metadata: authors: 0: author: Tovias, Alfred
1: author: Laird, Sam
count: Hungary
docna: 0: docna: Whither Hungary and the European communities?
docty: Policy Research Working Paper
subtopic: Construction Industry,Common Carriers Industry,Food & Beverage Industry,Pulp & Paper Industry,Plastics & Rubber Industry,Trade Policy,International Trade and Trade Rules,Rules of Origin,Energy and Mining,Business Cycles and Stabilization Policies,Trade and Multilateral Issues
teratopic: Environment,Macroeconomics and Economic Growth,International Economics and Trade,Rural Development
abstracts: cdata!: Recent political changes in Eastern
            Europe will help to cement improving economic relations with
            the European Communities (EC). Hungary has little
            alternative but to seek to continue strengthing these ties.
            It faces important supply constraints and needs injections
            of fresh capital to help it gear up to seize market
            opportunities. In the past, Hungary has been somewhere near
            the bottom of the EC's pyramid of privileges as far as
            tariff and non-tariff barrier (NTB) treatment are concerned.
            Hungary has been examining the options of applying for EC
            membership, European Free Trade Association (EFTA)
            membership, and examining other forms of association such as
            those the EC has with a number of Mediterranean countries.
            From a simulation exercise, the authors conclude that
            membership of the EC could lead to an expansion of Hungarian
            exports to the Communities of some 48 percent, with meats,
            iron and steel, fruit and vegetables, textiles, and clothing
            being the main sectors to gain. This results from setting
            tariffs to zero and eliminating non-tariff barriers. If EC
            or EFTA membership is ruled out, Hungary must seek a closer
            relationship with the EC, encompassing agriculture as well
            as manufactures, and covering tariffs and non-tariff barriers.
geo_reg_key: 517208,517191,517190
repnme: repnme: Whither Hungary and the European communities?
display_title: Whither Hungary and the European communities
listing_relative_url: /research/1991/01/700094/whither-hungary-european-communities
topicv3: Transport Equipment m1326014 1812,Tourism m1326299 825,Trade m1326924 698,Non-Tariff Measures m1326926 778,Iron m1503514 2931
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Environment,Macroeconomics and Economic Growth,International Economics and Trade,Rural Development
origu: Policy, Research & Ect Affairs
no_of_pages: 54
model_extractions: <!-- 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.

Produced **bN** the PRE Disscmination Center
# Table of Contents

|||Page|
|---|---|---|
|I|Introduction|1|
|II|The EC and Hungary as<sup>Trade Partners</sup>|1|
||A.<br>The present EC-Hungary trading<sup>pattern</sup><br>B.<br>Exports of services: tourism<br>C.<br>Imports|3<br>7<br>7|
|III|Trade Policy of the EC<sup>Applied on Hungarian Exports</sup>|9|
||A. Tariffs|9<br>|
||B. Non-tariff barriers|11|
|IV|Hungary's Recent Trade Relations<sup>with the EC</sup>|15|
|V|Three Challenges to Hungary's<sup>Exports</sup>|16|
||A.<br>First challenge: The progressive<br>integration of<br>Spain and Portugal into the<sup>European system of</sup><br>division of labor<br>|17<br>|
||B.<br>Secor.d challenge:<br>The integration of the<sup>GDR in the EC</sup><br>C.<br>Third challenge: Hungary and<sup>"1992"</sup>|18<br>19|
|VI|Hungary's Future Trade Regime<sup>with Western Europe</sup>|25|
|VII|Simulations of the Possible<sup>Effects of Changes in</sup><br>the EC Merchandise<br>Trade Regime|27|
|VIII|Conclusions|35|
||Bibliography|36|
||Statistical Annex|38|
# Abbreviations and Acronyms

CAP The EC's Common Agricultural Policy CEN European Committee for Standardization CENELEC European Committee for Electrotechnical Standardization CMEA Council of Mutual Economic Assista;tce

- EC European Communities

- EFTA European Free Trade Association

- GATT General Agreement on Tariffs and<sup>Trade</sup>

- GDR German Democratic Republic

- GSP Generalized System of Preferences

- NTB Non-Tariff Barrier

- ODA Official Development Assistance
# I. Introductior

The development of the European Communities<sup>(EC) over more than 30 years</sup> from a Customs Union of six countries<sup>to a Common Market of 12 countries for</sup> goods, services and production factors<sup>is bound to affect countries on its</sup> periphery more intensively than others. Hungary is in such a position. Moreover, the influence of the EC on Hungary's<sup>economy</sup><sup>**will**soon increase, partly</sup> because of the chax,ges which have<sup>taken place in Central Europe in the last two</sup> years, particularly in Hungary itself.<sup>The democratization of Hungary is being</sup> accompanied by economic reform, including<sup>a progressive liberalization of the</sup> foreign trade and currency regime, the<sup>promotion and protectior. of foreign</sup> private direct investment, and a<sup>reconsideration of the Council of Mutual</sup> Economic Assistance (CMEA).

The EC affects Hungary's economy both<sup>directly and indirectly.</sup> In the first category is the non-preferential trade<sup>and cooperation agreement concluded</sup> between the two parties in September 1988. This has heen partially superseded recently by several ad hoc measures in the<sup>form of u...lateral EC concessions--</sup> the inclusion of Hungary among GSP recipients,<sup>the elimination or suspension of</sup> QRs on Hungary's exports, and the expansion<sup>of textile quotas. In the financial</sup> realm, the EC is both the Chairman of<sup>a Consultative Group for emergency</sup> assistance to Hungary and Poland, contributing<sup>this fiscal year a 300 million ECU</sup> grant for both countries and a US$1 billion<sup>medium-term structural adjustment</sup> loan for Hungary. Indirectly, there are<sup>several processes by which the EC will</sup> affect Hungary:

- The Uruguay Round multilateral trade<sup>negotiations, scheduled to be</sup> completed in December 1990;

- The incorporation of the German<sup>Democratic Republic into the</sup> European Communities through German<sup>unification;</sup>

- The completion of the EC's internal<sup>market on December 31 1992; and</sup>

- The renewal, revision or establishment<sup>of trade schemes with</sup> different groups of countries (EFTA, Eastern<sup>Europe, Mediterranean</sup> countries, GSP and Gulf Cooperation Council).

