RESTRICTEDWORLD TRADE
ORGANIZATIONWT/TPR/G/40
26 June 1998
(98-2564)
Trade Policy Review Body Original: English
TRADE POLICY REVIEW
HUNGARY
Report by the Government
Pursuant to the Agreement Establishing the Trade Policy Review
Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), the policy statement by the Government of Hungary is attached.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Hungary.Hungary WT/TPR/G/40
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CONTENTS
I. THE ECONOMIC AND TRADE POLICY ENVI RONMENT..................................................4
(1) M ACROECONOMIC PROCESSES .................................................................................................4
(2) D EVELOPMENTS IN TRADE AND INVESTMENT FLOWS ..............................................................5
II. TRADE POLICY DEV ELOPMENTS 1991-97..........................................................................5
(1) T RADE POLICY MEASURES .......................................................................................................5
(i) Tariffs ..................................................................................................................... ...5
(ii) Non-tariff  measures ...................................................................................................6
(2) I MPLEMENTATION OF THE WTO AGREEMENTS .......................................................................6
(3) R EGIONAL INTEGRATION .........................................................................................................7
III. DOMESTIC POLICY DEVELO PMENTS AFFECT ING TR ADE............................................8
IV. TRADE POLICY  DIRECT IONS ................................................................................................8WT/TPR/G/40 Trade Policy Review
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I. THE ECONOMIC AND TRADE POLICY ENVIRONMENT
(1) MACROECONOMIC PROCESSES
1. 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.
2. 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 increasedcompetition 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.
3. 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 inconsumption, 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 accountposition 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 furthe r. 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.
4. 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 oneHungary WT/TPR/G/40
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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.
(2) DEVELOPMENTS IN TRADE AND INVESTMENT FLOWS
5. 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.
6. 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 in creased by 206 per cent, a rate higher than the
average but below import growth from ASEAN count ries (558 %); Canada (410 %); United States
(266 %) and Japan (220 %). Increase in Hungar ian 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.
7. 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.
8. 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 a nd 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 indu stries, 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.
II. TRADE POLICY DEVELOPMENTS 1991-97
(1) TRADE POLICY MEASURES
(i) Tariffs
9. The systemic changes in the turn of the 1990 s led to the dissolution of COMECON and its
underlying non-market based trade regulations, thus making Hungarian trade policies uniform vis-à-vis all partners. Starting from this new basis Hungary undertook a number of autonomous
liberalisation measures and entered into commitments under multilateral and regional agreements that
substantially lowered the level of protection accorded to domestic operators.
10. 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 tariffnomenclature did not increase the duties on any single product, the more detailed breakdown of goods
inevitably distorts time series of nominal tariff averages.
11. 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 productWT/TPR/G/40 Trade Policy Review
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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.
12. 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 andindustrial imports from LLDCs (currently 42 countries) receive total and unconditional duty free entry
to the Hungarian market.
13. 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 finallyeliminated by 1 January 1997 vis-à-vis all WTO partners.
(ii) Non-tariff measures
14. 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 beenfully 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.
15. 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 tradepartners under the respective free trade agreements does not take away import opportunities from
third country suppliers.  Products affected by non-tariff measures covered in 1991 some 10 per cent of
imports. Successive steps of liberalisation reduced the coverage below 5 per cent by now. Hungary
undertook to eliminate the global quota on consumer goods vis-à-vis its free trading partners by the
end of the year 2000. It is the intention of the Hungarian Government to continue the present practiceof extending this liberalisation to all WTO Members.
16. 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 flow s. Separate from licensing of foreign trade
transactions, operational licence is needed for compan ies 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.
17. While Hungary enacted the necessary regulations for the application of antidumping and
countervailing procedures, no such measures have been taken so far.
(2) I
MPLEMENTATION OF THE WTO AGREEMENTS
18. 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.Hungary WT/TPR/G/40
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19. 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.
20. 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 theWTO 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 tarifficati on 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.
21. Under the Agreement on Subsidies and Counterv ailing 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.
22. 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 waiverobtained 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.
23. 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 sect ors. 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.
24. 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 crim inal law procedures. By virtue of a government
decree customs authorities are empowered to preven t the importation of goods infringing intellectual
property rights.
(3) R
EGIONAL INTEGRATION
25. 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.WT/TPR/G/40 Trade Policy Review
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26. 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.
27. 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 Hung ary with those of the EU . Accordingly, on the 1
July 1997 Hungary introduced the system of European cumulation of origin, which means thatHungary applies the same rules of origin as the EU.
28. In the review period Hungary concluded a series of free trade agreements with the EFTA,
Central and Eastern European countries (the Cz ech 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-tariffbarriers 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 wher e all parties apply uniform (zero or low) tariff
rates without quantitative limitations for a large number of agricultural products.
29. 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.
III. DOMESTIC POLICY DEVELOPMENTS AFFECTING TRADE
30. 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 statecontrol. In 32 out of the 180 firms the state practices its - limited - ownership rights through "golden
share".
31. 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 hasbeen 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 electricitydistribution and power generation.
32. 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.
IV. TRADE POLICY DIRECTIONS
33. 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 internatio nal 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 tradeHungary WT/TPR/G/40
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negotiations and by the commitments taken in respect of market access for goods and services and the
protection of intellectual property.
34. 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 legalharmonisation has been so far and shall be in the fu ture 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.
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