WORLD TRADE
ORGANIZATIONWT/TPR/M/40
27 November 1998
(98-4772)
Trade Policy Review Body
7-8 July 1998
TRADE POLICY REVIEW
HUNGARY
Minutes of Meeting
Chairperson:  H.E. Mr. Ali Said Mchumo (Tanzania)
Page
I. INTRODUCTORY REMARKS BY THE CHAIRPERSON 2
II. OPENING STATEMENT BY TH E REPRESENTATIVE OF HUNGARY 3
III. STATEMENT BY THE FIRST DISCUSSANT 7IV. STATEMENT BY THE SECOND DISCUSSANT 10V. STATEMENTS BY MEMBERS OF THE TRADE POLICY REVIEW BODY 13VI. REPLIES BY THE REPRESENTATIVE OF HUNGARY AND ADDITIONAL
COMMENTS 19
VII. CONCLUDING REMARKS BY THE CHAIRPERSON 32WT/TPR/M/40
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I. INTRODUCTORY REMARKS BY THE CHAIRPERSON
1. The second Trade Policy Review of Hungary was held on 7-8 July 1998.
2. The Chairman welcomed the delegation of Hungary, headed by Mr. Péter Balás, Deputy
Secretary of State, Ministry of Industry, Trade and Tourism , and the discussants, Ambassador
Geoffrey Raby of Australia and Mr. Asoke Mukerji of India.  As usual, both discussants would be
speaking in their personal capacities and not as representatives of their governments.  Inaccordance with the established procedures, outlines of the main issues they intended to raise had
been circulated in advance;  these were contained in document WT/TPR/D/22.
3. He recalled the purpose of the Trade Policy Reviews and the main elements of the procedures for
the meeting.  The report by the Government of H ungary was contained in document WT/TPR/G/40 and
that of the WTO Secretariat in document WT/TPR/S/40 and Corr.1.   Copies of written questions
submitted by  the delegations of Hong Kong, China;  New Zealand;  Japan;  the European
Communities;  Canada;  Australia;  Switzerland;  Korea;  and the United States had beentransmitted to the delegation of Hungary.
  If full replies could not be provided during the meeting,
supplementary written replies could be provided later.WT/TPR/M/40
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II. OPENING STATEMENT BY THE REPRESENTATIVE OF HUNGARY
4. The representative of Hungary said that 1990 had brought about basic, systemic changes in
Hungary's political and economic life.  Parliamentary democracy had taken a firm hold, with all
governments serving their full four-year terms.  A new government would enter into office on
8 July 1998.
5. Induced and assisted by the change in the political system, Hungary had successfully completed
the transition to a free market economy, however, the price of transition had been high, both in economic
and social terms.  By 1993, GDP had decreased by more  than 20%, a third of enterprises were bankrupt,
unemployment had risen to 13%, and almost half of  Hungary's former export markets had disappeared.
Economic growth had recovered somewhat by 1994, but was led largely by an increase in consumption
and infrastructural investments.  Thus, macroeconomic indices had steadily deteriorated:  the current
account reached a record deficit of almost US$4 billion and the budget deficit approached 9% of GDP.
6. Urgent action was required to redress these macroeconomic imbalances:  austerity measures were
introduced to curb public expenditure, manage internal demand, and to improve external balances, and
conditions for business activities.  These measures included a sharp one-time devaluation of the
Hungarian currency followed by continuous exchange rate adjustments and the imposition of an 8%
temporary surcharge on imports.  The macroeconomic situation soon started to improve and by 1997 thetrade deficit had fallen to just over US$2 billion and the current account deficit was US$1 billion.  The
budget deficit remained under 5% of GDP, while economic growth accelerated to 4.4%.
7. Despite the difficult circumstances of the transition, successive Hungarian Governments had
resisted protectionist pressures, not only keeping open the market, but also further liberalizing the whole
economy.  The positive impact of the abolition of restrictions on foreign exchange, imports andestablishment, was apparent in the development of trade and investment flows.  In the period 1991-97
total Hungarian exports and imports more than doubled in U.S. dollar terms.  The geographical
composition of foreign trade showed differing trends in imports and exports.  While the share of
Hungary's free-trade partners (EU, EFTA, CEFTA) incr eased by about 10 percentage points, their share
in imports remained stable at around 70%.  The commodity pattern had also considerably improved:  overthree fourths of exports being made up of highly processed products.
8. The stock of foreign direct investment rose from US$2.8 billion in 1991 to US$17.3 billion by the
end of 1997, making Hungary the most attractive target for investments in the region.  Germany and the
United States acquired a share of about one third each;  the rest came mainly from other OECD countries.
Japanese investments in Hungary recently exce eded US$500 million.  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 and leather had been somewhat limited.  Almost halfof the FDI inflows targeted the manufacturing sect or, in particular machinery, food processing and
chemical industries.  The share of the services sector was also high, due to large-scale privatization
undertaken in banking and insurance, telecommunications and public utilities.
9. Privatization of state-held assets was a key task in the process of economic transformation.
Between 1990-97 almost 1,300 state-owned companies (85%  of the total) were sold, mainly on a cash
basis, with privatization revenue of over Ft. 1,400 billion.  Thus, the share of private sector in GDP rose
to 80%.  Only 180 companies (mostly regional transp ort companies, forestry and agricultural companies,
and research institutions) remained under some state co ntrol.  The state retained basic ownership rights
through "golden share" in only 32 of the 180 firms in partial public ownership.WT/TPR/M/40
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Trade policy developments 1991-97
10. The systemic changes at the beginning of the 1990s 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 basis Hungary undertook a number of autonomous liberalization measures
and entered into commitments under multilateral and re gional arrangements that substantially lowered the
level of protection accorded to domestic operators.
11. In the area of tariffs, the switchover to the HS-based nomenclature in 1992, and its refinement in
1996, more than doubled the number of tariff lines.  While the changes in the tariff nomenclature did not
increase the duties on any product, the more detailed breakdown of goods inevitably distorted time series
of comparisons of nominal tariff averages.
12. Since 1972 Hungary had operated a GSP scheme in favour of developing countries, containing
neither quantity limits nor, a priori, excluding product groups.  The nominal average of GSP rates wasless than half of the MFN tariffs both in agriculture and industry.  Due to the open nature and wide
product coverage of the scheme, around 95% of imports from developing countries received preferential
tariff treatment.  In 1998, a scheme of special and more favourable tariff treatment for least-developed
countries had been in operation in Hungary for twenty years:  all agricultural and industrial imports from
LLDCs (currently 42 countries) received total, unconditional duty-free entry to the Hungarian market.
13. Besides the reduction of customs duties, between 1995 and 1997 Hungary phased out
import-related charges.  The import licensing fee of 1% was abolished in 1995, while the 2% customs
clearance fee and 3% statistical fee were first lowered, then eliminated vis-à-vis  all WTO partners on
1 January 1997.  Non-tariff measures on agricultural imports, such as quotas and discretionary import
licensing, were fully liberalized as a result of th e Uruguay Round.  Hungary had also made considerable
progress during the review period in dismantling its residual quantitative restrictions.  Imports of a
number of industrial goods were liberalized, for example, furniture and undergarments.  On
1 January 1998 quantitative restrictions were lifted on all textile and clothing products as well as on
passenger cars with engines over 1,500 cc.
14. In addition to reducing the product coverage of the global quota on consumer goods, Hungary had
increased the value ceilings (denominated in U.S. dollars) for the remaining restricted goods, by about
10% annually.  These adjustments had ensured that the quota shares allocated to Hungary's free-trade
partners under the respective agreements did not remove import opportunities from third-country
suppliers.  Hungary undertook to eliminate the global quota vis-à-vis  its free-trade partners by the end of
the year 2000;  it was Hungary's intention to continue to extend this liberalization to all WTO Members.
Implementation of the WTO Agreements
15. As a result of the WTO Agreements, the level of overall bound tariffs increased from 83% to
95.7%, the increase in bindings was particularly marked for products under the Agreement on
Agriculture.  By the end of the Uruguay Round im plementation period the nominal MFN tariff average
would fall below 7% in industry and to about 27% in agricultural goods.  In 1997, the nominal MFN tariff
average on industrial products was 8.2%, while the trade weighted average of customs duties on MFN
imports was only 4.5%.
16. Prior to the Uruguay Round, Hungary applied low tariffs on agricultural products, and
quantitative restrictions served as the main protection against imports.  In accordance with the WTO
Agreement on Agriculture, these measures were abol ished as of 1 January 1995, with a parallel increase
in tariff protection.  Though agricultural tariffs had not been high compared to international rates, evenWT/TPR/M/40
Page 5
after tariffication, in line with WTO rules Hungary opened preferential tariff quotas for more than 100
products to provide appropriate market access oppo rtunities.  Hungary did not apply specific or
compound duties;  all tariffs rates were ad valorem .
17. Hungary notified its support programmes in accordance with Article 29 of the Agreement on
Subsidies and Countervailing Measures, including, inter alia , those to be eliminated by 2002.
Notwithstanding this deadline, Hungary discontinued, as from 1 January 1998, the export-performance
requirement that was linked to the eligibility for tax allowances on investments exceeding Ft. 1 billion.
Moreover, Hungary did not apply any measures falling under the scope of the TRIMs Agreement.
18. In the framework of the General Agreement on Trade in Services, Hungary made extensive
commitments in a large number of sectors to allow for the commercial presence of foreign service
providers and the cross-border supply of services.  Hungary also actively participated in the negotiations
on, and undertook far-reaching market access and national treatment obligations, in financial andtelecommunication services.  As a further liberalization step, a new law entered into force on
1 January 1998, allowing establishment in the form of branches.
19. Hungarian legislation provided effective protection for intellectual property in conformity with
the provisions of the TRIPS Agreement.  Breach of laws to protect patents, copyright, industrial designs,
topographies of integrated circuits, utility models, trade marks and geographical indications were subjectto severe sanctions under civil and criminal law.  Customs authorities were empowered to prevent the
importation of goods infringing intellectual property rights.
Integration issues
20. Since the last review Hungary had made considerable efforts to re-establish its traditional
economic and trade links with Europe through active participation in the regional integration process.Besides the Europe Agreement, Hung ary had concluded a series of free-trade agreements with the EFTA,
Central and Eastern European countri es (the Czech Republic, Poland, Slovakia, Slovenia, Romania) in the
framework of the Central European Free Trade Agreement (CEFTA), Israel, and Turkey.  Hungary was
currently negotiating further free-trade agreements with  Estonia, Latvia and Lithuania.  Negotiations with
Bulgaria on its accession to CEFTA had also reached their final stage.
21. Since 1990, due to obvious political, security and economic reasons, the priority goal of
successive Hungarian governments had been to seek closer ties with the EU, leading to accession.  The
Association Agreement between the European Communities and Hungary, signed in 1991, covered trade
in goods and services and addressed areas outside the scope of the WTO, such as political dialogue and
cooperation in various fields of the economy.  As a general rule, the agreement provided for a ten-year
transition period for the full elimination of barriers to trade.  In 1994 Hungary officially submitted its
application for membership of the European Union, and following the positive reaction at the 1997 EUsummit meeting in Luxembourg, accession negotiations commenced in April 1998.  It was Hungary's
firm belief that the enlargement of the EU would be of  considerable benefit not just to the participants but
also to third countries, and that the process would be carried out in consistency with both the latter and the
spirit of the WTO.
22. The representative of Hungary had noted with concern assertions in the Secretariat report that the
integration process might have serious negative effects on third parties.  He addressed three major
elements of the accession process:  the implementation of the trade provisions of the Europe Agreement;
the legal harmonization requirement;  and accession itself.WT/TPR/M/40
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23. The main concern in connection with the implementation of the trade provisions of the Europe
Agreement was that it had resulted in trade diversion:  third parties were believed to have lost market
shares.  He did not wish to prejudge the outcome of  the examination of the Agreement currently being
carried out, both for goods and services, in the Committee on Regional Trade Agreements, however he
drew attention to trade statistics reflecting the dy namics of Hungarian imports from the EU and other
non-preferential trading partners between 1991 an d 1997.  Imports from the EU had grown by 206%,
while those from the United States had increased by 266%, from Canada by 410%, from Japan by 220%,
and from Korea by 193%.  These figures clearly proved that the dynamics of imports from non-EU
countries exceeded the growth rate of imports from the European Union.  Thus, fears of trade distortion at
the expense of third countries were unfounded.  Trade with most Asian economies was heavily
unbalanced:  Hungary's exports to Japan and Kore a were only one seventh of imports.  Many of
Hungary's overseas trading partners had greatly benefited from the opening of the Hungarian market.  Inaddition, liberalization of all non-tariffs measures had been carried out strictly on an MFN basis, thus all
Members of the WTO had profited therefrom.
