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Czech Republic: March 1996

“ Privatization was recognized as a key component of the economic transformation. Some 80 per cent of productive assets were now under private control. More information was sought on the completion of privatization, particularly in "strategic" sectors.”

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First press release
Summary of Secretariat report
  > Summary of Government report

8 March 1996

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The Trade Policy Review Body of the World Trade Organization (WTO) conducted its first review of the Czech Republic's trade policies 14 and 15 February 1996. The text of the Chairman's concluding remarks is attached as a summary of the salient points which emerged during the two-day discussion.

The review enables the TPRB to conduct a collective examination of the full range of trade policies and practices of each WTO member country at regular periodic intervals to monitor significant trends and developments which may have an impact on the global trading system.

The review is based on two reports which are prepared respectively by the WTO Secretariat and the government under review and which cover all aspects of the country's trade policies, including: its domestic laws and regulations; the institutional framework; bilateral, regional and other preferential agreements; the wider economic needs and the external environment.

A record of the discussions and the Chairman's summing-up, together with these two reports, 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.

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), the Czech Republic (1996), Chile (1991), Colombia (1990), Costa Rica (1995), C˘te d'Ivoire (1995), the 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 & 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), Slovac 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).

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This meeting of the Trade Policy Review Body has now completed the first review of the Czech Republic's trade policies and practices. These remarks, which are made on my own responsibility, summarize the main points of the discussion. They are not intended to substitute for the collective evaluation and appreciation of the Czech Republic's trade policies and practices. Details of the discussion will be reflected in the minutes of the meeting.

The discussion developed under three broad themes: the economic transition; international trade policies, and specific issues.

The economic transition

Participants praised the Czech Republic for its rapid progress toward a market economy and current strong economic performance. Growth in 1995 had accelerated to some 5 per cent, with industrial output and labour productivity growing strongly; inflation declining; and unemployment low. Large inflows of direct investment and other capital, in a friendly climate, had meant real appreciation of the currency, rapid growth in imports, particularly of investment goods, and a slowing in export growth.

Privatization was recognized as a key component of the economic transformation. Some 80 per cent of productive assets were now under private control. More information was sought on the completion of privatization, particularly in "strategic" sectors. Some participants expressed concern over the concentration of industrial ownership in the hands of Investment Privatization Funds and other financial institutions, apparent reluctance to permit bankruptcies and the substantial value of non-performing loans held by banks.

The representative of the Czech Republic said that macro-economic stability was a key part of transformation and the best guarantee of a favourable investment climate. A tight monetary policy was in force and fiscal policy aimed at a balanced budget, stable medium-term growth and reductions in the tax burden. While competitiveness had been affected by the real appreciation of the crown, measures, including the widening of the exchange rate band, were being taken to discourage short-term capital inflows and stabilize inflationary pressures. Some part of the "grey" economy might be seen in figures for stock building.

The Czech representative gave details of the operation of Investment Privatization funds; links of these funds with the banks were not seen as negative. He made clear that privatization was not aimed at reducing concentration of business control but at ensuring effective management. New owners were responsible for restructuring, without government support. However, "strategic" companies in metallurgy, coal, gas, electricity and petrochemicals - where the State still held a stake - would be restructured before privatization or the reduction of State holdings case by case. Bankruptcy proceedings were slow, because of court overloads, the preference for restructuring of industry, and the need for complex negotiations with creditors. However, many non-viable enterprises had been wound up. Substantial support could be given for environmental rehabilitation, subject to a strict audit.

The trade policy environment

Members noted that regional agreements had made a central contribution to the reorientation of Czech trade policies and flows. Such agreements were in force with all major trading partners except Russia, and covered some 80 per cent of Czech trade. Of special importance was the Association Agreement with, and the prospect of membership in, the European Union. Some participants questioned the concentration on such regional arrangements and emphasized the need to diversify outside Europe. Others asked whether the process of entry into the EU would lead to an increase in Czech tariffs, and sought assurances that multilateral rules would be followed in this regard. It was noted that some regional agreements did not cover substantially all trade, particularly in agricultural products. Czech exports to the EU continued to face restraints, which were not limited to agriculture. It was asserted that the Czech-Slovak Customs Union deviated in some ways from the principle of a customs union, and information was sought on the future of the arrangement. Concern was also expressed about complex rules of origin in preferential agreements.

