37 enter Bulgarian markets either at the same or lower rates than in the EU. Altogether 86 percent of Bulgaria’s imports are subject to tariffs that are up to 10 percent higher than respective EU duties on these products.

**Table 18:** _Breakdown of Bulgaria’s tariff protection on industrial products: differences in applied MFN tariff rates between Bulgaria and the EU_

|The difference between BG and EU<br>applied tariff rates|Number of<br>tariff lines|Share in<br>total|Imports<br>(in million of US dollars)|Share in<br>total|
|---|---|---|---|---|
|above 25 percent|1|0.0%|1|0.0%|
|above 20 below/equal 25|16|0.4%|12|0.1%|
|above 15 below/equal 20|110|2.7%|274|3.2%|
|above 10 below/equal 15|412|10.0%|955|11.1%|
|above 5 below/equal 10|1,304|31.6%|2,075|24.2%|
|above 0 below/equal 5|1,382|33.5%|2,192|25.5%|
|equal zero|857|20.8%|2,344|27.3%|
|below zero (EU tariffs higher)|42|1.0%|740|8.6%|
|TOTAL|4,124|100%|8,591|100.0%|

Source: derived from the EU”s and Bulgaria's Applied Tariff Rates by HS 6-digit products in 2003 (average for 6-digit tariff line in % from UNCTAD TRAINS).

Yet, although 14 percent of Bulgaria’s industrial imports are subject to MFN applied tariff rates significantly higher than in the EU, the crux of the matter remains that not all of these imports are actually subject to higher rates. Industrial products originating in ‘pan-European’ countries and, increasingly, in SEE5 countries are not subject to duties. These have two important intertwined implications: First, preferential ‘pan-European’ and SEE-5 suppliers face lower levels of competition from MFN imports in EU markets than in Bulgarian markets for industrial products subject to rates higher than in the EU. Depending on the structure of industry, this may raise the price of imports and create rents for preferential exporters. For instance, if three firms, one from the EU and other two from non-preferential countries dominate the world market, a fifteen-percent tariff-related preferential margin gives a EU firm an opportunity to charge up to 15 percent more for the same product in Bulgaria than in the EU.

Second, wide tariff margins may suppress or make investment projects non-competitive. For instance, if specialized products or machinery available in ‘pan-European’ free trade for industrial products are of inferior quality than those available outside and are subject to higher MFN tariff rates than in other partner-countries, the restructuring or other capital project may never take off. While these foregone opportunities are only subject to speculations, their cost—as anecdotal evidence suggests—may be considerable.

Harmonization of Bulgaria’s applied MFN tariff rates with the EU CET on industrial products entails several benefits and few, if any costs. Major benefits stem from rationalization of tariff structure and, by the same, token minimization of distortions inevitably produced by diversity in tariffs. EU tariffs on industrial products are significantly lower, less diversified and tariff peaks are lower. Bulgarian users of imports would benefit from lower tariffs and their bargaining position vis-à-vis preferential suppliers would increase once preferential margins are reduced. Furthermore, with the fall in tariffs, transaction costs associated with exports and corresponding tariff rebates on imported inputs would also considerably decrease, as lower amounts of capital would be tied up. In a similar vein, importers of MFN products would be less inclined to actively seek duty exemptions on MFN imports.

But would it lead to a significant deterioration in Bulgaria’s government revenues, as a result of the declined in custom revenues from duties? Although based on ‘back-envelop’ estimates, the answer is unambiguously negative. Consider first that the loss in customs revenue due to FTAs has already taken place and the contribution of revenues from customs duties is rather small. Had MFN rates been applied to all imports, tariff revenue would have been around US$ 800 million higher in 2003, that is, US$ 1 billion rather than US$ 143 million. Their share in total revenue and grants varied between 1.59 percent and 1.95 percent over 2001-04 (IMF 2004a). In terms of the GDP, it was well below 1 percent. The duty collection rate, i.e.,