24. Legal harmonization was an obligation arising from the Association Agreement and a
precondition of accession.  The general consequence of harmonization was replacement of the regulatory
system by the acquis communautaire .  The overall result of this process was the introduction of more
liberal and transparent rules in Hungary.  Thus, th ird parties also benefit from the streamlined, uniform
and Euro-conform Hungarian regulatory system;  th e non-discriminatory application of the European
regulations improved establishment and market access possibilities also for non-European suppliers.
Telecom and financial services were excellent exam ples of how third-country suppliers benefited from
the legal harmonization in Hungary;  the result had also been bound in Hungary's GATS schedulesvis-à-vis  all WTO members.  The harmonization process had helped Hungary to become the main target
for investors from countries such as the United States, Canada, Japan, Australia, and South Africa.  Other
reforms rooted in the legal harmonization process, particularly in the areas of intellectual property and
competition policy, would go beyond Hungary’s WTO obligations.
25. Hungary’s ultimate goal was accession to the European Union, which would result in, inter alia ,
the EU Common Commercial Policy (CCP) becoming a pplicable to Hungary.  Hungary would implement
the Community Common Customs Tariffs upon accession, and reduce its tariff level to that of the EU.  In
1997, the simple average for industrial products (HS 25- 97) was 4.9% in the EU and 8.7% in Hungary.  In
services, the EU's GATS commitments would apply to Hungary.  In Hungary's view, this would further
improve the trading environment for third parties.
26. Hungary was convinced that Members would find its participation in the European integration
process was also beneficial for the trade interests of non-European countries.  Details of the accessionwould be elaborated in the coming years and he believed that it was premature to debate the hypothetical
consequences at this stage.
27. Finally, the representative of Hungary called atte ntion to what were, in Hungary's view, a number
of erroneous statements or judgements in the Secretariat report, as well as a number of areas that Hungary
did not consider relevant for discussion in this forum.
28. Hungary believed that its achievements in advancing trade and economic liberalization in the
period under examination, would be recognized by Members.  He assured Members of the TPRB that
Hungary would faithfully observe its WTO commitm ents and fully support further multilateral
negotiations under the auspices of the WTO in traditional and new areas.WT/TPR/M/40
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III. STATEMENT BY THE FIRST DISCUSSANT
29. The first discussant noted that Hungary was a pos t-transition economy, with the peculiarities of a
country that had emerged from a system of pervasive state direction and economic planning.  Remarkable
change had been achieved in a comparatively short period.  While this review might emphasize in a
constructive way areas where more needed to be done, this should not diminish the importance of whathad been achieved over the last five years.
30. Nothing underlined the extent of the transition more than the change in property rights.  This was
the most fundamental of all institutional arrangements and one that gave character and shape to an
economic system.  According to the Secretariat report, in the past ten years the private sector share in DP
had increased from 10% to around 75-80%.  Althoug h lower than for long-standing market economies,
this nevertheless represented an historic tran sformation in how the economy was organized and run.
31. The process, however, was not complete.  Having one quarter to one fifth of economic activity in
state hands still represented a loss of economy, efficiency and potential welfare.  The Secretariat report
noted continuing state ownership of varying degrees for some 290 enterprises at the end of 1997.  He
believed that Hungary may have gone further in privatization than other transition economies.
Presumably, this was because the Hungarian Government recognized the benefits of privatization in terms
of greater efficiency and hence welfare.
32. He requested clarification of the reasons, in terms of efficiency and welfare gains, for continuing
direct State ownership and involvement in enterprises.  He was interested to know whether the
Government planned to remove itself further from direct participation in the economy by selling off these
holdings, and if so, what process it envisaged and what its priorities were in this area.
33. With a not insignificant share of the Hungarian economy still in State hands, price controls and
administered prices still operated in some areas.  The Secretariat report contained an estimate that some
16% of prices (weighted by their share in the consumer price index) were subject to central or local
government control.  Somewhat surprisingly, however, the share of administered prices in all prices had
been rising, which was surely contrary to expect ations.  He requested the views of the Hungarian
delegation on this matter.
34. There could be no doubt that Hungary had entered a post-transition phase in moving towards a
more market-oriented economy.  The critical issue wa s how much further the Government believed the
reforms must go.  He wondered whether reform fatigue  might now be setting in, especially following the
recent, difficult macro-stabilization period;  and whether there was concern or discussion of the
possibility of getting stuck in a post-transition phase, where new, powerful interest groups formed to
maintain the new status quo.
35. With regard to macroeconomic management, a great deal had been achieved since the
stabilization package of 1995.  A key challenge in managing both the economics and politics of transition
was the extent to which macroeconomic balances were  maintained at the time the market was allowed to
play a greater role.  At times of domestic imbalances, reflected in increasing current account deficits,
pressures built up for greater government inte rvention in trade and even investment flows.
36. The 1995 stabilization package was introduced to cut inflation, stem a rising current account
deficit, and slow growth in foreign debt.  The package was intended to restore balance between aggregate
savings and investment, and thus cut the current account deficit.  More direct measures aimed at imports
were also taken.  These included an import surcharge (removed in July 1997) and a 9% devaluation of the
florint, accompanied by adoption of a crawling-peg mechanism for determining subsequent exchange rateWT/TPR/M/40
Page 8
movements.  The immediate impact of these measures resulted in actual falls in the components of
domestic demand:  GDP growth slowed, but remained po sitive;  importantly, the budget deficit as a share
of GDP fell, but this was achieved largely as a result of the proceeds of an accelerated privatization
programme.  This would represent a one-off windfall to government revenues unless increased
productivity from private ownership of the assets resu lted in a permanent stream of higher taxation
revenues.  Nevertheless, the structural budget deficit was also halved between 1995 and 1996.
37. Although the inflation rate fell in 1996 and 1997, it remained high compared with inflation in
most of Hungary’s competitors.  Moreover, it was not compensated for adequately under the exchange
rate adjustment mechanism, leading to an effective, real appreciation of the currency.  All of this made the
task of restoring external balance more difficult.
38. Domestic demand pressures also seemed to be building up again.  Growth in wages and earnings
had picked up in 1998, investment demand was once more growing very strongly, and the budget deficitas a share of GDP was returning to levels not seen since the austerity package was introduced.  Similarly,
the current account deficit seemed to be returning to pre-1995 levels.  He believed that the new
Government was committed to ensuring stable macroeconomic conditions, but welcomed advice on what
measures might be taken.  He wondered whether, for example, direct measures might be introduced again
to control imports and boost exports or whether it was likely that the current expansion would againbecome unsustainable, leading to another set of sharply contractionary policy measures.
39. He questioned whether, in the transition and post-transition periods, a succession of boom-bust
cycles was inevitable.  In this connection, the experience of the Asian economic crisis seemed to be
relevant:  it showed, for example, how difficult it was to manage economies as they opened to greater
external capital flows;  presumably, this was more so  for smaller than for larger economies.  He enquired
whether the Government had drawn any lessons from the East Asian experience for managing its own
liberalization endeavours.
40. Both the composition and direction of exports had changed markedly during the period of
transition.  The EU’s share of Hungary’s exports, for example, had increased from 45% in 1990 to almost
63% in 1996;  import shares showed similar change.  The structure of production had also changed:  thecombined share of agriculture and mining fell by almost half during the 1990s;  manufacturing remained
roughly constant;  and services increased, but from an already high base.  Such a change in an economy’s
structure was dramatic.  Part of the change no doubt reflected the impact of more rational economic
signals coming from the greater role of prices in allocating resources.  Nevertheless, it would be
interesting to know to what extent industrial policie s were playing a role and how the Government viewed
the future structural composition of the economy.
41. He noted that subsidies had fallen during the period under review, but a range of subsidies or
taxation incentives continued to be used to attract investment into particular areas.  Hungary also seemed
to continue to seek to attract foreign investment through a range of investment incentives with apparent
high costs in terms of taxation revenues forgone.  He asked to what extent the use of subsidies or taxation
incentives was tied into industry policy or whether these were still transitional measures that would be
phased out.
42. A major structural impediment for many transition economies seemed to be the difficulty of
introducing and enforcing an efficient and equitable system of taxation.  This was usually attributable to
many factors, privatization being not the least of them.  It had been reported  that in some places the
undeclared economy in Hungary could be as much as one third of declared GDP.  The question of
taxation seemed to be particularly important in view of the efforts of successive governments to restoredomestic balance through tighter fiscal policy.  With a large part of the privatization programmeWT/TPR/M/40
Page 9
completed, the task of fiscal consolidation was likely to be harder.  He sought the views of the Hungarian
delegation on this, and information on taxation reform issues.
43. After a period of phenomenal economic change and adjustment, Hungary's main focus of
economic and trade policies seemed to be towards a single, historic objective:  membership of the
European Union.  The political objective was understandable.  Hungary’s trade had already becomeheavily oriented towards the EU and it could be expected to become even more so over the next few years
before membership.  He requested an assessment of the expected impact of membership on the
composition of trade.  In particular, Hungary was capable of producing and exporting agricultural
products efficiently:  he asked whether future membership of the EU would lessen the importance of
pursuing difficult policies to maintain an efficient agricultural sector.
44. In conclusion, he noted the major changes that had occurred in every aspect of the Hungarian
economy.  It had been a truly remarkable and historic transformation and one that deserved the highestpraise.  The members of the Hungarian delegation deserved to be proud of these achievements.WT/TPR/M/40
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IV. STATEMENT BY THE SECOND DISCUSSANT
45. The second discussant, believed that the documentation provided indicated that Hungary had
successfully continued its internal economic restructuring towards a market economy, and integrating its
economy in regional terms with Europe, while mainta ining its multilateral commitments under the  WTO
Agreement.  He was interest to hear the Hungarian experience in managing this transition, given theinevitable pressures generated by any transition process, especially pressures to create protectionist
policies.
46. Addressing the first major area of trade policies and practices, he noted that Hungary had
removed border levies and charges for WTO Members from 1 January 1997.  Hungary levied MFN tariffs
for 25% of all tariff lines, with the remaining 75% of li nes attracting preferential tariffs.  This difference
in tariff treatment would have an obvious impact on Hungary's trade relations, and it would be useful to
know how the Hungarian authorities saw this situation in terms of their commitment to the multilateraltrading system.
47. The authorities had established a single-document customs clearance system.  He was interested
in hearing an assessment of the consequences of tariffication of quantitative restrictions, and whether
there had been any efficiency losses due to the 'complex tariff structure'. He also requested the views of
Hungarian delegation on the observation that protection through tariffs for agriculture, and the existenceof tariff quotas for agricultural products, could lead to distortions.
48. Regarding non-tariff border measures, although the necessary enabling legislation was in place,
during the period under review Hungary had not used anti-dumping, countervailing, or safeguard
measures.  Even the balance-of-payments import surcha rge, levied during a portion of the period under
review, had been  phased out;  there was no longer any barter trade;  and import licensing powers were
used with discretion and subject to appeal.  Hungar y still maintained some quantitative restrictions,
though these were limited to 5.7% of all its tariff lines.  He believed that a discussion of the operation of
the global quota on consumer goods would be useful, including possible reasons for its reported
under-utilization, as well as of the existence of sub-quotas for preferential trading partners.  He was
interested to know whether the Government intended  to continue to use import licensing, which affected
2.1% of its tariff lines.
49. Hungary did not levy export duties or charges, nor did it maintain any minimum export prices.
Export licensing existed essentially for environmental reasons and to prevent domestic shortages.  There
had been a reduction in export subsidies granted for several agricultural products.  Further, government
institutions had been established to facilitate exports considered important to national economy.  It would
be useful to hear an assessment of how these institutions had functioned, and were expected to function,
against the overall policy background of limited government involvement in measures directly affectingexports.
50. Almost a third of Hungary's technical regulations and national standards were different from
international norms.  The authorities intended to achieve harmonization with EU standards by 2001, and
he was interested to know whether the existing  differences, even between national and European
technical regulations and standards, had had any significant impact on trade.  He enquired about theGovernment's policy for aligning technical regulations and standards with international norms, in keeping
with WTO obligations, and the relevance of experience on mutual recognition among CEFTA countries
this context.