Members welcomed the Czech Republic's reliance on ad valorem tariffs as the primary means of import protection, with moderate rates which would decline under Uruguay Round commitments. However, it was noted that tariff escalation on processed products provided effective protection of manufacturing activities, particularly in sectors such as food, beverages, and textiles and clothing.

Members welcomed the information given by the Czech Republic on notifications under WTO procedures, but asked when the services aspects of the EU Association Agreement would be notified to the Council on Trade in Services. It was recognized that the Czech Republic had made a relatively large number of commitments under the GATS, with few m.f.n. exemptions; some members asked whether there were plans to phase out these exemptions in the near future. Clarification was sought on Czech policy toward service industries, with particular questions addressing areas such as insurance, banking, and health, auditing and legal services.

The representative of the Czech Republic said that its accession to the EU would depend largely on the outcome of the Intergovernmental Conference; in the process, the Czech Republic would honour all its WTO commitments. No substantial changes to the existing Europe Agreement in agriculture were expected. Quotas on steel exports to the EU had been abolished from 1 January 1996 and restrictions on textiles would end on 1 January 1998; sheepmeat quotas, he felt, were not an effective obstacle to trade. The representative also outlined conditions of the CEFTA and other agreements; he believed that the FTAs in force would have no adverse effects on trade with third countries. All such agreements would be notified. All free-trade agreements, apart from that with EFTA, covered trade in agricultural products; his view was that Article XXIV was fulfilled. The special circumstances of the Czech-Slovak customs union had been recognized by GATT; the suspension of tariffs on cars by Slovakia was seen as a necessary temporary measure. Rules of origin were necessary within the Customs Union because free movement of goods was not a part of the agreement.

The representative made clear that, through the Uruguay Round, the Czech Republic had sought to develop and diversify its export and import trade with all WTO Members. This process was strongly supported by the business community. No further reductions were currently envisaged in the common external tariff, except under multilateral negotiations. He noted that agricultural tariffs, reflecting tariffication under the Uruguay Round, were generally significantly lower than in many WTO member countries and would be reduced by 40 per cent over the period of implementation. The escalation of tariffs, given the low average level, was not seen by the Czech Republic as a major barrier to trade.

The representative of the Czech Republic gave details of possible future liberalization of financial services. He emphasised that licensing requirements for foreign and domestic insurance companies were identical. Access for foreign banks was judged according to financial, technical, professional criteria and economic expediency. He gave details of conditions for access to health, professional, auditing, legal, engineering and retail services sectors and confirmed that the services aspect of the Europe Agreement with the EU would be notified under Article V of the GATS. M.f.n. exemptions would be dealt with under future negotiations.

Selected trade policy and related issues

The importance of including the private sector in trade policy formulation was noted; more information was sought as to how this was done in the Czech Republic.

Participants noted that substantial State intervention remained in agriculture. Questions were raised regarding export subsidization for particular products; the use of m.f.n. and preferential tariff quotas; the extent to which quota administration restricted market access for non-preferential suppliers; internal support measures; and the restrictive levels of some sanitary and phytosanitary restrictions.

Concern was expressed about the remaining use of non-automatic import licensing and participants also sought information on legal requirements for obtaining automatic import licensing. The Czech Republic was also asked to assess the restrictiveness of export licensing under its export restraint agreements.

Members noted that legislation on anti-dumping and countervailing measures was in preparation and welcomed the Czech Republic's involvement in Uruguay Round efforts to reduce the scope for protectionist abuse of such measures. Some stressed that these rules should be designed to minimize such risk, introduce competition considerations in anti-dumping law and thus safeguard economic competition in import-competing industries.

