RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG13/W/1
28 September 2000
(00-3927)
Committee on Regional Trade Agreements
DRAFT REPORT ON THE EXAMINATION OF THE FREE TRADE AGREEMENT
BETWEEN THE EFTA STATES AND HUNGARY
Note by the Chairman
Following extensive consultations among interested Members, I am submitting below a draft
report on the examination of the Free Trade Agreement between the EFTA States and Hungary, for
consideration by the Committee on Regional Trade Ag reements and transmission to Council for Trade
in Goods for approval.
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DRAFT REPORT ON THE EXAMINATION OF THE FREE TRADE AGREEMENT
BETWEEN THE EFTA STATES AND HUNGARY
The Committee on Regional Trade Agreements (hereinafter the CRTA or the Committee), in
pursuance of item 1(a) of its Terms of Reference,1 presents its Report on the examination of the Free
Trade Agreement between the EFTA States and Hungar y to the Council for Trade in Goods, as agreed
at the CRTA 2..th Session, on … 2000.
This Report does not affect the rights and obligations provided for in the WTO Agreements.
I. BACKGROUND
1. In 1990, the European Free Trade Association (EFTA) States - Iceland, Liechtenstein,
Norway and Switzerland (at that time also incl uding Austria, Finland and Sweden) - concluded a
Declaration of Cooperation with Hungary.  The Free Trade Agreement between the EFTA States and
Hungary (hereinafter EFTA-Hungary FTA or Ag reement) was signed on 29 March 1993, as one of
the instruments relevant to creating a free-trade area, in an effort to develop further economic
cooperation and trade relations between the EFTA States and the Central and East European
Countries and to support these countries' transition to market economies and integration into the world
economy by contributing to the creation of a European-wide free trade system.
2. The Agreement contains substantive rules governing trade in goods, as well as disciplines in
other areas not governed by the scope of the examination process, such as intellectual property and
competition policy.  Within the framework of the Agreement, arrangements concerning trade in basic
agricultural products were concluded between each of the EFTA States and Hungary.
3. The EFTA-Hungary FTA and related instruments were applied provisionally as from
1 October 1993.  Formal entry into force for each of the Parties involved was as follows:
                                                     
1 Document WT/L/127.WT/REG13/W/1
Page 2
Hungary 1 October 1993
Iceland 1 June 1994
Liechtenstein 1 October 1994
Norway 1 October 1993
Switzerland 1 June 1994
4. In the first half of 1997, the Parties implemented rules of origin based on the concept of pan-
European cumulation.  The System of European Cumulation of Origin was notified to the WTO on
1 July 1998.
II. EXAMINATION PROCESS
A. NOTIFICATION AND PROVISION OF WRITTEN INFORMATION
5. The EFTA-Hungary FTA was notified as a free-trade area to the CONTRACTING PARTIES
on 7 December 1993, under the provisions of paragraph 7(a) of GATT Article XXIV.
6. The following documentation was provided to the Committee:
L/7360/Rev.1 Notification of the Agreement
L/7360/Add.1 Text of the Agreement2
WT/REG13/2 Questions and RepliesWT/REG13/3 Additional information provided on the basis of the Standard
Format
3
WT/REG/GEN/N/1 Notification on the System of European Cumulation of
Origin
WT/REG/GEN/1 & Add.1 Questions and Replies – System of European Cumulation of
Origin
B. EXAMINATION
7. To examine the Agreement in light of the relevant provisions of the GATT 1947, the GATT
Council established a Working Party at its meeting on 23 October 1993.  Subsequent to the WTO's
entry into force on 1 January 1995, the following terms of reference were adopted by the General
Council on 11 July 1995 (document WT/REG13/1):
"To examine, in light of the relevant provisions of the GATT 1994, the Free Trade
Agreement between the EFTA States and Hungary, and to submit a report to the Council
for Trade in Goods."
8. At that same meeting, the Chairman of the Council for Trade in Goods read out the following
Understanding regarding the examination:
"It is understood that the statement read out by the Chairman of the Council for Trade in
Goods under item 7 of the Agenda of its meeting on 20 February 1995, as contained in
document WT/REG3/1, applies mutatis mutandis  to this examination.  It is also
                                                     
2Copies of the Annexes and Protocols related to th e Agreement, as well as bilateral agricultural
arrangements, were made available for interested delegations.