51. Sanitary and phytosanitary measures did not discriminate against imported products.  Existing
measures appeared to be based on environmental considerations.  It would be useful to assess the impactWT/TPR/M/40
Page 11
of new measures, such as the new law on plant protection, both in terms of the application of such laws on
trade flows, and in terms of their impact on the issue of patenting of plants in general, which in turn could
impact on trade.
52. The 1988 tax reform had introduced the concepts of VAT, personal income tax, and corporate
income tax;  modifications to the corporate tax system had been made in 1997.  In the context of theimpact of such modifications on Hungary's trade policy, an observation had been made that corporate tax
concessions were also used to promote certain sectors;   he sought an exchange of views on this matter.
53. Privatization had been a key element in Hungary's transition towards a market economy.  As the
share of the private sector in the economy had increased, from 15% of GDP ten years ago to 80%
currently, the share of the government in the economy had decreased correspondingly.  It would be useful
to hear how this had affected Hungary's trade policies.
54. Hungary's legislative framework and practice on monopolies and competition were in line with
EU competition policy.  The new Bankruptcy Law of 1992 was significant for the development and
enforcement of market economy rules.  Against this background, he asked for comments on the
enforcement of relevant Hungarian laws, including the 1996 Competition Act, and the impact these laws
had had on the efficient functioning of the regulatory framework, which, in turn, impacted on Hungarian
trade policy legislation.
55. There was a natural bias towards regional integration in Hungary's trade policies, which had
accompanied the shift in the structure of ownership and production from a planned to a market economy
model, redistribution of land, active industrial policy, etc.  He was interested to know whether some
sectors had been encouraged at expense of others.
56. The agriculture sector had long been the mainstay of the Hungarian economy.  The compensation
bill system had been used to auction arable land;  there had been a fall in agricultural production and in
agriculture's share in GDP;  and agriculture exports had declined.  In terms of trade flows, it was obvious
that the main market for imports and exports was the EU.  Government assistance to agriculture was
provided through import tariffs, tariff quotas, and export licensing;  export restrictions were used
exceptionally.  Export subsidies for some products were expressed in national currency,  which operatedon a crawling-peg exchange system;  budgetary support was extended by the Government through direct
payment from agricultural funds, and social insurance subsidies.  Against this backdrop, it would be
useful to assess how Hungary's trade policies were directed towards preserving the traditional share of
agriculture in Hungary's trade;  and to ascertai n how the Agriculture Market Regulation Act of 1993,
which apparently regulated markets for specific products, had functioned, including its impact on new
legislation on procedures for plant seed approval and certification, and genetically modified organisms.
57. In the manufacturing sector, the Europe Agreement and EFTA/CEFTA agreements had provided
the framework for the  removal of tariffs and quantitative restrictions on manufactured imports and
exports, which had led to growth of trade with these partners.  A feature of these trade flows had been
outward processing trade (OPT), which accounted for 15% of total imports and 21% of total exports.  A
related issue concerned preferential treatment of foreign companies engaged in OPT.  He was interested
to know the role of OPT in terms of Hungary's trade policies, bearing in mind the preferential nature of
such arrangements and the impact of OPT on other countries.
58. The food and beverages subsector accounted for 20% of total manufactured exports and 5% of
imports;  40% of exports were destined for CEFTA markets.  These products had previously been
exported predominantly to CMEA markets, and the discussant asked whether trade flows had undergone
any reorientation.  The chemicals and pharmaceuticals subsector, apparently dominated by foreign firms,WT/TPR/M/40
Page 12
also exported mainly to former CMEA countries;  he requested a similar assessment regarding these
products.
59. In the textiles and clothing subsector, there ha d been a shift in trading patterns away from the
CMEA to the EU.  This subsector had traditionally pl ayed an important role in Hungary's foreign trade,
and he suggested that members address some of the important policy issues outlined in thedocumentation, especially the decision taken by Hungary not to apply textiles quotas to WTO Members
from 1 January 1998.  Such policy issues would be relevant to a broader discussion of the manner in
which Hungary's multilateral commitments were aligned with specific aspects of the trade policy of its
major trading partners with which it was currently seeking closer integration agreements.
60. A similar policy issue could be addressed with regard to the automobiles subsector, which was
one of the fastest growing subsectors, with a mainly regional export market.  The bulk of automobile parts
and components manufacturing was exported to the European market.  This subsector was the first toexperience the practical effects of the Government's trade policy which sought to integrate Hungarian
industry into an international network of  production and manufacturing.  It would be useful to focus on
the role assigned to customs free zones.
61. Hungary's financial subsector had achieved major success, as reflected in its comparatively
substantial commitments in GATS.  The situation was similar in the basic telecom sector.  These
successes would no doubt play an important role in th e future orientation of Hungary's trade policies.
Presupposing that there was no divergence between curr ent practice and the specific commitments in the
WTO, he wondered whether Hungary's relatively high levels of commitments in services allowed
sufficient flexibility if the Government was forced to  dilute such commitments.  He was also interested in
how Hungary dealt with the supply of services through movement of natural persons, given the delicateinterface between immigration policy and trade policy.  In both of these issues, he asked how the balance
could be maintained between protecting domestic inte rests and projecting Hungary's trade interests in a
regional and multilateral context.
62. He was interested to know how Hungary's trade policies on trade-related aspects of intellectual
property rights had evolved, bearing in mind its status as an economy in transition, and that most of theprovisions in this sector would come into effect in about 18 months' time.  Noting the high reputation of
many of Hungary's traditional products  and the creativity of its citizens, he was particularly interested in
the scope of additional protection given to trade of products bearing geographical indications, and the
status of intellectual property laws, such as copyright and patent legislation.
63. He believed that this review should focus specifically on Hungary's existing trade policies and
practices, and how they had changed since the last trade policy review of Hungary, rather on future
developments;  and should be placed in the context of Hungary’s existing commitments in terms of the
current provisions of the multilateral trading system.WT/TPR/M/40
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V. STATEMENTS BY MEMBERS OF THE TRADE POLICY REVIEW BODY
64. Members complimented Hungary on the changes that had been achieved since 1991 in its
transition to a market-oriented economy.  These changes had taken place under difficult economic and
social conditions, including the collapse of trade with the former socialist countries, the bankruptcy of a
large number of companies and the loss of jobs.  Members appreciated that, despite these circumstances,Hungary had resisted protectionist pressures and welc omed Hungary's assurances that regional integration
would be carried out in conformity with its commitments to multilateralism.
65. The representative of Hong Kong, China expres sed appreciation for Hungary's assurances that
regional liberalization efforts would be complementary to commitments to multilateralism.  He
welcomed, in particular, the removal of quota restrictions on textiles and clothing products and the
abolition of various trade-related fees on an MFN basis as a result of the Europe Agreement.  He noted,
however, that quantitative restrictions remained a core non-tariff border measure.  In area of appliedtariffs, Hungary's commitment to bind 95.7% of all national tariff lines at an average of 10.2% upon full
implementation of its Uruguay Round commitments was appreciated.  However, the average MFN rate
for industrial products, at 8.2%, was significantly higher than preferential rates, between 0.9% and 2.0%.
Continued efforts to open its trade regime would be in Hungary's long-term economic interest.  He
encouraged Hungary to consider acceding to the Plurilateral Agreement on Government Procurement and,as a first step, to apply for observer status in the Committee on Government Procurement.
66. The representative of Japan stated that his delegation had submitted written questions in advance
of the meeting and looked forward to hearing the responses.  He noted that Hungary had largely resisted
protectionist pressures, taking steps to curtail bo rder and internal restrictions, and that Hungary's
liberalization efforts had been carried out under difficult economic and social conditions, including thecollapse of the CMEA.
67. Hungary's priority during the coming years was to prepare for accession to the EU;  much of
Hungary's legislation was being modified to conform to relevant EU laws.  He emphasized the need for
consistency with WTO Agreements, referring in particular to GATT Articles XXIV:6 and XXIV:8
regarding the level of duties and other regulations, and the extent of their elimination, and to GATSArticle V:4 obligations regarding raising the level of barriers to trade in services.  He pointed out that
prior negotiation was required when increasing bound tariff rates;  when applying EU anti-dumping
measures in Hungary, certain procedures were to be followed, such as investigations to establish injury to
the domestic industry;  and that, in conformity with the purpose of regional agreements, any change in
Hungary's trade policy or measures should be transparent, and avoid creating adverse effects on the trade
of other Members.  He enquired whether Hungary pl anned to change its investment promotion policy in
the context of its accession to the EU.  With regard to the Europe Agreement, he welcomed Hungary'sconfirmation that the elimination of quantitative restrictions on textiles and clothing imports and certain
other products in 1997, and the removal of all restrictions scheduled for January 2000, were on an MFN
basis.  In the area of rules of origin he requested clarification on:  (i) whether Hungary had raised the
local-content ratio to grant origin in any sector or product;  (ii) whether, in the process of harmonization,
rules of origin criteria had changed from change-i n-tariff-heading (CTH) to value added;  and (iii)
whether Hungary had introduced any rule that required regional material or contents to grant origin to
final products.  He also asked whether Hungary had raised applied MFN tariff rates to third countries
since signing the Europe Agreement in 1991.
68. Concerning tariffs, 4.3% of tariff lines, including fish and mineral products, and footwear were
unbound.  Due to the high tariff rates on these goods, the simple average applied MFN rate, at 14.3%, washigher than the simple average bound rate of 11.8%;  this applied to 40 out of 97 HS chapters in 1997.WT/TPR/M/40
Page 14
69. Japan was concerned about reported export restrictions or prohibitions on agricultural products.
He emphasized that export countries, in principle, should not resort to such measures and recalled the
provisions of Article 12 of the Agreement on Agriculture regarding prior notification of such measures
and consideration of their effects on importing Members' food security.  Export subsidies were also a
cause for concern, and he requested that Hungary reduce its export subsidies, which were higher than thelevels agreed in the Uruguay Round, in accordance w ith the agreement which has been reached with the
interested parties.  Doubts had been expressed abou t the adequate enforcement of laws on intellectual
property rights, and these were of concern to Japanese industries.  He asked Hungary to ensure that legal
measures in this context were enforced.  Concerns had also been raised by Japanese industries regarding
transparency in the investment incentive scheme and  the negative effects of frequent amendments to tax
laws.  Regarding local-content levels in the automobile sector, in the context of exports to the EU, he
requested an amendment to the Secretariat report on the reported local content level achieved by aparticular Japanese company based in Hungary.  Finally, he referred to concerns regarding foreign capital
restrictions:  Hungarian residents required prior appr oval to borrow short-term foreign capital, however,
the three to four week approval delay prevented flexible capital management and raised both the risk and
the cost of cash-flow management.  Japan hoped that Hungary would review this regulation, as well as the
prohibition on holding a settlement account abroad.
70. The representative of the European Commission congratulated the Hungarian Government for the
introduction of the stabilization package in March 1995 and for its consistent implementation since then.
The package contained a number of painful measures such as cuts in government consumption, wage
restraint, and devaluation of the forint.  The programme had yielded the expected results such as reduction
of the government deficit, GDP growth, and reducti on in inflation and unemployment.  Most of the
questions transmitted to the Hungarian delegation by the Commission concerned how the Government
intended to continue the efforts and ensure continued macroeconomic stability and growth.
71. The EU had consistently supported Hungary in its continued process of liberalization and shared
Hungary’s determination to ensure that its relations with the EU remained consistent with, and supportive
of, the multilateral system.  Important steps in this context were the entry into force of the InterimAgreement on 1 March 1992 and the Europe Agreement on 1 February 1994, and the opening of the
Accession Negotiations at the end of March 1998.  These steps had had a determining impact on the
establishment of a more open trading regime in Hungary that had clearly benefited all partners.
Improvements in Hungary’s export performance to th e Community over the last three years had provided
a strong stimulus to the economy and to the development of Hungary's trade with other partners.
72. He disagreed with the suggestion in the Secretariat Report that Hungary’s agreement with the EU
could have had a trade-diverting effect.  Rather, the collapse of the CMEA had caused Hungary to lose its
traditional markets and had fundamentally altered the trading patterns.  The liberal market access offered
by the EU to Hungary had filled a gap and led to an increase in trade with the EU.  It was also clear that
the Europe Agreement has been one of the major factors in leading Hungary to remove many of the
border taxes, licensing levies and non-tariff restrictions that were formerly in place to shelter domestic
industries thus stimulating trade with other countries.  Against this background, he also questioned thesuggestion that the process of accession to the EU risked making Hungary’s trade regime less liberal in
certain respects.  Over the last four years, the process of integration had already led to a more liberal
market-oriented regime, replacing a formerly high level of restriction and state control of the economy.
