<!-- Start of picture text --> Policy, Research, and External Affairs<br>MIcaT]* *e * 2<br>International Trade<br>WPS 584<br><!-- End of picture text --> Thisi paper---a prod(uctof the International Trade Division, International Ec )nomics Dcpartment-is partofa larger eilort in PRE to analyze the implications of possible changes in the international economic environment. Copies are a\ailahlo free f-rom the World Bank, 1818 H Street NW, Washington DC 20433. Please contactGrace Ilogon, room S8-038, extension 33732 (48 pages).

partofa larger Recenit po litical changes in Eastern Europe are leading to clos,.r economic relations between its countries and the EC. Hungary has been granted GSP status by the EC and, with some important exceptions, quantitative restrictions on its exports to the EC will be progressivelv eliminated.

Further improvement of Hungary's access to the EC market faces three main challenges: the full integration of Spain and Portugal in the EC, unificationr of Gernmany, and completion of the EC's internal market in 1992. The inclusion of Spain and Portugal in the EC is likely to stiffen the competition for IlLlgairy's exports to the EC. After German unification, the fornmer GDR -an important market for - Ilungary will apply EC measures, and its goods **'Aill** Compete with Hungary's exports on more **.i\** orable termis in the rest ol the EC. Under EC-92 the reduction of internal barriers will likely cause dik ersion of trade to other EC suppliers away from nTin-EC suppliers, by 5-7 percent on average accordin" to LtIC EC's calculations. New regulations and norms will have both positive and negative aspects for I luhnioarv.

'Ihe continuing economic problems of Eastern lurope. including the Soviet Union, suggest that I lungary has little +eniative but to seek even closer ties **A** ith the EC. But H3ungary faces important supply constrainits and will need an infusion of new technology and physical capiLal to take advantage of its position on the doorstep of the EC. Hungary has been cxamining the options of applying for EC membership. It has also considered applying for European Free Trade Association (EFTA) membership - possibly as an interim step toward EC membershipbut Lhis seems unlikely to be accepted by the EC, and obtaining EFTA membership would not be easy.

EFTA membership would have distinct advantages because the EC/EFTA Protocol allows for virtually free trade in manufactures between the two blocs. Barring EC or EFTA membership, some form of - association might yet be broached along the lines of the EC's special relationship with Turkey, Yugoslavia, and other Mediterranean CoLuntries.

Tovias and Laird examined the potential trade effects of such different relationships between the EC and Hungary, including in the context of possible outcomes of the Uruguay Round. Their simulations confirm the importance of an exporter's place in the EC's pyramid of privileges. Membership in the EC could lead to an expansion of Hungary's exports to the EC of some 48 percent, with meats, iron and steel, fruit and vegetables, textiles, and clothing being the main sectors to gain, in declining order. This results from setting tariffs at zero and eliminating non-tariff barriers. Membership in the EFTA would lead to only a t5 percent expansion of exports to the EC, and obtaining the same preferential uariff treaunent as the NMediterranean countries would lead to a 10 percent increase. GSP treatment is projected to exparnd exports by 6 percent. The authors superimposed their Uruguay Round scenarios on these prefereintial positions and found that the export gains from EC membership are reduced to 43 percent - as EC barriers are reduced for all countries. EFTA membership and the same treatment as other Mediterranean and GSP countr ies are somewhat better for Hungary than non-Uruguay Round scenarios, because under these scenarios the authors allow for some reduction in non-tariff barriers in agriculture and in the textile and cloLhing sectors, which more than offsets the relative decline in preferential tariff treatment. Only minor losses to Spain and Portugal would result from improved access to the EC for Hungary.

Tie IPRE VA'orking Paper Series disseminates the findings of work under vvay in the Bank's Policy, Research, aid Extemal Affairs Complex. An ohjective of the scries is to get these findings out quickly, even if presentazions are less than full! peloished. The Findines, interpret ltions, and conclusions in these papers (1o not necess;arily represent official Bani policy.

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