The first three sub-regions are being<sup>singled out by the EC for further</sup> privileged treatment through what is called<sup>"proximity policy.",</sup> The tentative and changing nature of the<sup>EC-Hungarian relationship is</sup> apparent. What is also apparent is that EC relations<sup>with other groups of</sup> countries are also changing, and these<sup>changes will soon affect EC-Hungarian</sup> relations. While the present report will<sup>soon become outdated, it may be useful</sup> at a time the Hungarian government must<sup>think through the implications of</sup> different events: those over which it does<sup>not have any control and those for</sup> which different policy options are open to<sup>them.</sup>

# II. The EC and Hungary As Trade Partners

The economic importance of the EC-12 is<sup>impressive when compared to the</sup> USSR or the US, as shown in Table 1. In<sup>1987 the combined GNP of the EC-12 was</sup> almost as large as that of the US and<sup>larger than that of the USSR.</sup> The population c the Communities, however,<sup>is larger than that of the USSR or of the</sup> The authors express their appreciation<sup>to Monique Skruzny for some of the</sup> statistical work, and to Andras Inotai, Bela<sup>Balassa, Ron Duncan, Paul Meo, David</sup> Tarr, Chandrashekar Pant and Oli Havrylyshyn<sup>for comments on an earlier version.</sup> Aoence Europe, October 21, 1989.
**2**

US -- a fact which may be more sigiiificant in assessing absorption capacities for food or other primary commodities than income. In spite of some newer, poorer members, the average per capita **GNP of the EC-12 is one and** a half times that of the USSR. This may even be understated in terms of living standards, since much of the Soviet GNP reflects defense expenditure.

The EC is also the largest trading economy in the world, accounting for more than a third of world trade. About half of all world trade takes place in Western Europe and its immediate periphery.<sup>2</sup> Even when excluding from the figures intra-EC trade, the EC's external trade alone almost equalled the trade of the US and Japan combined. The EC has great bargaining power in trade negotiations, and its clout in the OECD is overwhelming, since half of OECD membership is constituted by EC countries.

Finally, the EC's development assistance effort is substantially larger than that of the US or the USSR. The share of the EC-12 in world ODA (average 1986/87) was over 35%, compared to the US's 20% and the USSR's **10%.** As Hungary breaks its tight institutional links with the **CMEA.** the EC could soon become the most important export outlet for Hungarian goods and services, given: 1) the limited possibilities that Hungary has to expand exports to its neighbors, also undergoing structural reforms; 2) the economic propinquity to the EC (compared to other sizeable markets), coupled with its huge purchasing capacity; 3) the incorporation into a united Germany of the GDR, an important trading partner of Hungary; 4) the widely diffused knowledge of three Western European languages (German, French and English).

Table 1: Some Comparative Statistics for 1987

||EC-12|US|USSR|
|---|---|---|---|
|Area (000/sa.km.)<br>|2,254.7|9,372.7|22.402.2|
|Population(mil.)|323.8|243.8|283.1|
|GNP,SBn|4,282.0|4,526.7|2500'|
|GNP/per capita (USS)|13,225.4|18,567.3|8,658.2|
|Exports|391.72|243.7|107.6|
|Imports|397.22|422.4|95.9|
|ODA, US$Bn.|19.13|8.9|4.2'|
|ODA/GDP %|0.45|0.20|0.17'|

Source: WDR 1989; COMTRADE; National Accounts; OECD. 1988, as estimated by the CIA

- 2 excluding intra-EC trade

- **3** ODA data for Greece, Luxembourg, Portugal and Spain not available.

While changes for the better or for the worse in any of these factors cannot be foreseen, there are other factors which with time will further increase the relative importance of the EC. One is a further broadening of the EC-Hungary

- 2 Narjes (1984), p. 215.
3 trade ag~.eement and/or further unilateral EC trade concessions. Another is the possible expansLon of the Er to include Au3tria, another important trade partner of Hu.gary.

# A. The Present EC-Hungary trad n_ pattern

In the recent past the USSR has been by far Hungary's main export outlet and took as much as one third of its exports in 1985. In the early 1980's Hungary had been exporting more heavily to the EC, particularly low-priced agricultural goods, but in the mid-1980s there was some re-direction of trade toward the USSR for hard currency and oil. This also coincided with an economic downturn in the EC. However, in the second half of the 1980s, the pattern has begun to change with the EC-12 becoming an increasingly important market for a wide range of Hungarian exports.<sup>3</sup> As TabLe 2 indicates the EC-12's share of Hungarian exports had grown to 22.7 per cent in 1988 while the Soviet share had declined to 27.6 percent (following a 4 6 percent decline in the $ value of this trade).<sup>4</sup> Preliminary data for 198S and the first half of 1990 show the continuation of these trends, and they are expected to continue -- for reasons discussed in succeeding sections of this paper.<sup>5</sup> Table 2. Geographical Distribution of Hungary's Merchandise Exports - 1980, 1985, 1988.

|Partner|19<br>Sm|80<br>%|19<br>Sm|85|1988<br>Sm|%|
|---|---|---|---|---|---|---|
|World|8,667|100.0|8,555|100.0|°,931|100.0|
|Austria|378|4.4|460|5.4|568|5.7|
|EC 12|1,810|20.9|1,373|16.0|2,250|22.7|
|Germany,F.R.|590|6.8|520|6.1|525|5.3|
|USA|113|1.3|198|2.3|293|3.0|
|USSR|2,540|29.3|2,876|33.6|2,742|27.6|

Source: COMTRA-DE 3 The Yearbook of the Hungarian Statistical Office shows that the share of the EC-12 in 1988 exports increased to 24%. On the other hand, Hungary represents less than 1% of EC's imports. It is also worthwhile noting that the relative importance of trade with the EC is almost twice as large as the average of the other CMEA couintries.

4 Although 45.5% was still exported to CMEA countries in 1988, only 41.2% of total exports was settled in transferable rubles. According to Hungarian sources, the share of CMEA is expected to go down to 40% in 1990, something very significant in historical perspective, given that it was more than _70%_ in 1960.

_5_ Exports to the* EC increased by 33.7% in value terms in the first six months of 1989. Eve.a discounting the effect of inflation which on an annual basis was not above 20%, this makes for a very substantial volume increase, at a time when exports to the USSR tended to stagnate if not decline in absolute terms. See EIU nr.4 1989.
4 Az general background on Hungary's trade, Table 3 gives a broad breakdown of the commcdity composition of its merchandise exports to the world and the EC in 1983 and .987. This shows the relative importance of machinery (electrical and non-electrical), food products (especially live animals, meat and meat preparations and fruits and vege'.ables), basic manufactures (mainly basic iron and steel products aa well as texziles), miscellaneous manufactures (especially clothing ar.d furniture) and chemicals, in that order. There were no dramatic shifts in the composition of Hungary's exports to the World in this period. However, the table shows that the increase in the EC-12's share of Hungarian exports was not evenly spread. Among the large trade items -- basic manufacturas and machinery, where exports to the world also grew much faster -- more were redirected to the EC-12 than on average. Also, while this re-orientation of exports in the food and miscellaneous manuafactures sector was less strong than the average -- probably due to the restraining influence of the CAP and the EC's textiles regime, respectively -- there was still a strong re-direction of trade towards the EC-12 in these traditional Hungarian export sectors.
l~~~~~~~~~~~~~~~~~~~~~~~