This trend would continue as the accession process developed, leading to a reduction, for example, in
Hungary’s industrial tariff, which was currently higher than that in the EU.  The application in Hungary
of the principles of the single market, in particular the free movement of goods, services, capital, etc.,
would represent a further liberalization.  All countries would benefit from the existence of common rules
and regulations in the EU and Hungary.WT/TPR/M/40
Page 15
73. The Community was examining the current gap between agricultural tariffs in the EU and
Hungary in the discussions on "Agenda 2000".  Proposals concerning agriculture were intended to
prepare EU agriculture for the 21st century, for eastward enlargement, and for the upcoming negotiations
on agricultural trade in the WTO.  The Community would ensure that any effects of Hungary's accession
on third countries were dealt with according to WTO rules.   In conclusion, he complimented Hungary onits continued commitment to trade liberalization in WTO, in both traditional and new areas.
74. The representative of Canada stated that his delegation considered the current climate for trade
and investment in Hungary to be excellent.  In recent years, Canada and Hungary had concluded a
number of trade facilitation, investment protection, and other agreements to promote a favourable
business environment between the two countries.  Cana da's exports to Hungary had steadily risen in the
past ten years alongside a significant increase in imports from Hungary.  Canada was a significant
investor in Hungary and had undertaken, and was considering further, large projects.  Canadian firms hadlocated in Hungary to serve not only the local market, but also in order to market their goods and services
in other central and eastern European countries, and in anticipation of Hungary's accession to the
European Union.  He reminded Hungary that, like other WTO Members, it must continue to reduce
agricultural export subsidies in accordance with the agreed programme.
75. The representative of Australia noted that Hungary was one of the most advanced economies in
central and eastern Europe;  it had attracted significant levels of foreign investment and had made great
progress in liberalizing its economy.  The increasing openness of its economy was indicated by the 1997
level of foreign trade turnover of US$19.1 billion in exports and US$21.1 billion in imports.  However
she was concerned that this openness should take place in the context of a commitment to MFN and open
regionalism;  MFN tariffs applied to less than a quarter of Hungary's imports.  She was interested to hearHungary's views on comments regarding diversion of trade as a result of its preferential agreements.  In
the context of accession to the EU, she strongly en couraged Hungary to continue its liberalization in
agricultural trade, and to encourage the CAP to evolve  in the same direction;  Hungary's producer subsidy
equivalent was currently 12-16% compared to 44% in  the EU.  She asked for Hungary's comments on the
difficulties it would face in bringing its agricultural policies into line with the CAP and in futurenegotiations in agricultural liberalization.
76. Along with other WTO Members, Australia would be monitoring the implementation of
Hungary's waiver for agricultural subsidies, and she urged Hungary to take the necessary steps to adjust
its support programmes in order to meet its commitments by 2002 at the latest.  Australia welcomed
Hungary's statement that the emphasis in agricultural assistance was on green-box type measures, and
requested further information on the measures under consideration.
77. The representative of New Zealand commended Hungary's elimination of trade-related charges,
including import surcharges, and its progress towards reducing the proportion of tariff lines affected by
non-tariff measures.  However, MFN tariffs were relatively high for agricultural products;  these would
act as barriers to trade and leave Hungarian farmers inadequately prepared to participate in a liberalized
world market.  He was similarly concerned over  Hungary's need for a WTO waiver for certain
agricultural export subsidies, and encouraged elimination of these restrictions on free trade, which couldlead to distortion of investment and reduced efficiency in the domestic market.
78. Hungary received 40% of total foreign direct investment in central and eastern Europe.
Two-thirds of the 200 largest Hungarian companies had foreign participation – a testament to the
openness of Hungary's investment regime.  FDI had made a major contribution to the restructuring of
Hungary's economy;  the benefits included reduced external debt and improved business practices.WT/TPR/M/40
Page 16
79. Hungary's accession to the EU should further improve, inter alia , its competition policies and
protection of intellectual property rights, however, he  was concerned about pressures on Hungary to raise
agricultural support and protection.  He hoped that Hungary would adopt a libe ralizing stance within the
EU, through active support for rules and principles of  open trade in all sectors.  Hungary had signed a
number of preferential free-trade agreements, which could lead to greater trade liberalization anddomestic economic efficiency when applied in a non-trade-diversionary manner.  However, MFN tariffs
currently applied to less than a quarter of Hungary's imports;  WTO Members outside FTA coverage were
thus facing disadvantageous tariffs compared to the bulk of Hungary's preferential trading partners.  He
encouraged Hungary to continue to pursue and expand open, multilaterally based trade policies.  His
delegation had raised a number of specific questions on Hungary's trade regime and looked forward to
receiving Hungary's responses.
80. The representative of Switzerland noted the excellent trade relations between Hungary and
Switzerland based on their free-trade agreement and membership of the WTO.  His delegation had
transmitted questions to Hungary regarding the protection of intellectual property rights and envisaged
changes of trade regulations for pharmaceuticals, and he looked forward to hearing the responses during
the course of the review.
81. The representative of Korea observed that Hungary currently afforded preferential tariff treatment
to EU, CEFTA and EFTA countries, with what he believed to be a highly discriminatory impact on
parties outside these agreements.  For example, imports of PMVs of less than 1,500 cc from non-members
were subject to a tariff of 28%, while imports of the same cars from member countries carried a 0% tariff;
taking into account additional charges and duties the final difference in selling price amounted to 60%,
implying a significant decline in price competitiveness for non-member countries.  He requested theHungarian Government to address this matter promptly.  He also requested an explanation of the criteria
used by Hungary for allocating quotas, where priority was also given to CEFTA and EU countries.  Korea
hoped that this quota system would be eliminated.
82. Imports of all industrial goods into Hungary, whether or not they satisfied international standards,
were subject to safety inspections.  This procedure could take up to three months to complete andconstituted a barrier to smooth market access.  He asked for Hungary's reasons for believing a duplicate
inspection was necessary, and requested the elimination of the procedure.
83. Regarding the Agreement on Government Procurement, he believed that Hungary's accession to
this Agreement would enhance transparency and minimize discrimination in a number of areas.  In the
construction sector, while, officially, a system of open tendering was used, EU firms appeared to be
favoured for projects benefiting from EU credit assistance.
84. The representative of the United States expressed concern over the direction of Hungary's trade
policies in some specific areas.  The recent waiver for export supports in agriculture indicated Hungary's
continued dependence on distortive trade practices in this sector.  She was also concerned that Hungary
had not bound tariffs on certain important items such as transportation equipment and in some areas of
agriculture.   While appreciating Hungary's difficulti es in the past decade, the growing trend for regional
trade preferences had resulted in some 75-80% of imports entering Hungary under non-MFN rates.Hungary must remain mindful of its WTO obligations and the MFN principle during its process of
accession to EU membership.  She was impressed by the resilience of the Hungarian economy and the
transformation since the last review, in particular by the development of a strong and dynamic services
sector that was largely open to foreign operators.
85. The representative of the Czech Republic commended Hungary's overall successful performance
since the last review and successful stabilization and structural reform efforts.  The stabilization packageWT/TPR/M/40
Page 17
introduced in March 1995 had restored macroeconomic balance and created a sound base for long-term
sustained growth and economic development.  Noticeable results had been achieved in privatization,
attraction of FDI, and reorientation of trade since the collapse of the CMEA.  He believed that the liberal
trade policies Hungary had been pursuing, based on internationally agreed rules and principles, should
continue and hoped that Hungary would not introduce an y new, restrictive or safeguard measures in the
future.
86. The representative of Turkey drew attention to the extremely difficult economic background
against which Hungary had transformed its economy.  Th e impact of trade liberalization was most evident
in the volume of Hungary's foreign trade, which had almost doubled, from $8.6 billion in 1990 to
$16.2 billion in 1996.  Hungary's trading partners had also benefited from its more accessible markets,
though some more than others.  Border and internal restrictions had been liberalized, all tariffs were
ad valorem  and almost 96% of tariff lines were currently bound compared to 83% in 1993;  all other
trade-related charges had been terminated in 1997.  The Europe Agreement had no doubt accelerated the
liberalization process.  Much of Hungary's legislation was being amended, while legislation on
intellectual property rights went beyond the provisio ns of the WTO Agreement.  In addition, Hungary had
made extensive commitments under the GATS.  He hoped that the free-trade agreement between Turkey
and Hungary, which entered into force on 1 April 1998 , would further contribute to their rapidly growing
bilateral relations.
87. The representative of Norway referred to the various difficulties that Hungary had faced during
its period of structural adjustment, and the greatly increased openness and economic performance that had
resulted from this transformation.  She offered en couragement for the further structural changes that
would have to be made during Hungary's preparat ions for accession to the EU.  While Hungary's
government procurement regime appeared to be transparent and well developed, she was interested to
know why Hungary did not envisage acceding to  the Agreement on Government Procurement.
88. The representative of Romania commended Hungary's efforts to ensure the symbiotic relationship
between its regional agreements and multilateral commitments.  He believed that the results of Hungary's
transition process had been extremely positive.  Referring to the possibility of trade diversion mentionedin the Secretariat report, he believed that the period used for this evaluation, 1990 to 1997, was not
conducive to a meaningful analysis.  Statistical eviden ce in the report showed that the strongest change in
trade with the EU and CEFTA countries took place before the respective preferential agreements entered
into force and thus were due to reasons other than the preferential agreements.
89. The representative of the Slovak Republic expr essed his delegations appreciation for Hungary's
positive macro- and micro-economic achievements and support for the continuation of this trend.  He
praised Hungary's commitment to continue future liberalization efforts and its active role in multilateralnegotiations within the WTO.
90. The representative of Poland noted that H ungary's macroeconomic indicators now showed
positive trends.  Following liberalization efforts, Hungary currently retained only a few non-tariff barriers
and these would soon be eliminated.  Regarding the effects of regional agreements on non-preferential
trading partners, the volume of imports from non-regional partners proved the positive impact of regionalagreements on market access in the multilateral context.
91. The representative of India commended Hungary for its effective macroeconomic stabilization
programme, which had enabled widespread improvement in Hungary's economic performance.  However,
she recalled the word of caution in the Secretariat report on the issue of tax evasion being exacerbated by
recently introduced privacy laws and the underlying need to restrain the parallel economy.  She asked thatWT/TPR/M/40
Page 18
the Hungarian authorities monitor the investment-savings gap, which was vulnerable to demand-related
factors and inflation.
92. Hungary's commitments under the GATS had to some extent underpinned the improved
performance in services sectors vis-à-vis  trade in goods, and the increased importance of trade in services
in the composition of trade.  While there had b een some change in legislation in connection with
commitments under the TRIPS Agreement, some problems associated with piracy apparently remained to
be addressed.
93. Noting the shift in the geographical pattern of tr ade towards industrialized countries, particularly
in Europe, and the ongoing process of harmonization of  Hungarian legislation with that of the EU, she
recommended that Hungary redress the geographical concentration, strengthening its economy through
diversified export and import markets.  The alignment of Hungary's trade policies with those of the EU
were of significant interest to India.  The European system of diagonal cumulation or origin, withemphasis on developing outward-processing and assembly operations, would attract foreign investment in
Hungary.  However, the application in certain sector s, notably the automotive sector, raised concerns for
third countries.  In addition, built-up passenger cars were subject to high tariffs as well as non-tariff
protection for non-preferential-agreement trading partners.
94. The different tariff phase-out schedules contained in Hungary's free-trade agreements made the
tariff structure somewhat cumbersome and added to the overall dispersion in applied tariff rates.  While
dispersion for industrial products had declined marginally, dispersion in overall applied tariffs had
doubled since 1991 and a threat of higher degrees of distortion existed from these schedules in the
non-industrial sector.  It remained to be seen whether dispersion would increase with the alignment of
Hungary's agricultural policies to the CAP, which encompassed much higher levels of tariffs andassistance, and a complex framework of subsidies.  Hungary was scheduled to reduce the value of export
subsidies by 36% and AMS by 20% by the year 2000.  Hungary had not signed the Information
Technology Agreement in 1997 and she requested clarification on Hungary's possible application of EC
tariff reduction commitments on ITA imports from third countries and from the EC as a result of the
Europe Agreement.
