RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/89
19 September 2001
(01-4315)
Trade Policy Review Body
TRADE POLICY REVIEW
CZECH REPUBLIC
Report by the Secretariat
This report, prepared for the second Trade Policy Review of the Czech Republic,
has been drawn up by the WTO Secretariat on its own responsibility.  The
Secretariat has, as required by the Agreement establishing the Trade Policy
Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the
World Trade Organization), sought clarification from the Government of the
Czech Republic on its trade policies and practices.
Any technical questions arising from this report may be addressed to
Mr. W. Alfaro (tel. 739 5372) or Mr. C. Boonekamp (tel. 739 5226).
Document WT/TPR/G/89 contains the policy statement submitted by the
Government of the Czech Republic.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on the Czech Republic.Czech Republic WT/TPR/S/89
Page iii
CONTENTS
Page
OVERVIEW vii
I. ECONOMIC ENVIRONMENT 1
(1) R ECENT ECONOMIC DEVELOPMENTS 1
(2) S TRUCTURAL REFORMS – THE CAUSES OF THE FINANCIAL CRISIS AND BEYOND 7
(3) T RADE AND FOREIGN INVESTMENT PERFORMANCE 8
(i) Trade patterns 8(ii) Investment patterns 10
(4) O
UTLOOK 11
II. DEVELOPMENTS IN TRADE AND INVESTMENT POLICY 12
(1) I NSTITUTIONAL FRAMEWORK 12
(i) Institutional structure 12(ii) Policy formulation and implementation 13(iii) Transparency and openness of decision making 14
(iv) Main laws and regulations 15
(2) D
EVELOPMENTS IN INTERNATIONAL RELATIONS 16
(i) World Trade Organization 16(ii) Regional agreements 18(iii) Bilateral agreements 24(iv) Unilateral tariff preferences 24
(3) D
EVELOPMENTS IN FOREIGN INVESTMENT REGIME 25
III. MARKET ACCESS IN GOODS 28
(1) C USTOMS PROCEDURES 28
(i) Valuation, clearance, and inspection 28(ii) Rules of origin 29
(2) T
ARIFFS AND OTHER CHARGES AFFECTING IMPORTS 30
(i) MFN tariffs (applied rates and bindings) 30(ii) Regional, bilateral and unilateral tariff preferences 33(iii) Tariff quotas and seasonal tariffs in agriculture 34(iv) Tariff concessions and exemptions 35(v) Balance-of-payments measures 35
(vi) Indirect taxation 36
(3) I
MPORT LICENSING AND CONTROL 37
(i) Trade prohibitions 37(ii) Licensing – with and without volume limits 37
(4) C
ONTINGENCY MEASURES 38
(i) Anti-dumping and countervailing measures 38
(ii) Safeguard measures 39
(5) S TANDARDS AND TECHNICAL REGULATIONS 41
(6) O THER MEASURES AFFECTING MARKET ACCESS IN GOODS 43WT/TPR/S/89 Trade Policy Review
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IV. OTHER POLICIES AFFECTING TRADE IN GOODS 44
(1) E XPORT  MEASURES AT THE BORDER 44
(i) Export licensing and control 44(ii) Duties and taxes, and minimum export prices 44
(2) E
XPORT ASSISTANCE 45
(3) S TATE AID 46
(4) G OVERNMENT PROCUREMENT 49
(5) P RIVATIZATION  AND  PUBLIC ENTERPRISE RESTRUCTURING 50
(6) B ANKRUPTCY LAW AND PRACTICE 55
(7) C OMPETITION LAW 56
(8) P ROTECTION OF INTELLECTUAL PROPERTY 58
V. DEVELOPMENTS IN SELECTED SECTORS 63
(1) F INANCIAL SERVICES 63
(i) Banking services 63(ii) Insurance services 66(iii) Other financial services 67
(2) T
ELECOMMUNICATIONS SERVICES 68
(3) T RANSPORT SERVICES 71
(4) T OURISM SERVICES 73
REFERENCES 75
APPENDIX TABLES 79Czech Republic WT/TPR/S/89
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CHARTS
I. ECONOMIC ENVIRONMENT