# Table 3. Hungarian Exports to the World and the EC-12, 1983, 1987.

||Product||19<br>World<br> <br>|83<br>EC12<br> <br> <br>Sh of|Wor<br>Sm|1<br>ld<br>Share|987<br>EC<br>in<br>$m|12<br>Share of|
|---|---|---|---|---|---|---|---|---|
|||Sm|Share<br> <br>Total<br>|n<br>$m<br>are<br>%<br>Exports<br>to World||<br>Total<br>|<br> <br>%|Exports<br>to World|
||Total|8,722<br>|100.01<br>|3,384<br>15.9<br> <br>2|9,571<br>1529|100.0<br>160|1,912<br>476|20.0<br>31.2|
|0|Food & Live Animals|1,636<br>|18.8<br>|421<br>5.7<br> <br>74|,<br>151|.<br>16|<br>17|11.4|
|1|Beverages<br>& Tobacco|216<br>|2.5<br>|16<br>.<br> <br>317|<br>411|.<br>43|<br>153|37.1|
|2|Crude Matla<br>Excl Fuels|349<br>|4.0<br>|110<br>.<br> <br>|<br>402|.<br>42|<br>69|17.2|
|3|Mineral<br>Fuels Etc|806<br>|9.2<br>|47<br>5.8<br> <br>124|<br>80|.<br>08|<br>9|11.0|
|4|Animal,<br>Veg. Oil, Fat|105<br>|1.2<br>|13<br>.<br> <br>230|<br>1112|.<br>116|<br>262|23.5|
|5|Chemicals|883<br>|10.1<br>|203<br>.<br> <br>198|,<br>1311|.<br>137|<br>351|26.8|
|6|Basic<br>Manufactures|1,090<br>|12.5<br>|216<br>.<br> <br>57|,<br>3249|.<br>339|<br>243|31.6|
|7|Machines,Transp.Equip.|2,650<br>|30.4<br>|151<br>.<br> <br>|,<br>1152|.<br>120|<br>292|25.4|
|8|Misc Manuf Goods|839|9.8|183<br>21.3|,|.|||
|9|Goods Not Classfd|||<br>188|175|18|40|23.0|
||By Kind|127|1.5|24<br>.||.|||

',urce: COMTRADE Note: Percentage calculations and totals are based on<sup>more detailed</sup> data which are<sup>rounded</sup> off in this tab:e.
6 Taking further the comparison of the composition of Hungary'. exports to the EC-12 with Hungary's exports to the world for 1987 (Table 4), there are **some** triking differences. For example, only 16 percent of Hungary's exports to the sorld are food items whereas nearly 25 percent oZ its exporta to the EC-12 are food items. Again, among the large trade items there is a much higher shar- of basic manufactures (SITC 6) and miscellaneous manufactures (SITC 8) in Hungary's exports to the EC-12 than to the world. However, when it comes to n-chinery and transport equipment (SITC 7), these make up 33.9 percent of Hungary'.J export. to the world but only 12.7 percent of its exports *o the EC-12. This appears to be related to the inclusion in world exports of transport equipment (buses) which are exported to the USSR. These products are relatively uncompetitive in the EC. Certainly, tariff rates seem high against Hungary in this sector but other trade barriers that Hungary faces in the EC-12 are not discriminatory against Hungary in this sector. On the contrary, NTB's have been Hspecially aimed at Japanese autos. Moreover, as we shall see in Section IV there is greater protection in other large export sectors. However, it .s notable that almost half of Hungary's exports to the USSR are machinery and transport equipment -- mostly buses. (Indeed mcre than 80 per cent of Hungary's exports of buses are to other CMEA countries). Thus, Hungary's world figures were somewhat distorted by the special trade arrangements within the CMEA and its remains to be seen how these will now change.

Table 4. Commodity composition of Hungary's exports to the world and the EC-12, 1987.

|Product|world|EC-12|Difference as%<br>of world Share|
|---|---|---|---|
|Total Export (Sm)|9571|1912||
|Share in total (percent)|<br>100.0|100.0||
|0|16.0|24.9|+55.6|
|1|1.6|0.8|-50.0|
|2|4.3|8.0|+86.0|
|3|4.2|3.6|-14.2|
|4|0.8|0.4|-50.0|
|5|11.6|13.7|+18.1|
|6|13.7|18.4|+34.3|
|7|33.9|12.7|-62.5|
|8|12.0|15.3|+27.5|
|9|1.8|2.1|+16.6|

Source: COMTRADE
7

# B. ExDorts of pervices: tourism

The World Tourism Organization comp.les national statistics reported by some of its membcrs, including Hungary. Although the data available **are** incomplnte, they show (Table 5) that a third of the hotel nights spent<sup>by fnreign</sup> tourists originate in five out of the twelve EC countries for which there **are** data. The EC-12, therefore, probably has a much larger weight in Hungary's exports of tourism than of goods, comparable to the total CMEA and double as much as the USSR. Moreover, the EC tourists brought convertible currency with theml thus their relative effect on Hungary's balance of payments was likely much larger than the hotel nights demonstrate.

Table 5: Foreign Tourists Nigihts Spent in Hotels (number of nights)

|Countries<br>1985|1986|1987||
|---|---|---|---|
|France<br>German Federal Republic|81,000<br>1,406,000|84,000<br>1,223,000|92,000<br>1,481,000|
|Italy|157,000|217,ono|307,000|
|Netherlands|94,000|89,000|12F,000|
|United Kingdom|77,000|85,000|87,000|
|EC-5|1,815,000|1,698,000|2,095,000|
|Bulgaria|90,000|97,000|123,000|
|Czechoslovakia|220,000|255,000|260,000|
|German Democratic Rep.|237,000|24C,000|220,000|
|Poland|529,000|537.000|450,000|
|Romania|50,000|27,000|23,000|
|Soviet Union|881,000|928,000|1,216,000|
|CMEA|2,007,000|2,084,000|2,292,000|
|world|5,343,000|5,384,000|6,392,000|

Source: Yearbook of Tourism Statistics, Table 5, 1987 and 1988.

The higher share of the EC in Hungary's tourism may be explained by the facts that: 1) trade in tourism services is much less distorted than trade in goods; 2) the CMEA arrangements have little bearing on tourism; 3) tourism demand is directly related to income in the originating countries and to relative transport costs. Since the latter is roughly similar, the different income levels in the two blocs probably explains the present flows more than any other factor. It seems likely that in the future the ECs share in foreign tourist nights spent in Hungary will increase because of the economic crisis in Eastern Europe and the increasing appeal of Eastern Europe to potenti - Western tourists at the end of the Cold War.