95. Quantitative restrictions on textile and clothing imports and 40% of other quantitative restrictions
on industrial products were eliminated in  December 1997 on an MFN basis, and were scheduled for
elimination on 1 January 2001.  However, core restrictions, which included certain products of some
concern to India, were applied through prohibitions, quotas or non-automatic licensing and she questioned
their WTO justification.  Regarding other trade measures, Hungary had bound almost 96% of its tariff
lines, tariffied discretionary import licensing on agricultural products, and currently applied ad valorem
tariffs;  following tariffication, the average applied MFN tariff rate had risen from 11% in 1991 to 14.3%in 1997.  She noted that the elimination of other border levies and charges for WTO Members and the
simplification of documentation requirements would help to reduce costs at the border.
96. The representative of Morocco recognized Hungar y's efforts to transform its economic and trade
environment, noting in particular the liberalization of trade in textile on clothing products, reduction of
tariffs, and measures taken in the agriculture sector.  Her delegation appreciated Hungary's GSP schemefor developing countries and special treatment for ag ricultural and industrial imports from least developed
countries.   Referring to privatization measures taken between 1990 and 1997, while the private sector
now represented 80% of GDP, a number of transport, agricultural, and research institutions remained
outside of this programme.  She was interested to know the reason for these exceptions.WT/TPR/M/40
Page 19
VI. REPLIES BY THE REPRESENTATIVE OF HUNGARY AND ADDITIONAL
COMMENTS
97. Replies were divided into four main themes:  (i) economic background and transition issues;  (ii)
regional integration issues;  (iii) trade and investment measures;  and (iv) sectoral issues.
98. The representative of Hungary noted that the unanimous recognition of the results achieved
would give a sign of encouragement for the new Hungarian Government to advance the process of
economic modernization and structural adjustments.  However, the new Government was taking office
only today, and he was not in a position to give a deta iled description of future plans or intended policies
in particular areas.
(i) Economic background and transition issues
99. Referring to internal and external balances, he noted that despite a slight increase in 1997, the
budgetary deficit had remained below 5% of GDP.  Thus, a return to the pre-austerity programme level9% of was out of the question.  The improvement in government finances was due mainly to cuts in
government expenditure, and not the result of a on e-time windfall from privatization revenue, which was
not included in budget deficit calculations.
100. Hungary had succeeded in reducing the relatively high level of inflation by about ten percentage
points in the last two years;  one of the priority policy objectives of the incoming Government was tocontinue this process.  Under the Government's prog ramme the rate of inflation was envisaged to fall to
10% by the year 2000.
101. Questions raised concerning Hungary's external balance appeared to be based on a
misunderstanding.  The current account deficit was US$982 million in 1997, less than a quarter of the
1994 level.  With the improving balance of trade, as well as increased invisibles income and capitalinflows, Hungary saw no basis for envisaging a pos sible return to the high pre-1995 current account
deficit level.  Despite faster economic growth in 1998 compared to the 4.4% rate in 1997, there was no
sign of any deterioration in the trade balance:  export growth for the first five months of 1998 was 24%
compared to 20% growth of imports.  These encouraging figures appeared to disprove the assumption of
any negative effects stemming from real appreciation of the Hungarian currency.  While the crawling-pegdevaluation of the Hungarian forint was less than the gap between the rates of inflation in Hungary and its
major export markets, this was offset by improvements in productivity in Hungary's export sectors.
International competitiveness as measured in unit labour costs had also further improved.  He believed
that, against this background, the present level of economic growth was sustainable.  The new
Government expected a higher level of growth due to the continued massive inflow of foreign direct
investment and the dynamism of the domestic sector where specific policies aimed at job creation,
strengthening of the small and medium-sized enterprise sector, and business-friendly modifications infiscal policy were foreseen.  Such modifications might include cuts in the tax level and social security
contributions.  The budgetary situation was expected to strengthen further due to improved tax collection
methods and the gradual shrinking of the unofficial sectors of the economy.
102. Regarding the possible negative effects from the Asian crisis, while no country could be fully
immune to the spillover effects from crisis-hit re gions, the Hungarian economy was, in his view, fairly
resilient to such effects.  Hungary's profound structural adjustment and mainly privatized,
well-functioning banking system and regulated capital markets, had created a healthy economic base.
The bulk of investment into Hungary was direct in vestment in the manufacturing and services sectors;
portfolio investments played only a secondary role.WT/TPR/M/40
Page 20
103. In the context of a question on Hungary's foreign investment regime, he recalled that a recent
review, under the OECD Code of Liberalisation of Capital Movements and Current Invisible Operations
and National Treatment Instrument, concluded that Hungary's liberal policy had been maintained for
foreign direct investment.  Furthermore the establishment of branches of non-resident enterprises was
allowed.  In the privatization process, Hungary ensured that foreign and domestic investors were givenequal access.  Concerning other capital movements, Hungary had taken additional liberalization
measures, beyond its original commitments in the OE CD.  As a result of these steps, all medium- and
long-term capital movements were now liberalized except for outward financial credits and certain
operations in collective investment securities.
104.  On the question of privatization, he referred to questions regarding industrial policies and
assertions of higher than average protection in certain sectors and sector-specific incentives.  It was
evident that, as in most countries, tariff and NTM protection was not uniform across sectors.  However,higher duties or other measures in a particular sector did not necessarily influence the development of
other, less-protected sectors or industries.  Investment incentives in general, and tax concessions in
particular, were equally available to any sector.
105. Responding to a question alleging large-scale state intervention and support, he recalled that the
most important feature of Hungary's transition was the dismantling of state intervention and immensereduction in direct and indirect state support.  The current share of the private sector in GDP was, at 80%,
comparable to the level in many highly developed west-European countries;  total budgetary subsidies to
enterprises had declined from over 10% of GDP to less than 2%.  Companies that remained in mainly
partial state ownership were for the most part in the non-competitive sector, for example, infrastructure
and social services.
106. Clarifying the apparent increase in price control, he stated that this was mainly due to
developments in the energy and basic utilities sector.  With the privatization of the energy distribution
system, price formulae had been introduced to control price increases at a time when the weight of energy
had greatly increased in total consumption.
107. The first discussant, noting comments on the budget deficit and fiscal policy in general, requested
clarification on measures that might be taken to strengthen the taxation system, and the basis for
Hungary's certainty regarding the shrinkage of the grey-area of the economy.  Broadening of the taxation
base, enhancement of revenue collection, and contraction of the grey-area of the economy would strongly
contribute to continuing the achievements in reducing the budget deficit and pursuing fiscal consolidation.
Regarding inflation, growth of aggregate measures of money supply remained much higher than growth
in aggregate output, M2 and M3 growth were currently close to 20%, thus fiscal policy was implicated,
and monetary policy might also be an issue in ensuring a return to greater price stability.
108. The second discussant was pleased to note that Hungary did not apply specific sectoral incentive
schemes.  The share of the private sector in the Hungarian economy was a significant indication of the
manner in which the Hungarian economy was evolving and could be compared with many highly
developed west-European countries.
109. The representative of Hungary responded th at the new Government's programme, which
specifically emphasized improving the budgetary situation through an enhanced tax collection system,
had identified two policies:  gradual reduction of the tax and social security burden to make evasion less
attractive, and continual strengthening of the coll ection system.  He noted that recent high-profile
economic crimes had resulted in the imposition of stiff sentences.WT/TPR/M/40
Page 21
110. The rate of inflation had continued to decline but at a slightly slower rate than desirable.  This
was a priority issue for the new Government, and it was expected that the inflation rate would fall from
18% in 1997 to some 14.5% by the end of 1998.  He noted that, while the current structure of the
Hungarian economy currently left little scope for major increases in private-sector participation, certain
areas of the remaining state assets might be earmarked for privatization under the new programme.
(ii) Regional integration issues
111. The representative of Hungary noted that European integration was an issue of prime interest to
delegations and he confirmed that WTO rules and commitments had been thoroughly observed during the
whole process.  The Europe Agreement was in full conformity with Article XXIV of the GATT and the
Understanding as well as with Article V of the GATS.  Hungary had not raised, due to the FTAs, any
MFN duty rates that would increase the preferential margins for the EU or other free-trade partners.
Article XXIV of the GATT clearly recognized FTAs as legitimate exemptions from themost-favoured-nation principle, thus the application of  higher MFN duties to third countries could not be
considered inconsistent with GATT rules, nor as being in conflict with the principles of multilateralism.
112. He refuted one delegation's assertion of discrimination in Hungarian tariffs and questioned their
complaint regarding the openness of the Hungarian market.  Citing trade figures that illustrated the
increasing trade imbalance between th e two countries, he stated that this country's exports to Hungary
were twelve-fold Hungary's exports to the Member country.  Thus, Hungary saw no reason to "promptly
address this serious matter and reduce this high tariff" as urged.
113. The accession process to the European Union had started only recently:  Hungary was still in the
first phase of the "acquis screening".  The terms and conditions of Hungary’s accession would be
elaborated during the forthcoming negotiations, therefore, it was premature to ponder its specific effectson third countries.  He confirmed that the integration process would continue to respect WTO rules and
duly take into account the interests of third countries.
114. On the issue of alleged large-scale trade diversion stemming from the application of preferential
tariffs between the EU and Hungary, arguments were based on a comparison of the share of the EU in
Hungarian foreign trade in 1990 and in 1996 respectively.  He disagreed with the methodology applied onvarious accounts.  First, the base year was incorrect, since the present examination covered the period
from 1991.  Furthermore, and more importantly, the base year used was misleading for an assessment of
the real effects of the FTA and its presumed trade distortion.  By 1991, before the entry into force of the
Europe Agreement provisions, the EU's share in Hungary’s imports had already reached some 57%.
Thus, a major increase in the EU’s share had already occurred, without any preferences, due to the effect
of the geographic reorientation of Hungary’s trade following the collapse of the CMEA.  In 1996, after
five years of operation of the Europe Agreement, the share of the EU was still below 60%, an increase ofless than 3%.  In light of these figures, he could not agree with the conclusion that major trade diversion
had resulted from the tariff preferences.  Third, Austria, Finland and Switzerland acceded to the European
Union in 1995, thus the trade between these countries and Hungary was not reflected in the 1991 figures,
but was included in the 1996 data.  Trade preferences with EFTA countries came into force only in 1994,
when the present member States already had a reasonable share in Hungarian foreign trade.  Fourth,imports from non-European trade partners, both in North America and in the Pacific region had grown
faster than those from EU sources.  These figures also brought into question the alleged trade diversion
disadvantaging third countries in the Hungarian market.
115. Regarding Hungary's free-trade agreements with Bulgaria and the Baltic States, these were
similar to those of the CEFTA agreement.  The agreements would be notified, following their signature,in accordance with the relevant rules of the WTO.WT/TPR/M/40
Page 22
116. The first discussant welcomed the assurances of the Hungarian delegation that MFN rates to third
parties would not be increased as a result of preferential trade arrangements.  He believed that this policy
set a good example to others and should be standard procedure in this type of arrangement.  He
recognized that free-trade agreements were, by definition, discriminatory, even though this was allowed
for in WTO rules.  The problem was with the exis ting rules.  It would not be easy to find this
arrangement, or others, in conformity with the rules.
117. He regretted that certain questions had been dealt with in terms of bilateral trade imbalances;
bilateral trade surpluses and deficits with different countries represented the working of comparative
advantage, the important issue was the overall balance of trade with all partners.
118. With respect to the reorientation of Hungary's trade, he welcomed the remarks of the Hungarian
delegation, which had clarified certain misconceptions.  There were real concerns about the compilation
of data and how this was measured.  In general, the issue of trade diversion was extremely difficult todocument and to measure.  He noted that data cite d by Hungary for growth of imports from areas other
the EU was from comparatively very low bases, and it was therefore not surprising, in the context of the
general liberalization of the Hungarian economy, that coming from quite different bases those areas
would show proportionally more rapid rates of growth.
119. The representative of Japan noted his delegation's keen interest in the impact of regional
integration from the standpoint of a country outside of most regional trade agreements.  With reference to
a previous question, regarding a tariff margin of over 25% between FTA and non-FTA partners, while
Article XXIV allowed a difference between for MFN and FTA rates, such a margin would make it
impossible for a third country to compete.  He hoped that the figures stated would be checked and that
further clarification would be forthcoming.
