Hungary: July 1998
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.
2 July 1998
Reforms in Hungary attract foreign investment and lead to more open trade policies as eu membership efforts intensify
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), C˘te 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
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-Ó-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.
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.Back to top
TRADE POLICY REVIEW BODY: HUNGARY
Report by the Government
The economic and trade policy environment
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
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-Ó-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-Ó-vis all WTO partners.
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-Ó-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.
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