3Consolidated information on EFTA Free Trade Agreements with Bulgaria, Hungary, Israel,
Poland, Romania and Slovenia.WT/REG13/W/1
Page 3
understood that, during the examination, due account will be taken of the intrinsic
differences between customs unions and free-trade areas."
9. At the time that the examination of the EFTA-Hungary FTA was transmitted to the CRTA,
the previously established Working Party had not yet held any meeting.  However, the Parties had
already begun to provide responses to written questions put forward.
10. The Committee examined the EFTA-Hungary FTA on its own merits though, for practical
reasons, did so together with a number of other agreements concluded between EFTA States and
European countries and Israel.  The examination was conducted on the basis of the Standard Format.
The proceedings of the two meetings devoted to the examination (17 September 1996 and
17 March 1997) are contained in documents WT/REG13/M/1&Rev.1 and WT/REG13/M/2; the
proceedings of the three meetings devoted to the discussion of the European System of Cumulation of
Origin (23 September and 1 December 1998, and 30 April 1999) are contained in documents
WT/REG/GEN/M/1-2 and WT/REG/GEN/M/4.  Thes e proceedings are to be considered as an
integral part of this Report.
III. FACTUAL RECORD OF THE EXAMINATION IN ACCORDANCE WITH THE
TERMS OF REFERENCE
11. Article XXIV:7(a) of the GATT 1994 states that "Any contracting party deciding to enter into
a ... free trade area ... shall promptly notify the CONTRACTING PARTIES and shall make available
to them such information regarding the proposed ... area  as will enable them to make such reports and
recommendations to contracting parties as they may deem appropriate".  The Committee observed
that the EFTA-Hungary FTA and related instruments had been notified to the GATT eight months
after signature of the Agreement and two months after its provisional application  (entry into force for
Hungary and the first EFTA  State).
12. The Parties provided Members with statistics and information of a general nature, as well as
detailed information on specific aspects of the Agreement in response to the written and oral questions
put forward.  With respect to the trade statistics provided, opinions differed regarding whether the
provision of additional tariff-line information, including the share of tariff lines subjected to dutyelimination in total tariff lines, was required; this issue remained unresolved and is under
consideration in the Committee's systemic debate.
13. Article XXIV:8(b) states that a free trade area is "a group of two or more customs territories
in which the duties and other restrictive regulations of commerce (except, where necessary, those
permitted under Articles XI, XII, XIII, XIV and XX) are eliminated on substantially all the tradebetween the constituent territories in pr oducts originating in such territories".
14. In this context, the Committee was informed by the Parties that:
(a) the Agreement stipulated that duties and other restrictions on originating industrial
goods (HS Chapters 25-97) and on fish a nd other marine products would, with some
exceptions, be abolished by the EFTA States  on the entry into force of the Agreement
and would be progressively phased out by January 2001 in the case of Hungary;
(b) basic agricultural products were the subject of separate bilateral arrangements
between the EFTA States and Hungary; and,
(c) with respect to basic and processed agricultural products, the EFTA States, with some
variations between countries, had abolished or reduced duties from the Agreement'sWT/REG13/W/1
Page 4
entry into force; and Hungary had granted progressive reductions of duties, including
to zero rates in some cases, on imports of [certain basic and processed] agricultural
products; on certain agricultural products, specific, preferential tariff quotas were
established within the framework of the Agreement.
15. Views diverged regarding the meaning of the te rm "substantially all the trade" and the scope
of the term "other restrictive regulations of commerce", which are subjects of debate in theCommittee's on-going work on systemic issues.
16. The Parties provided data showing that products on which duties were eliminated or reduced
between the Parties accounted for 94.7 per cent of EFTA  States' total exports to and imports from
Hungary in 1995, including 100 per cent of two-way tr ade in industrial products; for agricultural
products, including those under bilateral agreements with individual EFTA States, duty eliminations
or reductions accounted for  73.0 per cent of EFTA exports to Hungary and 28.7 per cent of EFTA
imports from Hungary of agricultural products.  In this respect, there was disagreement amongMembers regarding the relevance of "duty reductions" in relation to the elimination of duties required
in Article XXIV:8(b).
17. Opinions differed regarding whether the existence of separate arrangements in the agricultural
sector could mean that this sector was not fully covered by the Agreement.  The Parties declared that
both the Agreement and the three bilateral arrangements were instrumental in creating the free-tradearea; they also made reference to the fact that  not including arrangements within the Agreement
proper paralleled the practice applied among the individual EFTA States themselves, and also
between the EFTA States and the EC.