120. He welcomed the statement that Hungary would eliminate quantitative restrictions on an MFN
basis.  He asked whether, in the integration process with the EU, new arrangements had been established
giving sole preferential status to the EU in the allocation of quotas.  Regarding rules of origin, he noted
that Pan-European rules of origin had not yet been notified to the Committees on Regional Trade
Agreements and on Rules of Origin.  While the system had not yet been examined, he believed that thecumulation system was better than non-cumulation, howev er, he wished to know whether, in the process
of harmonization with the EU, Hungary had raised the local-content ratio to grant origin;  whether a new
value-added test had been introduced, rather than a change-in-heading system;  and whether Hungary now
required more than 50% of the value added in local content, which he believed would create trade
diverting effects for imports of content from third coun tries.  He asked whether Hungary had introduced a
new rule requiring regional content to grant origin to final products.  With regard to the issue of trade
diversion, he believed that the effects should be tested sector by sector in aggregate form.
121. The representative of the United States stated that careful consideration was required to determine
whether there had been distortive trade diversion resulting from Hungary's search for new markets.  It was
an inevitable part of economics that countries seek their neighbours.  Recognizing that it was premature to
expect comments on the specific terms of joining the EU, he hoped that Hungary would bear in mind the
concerns raised by delegations.  For example, agricultural supports were considerably lower in Hungarythan in the European Union;  the possible increase in the level of support as a result of joining the EU was
a source of concern.  In the area of services, if Hungary had to adopt the provisions of the broadcast
directive, this would constitute a form of assumed protection rather than openness or liberalization.
While, in general, accession of countries to the EU was healthy for the WTO, these were just two
examples of the potential sources of concern.WT/TPR/M/40
Page 23
122. The representative of India welcomed the assurances of the Hungarian delegation that the
integration process would continue to follow the WTO rules.  She looked forward to discussing the trade
policy elements of the Europe Agreement in the Committee on Regional Trade Agreements and hoped
that the integration process would be effected in such a manner that trade from third countries would not
be affected.
123. The representative of Canada stated that from a forward-looking perspective, expansion of the
network of preferential agreements should reduce the need for residual protection vis-à-vis  third
countries:  the necessary adjustment process that occurred when a country opened a large share of its
trade regime to its main trading partners should facilitate rather than hinder further multilateral
liberalization.  He noted, however, that areas or sectors excluded from regional agreements might
represent an impediment to further multilateral liberalization.
124. The representative of Korea was pleased to note the active discussions resulting from references
to bilateral relations, and appreciated the various comments regarding discriminatory tariffs and bilateral
trade imbalances.  If there was a discrepancy in the figures quoted he believed that these should be
addressed bilaterally.
125.  The representative of Australia took note of Hungary's responses regarding regional integration,
and was interested in receiving answers her delegation's specific questions, in particular on the
Pan-European cumulative rules of origin scheme.  On the question of EU accession, she welcomed
Hungary's assurances regarding WTO Agreements, however, she wished to register in advance concerns
regarding the possible future direction of accession policies, so that they could be taken into account.
126. The representative of the European Communities did not believe that the more rapid rise in
Hungary's imports from some groups of WTO countries than from others, between 1990 and 1996, was
evidence that Hungary's agreements with other Euro pean countries had resulted in trade diversion:
diversion occurred when margins of preference enabled preferential suppliers to push traditional suppliers
out of the market;  there was no evidence that this had happened.  To make a judgement it would be
necessary to isolate the effects of regional agreements from those of factors such as the collapse of the
CMEA, Hungary's other policies, and changes in tec hnology.  The collapse of the CMEA had been a
major factor in the increase in trade between east and west Europe, and he believed that west Europe
would have become Hungary's main supplier even in  the absence of its regional agreements.  Well
designed free-trade areas and customs unions could be trade creating not trade diverting as evidenced by
the exception provided in the WTO.  The increase in Hungary's imports between 1990 and 1996 from all
WTO Members suggested that the agreement between the EU and Hungary had led to trade creation
rather than diversion.
127. The representative of Hungary agreed that, while it was preferable not to raise issues of bilateral
trade balances in the context of multilateral discussions, he wished to clarify the specific issue of alleged
tariff discrimination for cars under 1,500cc.  The MFN tariff was currently 13%, rather than the 28%
mentioned by one delegation, and the preferential tariff rate was currently 5.9%:  thus, the difference was
around 7%, which could not be considered prohibitive.  The issue of trade diversion had to be considered
in terms of the overall picture, the relevant time element, and the collapse of the CMEA.  The Hungarianmarket had expanded very rapidly, imports were playing an increasing share in GDP, and third country
suppliers had not suffered from regional preferences.  On the question of future liberalization, Hungary
was among the countries that had argued for a broad-based new round of negotiations under the WTO,
covering all sectors.WT/TPR/M/40
Page 24
(iii) Trade and Investment Measures
128. The representative of Hungary drew attention to the marked improvement in the share of
Hungary's bound tariffs.  He noted certain discrepancies in tariff data included in the Secretariat report
and request their correction.  In reply to a specific question regarding precious stones he stated that these
were bound in the Hungarian customs tariff.
129. Hungary had notified the operation of the global quota on consumer goods in the form of
responses to the questionnaire on Import Licensing Procedures.  This notification had recently been
updated in document G/LIC/N/3/HUN/ 2.  The reason for the under-utilization of some sub-quotas was
that the annual 10% increase of quota limits in many cases exceeded actual demand.  The increase of the
value ceilings also ensured that the quota shares allocated to Hungary’s partners in free-trade agreements
did not remove import opportunities from third country suppliers.  Hungary would continue to use import
licensing for products outside the global quota - affecting 2.1% of tariff lines - due to the nature of theproducts concerned, for example, arms, ammunitions, and works of art.  As to the alleged negative impact
of quota allocation on imports of cars from one member country, sales of this member's cars in Hungary
had risen from 363 units in 1992 to 7,547 units in 1996.  One major producer from this member alone
held over 10% market share, topped only by two lo cally manufactured makes of car.  These figures were
self-explanatory.
130. Responding to questions from various delegations, he noted that the number of Hungarian
national standards was continuously decreasing as more international or European standards were
introduced.  Hungary's objective was to reach a 70 % share of international or European standards by the
time of accession to the EU.  There were currently 14,682 standards in force in Hungary, of which 2,174
were European and 1,369 international standards.  CEFTA did not contain any commitment for theharmonization of standards and technical regulations and CEFTA countries did not intend to introduce
such an obligation.  Regarding the Hungarian National Accreditation Body, this was a public association
not a government body.  The accredited testing laborato ries were located in Hungary;  testing in foreign
laboratories might be accepted on the basis of appropriate agreements concluded between the relevant
institutions.  Accession to the European Accreditation Organisation was in process.
131. Regarding a question on the safety inspection system, there was no inspection system applying to
all imported industrial goods in Hungary.  The existing safety inspection was applied for 35 products
only, including child safety seats, washing ingredients, and ceramic pots, for health and environmental
protection reasons.  This requirement was applied both to domestic and imported goods in these
categories.  There was no monopoly for carrying out the inspection.
132. In response to questions regarding subsidies and incentives, he reiterated that the most important
feature of the transition was the dismantling of state intervention and the immense reduction in direct andindirect state support.  The total budget for subsidies to enterprises had declined from over 10% of GDP
to less than 2%.  On Hungary’s investment policies, he did not agree with the statement in the Secretariat
report that "incentives may not be merely ineffective but possibly counter-productive".  Neither did
Hungary believe that the incentives provided for regional development, research activities, or for
investments in general were either excessive or against the interest of the national economy.
133. The restructuring of Hungary's steel industry had been in progress since the mid-1980s:  huge
capacities had been diminished and thousands of employees had lost their jobs.  This restructuring,
together with the privatization of the remaining production facilities, would hopefully soon be finished.
Hungary did not provide any WTO-inconsistent subsidies to this sector.WT/TPR/M/40
Page 25
134. On the question of subsidies, Hungary confirmed that incentives for R&D and regional
development were being provided in conformity with Article 8 of the SCM Agreement.  Tax concessions
to promote export-oriented product development and to promote investments in the production of
exportable goods were abolished on 1 January 1997.  Consumer subsidies were being provided for local
and long-distance passenger transport and pharmaceuticals.
135. A new law on government procurement had been in force since 1 January 1996.  The law
provided for very transparent rules for a wide range of public procurements ranging from central
government purchases through local government to pub lic company procurement.  Provisions included a
10% price preference for suppliers registered in Hungary.  On the basis of this legislation, Hungary was
actively participating in the work of the Working Gr oup on Transparency in Government Procurement, as
well as in the Committee on GATS Rules, where future government procurement rules in services
procurement were being negotiated.  For the time be ing Hungary did not intend to join the Agreement on
Government Procurement.
136. There were no state trading enterprises in Hungary in the sense of Article XVII of the GATT and
the relevant Understanding, since as a result of th e economic transformation such activities had been fully
discontinued.  Privatization in the context of the full market economy had been completed:  no sectors or
industries were excluded from further privatizat ion.  The Government would review privatization
possibilities and make its decision accordingly.
137. Hungary's Competition Law, adopted in 1990, provided a coherent and comprehensive regulatory
framework for  the functioning of a market economy.  Based on the experiences gained from its
operation, this law was amended in 1996 and at present was fully compatible with competition legislation
in the developed market economies.
138. A question had been posed about  the evolution of trade policies relevant to TRIPS, and Hungary's
views on copyright and patent protection had been sought.  He noted that the overall development of
Hungary's intellectual property protection had been outlined during the review of national legislations in
the TRIPS Council.  Hungary was member of the major international agreements and conventions both
for copyrights and related rights as well as for industrial property rights.  Furthermore, during the periodunder review several new laws had entered into force, thus Hungarian legislation in this sector not only
complied with obligations under the TRIPS Agreement, but as a result of the legal harmonization with
that of the EU, in several aspects went beyond those requirements.  Regarding Hungary’s views on
copyright protection, the relevant Hungarian authoritie s intended to ratify both the new WIPO Copyright
Treaty and the WIPO Treaty on Performances and Phonograms.  He noted that Hungarian industrial
property legislation already provided for the patentability of new plant varieties.
139. Regarding a question on enforcement, he believed that the doubts on low enforcement of
intellectual property rights were based on the existence of tax evasion.  He emphasized that the
enforcement of intellectual property rights had been gaining importance in Hungary even before the
TRIPS Agreement entered into force.  However, sin ce then efforts to increase the efficiency of law
enforcement had been reinforced and extended.  Hungarian legislation fully complied with the
requirements of the TRIPS Agreement, including Part III.  In order to permit effective action against anyact of infringement of intellectual property rights covered by the Agreement, Hungary had ensured that
adequate remedies and appropriate procedures were available in all branches of legislation.  Breach of
laws on the protection of patents, copyright, industrial designs, topographies of integrated circuits, utility
models, trade marks and geographical indications could be sanctioned through civil and criminal law
procedures.  By virtue of a government decree customs authorities were empowered to prevent the
importation of goods infringing intellectual property rights.  The number of infringement cases had beenWT/TPR/M/40
Page 26
significantly reduced.  Details of laws and regulations on enforcement of intellectual property rights could
be found in Hungary's notifications to the TRIPS Council.
140. A question had been raised regarding the exception applied under Hungarian law from exclusive
rights conferred by a patent,, particularly in the pharmaceutical industry, for experiments and testing.  In
response, he stated that Section 19(2) of the Patent Act provided for all exclusive rights required byArticle 28 of the TRIPS Agreement.  The TRIPS Agreement did not require Members to grant exclusive
rights concerning experiments, tests and generation of  data.  Moreover, Article 30 provided that members
were permitted to apply limited exceptions to the exclusive rights conferred by a patent as long as such
exceptions did not unreasonably conflict with normal exploitation and unreasonably prejudice the
legitimate interest of the patent owner.  The exceptions provided for in Section 19 of the Hungarian Patent
Law were limited to acts done privately or not involved in an economic activity, to acts done for
experimental purposes, including experiments and tests necessary for the registration of medicines, and touse of the patent in individual cases, for preparing a medicine.  Thus such acts, according to generally
accepted international norms, were not considered to be unreasonably in conflict with the normal
exploitation of the patent.  The creation of the exceptions in the Hungarian Patent Law took due account
of the legitimate interests of third parties and in Hungary's view was in accordance with the TRIPS
Agreement.  Furthermore, Hungarian legislation was fully harmonized with the Luxembourg Agreement
on Community Patents (CPC).  So far, no case had been reported in Hungary on the application of
Section 19(6) of the Patent Act.