I.1 External developments, 1993-2000 4
I.2 Intensity of intra-industry trade with selected partners, 1996 and 2000 9
II. DEVELOPMENTS IN TRADE AND INVESTMENT POLICYII.1 Trade with free-trade agreement partners, 1993-2000 21
III. MARKET ACCESS IN GOODS
III.1 Frequency distribution of MFN tariffs, 1995 and 2001 31
III.2 Applied MFN tariffs 1995 and 2001 and bound rates, by HS section 32III.3 Tariff escalation by 2-digit ISIC industry, 2001 33
IV. OTHER POLICIES AFFECTING TRADE IN GOODS
IV.1 Privatization and evolution of ownership structure, 1990-2000 52V. DEVELOPMENTS IN SELECTED SECTORS
V.1 The Czech banking system, 1989-99 63
V.2 Evolution of selected telecommunication services, 1994-2000 69
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Selected economic indicators, 1993-2000 1
I.2 Czech Republic at a glance, 1990-2000 3I.3 Foreign direct investment by sector and country, 1995-2000 10
II. DEVELOPMENTS IN TRADE AND INVESTMENT POLICY
II.1 Promulgation of laws and treaties, 1993-2000 15
II.2 The Czech Republic's main legislation related to trade, April 2001 16II.3 Sectors subject to foreign investment restrictions, 2001 26
III. MARKET ACCESS IN GOODS
III.1 Key features of the Czech MFN tariff structure, 1995-2001 31
III.2 MFN tariffs (simple average) by stage of processing, 1995, 1998 and 2001 32III.3 Czech tariff preferences by agreement and import volumes, 2001 34
III.4 Taxes levied on imported and domestic goods and services, May 2001 36
III.5 Czech  technical regulations and standards, 1991-2000 42
IV. OTHER POLICIES AFFECTING TRADE IN GOODS
IV.1 Classification of subsidies from the State budget, 1994-2000 47
IV.2 Transfers associated with agricultural policies, 1996-2000 48WT/TPR/S/89 Trade Policy Review
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IV.3 Key features of the Czech Republic's procedures on government procurement 50
IV.4 Competitive and non-competitive activities 53IV.5 Main provisions of the Czech Republic's competition law 57IV.6 Summary of intellectual property protection in the Czech Republic, June 2001 59
IV.7 Enforcement of Intellectual Property Rights, 1997-2000 62
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Balance of payments, 1993-2000 81
AI.2 Exports by destination, 1993-2000 82AI.3 Imports by origin, 1993-2000 83
AI.4 Exports by group of products, 1993-2000 84
AI.5 Imports by group of products, 1993-2000 85
II. DEVELOPMENTS IN TRADE AND INVESTMENT POLICYAII.1 Selected Czech notifications to the WTO, June 2001 86
AII.2 The Czech Republic's preferential trade agreements, April 2001 90
III. MARKET ACCESS IN GOODSAIII.1 Average tariffs and bindings, by H.S. chapter 91
AIII.2 Tariff quotas, 2001 95
AIII.3 Import and export licensing, 2001 98
IV. OTHER POLICIES AFFECTING TRADE IN GOODSAIV.1 Summary of the State aid system in the Czech Republic 99Czech Republic WT/TPR/S/89
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OVERVIEW
1. The Czech economy is recovering
from the 1997-99 recession: led by exports
and a surge in foreign direct investment, GDP
grew by 2.9% in 2000 following three years of
negative growth.  The recession was caused byboth microeconomic factors, such as an
insufficient restructuring of the corporate and
banking sectors, and macroeconomic
imbalances, including a deterioration in the
General Government accounts.