It was noted that the Czech Republic had not taken the option available to transition economies to delay the implementation of parts of the TRIPS Agreement. Questions were raised on whether the Czech Republic was enforcing the Agreement effectively, in particular against software and video piracy. Clarification or further information was sought on compulsory licensing and criteria for cancelling a trademark registration for failure of use. Details of forthcoming changes in the trademark law were requested, including the relationship of such changes to the TRIPS Agreement and the European Patents Convention.

The simplicity and transparency of the Czech Republic's liberal GSP regime were appreciated by participants. It was noted, however, that few preferences were offered on agriculture, food and beverages.

In reply, the representative of the Czech Republic stressed that export subsidies in agriculture were marginal and declining, applied only to dairy products in 1995. Tariff quota allocations reflected commitments undertaken under FTAs signed before the Uruguay Round; all increases in m.f.n. tariff quotas would be available to all countries. Preferential imports were counted against quota limits under agreed minimum access commitment criteria. M.f.n. tariff quotas were administered on a first-come, first-served basis. In-quota tariffs would remain unchanged during the implementation period, while out-of-quota rates would fall. Strict SPS requirements for chicken were seen as necessary to avoid the spread of salmonella, given the concentration of domestic poultry production. No goods were now subject to State trading monopolies; the State Fund for Market Regulation intervened to guarantee certain prices but imports were liberalized.

On import licensing, the representative noted that since January 1996, coal was the only product under quantitative restriction, justified under Article XX of GATT 1994. Automatic licensing for monitoring reasons had no effect on trade. Export licensing was applied to textile and clothing items covered by bilateral agreements. The Czech representative made clear that the private sector was consulted regularly on the preparation of trade policy, though business associations.

New anti-dumping, countervailing and safeguard laws were expected to be promulgated in 1996, or at latest 1997. The authorities were seriously concerned that such legislation should not be used as protective measures. No actions had been taken to date. FTAs involving the Czech Republic referred specifically to GATT legal instruments in these areas.

The representative indicated that a new Trademark Law had entered into force in October 1995; amendments to the Copyright Act should come into force in the second half of 1996. These acts, made in light of the TRIPS Agreement, should fulfil all relevant requirements, including enforcement in areas such as software and recorded media. National treatment was provided and no compulsory licences had been granted to date. Under the Trademark Law, trademarks could be cancelled when no use had been made for five years without justifiable reason by the owner or a licensed third person. Public interest could be enforced, subject to appeal, when articles offended against morality, religion or other similar concerns.

The representative also made clear that the GSP system had been substantially extended from 1995. Margins of preference related to sensitivity of the goods; however, no quotas or ceilings were applied. Imports from least-developed countries and tropical products entered duty free, and concessions were also extended on many agricultural and some textile and clothing products.

Overall, I would single out two issues for final comment. Firstly, the transformation of the Czech economy over the past five years or so. The scale and pace of change have been remarkable by any standards. The challenge now is to ensure the long term sustainability of what has been achieved. In particular, the follow through on the privatization process will require careful monitoring; as was repeatedly pointed out by delegates here, enterprise restructuring is the logical corollary of privatization and must take place under the new ownership.

Secondly, while the trade picture was felt to be generally healthy, there is no room for complacency. It is indeed true that significant import demand tends to be associated with the early stages of modernization and transformation; however, trade deficits over any sustained period would be bound to give rise to concern. The huge inflows of capital - while presently financing the trade deficit - will also continue to require close attention; such inflows are undoubtedly a sign of confidence in the Czech economy, but vigilance will have to continue to be exercised in relation to any potentially destabilizing effects. Also, while it is quite natural that the trade of the Czech Republic should be oriented towards European neighbours, a wider spread of markets - including those outside the shelter of preferential agreements - will be important to the longer-term development of a fully competitive and resilient economy.

Finally, I would say that all WTO members recognize that the Czech Republic has come a very long way in a very short time. If we may give advice, this would be to stay the course, to guard against the emergence of protectionist or inflationary pressures and to ensure that the existing strong commitment to WTO and multilateralism remains intact. Back to top