141.  With reference to trade defence instruments, the applicable procedural requirements and the
type of remedial actions were, in Hungary's view, totally different for anti-dumping/countervailing and
safeguard measures.  The competent authorities evaluated all requests for safeguard, anti-dumping orcountervailing actions on the basis of the relevant international rules and Hungarian legislation, and
made their decisions according to the merit of the case.  At present certain non-WTO members were
subject to safeguard measures in the form of import quotas.
142. No incentives were applied in Hungary in the sense of the TRIMS Agreement.  Examples cited in
the Secretariat report did not support the view that incentives were sometimes conditional uponlocal-content requirements.  The tax allowance conditional upon export performance was not a TRIM,
thus it was notified by Hungary under the SCM Agreemen t.  The reference to local content suggested that
the requirement for offshore companies to employ only domestic lawyers constituted a TRIM, he
questioned how such an employment requirement might be regarded as a local-content condition in the
sense of the TRIMs Agreement.
143. Responding a question on rules of origin, specifically the Pan-European Cumulation System, he
pointed out that the system was applied in all free-trade agreements within Europe.  The new systemlinked more than thirty countries (the EU Member States, the EFTA States, ten countries in central and
eastern Europe and, through special legal instruments, Andorra and San Marino).  Turkey and Israel were
not yet members of the system.  Hungary believed that the implementation of the Pan-European
Cumulation System would have positive effect both for the participants and third countries.  For firms
established in Europe, including foreign-owned firms, it allowed more freedom to use input material or indeciding where to locate their production facilities.  With regard to third country materials, the new rules
were generally more flexible as they provided general tolerance rules as well as alternative processing
rules allowing more input of third country materials.  The parties would shortly be sending the relevant
notifications to the Committees on Rules of Origin  and Regional Trade Agreements for an in-depth
review of the system.  He believed that there had been a misunderstanding on the effects of theintroduction of the new system:  there had been no change to European rules of origin, which required
60% originating content.WT/TPR/M/40
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144. On trade facilitation, the introduction of the fully computerized customs-clearance system was in
its final stage;  fast-track processing for authorized trade was already in operation.  Pre-arrival procedures
would be introduced by the time the fully computerized customs clearance system was in operation.  In
response to a question on the application of the simplified customs valuation procedures, this was only
possible for imports of certain products, including fruit, vegetables and cut flowers.  An average worldmarket price was calculated by the customs authorities and the importer had the right to choose whether
to accept.  Importers accepting the average price should not declare the transaction value.
145. Regarding free-trade zones, incorporated companies could obtain permission to operate under
customs-free status.  These zones were regarded as falling outside the Hungarian customs territory;
consequently, all foreign trade regulations were applied on exports and imports between duty-free zones
and the Hungarian customs territory.
146. The second discussant asked whether preferences on imports of raw materials were part of a
particular trade policy orientation.  Regarding standards, he was interested to know whether the
differences between Hungarian and international, regi onal, or European standards had created any market
access difficulties for Hungarian products,  and whether mutual recognition agreements were a way of
resolving these problems.  He asked for clarification of the functioning of the regulatory government
institutions responsible for the implementation and application of trade policies, given the reorientation oftrade, and the accession negotiations.
147. The representative of Japan asked whether the correction requested by Hungary to certain data in
the Secretariat report meant that the simple average MFN tariff rate was not beyond the bound tariff rate.
Regarding intellectual property rights, he noted that Japanese industries were concerned about the
enforcement of intellectual property regulations in  Hungary, and hoped that the Government would take
appropriate measure to improve enforcement.  He noted the statement that Hungary had no incentives
falling within the TRIMs Agreement and asked for further clarification of this statement.
148. The representative of New Zealand recalled his delegation's questions regarding the expected
completion of Hungary's process of adopting interna tional and/or EU standards, and the proportion that
would be based on EU standards and on international standards.
149. The representative of Hungary confirmed that, as was the case in many other countries, raw
materials generally carried lower tariffs than processed products.  The difference, however, was likely to
fall with the tariff reductions undertaken under the Uruguay Round.  On the question of standards,
Hungary had not experienced problems of access to the European market for two main reasons:  the
Hungarian technical cultural was largely based on German sciences and specifications, thus a large
number of the Hungarian standards were technically very similar to European standards.  However, he
was unable to clarify the percentage of international as against European standards.  Under legalharmonization, Hungary was attempting to approach, as closely as technical and financial conditions
allowed, the standards used by the European Union.  This was in Hungary's best interests as exports
needed to be compatible with European market requirements, and because foreign investors preferred not
to face a variety of standards.  On the issue of introduction of new regulatory infrastructure due to trade
reorientation, all economic and trade regulations were now market based;  technical regulations were inthe process of  harmonization.
150. In response to a question on TRIMS, he reiterated that Hungary did not have any regulations
falling under the TRIMs Agreement.  The incentive related to production performance had been notified
under the WTO subsidies code.  On the question of TRIPS enforcement, reinforced laws had recently
been introduced, and while it would take time to see any real effects, Hungary was confident that theywould prove to be more effective than previous legislation.  Concerning the levels of the applied andWT/TPR/M/40
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bound rates, it was impossible for average applied rates to exceed bound rates in respect of chapters
falling under the Agreement on Agriculture, as such products were bound.  In some industrial sectors,
however, the applied tariff on some products falling within chapters that were not bound, may exceed the
average bound rate for the sector;  this would inevitably increase the average rate of applied duties.
(iv) Sectoral issues
151. With reference to legislation on agricultural land, the proposed Land Bill had recently been
withdrawn from Parliament:  under the new Governme nt's programme, there was no intention to change
the present conditions for land ownership in the near future.  Compensation bills had been provided since
1991 to former landowners, based on the value of their land or other expropriated property.  These bills
had been the major means for the privatization of agricultural land.  The process had recently come to an
end.
152. Reference had been made to the apparently high level of Hungarian tariffs in the agriculture
sector.  In response, he draw attention to the Hungarian Schedule.  Given the level of agricultural tariffs
and the fact that these were expressed in ad valorem  terms without additional requirements, it was evident
that the Hungarian agricultural import regime was not excessively protective, especially in the European
context.
153. Since 1995, agricultural products were affected only by tariffs.  The increased dispersion of
applied tariff rates since 1991 was due to tariffication in the agriculture sector, and was a reflection of the
varying effects of NTMs on different agricultural products prior to 1995, not an indication of a higher
degree of distortion.
154. Seasonal tariffs were applied to imports of po tatoes, tomatoes, cauliflower, broccoli, lettuce,
celeriac, cucumbers, leguminous vegetables, other vegetables, avocados, citrus fruit, grapes, melons,apples, pears, apricots, cherries, sour-cherries, peaches, plums, strawberries, and kiwifruit.  Seasonal
tariffs did not normally vary, since their introduction was mainly the result of applying the EC Combined
Nomenclature.  Tariff rates for agricultural products had been subject to annual reductions since 1995, in
accordance with the Hungarian Schedule.  They would reach the final bound commitment level by 2000.
155. In 1997 MFN tariff rates for cereal grains and animal or vegetable fats and oils were below the
in-quota tariff rates, consequently tariff quotas were not opened.  In the case of two other product groups
in-quota tariff rates were set significantly below the levels contained in the Schedule.  This was an
autonomous liberalization measure by Hungary.
156. Regarding a statement on the lack of preferential agricultural access for EU and EFTA partners,
he pointed out that the Europe Agreement did, in fact, contain agricultural market access concessions.
157. Law CXXXI of 1996, on plant certification, and approval, production, and sale of plant seed and
propagating material, came into force on 1 March 1997.  Its aim was to ensure the preservation and theuse of high-quality genetic materials.  Under the law only certified plant types may be marketed in
Hungary.  This practice was in line with the OECD scheme for variety certification of herbage and oil
seed in international trade.
158. Besides advisory services and agricultural research programmes, green-box subsidies were
mainly aimed at providing assistance for structural adjustment and to disadvantaged regions, andpromoting soil conservation activities.  The first prog ramme was intended to facilitate the organizational
and structural adjustment of the agriculture sector in the context of re-privatization of agricultural land in
accordance with paragraph 11 of Annex 2 of the Agreement on Agriculture.  The second programme
provided assistance for rural development in disadvantaged regions and met the criteria of paragraph 13WT/TPR/M/40
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of Annex 2.  The third programme was aimed at co-financing soil conservation measures and their
feasibility studies in order to protect farmland.  This support measure fell under paragraph 5 of Annex 2
of the Agreement on Agriculture.  These programmes met both the fundamental and the relevant
policy-specific criteria of "green box".  Agricultural domestic support measures were notified on 11
December 1997 in document nG/AG/N/HUN/10 and Corr.1.
159. On the basis of the Agricultural Market Regulation Act of 1993 guaranteed prices could be set for
five products:  wheat for human consumption, maize for feeding purposes, milk, beef for slaughter and
pig for slaughter.  The prices were set below the cost of production and were intended to provide an
income safety net.  Until 1997, domestic market prices remained above the guaranteed prices and the
support programme was therefore not operational.  Such purchases first took place between 1 December
1997 and 1 March 1998:  subject to a quantity limit of 3.2 tonnes/ha, maize for feeding purposes could be
sold to the State at a price of Ft 15,000/tonne;  actual sales amounted to 44,000 tonnes.  Measures topromote the establishment of optimal farm structures were still under consideration;  the criteria had not
been elaborated.
160. During the Uruguay Round Hungary committed itself to reducing its level of domestic support
measured by total AMS by 20% from the level of the base period (1986-88).  There was no obligation
under the WTO to reduce current domestic support or notify such reductions.  Notifications for the recentperiod would be submitted in the near future.
161. He understood the concerns expressed regarding the use of export restrictions and agreed that
such measures should be used exclusively in cases identified in the relevant WTO provisions.  Hungary's
export restrictions were introduced in recent years only to address serious shortages.  The measures were
in conformity with Article XI(2)a of GATT 1994 and Article 12.1 of the Agreement on Agriculture.  Therestrictions introduced in 1996 were maintained only for maize.  Export licences are no longer required
for barley, wheat and meslin flour, other cereal flours, cereal groats, meal and pellets, cereals grains
otherwise worked and cereal preparations used for animal feed.  Export licensing for barley was abolished
in 1998 and for the other products in 1997.  Export licensing in Hungary was not restrictive:  in 1998
export of maize had been limited to 500,000 tonnes, applications had been made for only 400,000 tonnes.A reimbursable deposit of Ft 500 per tonne was payable for these licences;  the deposit could be
reclaimed if at least 80% of the quantity applied for was exported.  Concerns had been raised concerning
the feeding method of geese in Hungary.  To remedy this situation Hungary had introduced
non-discriminatory export licensing as part of the Government's general policy to improve animal
welfare, reflected in the recent adoption of Law No. XXVIII on the protection of animals, which would
enter into force on 1 January 1999.
162. Several delegations raised the issue of the WTO-waiver on export subsidies granted to Hungary
on 22 October 1997.  He reaffirmed that Hungary strictly adhered to the terms and conditions laid down
in the waiver and contained in its Schedule.
163. EU accession negotiations in agriculture would not commence before 1999, thus, he believed that
questions on the treatment of Hungary’s export subsidy commitments upon accession were premature.
164. Regarding enquiries on SPS regulations, Law XC on food entered into force on 1 January 1996.
The law contained detailed rules on the general conditions of food production, of placing food on the
market, on packaging and consumer information, and controls and measures that could be taken by the
authorities to ensure compliance with the provisions  of the law.  Its objectives were to determine
production and marketing conditions for raw, semi-processed and processed food for public consumption
that ensured the protection of consumer health and interests, and the fairness of market competition, andthe promotion of free flow of these goods betwee n countries.  Hungary had increasingly used theWT/TPR/M/40
Page 30
standards set by the Codex Alimentarius Commission of  the FAO, and EC regulations in this field.  The
move away from national standards would be comple ted in 1999.  Hungary was in full compliance with
the provisions of Article 5.1 of the SPS Agreement.
165. As regards the textiles and clothing sector, Hungary had removed quantitative restrictions on
textiles and clothing products for all WTO member s as of 1 January 1998.  Along with many other
countries, Hungary applied the practice of outward processing;  the share of OPT was admittedly rather
high in the textile and clothing industry.  International practice was respected in that imported inputs were
duty free on the condition that after processing the end-products were exported.
166. The motor vehicles industry was one of the most dynamic export-oriented industries in Hungary,
particularly component production, which attracted a lot of foreign direct investment.  As a result of this
investment, Hungary had become part of the wo rld-wide production network of component production.