2. In addressing the recession, the Czech
Government took significant steps to enhance
the economic climate, both through domestic
reform and by further trade and investment
liberalization.  The legal environment foreconomic and trade activities has also
substantially improved since the Czech
Republic's previous Trade Policy Review in
1996.  A broadly coherent body of commercial
and trade law is now in place.  Much of the
progress can be attributed to the Czech
Republic's goal of accession to the EuropeanUnion (EU).  EU harmonization, which
requires absorption of the EU acquis
communautaire, has proved to act as a
catalyst to speed up the implementation of the
reform agenda.  While the legal environmentis good on paper, it appears that weaknesses
in the dispute resolution system continue to be
a problem.  The slow functioning of the
overburdened commercial courts and weak
enforcement has been identified as a factorshampering the business environment.
3. The Czech Republic remains highly
integrated into the world economy.
Merchandise trade (exports and imports) were
the equivalent of 120% of GDP in 2000 (upfrom 105% in 1994), and the ratio of foreign
investment to GDP was 5.3% (9% in 1999).
The geographic distribution of merchandise
trade has continued to move towards western
Europe, reflecting the Czech Republic's
continued integration with western Europe.  In
2000, the EU accounted for almost 69% oftotal merchandise exports and 62% of total
imports.4. The Czech Republic participates
actively in the work of the WTO.  It grants at
least MFN treatment to all WTO Members, as
to several other countries with which bilateral
agreements have been signed.  During the
period under review, the Czech Republic hascontinued to undertake major commitments
within the multilateral framework, including in
basic telecommunications and financial
services.  Under the WTO dispute settlement
mechanism, the Czech Republic has beeninvolved in two cases, one as a complainant
and one as a respondent.  In both cases, the
disputes have been resolved through bilateral
consultations.
5. Trade liberalization has been an
important element in the reform agenda
during the period under review.  The average
Czech MFN tariff rate has been lowered by
two percentage points, to 6% in 2001.
Moreover, both tariff dispersion and the
number of rates have decreased since the
previous review.  With no specific, compositeor other non-ad valorem rates, the Czech tariff
system remains transparent.  All tariff lines
are bound (almost all at the applied MFN
rates), fostering a more predictable trading
environment for businesses.
6. Most agricultural goods, however, are
protected by relatively high tariffs.  The simple
MNF tariff average for agriculture products
(WTO definition) in 2001 was 13.4%,
compared with an average rate of 4.3% fornon-agricultural goods.
7. Given the large number of preferential
trading agreements to which the Czech
Republic participates, MFN rates apply only
to a limited share of Czech imports (
78% of
total imports in 1999 were from free-trade
agreement partners ).  The Czech Republic has
continued to build up its network of
preferential trade agreements.  As part of its
efforts to accede to the EU, the Czech
Republic has to adopt all of  the preferential
agreements concluded by the EU with third
countries.  Towards this end, the Czech
Republic has concluded several free-tradeagreements during the period under reviewWT/TPR/S/xx Trade Policy Review
Page viii
(Estonia, Latvia, Lithuania, Israel and
Turkey), while continuing liberalization within
the framework of previous agreements.
Although these have helped further open the
Czech market, such arrangements may also
distort trade and investment patterns as theyinvolve different margins of preferences.  The
impact on net trade creation of the Czech's
possible accession to the EU is not completely
clear.  Non-tariff barriers on an MFN basis
are expected to fall.  On the other hand, EUmembership is most likely to raise the level of
protection in agriculture as the current overall
MFN tariff on agricultural goods is higher in
the EU than in the Czech Republic;
agricultural assistance is also likelyto increase significantly.  Nevertheless,
integration with the EU should accelerate the
Czech Republic's economic development and
provide renewed opportunities for further
economic and trade reforms.