18. The Parties also indicated that the possibility of granting future concessions in agriculture was
provided for in the Agreement, but concerns were expressed over the absence of a precise timetablefor the elimination of remaining restrictions and the scope of liberalization in agricultural products.
19. In respect of safeguards on intra-trade, the Committee observed that the Agreement contained
provisions for Hungary to apply safeguards to protect the establishment of new industries, sectors
being restructured or with serious difficulties. Th e Parties informed the Committee that the possibility
to use this type of measure ends on 1 March 2002, and that no such safeguard measures had ever beenapplied under the Agreement.
20. GATT Article XXIV:5(b) provides that "the duties and other regulations of commerce
maintained in each of the constituent territori es and applicable at the formation of such
free-trade area ... to the trade of contracting parties not included in such area" are not to "be higher or
more restrictive than the corresponding duties and other regulations of commerce existing in the sameconstituent territories prior to the formation of the free-trade area".
21. With respect to duties, the Committee noted that, upon formation of the free-trade area,
neither the EFTA States nor Hungary had increased tariffs on their trade with Members not included
in the area.
22. With respect to "other regulations of comme rce", the Committee recognized that there was
not yet a common understanding on the scope of that term, in particular whether preferential rules of
origin under an FTA fell within the meaning of the term.  This is a subject of the Committee's workon systemic issues.
23. The Committee was informed by the Parties that the Agreement did not contain provisions
requiring the Parties to introduce restrictions on third-parties' trade as a result of the formation of the
free-trade area.WT/REG13/W/1
Page 5
24. Attention was given to the Agreement's provisions pertaining to the application of global
safeguard measures. The Parties informed the Committee that a safeguard measure applied by an
individual Party in accordance with the Agreement on Safeguards would also be applied to the other
Parties to this Agreement. Views differed on the relationship between the GATT Article XXIV:8
requirement concerning the elimination of duties and other restrictive regulations of commerce with
respect to intra-trade and the requirement contained in GATT Article XIX and the Agreement onSafeguards, that measures should be applied to all imports, irrespective of their source.  This issue is
under consideration in the Committee's systemic debate.
25. The Committee discussed extensively the Agreement's provisions on rules of origin and
observed that the Parties introduced the System of European Cumulation of Origin in the first half of
1997; and that through the diagonal cumulation provisions of the System, in certain circumstances,
originating status and duty drawback are conferred on imports from countries which, though not
Parties to the Agreement, have concluded FTAs with each of the Parties, while such provisions arenot available to imports from other WTO Members on an MFN basis.  Views diverged as to whether
the existence of a bilateral FTA with a Party to the Agreement justified departure from MFN
treatment in this regard.  In response to the concerns expressed with respect to the effects of the
changes in the Agreement's rules of origin on third-country suppliers, the Parties declared that the
System provided stability, transparency and predictability to third-country suppliers.
26. Attention was also given to how the Agreement fitted within the network of preferential
agreements which included the EC, the States of  the European Free Trade Association, and other
European and Mediterranean countries, in particular, how overlapping tariff preferences granted by
each of the Parties to the EC and to each other would mesh and how they related to preferences
provided to third parties.  The Parties stated that  the objective of these agreements was to provide a
stable framework for the development of trade and investment and that they were related to a wider
process of economic integration in Europe.
27. An additional issue raised during the examination related to the non-zero preferential
concessions granted by the Parties on their mutual trade in a number of products.  In this regard,
divergent views were expressed as to whether these concessions were justifiable under relevant GATT1994 provisions.
IV. CONCLUSIONS
28. In the light of the discussions reflected in Part C of this Report, the Committee found the
EFTA-Hungary Agreement in compliance with specific requirements contained in relevant provisionsof the GATT 1994, and noted that, after examination of the Agreement, there were still divergent
views among Members about its consistency with respect to certain other relevant provisions of the
GATT 1994.
29. The Committee also took note of the different opinions expressed on the interpretation of
some provisions of the GATT 1994, which were of a systemic nature and could not be reconciled in
the context of this examination, and it referred to its work under item 1(d) of its Terms of Reference.
30. In concluding its review of the Agreement, the Committee underlined the importance of the
periodic reporting provisions contained in paragraph 11 of the Understanding on the Interpretation of
Article XXIV of GATT 1994.
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