In response to a question on PMVs, he noted that the MFN tariff on cars under 1,500 cc was 13% not28%.  The preferential tariff rate for free-trade partners was 5.9% and not 0%.  He believed that the 7%
difference could not be considered discriminatory, as had been claimed.  Concerning charges, Hungary
applied no differential treatment.
167. Replying to a question regarding pharmaceuticals, he stated that the protection of consumers was
the rationale behind the restriction of sales of medicines to pharmacies only through authorizeddistributors.  He noted that these distributors were not state-owned companies;  any enterprise meeting the
specific requirements set by law could act as distributor.  Distribution services were liberalized in
Hungary's GATS Schedule.
168. A question had been raised regarding Hungary's high level of commitments and whether there
was enough flexibility to modify these commitments.  He stated that it was not the intention of theHungarian authorities to withdraw commitments ma de under the GATS.  In the event that unforeseen
circumstances required Hungary to make any change in its Schedule it would use the relevant GATS
provisions on safeguards contained in Article X, or on Modifications of Schedules contained in Article
XXI.  Hungary was disappointed at the pace and main direction of the negotiation on safeguards and
modification of schedules.  Hungary had made libe ral commitments on the assumption that simple and
flexible rules would be developed to adequately address temporary or permanent changes in the
economic environment in services.
169. He recognized that movement of natural persons was generally not the most liberal mode of
supply under the GATS, as was the case in Hungary's preferential agreements.  Hungary's commitments
under mode 4 were in line with the general level of liberalization of WTO Members;  however, Hungary
undertook to provide access for key personnel and business visitors.  He agreed that there was a delicate
interrelation between immigration policy and trade policy.  Hungary, had undertaken to allow theestablishment of commercial presence through the form of branches in the recent negotiations on
financial services:  as of 1 January 1998 branching was allowed not only for financial services.
170. In response to a question regarding Hungary's MFN exemption, he recalled that under the recent
negotiations on financial services, Hungary undertook to liberalize not only its Schedule of specific
commitments but also its MFN exemption list.  Compulsory government licensing for the establishmentof financial services providers would thus be wit hdrawn when the new commitments entered into force,
hopefully, in early 1999.  Under GATS provisions Hungary's MFN exemption list would be subject to
negotiation in the next round.
171. A question was raised regarding the possibility of advancing the date of liberalization of basic
telecommunication services.  Exclusive rights were granted by the Government in business contractsWT/TPR/M/40
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under Civil Law, therefore, the Government had legal obligations towards investors to keep the
parameters contained in Hungary's telecom schedules unchanged.  However, he drew attention to the very
competitive nature of the Hungarian telecommunications market as illustrated by the rapid penetration of
new technical innovations and of competitive prices.  In local districts two operators were licensed in
order to enhance competition, in addition there was strong competition between and among wire-basedand cellular services providers.
172. On air transport services, he pointed out that the GATS Annex on Air Transport Services
practically excluded air transport services from the scope of the Agreement, other than aircraft repair and
maintenance, sales and marketing of air transport se rvices, and computer reservations services.  These
activities were included in the Hungarian Schedule but Hungary had no other obligations on air transport
services under the GATS Agreement.  He added that the Hungarian national carrier, MALEV was now
being privatized;  negotiations with potential investors were ongoing.WT/TPR/M/40
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VII. CONCLUDING REMARKS BY THE CHAIRPERSON
173. The second Trade Policy Review of Hungary was conducted by the TPR Body on 7-8 July 1998.
These remarks, prepared on my own responsibility, are intended to summarize the main points of the
discussion;  they are not intended as a full report.  Details of the discussion will be reflected in the
minutes.
174. The discussion developed under four main themes:  (i) economic background and transition
issues;  (ii) regional integration issues;  (iii) trade and investment measures;  and (iv) sectoral issues.
(i) Economic background and transition issues
175. Members congratulated Hungary on the remarkable changes that had been achieved, during the
short period since the previous TPR in 1991, in its transition to a market-oriented economy.  It was
recognized that these changes had taken place under difficult economic and social conditions, including
the collapse of trade with the CMEA, the bankruptcy of a large number of companies and the consequenttemporary loss of jobs.  Members welcomed the fact that, despite these circumstances, Hungary had
pursued its liberalization process and continued to make an important contribution to the WTO.
176. With regard to macroeconomic management, Members recognized the Government's
achievement in restoring domestic and external balance following the March 1995 stabilization package.
However, questions were raised as to whether fiscal consolidation could be maintained in the absence offurther large-scale receipts from privatization, now in its final phase, and in view of difficulties in creating
an efficient and equitable tax collection system.  Questions were also raised whether the impact on the
external balance of recent real effective appreciation of the currency might not lead to renewed
contractionary measures.
177. In response, the representative of Hungary said that the improvement in government finances was
not the result of a one-time windfall from privatization, but due to cuts in government expenditures.  The
budgetary situation was expected to strengthen further, due to improved tax collection methods and to the
gradual shrinking of the unofficial, grey sector of the economy as tax rates were to be reduced.  He added
that improvements in the trade and current account balances implied that there would be few risks of
negative effects from the real appreciation of the currency.  While the crawling-peg devaluation of theforint might have been lower than the difference between  the rates of inflation in Hungary and in its major
export markets, this gap was offset by productivity improvements in Hungarian exporting sectors.
178. While welcoming the considerable structural changes to the economy through privatization and
the role of the price mechanism in allocating resources, Members sought clarification of the role of
industrial policies, including investment incentives, in influencing the future structure of the economy.  In
response, the representative of Hungary emphasize d that direct investment in Hungary was fully
liberalized.  Hungary did not apply specific sectoral incentive schemes;  investment incentives in general,and tax concessions in particular, were equally available to any sector.
(ii) Regional integration issues
179. Members recognized that the move toward EU accession had been a major element in Hungary's
liberalization process.  However, questions were raised on possible trade diversion stemming from
preferences, and there was a considerable debate on this issue and its systemic implications.  In response,the representative of Hungary stressed that WTO rules and commitments had been, and would be,
thoroughly observed during the whole process of integration into the European Union.  He rejected
allegations that European integration had diverted trade to the disadvantage of third countries;  on the one
hand, trade flows had moved in favour of western ma rkets, following the collapse of the CMEA, andWT/TPR/M/40
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before the introduction of EU preferences;  on the ot her, imports from non-European trade partners, both
in North America and in the Pacific region, had grown faster than those from EU sources.
(iii) Trade and investment measures
180. Members raised concerns over the scope of unbound tariffs on a number of items, such as some
fish products, footwear, precious stones, transporta tion equipment and agricultural products, and on the
average levels of bound and applied tariffs in some areas.  In response, the Hungarian representative
noted that 95.7% of tariff lines were bound and that the data on bound and applied items in the Secretariat
report reflected averaging of bound and unbound items.
181. While welcoming the phase-out of the global quota on consumer goods, Members raised
questions concerning its allocation and the reasons for its under-utilization.  Members also sought
clarification of the Government's future import and export licensing policies.  In response, the Hungarian
representative said that details of the operation of the quota had already been notified to the WTO.  Thereasons for the under-utilization of some subquotas was that the yearly 10% increase of the quota in many
cases exceeds the actual demands.
182. Members also raised questions on:  the alignment of technical regulations and standards to
international norms, as well as inspection procedures;  investment incentives conditional upon export
performance and plans to notify existing TRIMs to the WTO;  Hungary's attitude to joining the
Government Procurement Agreement, to which it is not a party;  state-trading, and plans and priorities to
further reduce Government involvement in enterprises through privatization;  and the enforcement of laws
pertaining to the protection of intellectual property.
183. In response to these issues, the representative of Hungary pointed out that the number of
Hungarian national standards was continuously decreasing, the objective being to reach a 70% share ofinternational or European standards by Hungary's accession to the EU.  Only 35 industrial products were
subject to inspection (on health and environmental grounds), with domestic and imported products treated
identically.  He emphasized that Hungary had no incentives in the sense of the TRIMs Agreement.  On
government procurement, the representative of Hungary called attention to the transparency of the new
law introduced from 1996.  Having weighed the pros and cons of possible accession, Hungary did not
intend to join the Plurilateral Agreement at this stage;  however, it was participating actively in the
Working Group on Transparency in Government Procurement  as well as in the Committee on GATS
Rules, where future government procurement rules are being negotiated.  On state trading and
privatization, the representative of Hungary stated that there was no State trading in the sense of GATT
Article XVII.  In the context of the full market economy, no sectors or industries were excluded from
further privatization.  On intellectual property rights, the representative stressed that Hungary's present
legislation complied fully with the requirements of th e TRIPS Agreement.  As a result of new legislation
and enforcement efforts, the number of infringement cases had been significantly reduced.
(iv) Sectoral issues
184. On agriculture, food and beverages, Members raised various questions referring in particular to
land ownership;  tariffs;  plant certification;  SPS measures;  the nature and value of various types of
support;  and export restrictions and subsidies.  The representative of Hungary responded that there wereno plans to change land ownership regulations at  present:  compensation for former landowners had
recently been ended.  The Hungarian agricultural tariff regime was, as shown in its WTO Schedule, one
of the most liberal among WTO Members.  The increase in tariff dispersion was the consequence of
tariffication, which reflected the variable effects of previous agricultural NTMs.  Only certified plant
types could be marketed in Hungary, consistent with OECD provisions:  SPS standards were becomingWT/TPR/M/40
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internationalized under the 1995 Food Law.  Domestic support, justified under "green box" provisions,
involved advisory services and agricultural research  programmes together with assistance for structural
adjustment, to disadvantaged regions, and for the prom otion of soil conservation.  Guaranteed prices were
set for five products, below the cost of production;  intervention had been used only once.  Export
licensing was maintained only on maize, and was not restrictive in practice.  As regards export subsidies,the representative reaffirmed Hungary's strict adhe rence to the terms and conditions laid down in the
WTO waiver.
185. On motor vehicles, the representative of Hungary rejected allegations by Members that
preferential tariffs and quotas related to regional trade agreements adversely affected third parties, citing
the success of a Korean company in increasing exports to the Hungarian market during the period
1992-96.  He added that the restriction on importation of used cars over four years old was designed to
prevent Hungary becoming a "garbage cemetery" for used cars.
186. Members raised questions on trade measures applying to textiles and clothing, referring in
particular to outward processing trade (OPT), and to wholesale activities for pharmaceuticals.  The
representative acknowledged that the share of OPT was high, reflecting existing patterns of trade.
Hungary respected international practices in this regard;  i.e., material inputs  are imported duty-free on
condition that end products are subsequently exported.  On pharmaceuticals, legal provisions were inforce to maintain health protection;  the wholesale sector was open to foreign participation.
187. On services, Members welcomed Hungary's high level of commitments in the GATS.  It was
asked whether this level provided sufficient flexibility for Hungary;  if establishment of foreign branches
in Hungary was allowed for services other than fi nancial;  and whether the Government would advance
the date for liberalization of national and international telephone services.  The representative of Hungaryreplied that Hungary would not withdraw its GATS commitments;  in unforeseen circumstances, GATS
rules would be followed.  He confirmed that, as of 1 January 1998, all restrictions on foreign branching,
including in financial services, had been abolished.  As regards advanced liberalization of
telecommunication services, the representative replied that the Government had a legal obligation to
maintain the exclusive rights granted in business cont racts with investors for the agreed periods, however,
there was strong competition in the market.
188. Hungary's participation in this review has reflec ted its strong commitment to the WTO process, as
well as the positive effects of its transition to a market economy.  The statements made on Tuesday, and
again this morning, have indeed been helpful to Members.
189. I would agree with the view expressed by several delegations that Members have much to learn
from Hungary's process of transition to a market economy and the role of trade and investment
liberalization in this process.  There has also been  quite a lively debate, in this connection, on systemic
issues related to regionalism and its effects in terms of possible trade creation and diversion; these issues
will, no doubt, be followed appropriately in the CRTA.
190. Finally, I should like to thank the delegation of Hungary, led by Dr. Balás, for their clear
statements yesterday and today, and its positive partic ipation in the review;  and also thank our two expert
discussants, Dr. Raby and Mr. Mukerji, for their very useful opening remarks yesterday and follow-upcomments today.  The overall success of this review has also largely depended on the full participation of
other delegations, to whom I express my gratitude.  I wish Hungary success in their endeavours in the
further opening up of their economy in line with their WTO obligations.
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