# C. Imports

Turning to imports, Hungary's trade with the EC has been increasing since - the relatively low level and share of 1984 see Table 6. According to Hungarian
B data, more thai a quarter of Hung, ry'u total imp.rts and a third of **its** manufactured imports originated in the EC by lS88.6 Table 6. Geographical Distribution of Hungary's Imporle, 1980, 1985, 1988.

||Sm|1980|1<br>$Sm|984<br>%|1<br>Sm|98',|
|---|---|---|---|---|---|---|
|World|9,212|lC0.0|8,084|100.0|9,855|100.0|
|Austria|497|5.4|408|5.0|626|6.4|
|EC-12|2,135|23.2|1,651|20.4|2,426|24.6|
|Germany, F.R.|640|6.9|515|6.4|628|6.4|
|USA|252|2.7|199|2.5|251|2.5|
|USSR|2,556|27.7|2,354|29.1|2,805|28.5|

# Source: COMTRADE

The basic structure of Hungary's imports has not been changir&g signif cantly over time. HungLry imports manufactured products from the EC, more than 90%, and half its imports from the USSR are minerals and fuels **(see Annex** Tables Al and A2).

The EC is by far t:;Fr principal euppli :. of manufactu:ed products, and incorporation of the GDR into the EC will only reinforce this, particularly for machinery. On the other hand, most Hungarian fuels imports originate in the USSR, which ia also the prime foreign supplier of agricultural products. A further cra1e liberalization in Hungary and a reform or withering away of the CMEA would probably increase the share of non-CMEA suppliers, including that of the EC. There is sonte movement in this direction. The USSR has indicated that wishes to reduce ite fuel deliveries to Hurgary in the short run (see later).

Table 7: Geographical Distribution of Hurgary's .mports by Main Category of Products, 1987 (percent)

||EC-12|USSR|GDR|AUSTRIA|USA|Rest of the<br>world|
|---|---|---|---|---|---|---|
|Total trade|24.6|<br>28.5|6.4|6.4|2.5|31.7|
|Agriculture|15.5|<br>25.1|1.5|3.7|3.0|51.3|
|Mineral fuels|1.7|85.0|1 7|0.2|0.4|11.1|
|Chemicals|4.2|<br>13.9|5.2|V.3|4.5|24.9|
|Machines,tra.,s.equip.|<br>27.2|<br>17.5|12.7|8.3|3.3|31.1|
|Other manuf.products|33.8|<br>11.9|5.8|10.1|1.5|37.0|

# Source: COMTRADE

6 According to the Yearbook of the Hungarian Statistical office the share of the EC12 increased moderately in 1988 to 25.3%.
9

# III. Trade Policy of the EC Applied on Hunaarian Extorts

Until the concluseon of the September 1988 Trade and Cooperation Agreement between the EC and Hungary, the latter was treated as a GATT member as far an tariffs were concerned. However, the EC has a multiplicity of trade arrangements so that, as far as tariffs are concerned, GATT most favored nation (MFN) treatment often works out as the least favorable treatment in practice. In addition, non-tariff barriers (NTBs) have been applied by the EC and its member states in wavs which have discriminated against Hungary. Provided there were no serious supply constraints, Hungary's exports to the EC could expand substantially if it were to receive better treatment in the EC trade r6gime.

# (A) Tariffs

Table 8 shows tne average tariffs applied by the EC-10 (Belgium-Luxembourg, Denmark, the Federal Republic of Germany, France, Great Britain, Greece, Ireland Italy and the Netheilands) under the common Pxternal tariff (CET) in 1983 on imports from Hungary, OECD countries, the socialist (or former socialist) countries (excluding China), developing countries (including China), Mediterranean countries, EFTA countries and the world. The sources of data are discussed in Annex II. There have been only minor changes in tariffs since 1983. This was the mid-point of implementation of the Tokyo Round results which still prevail, but the EC had introduced some of those tariffs ahead of schedule. There have also been minor changes in the GSP and in the arrangements under the Lom6 Convention. More importantly, the EC-12 has started to grant improved treatment to Hungary (see later). However, these data give a reasonably accurate picture of the situation until the most recent changes.

Several points must be noted: first, the average rate of 6.8 percent applied against imports from Hungary was much higher than corresponding rates for the world or for other groups of countries. This results from the fact that the EC has a complex structure of tariff preferences under trade agreements with EFTA countries and the Mediterranean countries, while it also accords special tariff treatment to developing countries under the Generalized System of Preferences (GSP) and to former African, Caribbean and Pacific (ACP) territories under the Lome Convention. Thus, GATT MFN treatment was basically the treatment for nonEuropean industrial countries and the 'socialist" countries. Apart from the tariff preferences, Hungary exports many goods which attract relatively high protection in the EC marlet -- including many labor-intensive goods. This highprotection composition of trade is also why the average rate against Hungary is more than double the average rate against uther "socialist" countries, although item-for-item the rates are mostly the same.
10 Table 8: EC TARIFFS APPLIED IN<sup>1983 AGAINST GROUPS</sup> OF EXPORTERS (percont)

