33

**Table 13:** _The scope for reverse discrimination in industrial imports implicit in Bulgaria’s tariff schedule in 2003_

|Applied MF tariff rate is|Number of tariff<br>lines|Share in total|Imports (million of<br>US $)|Share in total<br>industrial imports|
|---|---|---|---|---|
|above 25 percent|18|0.4%|36|0.4%|
|below 25 and above/equal 20|367|8.9%|633|7.4%|
|below 20 and above/equal 15|422|10.2%|1,290|15.0%|
|below 15 and above/equal 10|577|14.0%|1,148|13.4%|
|below 10 and above/equal 5|1,547|37.5%|2,320|27.0%|
|below 5 and above 0|734|17.8%|1,351|15.7%|
|equal0|459|11.1%|1,813|21.1%|
|TOTAL|4,124|100%|8,591|100%|
|**_Memorandum_**: Imports from Pan-Europeanpartners|||6,530|77%|

Source: Derived from Bulgaria's Applied Tariff Rates by HS 6-digit Product in 2003 (average in % from UNCTAD TRAINS)) ‘Pan-European’ suppliers and, to a lesser extent, FTA partners from Stability Pact enjoy a sizable competitive advantage over MFN and other non-preferential exporters. Consider that their preferential margin exceeds or equals 20 percent _ad valorem_ (of the value of a shipment) for 8 percent of Bulgaria’s imports of industrial products in 2003, or US$ 670 million. MFN supplier would have to have costs lower at least 20 percent than a preferential supplier in order to be able to win a contract with a Bulgarian importer. Around US$ 3.1 billion worth of Bulgarian industrial imports were protected by MFN applied tariff rates equal or exceeding 10 percent, thus offering extra advantage to often least-cost effective suppliers or allowing them to capture rents by charging higher prices.

Has reverse discrimination implicit in Bulgaria’s MFN tariff schedule resulted in significant trade diversion, i.e., replacing more efficient non-preferential suppliers? Without an extensive examination of previous trade patterns and costs of imports, one may only sketch an answer to this question. Note first that ‘Pan-European economies’ accounted for three-thirds of Bulgaria’s total imports, with the EU-15 contributing about half of the total. During both crisis in 1996-99 and recovery phase in 2000-02 in Bulgarian foreign trade performance imports from ‘pan-European’ economies have been expanding. This has been in stark contrast to all other imports, which fell in 1996-99 (Annex Table 1).

Since the increase in presence of ‘pan-European’ suppliers in Bulgarian markets for industrial goods, which occurred mainly over 1997-99 (Table 14), coincided with slashing tariff rates under the ‘panEuropean’ preferential agreements, it would be tempting to point to trade diversion. But this might not be necessarily a right conclusion. Although the accompanying increase in reverse discrimination might have contributed to the increase in their share from 43 percent in 1996 to 60 percent in 1999 and 65 percent in 2003, other factors than market access considerations appear to be more relevant. The share of the EU increased even before tariff rates on industrial products were significantly reduced. So did the share of former CEFTA suppliers from 4.7 percent in 1996 to 7.1 percent in 1998, that is, even before Bulgaria joined CEFTA.

**Table 14:** _Pan-European, other FTA partners and ROW in Bulgaria’s industrial imports in 1996-2003 (in million of US dollars and percent)_

|||Industri|al impo|rts(milli|on of U|S dollar|s)||Sh|are in|total in|dustri|al imp|orts(i|nperce|nt)|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
||1996|1997|1998|1999|2000|2001|2002|2003|1996|1997|1998|1999|2000|2001|2002|2003|
|**A. Pan-European**|1,992|2,029|2,493|2,995|3,441|4,183|4,648|6,486|46|48|58|62|58|76|78|77|
|of which EU-15|1,624|1,672|2,050|2,467|2,676|3,369|3,704|5,004|37|39|48|51|45|61|62|59|
|**B. Other FTA**|43|41|40|32|35|35|36|44|1.0|1.0|0.9|0.7|0.6|0.6|0.6|0.5|
|**TOTAL(A+B)**|2,035|2,070|2,534|3,027|3,476|4,218|4,683|6,530|47|49|59|63|59|77|78|77|
|Non-preferentialpartners|2,335|2,192|1,766|1,810|2,413|1,274|1,286|1,936|53|51|41|37|41|23|22|23|
|TOTAL IMPOORTS|4,370|4,262|4,299|4,836|5,889|5,492|5,969|8,466|100|100|100|100|100|100|100|100|

Note: Pan-European partners include EU-25, Romania, Turkey, and EFTA. Other FTA partners include SEE-5 and Israel. Industrial products are defined as SITC 3+5+6+7+8+27+28 in Revision 2 or Harmonized System 25 and above. Source: Derived from UN COMTRADE database as reported by Bulgaria Second and more important, there is no relationship between the shares of preferential imports in total imports of pan-European transition economies and their respective average MFN rates on manufactured