8. The Czech import regime has
relatively few non-tariff barriers.  Some itemshave been removed from the list of automatic
licensing during the review period.  A non-
automatic licence continues to apply to
imports of, inter alia, certain: sugar, coal,
explosives, and firearms. As part of theaccession to the EU, the Czech Republic is
harmonizing its standards and technical
regulations with those of the EU.  Towards
that end, several new laws have been enacted,
simplifying the testing and standardizationprocess.  The Czech Republic has also
concluded mutual recognition agreements for
the results of conformity assessments with
several countries.  Amendments to the
government procurement legislation providefor enhanced transparency, but the system
appears to discriminate, in some instances,
against foreign firms.  The Czech Republic
became an observer to the WTO Agreement on
Government Procurement in August 2000.
Competition rules as well as intellectual
property rights legislation have beenstrengthened during the period under review.
Regarding contingency measures, the Czech
Republic has recently enacted legislation
pertaining to anti-dumping, countervailing
and safeguard measures.  It is yet to be seen ifthe Czech Republic will be an active user of
contingency measures.
9. Along with liberalization of the
foreign investment regime, total foreign
investment (net) has jumped in recent years to
around 9% of GDP in 1999.  As part of itsaccession to the Organization of Economic
Cooperation and Development (OECD) in
December 1995, the Czech Republic agreed to
meet, with a few exceptions, the OECD's
standards for equal treatment of foreign anddomestic investors, and on restrictions on
special investment incentives.  Foreign
investment in a few sectors (mainly services)
remain restricted or controlled.
10. The Czech Republic has progressively
changed its policy on foreign investment
incentives during the period under review. In
May 2000 a package of incentives was
approved, changing the previous policy of
offering investment incentives on a case-by-
case basis (subject to governmental approval),
a major change from the "no incentives"policy during 1992-98.  The package appears
to have been designed to bring the Czech
Republic into line with its competitors for
inward investment.  However, it is not clear if
the benefits of the incentive package outweighthe associated costs.  Investment incentives are
typically not the best solution.
11. The deficiencies in the banking sector
were among the factors behind the 1997
recession.  Imprudent lending by state-ownedbanks enabled enterprises to postpone
restructuring.  The unreformed enterprise
sector was also a result of the State
involvement through indirect ownership (state-
owned banks owned investment funds which inturn owned enterprises).  Moreover, it was
apparent that weaknesses in regulation and
supervision of capital market institutions
(investment funds, pension funds and
insurance companies) would prevent the build
up of strong governance structures and faster
enterprise restructuring.  Against thisbackdrop, a number of bank and capital
market reforms were implemented in several
steps.  Many of the reforms were alsoCzech Republic WT/TPR/S/89
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implemented with the aim of harmonizing
Czech law and regulations with those of the
EU.  In particular, the central bank
strengthened the regulatory framework for
bank supervision, moved towards a
consolidated supervision, incorporated marketrisk into the capital adequacy requirement,
tightened provisioning requirements, and
revoked a number of bank licenses.  The
deficiencies in the banking sector were also
addressed with privatization.  With theprivatization of three large state-owned banks
during the review period, there is only one
remaining state-owned commercial bank left,
which is also slated for privatization for the
second half of 2001.
12. In addressing enterprise restructuring,
the Government set up a Revitalization
Agency, with a mandate to prepare a limited
number of heavily indebted companies for
privatization.  An inadequate bankruptcy legal
framework was perceived as impeding enterprise restructuring.  Thus, the
bankruptcy law has been amended several
times since 1996, aimed at facilitating and
speeding up the bankruptcy process.
Notwithstanding the recent changes to the
bankruptcy law, the present law appears tostill suffer from some weaknesses.
13. Regarding other areas of services, the
Czech Republic has embraced competition in
the telecommunications sector by gradually
opening up its markets to national and foreigninvestors.  The telecom monopoly company
has been partly privatized, and, most recently,
additional operators were allowed in the
provision of international and long-distance
services.  Progress has been made inliberalizing transport services.  As in 1996, the
sector portrays a mixed picture.  While the
Czech Republic has a relatively competitive
trucking industry and a non-subsidized airline
company, passenger railway services and, to a
lesser extent, bus services require large
amounts of transfers to cover their losses.