|SITC|DESCRIPTION<br>|world O|ECD|SOC|LDC|MED|EFTA|<sup>HUNGARY</sup>|
|---|---|---|---|---|---|---|---|---|
|ALL|TOTAL TRADE|2.6<br>|3.2<br>|2.7<br>|2.1<br>|1.9<br>|0.3<br>|6.8<br>|
|00|LIVE ANIMALS|2.2<br>|0.6<br>|4.6<br>|5.6<br>|5.4<br>|1.8<br>|4.8<br>|
|01<br>|MEAT&PREPARATIONS<br> <br>|13.2 1<br>|3.2<br>|9.5<br>|4.3<br>|4.2<br>|9.1<br>|9.6<br>|
|02|DAIRY PRODUCTS<br>& EGGS|10.8|1.1|3.3|1.9|2.0|1.4<br>|2.0<br>|
|03|FISH&PREPARATIONS|8.2<br>|6.8 1<br>|2.7 1<br>|1.5<br>|10.2<br>|3.4<br>|3.3<br>|
|04<br>|CEREALS AND PREPARATIONS<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|
|05<br>|FRUIT & VEGETABLES<br> <br>HONEY|8.3<br>259|7.1<br>70|3.0<br>66|9.7<br>59|5.7<br>52|6.6<br>63|4.2<br><sup>270</sup>|
|06|SUGAR, PREPARATIONS<br>&|.|.<br>|.<br>|.<br>|.<br>|.<br>|<sup>.</sup><br>|
|07|COFFEE, TEA, COCOA, SPICES|2.5<br>|1.9<br>|2.8<br>|2.5<br>|3.5<br>|8.0<br>|11.6<br>|
|08|ANIMAL FEEDING STUFF<br>|1.7<br>|0.1<br>|0.3<br>|2.3<br>|0.6<br>|1.6<br>|0.2<br>|
|09|MISC FOOD PREPARATIONS|12.6<br>|0.7<br>|7.3<br>|4.2<br>|1.5<br>|7.1<br>|4.6<br>|
|11<br>|BEVERAGES<br> <br> <br>|12.4<br>|7.1<br>|1.3<br>|2.4<br>|16.7<br>|9.0<br>|20.1|
|12|TOBACCO<br>& MANUFACTURES<br>THEREOF|61.8|6.1|8.7|5.5|0.0|<sup>8.2</sup>||
|<br>21|<br>HIDES,SKINS, INC. FUR, UNDRESSED|<sup>0.0</sup><br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|
|22<br>|OIL SEEDS,NUTS,KERNELS<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|
|23<br>|RUBBER CRUDE,SYNTHETIC<br> <br>|0.0<br>|0.0<br>1|0.1<br>00|0.0<br>01|0.1<br>00|0.0<br>00|1.2<br> 01|
|24|WOOD, LUMBER<br>& CORK|0.1|0.<br>|.<br>|.<br>|.<br>|.<br>|.<br>|
|25<br>|PULP AND WASTE PAPER<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|
|26<br>|TEXTILE FIBERS (NOT YARN, THREAD)<br>|<sup>0.6</sup><br>|0.6<br>|1.6<br>|0.6<br>|0.1<br>|0.0<br>|2.6<br>00|
|27|CRUDE FERTILIZERS&MINERALS<br>|0.0<br>|0.0<br>|0.2<br>|0.0<br>|0.0<br>|0.0<br>|.<br>|
|28|METALLIFEROUS<br>ORES, METAL SCRAP<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|
|29<br>|CRUDE ANIMAL VEG MATERIALS<sup>NES</sup><br>|3.6<br>|3.8<br>|0.8<br>|2.7<br>|7.9<br>|1.7<br>|0.7<br>|
|32|COAL,COKE,BRIOUETTES<br> <br>|2.9<br>|3.0<br>|2.8<br>|2.7<br>|1.8<br>|0.0<br>|0.9<br>|
|33<br>|PETROLEUM<br>& PETROLEUM<br>PRODUCTS<br>|0.2<br>|0.4<br>|0.6<br>|0.2<br>|0.4<br>|0.0<br>|3.5<br>|
|34<br>|GAS NATURAL AND MANUFACTURED<br>|0.1<br>|0.6<br>|0.1<br>|0.1<br>|0.1<br>|0.0<br>|1.0|
|35|ELECTRIC ENERGY|0.0|0.0|0.0|0.0|0.0|0.0<br>||
|41|ANIMAL OILS&FATS<br>|0.5<br>|0.6<br>|2.4<br>|0.2<br>|0.7<br>|0.5<br>|2.2<br>|
|42|FIXED VEGETABLE OILS & FATS<br> <br>|6.7<br>|9.9<br>|7.4<br>|6.5<br>|8.4<br>|8.8<br>|8.9<br>|
|43|PROCESD<br>ANIMAL, VEG OIL & FATS<br>|9.2<br>|9.3<br>|0.7<br>|9.5<br>|0.1<br>|13.8<br>|0.5<br>|
|51|CHEMICAL ELEMENTS<br>&COMPOUNDS<br>|3.3<br>|3.2<br>|4.1<br>|4.0<br>|3.6<br>|0.2<br>|3.0<br>|
|52<br>|MINERAL TAR & CRUDE CHEMICALS<br>|0.3<br>|0.1<br>|0.8<br>|0.3<br>|0.1<br>|0.0<br>|1.1<br>|
|53|DYEING, TANNING & COLORING<sup>MATRL</sup>|<sup>2.7</sup>|2.5|8.8|3.9<br>|3.4<br>|0.0<br>|10.0<br>|
|54|<br>MEDICINAL & PHARM PRODUCTS<br> <br>|2.7<br>|2.5<br>|5.7<br>|5.0<br>|3.6<br>|0.1<br>|6.8<br>|
|55<br>|ESSENTIAL OILS&PERFUME<br>MATRLS<br>|2.3<br>|2.5<br>|0.7<br>|1.6<br>|1.1<br>|0.0<br>|3.2<br>|
|56|FERTILIZERS MANUFACTURED|2.5|2.4|3.6|4.1|3.0|0.0|7.5<br>|
|57|EXPLOSIVES, PYROTECH<br>PRODUCTS<br>|3.9<br>|3.1<br>|5.7<br>|5.4<br>|2.3<br>|0.0<br>|8.9<br>|
|58|PLASTIC MATERIALS ETC<br>|5.7<br>|5.6<br>|12.5<br>|8.7<br>|3.6<br>|0.0<br>|13.4<br>|
|59|CHEMICALS NES|3.4<br>|3.3<br>|5.2<br>|4.0<br>|0.9<br>|0.0<br>|6.8<br>|
|61|LEATHER/FURS INC MANUFS<br>|2.1<br>|1.2<br>|3.7<br>|2.8<br>|3.2<br>|0.0<br>|5.1<br>|
|62<br>|RUBBER<br>MANUFACTURES<br>|2.9<br>|2.3<br>|6.6<br>|4.3<br>|2.9<br>|0.0<br>|6.8<br>|
|63<br>|WOOD & CORK MANUFACTURES<br> <br>|4.1<br>27|2.8<br>26|8.3<br>89|5.9<br>67|4.2<br>63|0.0<br>14|6.4<br>105|
|64|PAPER/BOARD<br>& MANUFACTURES<br>|.<br>|.<br>|.<br>|.<br>|.<br>|.<br>|.<br>|
|65<br>|TEXTILE YARN, FABRICS & ARTICLES<br>|5.3<br>|3.2<br>|10.1<br>|7.6<br>|3.0<br>|0.1<br>|12.0<br>|
|66<br>|NON-METALLIC MINERAL MANUFACTUR<br>|ES<sup>2.0</sup><br>|2.0<br>|4.2<br>8|1.1<br>33|0.7<br>38|0.0<br>00|8.6<br>60|
|67|IRON & STEEL|2.3<br>|1.7<br>|5.<br>|.<br>|.<br>|.<br>|.<br>|
|68|NON-FERROUS<br>METALS<br>|0.6<br>|0.8<br>|0.5<br>|0.5<br>|3.1<br>|0.0<br>|4.1<br>|
|69|METAL MANUFACTURES<br>NES|3.0|2.5|5.3|4.9|2.5|0.0|6.1|
|<br>71|<br>MACHINES NON-ELECTRIC|3.3|3.3|5.5<br>|3.9<br>|2.4<br>|0.0<br>|5.3<br>|
|72|MACHINERY<br>ELECTRIC|6.0<br>|5.7<br>|6.2<br>|7.0<br>|3.5<br>|0.0<br>|6.3<br>|
|**73**|TRANSPORT<br>EQUIPMENT|4.7|4.8|8.9|3.4|6.0|0.0|16.9|
|81|SANITARY,PLUMBG,HEATNG,LGHTNG<br>EOU|<br><br>2.2|0.9|6.8|4.7|4.3|0.0<br>|8.5<br>|
|82|<br>FURNITURE|<br>3.2<br>|0.9<br>|6.6<br>|5.4<br>|4.2<br>|0.0<br>|6.7<br>|
|83<br>|TRAVEL GOODS, HANDBAGS<br>|4.9<br>|3.3<br>|5.1<br>|4.3<br>|4.2<br>|0.0<br>|6.1<br>12|
|84|CLOTHING|7.3|2.1|10.5|9.3|5.4|0.0<br>|3.<br>|
|85<br>86|FOOTWEAR<br>PROF SCIENTIFIC ETC INSTRUMENT|6.5<br>S<sup>61</sup>|0.7<br>62|9.6<br>69|9.1<br>4.4|5.9<br>1.5|0.0<br>0.0|11.7<br>6.9|
|<br>89|.<br>MISC MANUFACTURES<br>NES|<sup>.</sup><br>5.1|.<br>4.9|.<br>6.0|<br>5.0|<br>2.4|<br>0.2|5.5|

