31 A lower level of the weighted average tariff rate than that of the simple average tariff rate indicates that tariffs effectively suppress imports of items subject to high tariff rates, as sectors with high tariff will generally have a lower weight as imports are smaller. For higher level of weighted average rates, the opposite is the case. Agricultural goods fall into the latter: high tariffs do not completely prevent their imports, while they appear to do so in the case of industrial products. There are two caveats, however. First, as indicated earlier, most of Bulgaria’s imports are subject to preferential, mostly zero tariff rates. The UNCTAD database does not take into account preferential trade. In consequence, weighted tariff rates are probably much higher for all countries in Table 12.

**Table 12** : _Average Applied Tariffs and Bound Rates: Bulgaria’s preferential partners as available for most recent year (in percent)_

|||||Average|Applied MF|N Tariff Ra|te (%)||||
|---|---|---|---|---|---|---|---|---|---|---|
|||Total Goo|ds|Agricultur|al Goods|Industrial|Goods|Bound Ra<br>goods|te of All|Binding|
|Reporter|Year|Simple<br>Average|Weighted<br>Average|Simple<br>Average|Weighted<br>Average|<br>Simple<br>Average|Weighted<br>Average|<br>Simple<br>Average|Weighted<br>Average|Coverage<br>inpercent|
|Albania|2002|8.5|8.6|9.9|9.5|8.4|8.2|7.0|7.9|100|
|Bosnia and Herzegovina *|2001|5.4|5.1|4.2|6.8|5.4|4.6|na|na|Na|
|<br>Macedonia|2001|10.2|9.3|14.4|17.2|9.8|7.5|na|na|Na|
|Moldova|2001|5.1|2.8|11.2|9.2|4.5|2.0|na|na|100|
|Serbia &Montenegro*|2001|9.0|5.8|13.1|11.9|8.7|5.0|na|na|na|
|**_Bulgaria_**|**_2003_**|**_10.2_**|**_9.5_**|**_19.4_**|**_21.5_**|**_9.0_**|**_8.6_**|**_24.2_**|**_20.0_**|**_100_**|
|Croatia|2002|6.0|4.7|10.9|11.3|5.6|4.2|5.8|4.8|100|
|Romania|2001|11.6|8.3|24.8|30.7|10.6|6.3|40.4|40.3|100|
|**_Memorandum:_**|||||||||||
|European Union (15)|2004|4.2|3.0|7.6|4.5|3.7|2.3|3.9|3.0|100|
|Turkey|2003|5.2|4.0|20.7|12.3|3.7|2.3|28.6|19.8|50|

Note: Agricultural goods are based on WTO classification of HS 01-24 and industrial goods are HS 25-96. * indicates non-WTO member as of August 2003. Sources: Based on UNCTAD TRAINS database and WTO bound tariff rates from WTO IDB database.

Second, since Pan-European partners have duty-free access for all their industrial products, the fact that the value of the weighted average is above that of a simple average indicates that higher tariffs on industrial products serve no well-defined protectionist purpose. They seem to be redundant. We shall return to this issue in the next section.

Despite benefits that a small economy like Bulgaria can gain from opening up, its multilateral liberalization within the WTO framework has neither led to low tariffs nor extended commitments to remove barriers to entry to services sectors. MFN applied tariff rates remain relatively high by regional standards. While Bulgaria has signed WTO agreements extending either duty free treatment to selected products (e.g., Information Technology Agreement) or countries (Generalized System of Preferences for least developed countries), it has kept relatively high MFN tariff rates especially on agricultural products. One should add that Bulgaria’s approach to multilateral trade liberalization does not differ from that of several other Central European countries including Hungary, Poland and Romania. Despite low levels of non-preferential trade, they have declined to lower MFN tariff rates (Kaminski 2001).

# **3.3. Reverse discrimination: level, scope, implications**

FTA, by definition implies discriminatory liberalization, that is, it artificially changes relative competitiveness of goods from countries entering the FTA. Following Jacob Viner’s (1950) seminal work, two static effects of FTAs are usually distinguished—trade creation and trade diversion. The latter leads to purchases from a higher-cost preferential supplier, which results in static losses, whereas the former leads, like in the case of multilateral liberalization, to lower domestic prices thanks to increased competition from imports and closing down of some high-cost firms replaced by lower-cost imports.<sup>29</sup> Since trade creation 29 The EU’s Common Agricultural Policy provides an extreme illustration of a trade diversion effect, as it increases the “regional” trade at the expense of trade with outside countries (Baldwin 1991).