in the Czech economy, especially by the completion of privatization, by the restructuring process and by the start of an economic recovery.
In 1994, the foreign exchange reserves reached their highest level since the beginning of the transformation period. In the course of this year, the value of the foreign exchange reserves of the Czech National Bank increased by additional US$2,372 million to US$6,243 million. The foreign exchange reserves, accordingly, represented five months` imports of goods and services in convertible currencies. The increase of the foreign exchange reserves of the entire banking system was higher, amounting to US$2,648 million, thereby, the foreign exchange reserves of the banking system increased to US$8,872 million.
The service sector has also been subject to profound changes since 1989. The process of autonomous liberalization, deregulation and privatization has led to the establishment of basic regulatory framework respecting market rules and principles have led to its major expansion. Foreign ownership is this sector has increased significantly.
Changes in the domestic regulatory framework and growing role of services sector in the national economy enabled the Czech Republic to become an active participant in the Uruguay Round negotiations on trade in services. The Czech Republic supported the creation of new multilateral rules and disciplines and liberalization of trade in services.
The Czech Republic took commitments which consolidated previous liberalization measures and made a large number of them internationally binding. The commitments are contained in the Czech Republic's Schedule annexed to the GATS. They cover almost all services sectors, with the exception of those in which no consensus was reached or which are subject to the ongoing negotiations.
The market access commitments are offered under the national treatment principle, with a small number of exceptions as specified in the national Schedule.
The Czech Republic pursues an active policy in the area of intellectual property aimed at ensuring meaningful protection of intellectual property rights in its territory and preventing distortions and impediments both to domestic and international trade. The Czech Republic is presently in the process of preparation of the relevant amendments to its IPR legislation ensuring the implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights concluded within the framework of the Uruguay Round.
In the bilateral and plurilateral relations the Czech Republic has included in its agreements with other countries (EU, EFTA, CEFTA) provisions on the protection of intellectual property with the aim to improve the protection of IPR which contributes to the promotion of trade and transfer of technology. It may be stated that the Czech legal protection of intellectual property is at present already harmonized with the corresponding legislation of the West European countries.
(1)The six agreements are the Czech-Slovak Customs Union, the EU Association Agreement, the Central European Free Trade Agreement (CEFTA, which includes the Czech Republic, Hungary and Poland) and free-trade agreements with Romania, Slovenia, and the countries of the European Free Trade Area (EFTA). Back to top