# Source: See Annex 11.

Note: Missing vaLues impLies<sup>no imports</sup> in these categories. SOC * "Socialist" countries of Asia and Eastern Europe pLus<sup>the USSR</sup><sup>**and**Cuba, excluding China</sup><sup>**and**Hungary.</sup> MED - Mediterranean countries, not elsewhere included, including China, LDC Developing countries, not elsewhere included, incLuding China. OECOOECD countries, including Spain and Portugal, excluding Turkey. EFTAAustria, Finland, Norway, Sweden, Switzerland and IceLand.
11 With respect to individual categories of prcducts, it is clear from the table that thero are relatively high tariffs spread throughout the agricultural sector, as well as in chemicals, textiles, transport (automobiles), clothing and footwear.

# (B) Non-Tariff Barriers

By all accounts the main obstacles to market access for Hungary were (and still are) non-tariff barriers (NTBs), some of them targeted specifically at Hungary. In that respect, a distinction must be made between those barriers applied by the EC a. a group and those applied by individual member states.

Table 9 gives a broad overview of the use of NTBs by the EC as a group in 1988. A perusal of the table shows that the products concerned were both "sensitive" in the EC and relatively competitive in Hungary.
12 Table 9: Main NTBs Applied on EC Imports from Hungary,<sup>1988</sup>

|Type of NTB<br>Fr|equency|Main cat. of products<br>concerned|
|---|---|---|
|Tariff quotas<br>Seasonal tariffs|4<br>17|sheep and lambmeat<br>apples,cherries|
|Variable levies|19|sheep and porkmeat,other<br>animal pr.,preserved fruit|
|Variable component|1|extracts of coffee|
|Licenses|48|meat,preserved fruit and<br>vegetablea,maize,wine|
|Quotas|2|preserved vegetables|
|Quotas by country<br>VERs|4<br>22|sheepmeat<br>iron and steel products|
|MFA restrictive agr.|217|textiles and clothing|
|Retr. surveillance|1|nitr.fertilizers|
|Community surveillance|<br>32|apples,footwear,steel pr.<br>|
|Reference prices|47|fr.fruit&veg.,maize,wine|
|Price surveillance|228|text./clothing,iron/steel pr.|
|Anti-dumping investig.|<br>2|urea,nitr.fertilizers|
|Undertakings|7|alum.oxide,sulphates,drawn<br>wood, glass, transformers,<br>el.lamps and bulbs|

Source: Official sources in the EC (mainly the EC Official Journal,<sup>GATT</sup> documents, and the EC Tariff Schedules) computerized by<sup>UNCTAD. See Annex III</sup> for more details.

The relative importance in the use of NTBs by the combined<sup>member states</sup> of the EC-10 (i.e., not EC group measures) in the food sector is given in Table 10. This table shows the percentage of EC imports from Hungary (in 1984 value terms, excluding intra-EC trade) affected by different broad<sup>categories of NTBs.</sup> Trade is defined by broad standard groupings (with SITC item 67 being included in Ores and metals). The types of NTBs have been categorized<sup>into the following</sup> broad categories: price-increasing NTBs (e.g., variable<sup>levies, anti-dumping</sup> duties, tariff quotas, etc), threats (e.g., monitoring<sup>systems, automatic</sup> licensing, anti-dumping or countervailing investigations. etc. )<sup>8</sup> , and quantitative restrictions (e.g., quotas, voluntary export restraints, restraints under the MFA, etc.).

The data in Table 10 are aggregated from the data for the individual member states which have applied a number of NTBs independently of the<sup>EC policy.</sup> The continued existence of some differences in the application of NTBs by individual members states mainly results from the grandfathering of NTBs<sup>applied</sup> prior to the Treaty of Rome. In 1992 with the unification<sup>of the market it is</sup> intended that NTBs will only be commonly applied.

**8** The inclusion of "threats" as NTBs is based on the chilling effect of these measures which have been the subject of other<sup>studies.</sup> For example, Messerlin (1989) shows that five years after the initiation<sup>of anti-dumping</sup> investigations by the EC, imports of items covered in the<sup>inquiries dropped to</sup> half the initial level. Imposition of anti-dumping duties led<sup>to even further</sup> reductions in imports.
13 It is important to emphasize that the descriptive statistic used - share of imports affected by NTBs (which is described in more detail in **Annex** III) - is not a measure of the restrictiveness of NTBe. Rather, it gives a measure of the incidence of NTBs, analogous to some extent to describing sectors as being affected by non-zero tariffs.<sup>9</sup> Table 10: EC IMPORTS FROM HUNGARY AFFECTED BY NTBS APPLIED IN 1988 BY BROAD IMPORT CATEGORIES

||IMPOR<br>1984<br>$'000|TS<br>PRICE<br>%|NTB T<br>THREATS<br>%|YPES<br>QRS<br>%|ALL<br>%|
|---|---|---|---|---|---|
|FOOD PRODUCTS|1123110|64.6|1.9|45.3|64.6|
|AGRIC. RAW MATERIALS|237789|0.1|2.3|5.7|7.6|
|ORES & METALS|450972|14.1|24.9|30.4|32.5|
|FUELS|397098|0.0|17.4|9.0|26.5|
|MNFRS (INC CHEMICALS)|1651383|17.0|3.8|19.4|24.4|
|TOTAL|3860352|27.7|7.0|26.3|35.2|

# Source: See Table 9.

In Table 11 information is given for each SITC division (excluding SITC 9) on the EC's NTB treatment of Hungary and other broad groups of countries (the same as were shown for tariffs in Table 8). The table shows a significantly higher incidence in the application of NTBs against Hungary's trade than against other groups of countries -- even other "socialist" countries -- and against the world in general.

In respect of individual SITC divisions, there are only a few in which the share of trade from Hungary affected by some kind of NTB is lower than that for other groups of countries. The final column also gives a more detailed breakdown of the sectors affected by NTBs than was given in Table 10, although only the figure for "All types of NTBs" is given. The breakdown by different types of broad categories of NTBs is given in Annex I, Table A4.

The textiles and clothing sectors are significant in having very high shares of imports from Hungary, other "socialist" countries, and developing countries affected by NTBs. In contrast, the share of imports from OECD countries affected by NTBs is negligible, reflecting their exclusion from the MFA or the EC textile r6gime. Other important sectors where this type of differential is marked include: petroleum and petroleum products (SITC 33), animals oils and fats (SITC 41), leather goods (SITC 61), paper and paperboard manufactures (SITC 64), iron and steel (SITC 67), sanitary and plumbing equipment (SITC 81) and footwear (SITC 85). However, there are some sectors where the incidence of NTBs against OECD countries is higher, e.g., transport equipment, reflecting the application of VERs by some EC countries against Japan.

9 Some recent econometric work suggests that, within certain bounds, this definition can be of some help in trying to explain trade flows.
14 Table 11: EEC IMPORTS FROM PARTNER GROUPS AFFECTED BY **NTBS**<sup>IN 1988</sup><sup>**(X)**</sup>

|SITC|<br>DESCRIPTION<br>|worLd|**OECD**|SOC|LDCS|**MED**|EFTA|HUNGARY|
|---|---|---|---|---|---|---|---|---|
|ALL|TOTAL TRADE|13.8|16.0|21.4|20.7|7.5|6.7|<br>**35.2**|
|00<br>|LIVE ANIMALS<br> <br> <br>|59.9<br>|11.3<br>|80.3<br>|55.7<br>|9.8<br>|87.4<br>|<br>88.3<br>|
|01<br>02|MEAT&PREPARATIONS<br> <br>DAIRY PRODUCTS&EGGS|83.1<br>83.0|89.0<br>85.0|85.3<br>75.7|74.6<br>60.8|47.6<br>38.4|95.7<br>69.7|39.7<br> <br>89.8<br>|
|03|FISH & PREPARATIONS<br>|3.0<br>|34.8<br>|40.9<br>|60.3<br>|48.7<br>|63.6<br>|<br>7.9<br> <br>|
|04|CEREALS AND PREPs<br>1|00.0|100.0|100.0|100.0|100.0|100.0|<br>100.0|
|<br>05|FRUIT&VEGETABLES|53.3|68.4|56.7|38.0|61.7|46.4|<br>61.5|
|06|SUGAR,honey|98.1|78.1|87.7<br>|99.3<br>|94.8<br>|74.2<br>|<br>58.1<br>|
|07|COFFEE, TEA, COCOA|27.2|37.2|37.5|22.1|9.7|59.9|65.5|
|<br>08|<br>ANIMAL FEEDING STUFF|29.2|43.7|24.2|23.0|63.7|4.6|<br>39.8|
|09|MISC FOOD PREPARATIONS|49.9|50.1<br>|61.1|14.0|62.4<br>|81.3<br>|<br>85.4<br> <br>|
|11|BEVERAGES|2.1|**3.5**|0.8|0.2|0.2|0.5|<br>0.3|
|<br>12|<br>TOBACCO & MANUFACTURES|0.0|0.0|0.0|0.0|0.0|0.0|<br>0.0|
|21|HIDES,SKINS,<br>FUR|0.0|0.0|0.0<br>|0.0<br>|0.0<br>|0.0<br>|<br>0.0<br> <br>|
|22<br>|OIL SEEDS,NUTS,KERNELS|1.2|2.7|0.8<br>|0.1|0.0<br>|2.7<br>|<br>9.6<br> <br>|
|**23**|RUBBER CRUDE,SYNTHETIC<br>|0.4|0.0|7.4|0.1<br>|0.0<br>|0.0<br>|<br>6.8<br> <br>|
|24|WOOD,LUMBER&CORK|0.0|0.0|0.0|0.0<br>|0.0<br>|0.0<br>|<br>0.1<br> <br>|
|25<br>|PULP AND WASTE PAPER<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|<br>0.0<br> <br>|
|26|TEXTILE FIBERS|12.8|8.7|18.3|12.8|45.5|7.0|<br>18.9|
|27|CRUDE FERTILIZERS|18.3<br>|3.1<br>|17.1<br>|16.4<br>|3.5|17.7<br>|<br>40.0<br>|
|28|METALLIFEROUS ORES|7.4|12.2|1.9|3.7|0.9|2.5|5.2<br>|
|29|CRUDE ANIMAL VEGMATs|18.0|14.0|30.2|19.4|14.7|16.1|<br>21.9|
|32<br>|COAL,COKE,BRIOUETTES|0.0|0.0<br>|0.0<br>|0.0<br>|0.0<br>|0.0<br>|<br>0.0<br>|
|33<br>|PETROLEUM & PRODUCTS<br>|12.3<br>|17.2<br>|28.1<br>|10.5<br>|14.0<br>|4.3<br>|32.6<br> <br>|
|34|GASNATURAL AND Mnfd|1.2|0.0|11.1|0.0|0.0|0.0|<br>0.5|
|35|ELECTRIC ENERGY|1.5|0.0|11.1<br>|0.0<br>||0.0<br>||
|41|ANIMAL OILS & FATS<br>|6.6<br>|10.3<br>|2.2<br>|0.2<br>|0.0<br>|1.2<br>|34.4<br> <br>|
|42|FIXED VEG. OILS & FATS|6.4|2.2|0.2|0.1|98.7|0.2|<br>0.0|
|<br>43|PROCESD OILS & FATS|0.0|0.0|0.1|0.0|0.0<br>|0.0<br>|<br>4.2<br> <br>|
|51|CHEMICAL ELMNTS & cmpds|1.8|2.6|4.0<br>|0.9<br>|0.0<br>|2.6<br>|<br>1.2<br> <br>|
|52|MINERAL TAR|0.8|0.1|3.0|1.0|0.0|0.0|<br>2.9|
|**53**|DYEING, TANNING MATRLS|0.9|0.7|15.1|5.1|0.0<br>|0.0<br>|<br>7.3<br>|
|54|MED&PHARM PRODUCTS|5.3|5.4|4.9|2.7|4.4|6.8|7.1<br>|
|55|ESSENTIAL OILS S|0.8|0.5|0.1|2.0|0.0|0.0|<br>0.0|
|56|FERTILIZERS<br>MANUFACTUR|ED<br>1.7|6.6|11.6|0.0|0.0|0.0|<br>11.5|
|57|EXPLOSIVES|0.4|0.0|21.7<br>|5.6<br>|0.0<br>|0.0<br>|<br>24.8<br> <br>|
|58<br>|PLASTIC MATERIALS ETC<br>|1.5<br>|1.1<br>|20.2<br>|1.9<br>|0.0<br>|0.0<br>|<br>9.1<br> <br>|
|59|CHEMICALS NES|8.2|14.3|6.6|19.4|8.7|1.7|<br>5.5<br>|
|61|LEATHER/FURS<br>INC MANUFS|16.4|11.2|32.1|12.1|92.7|3.5|43.1<br>|
|62<br>|RUBBER MANUFACTURES<br>|6.2<br>|0.9<br>|26.4<br>|14.9<br>|0.0<br>|0.0<br>|<br>16.6<br>1|
|63|WOOD&CORK MNFS|33.5|23.8|52.1|46.3|4.6|23.2|6.7|
|64|PAPER/BOARD&MNFS|35.4|42.2|27.0|12.7|0.0|12.7|78.6|
|65<br>|TXTL YARN, FBRCS,ARTCL|S<br>29.6<br>|1.4<br>|77.6<br>|69.7<br>|0.1<br>|0.6<br>|<br>96.9<br>|
|66|NON-METALLIC<br>MIN MNFS|7.3|5.0|36.4|4.6|11.0|0.1|32.7|
|<br>67|IRON&STEEL|32.7|19.2|57.9|28.7|8.9|44.5|61.4|
|68|NON-FERROUS<br>METALS|2.0|4.4|0.4|0.5<br>|0.1<br>|1.5<br>|<br>5.8<br>|
|69|METAL MANUFACTURES<br>NES|2.5|1.5|7.6|3.5|5.7|2.1|4.3|
|71|MACHINES NON-ELECTRIC|4.2|6.6|7.5|0.8|0.1|0.5|<br>11.2|
|72|MACHINERY ELECTRIC<br>|6.8<br>|9.9<br>|18.9<br>|7.1<br>|5.4<br>|3.7<br>|7.0<br>|
|73<br>|TRANSPORT<br>EQUIPMENT<br>|11.0<br>|34.3<br>|11.0<br>|3.3<br>|3.4<br>|3.1<br>|7.4<br>2|
|81|SANITARY, ETC EQUIP|3.1|1.1|1.6|5.3|0.2|0.3|6.5|
|82|<br>FURNITURE<br>|13.1<br>|8.0<br>|21.6<br>|11.5<br>|10.6<br>|9.8<br>|19.6<br>|
|83<br>|TRAVEL GOODS, HANDBAG<br>|S 0.2<br>|0.0<br>|2.7<br>|0.0<br>|0.0<br>|0.0<br>|4.2<br>|
|84|CLOTHING|52.9|0.2|93.7|77.3|0.3|0.3|90.2<br>|
|85<br>86|FOOTWEAR<br>PROF SCIENTIFIC INSTS|40.5<br>54|22.7<br>75|69.0<br>241|45.4<br>15|21.3<br>09|25.9<br>1.6|66.7<br>3.9|
|<br>89|.<br>MISC MANUFACTURES<br>NES|.<br>3.4|.<br>5.5|.<br>8.5|.<br>3.1|.<br>0.1|<br>0.5|3.2|

Source: See Table 9. Notes: See Table 8.
15

# IV. Recent Chanoes in Huncary's Trade<sup>Relations with the EC</sup><sup>**Hunaary**</sup>

Hungary established diplomatic relations<sup>and signed a nonpreferential</sup> dgreement with the EC in September 1988,<sup>based on Article113of the Treaty of</sup> Rome. This agreement provided for the<sup>progressive elimination of quantitative</sup> restrictions on Hungarian exports into<sup>the EC and access for Communityfirms</sup> in the Hungarian market. However, textiles and steel products<sup>continue to be</sup> covered by separate agreements; and the<sup>September 1988 agreement has only a "best</sup> endeavors clause" in relation to agricultural<sup>products--</sup> which means, in essence, they are virtually excluded.<sup>Hungary continues to apply VERs on exports</sup> of sheep, mutton and lamb to the EC. These<sup>exceptions detract greatly from the</sup> economic value of the agreement since:

- EC tariff and nontariff protection is highest<sup>for agriculture,</sup>

- Between a third and a quarter of EC imports<sup>from Hungary are</sup> agricultural products, and

o Compared to other sectors, agriculture<sup>is the most export-oriented</sup> sector in Hungary, with more than 30% being exported.

According to Hungarian officials, the September<sup>1988 agreement simply ended</sup> a dispute between Hungary and the EC<sup>dating back to 1975, after Hungary's</sup> accession to the GATT. The EC declined to apply<sup>GATT's Article 13, abolishing</sup> QRs, and therefore did not confer full<sup>GATT status on Hungary.'0</sup> Thus, the September 1988 accord only harmonized<sup>positions among OECD countriesvis-a-vis</sup> Hungary. However, Hungary is still considered<sup>by the EC to be a "state trading</sup> country."" This did not prevent the<sup>EC from granting Hungary GSP status on</sup> January 1, 1990 on "an exceptional basis,"<sup>as it did for Romania.'2 The US,</sup> Japan and Austria have done the same. Superseding<sup>the September 1988 agreement,</sup> which indicated such measures would be<sup>phased in much later on, all</sup> discriminatory QRs specifically aimed at<sup>State Trading countries were eliminated</sup> on January 1, 1990. The EC has also<sup>suspended provisionally for one year all</sup> general QRs which also affected Hungarian<sup>exports.-~ Furthermore, as of March</sup> 1990, the EC has agreed to modify the textile<sup>agreements in force and to expand</sup> the textile quotas on Hungary's exports in rate suggested by the MFA, and valued at<sup>1990-91 by 13%, an increase twice theECU39 million.'</sup> 4 There have been negotiations both for nonpreferential<sup>trade concessions on agricultural products</sup> on a reciprocal basis and for the setting up<sup>later this year of an agreement in</sup>

**'0** Hlingary has been requesting the removal<sup>of those QRs for more than 20</sup> years. It is interesting to note that<sup>Italy--</sup> which, together with the FRG, currently champions the cause of Hungary<sup>in the EC--</sup> was the country most reluctant to accede to Hungary'B demands,<sup>since it had by far the longest list</sup> of specific QRs on Hungary's exports.

" Another sign of the low status of the agreement<sup>is that according to its</sup> article 12, member countries are allowed<sup>to sign economic cooperation agreements</sup> with Hungary, independently of the EC,<sup>thus retaining national authority over</sup> cooperation ventures. The same applies<sup>to export credit policies.</sup> '2 The EC's GSP includes a limited list of<sup>agricultural imports on which the</sup> CCT is partially reduced. According to EIU(1990),<sup>both Hungary's access to the</sup> GSP and the abolition of QRs will boost<sup>exports by only $50 Mo. annually, a 2%</sup> increase in exports to the EC.

- **'3** The suspension is not being applied by Spain<sup>nor Portugal.</sup>

- **"'** Aaence Europe, March 24, 1990.
16 the coal and steel sector.'5 The<sup>latter would include the eliminatior of the EC's</sup> barriers to trade on steel products.<sup>There has already been a 15% increase in</sup> EC quotas applied to a series<sup>of countries, including Hungary, which have steel</sup> agreements with the EC."<sup>6</sup> As a result of these actions,<sup>the position of Hungary in the EC's pyramid</sup> of privilege has been changing<sup>dramatically in the last year. Whereas, as late</sup> as early 1989, Hungary was placed<sup>in the worst category, it is currently in a</sup> better position than the developing<sup>or semi-industrialized countries of Latin</sup> America or Asia, or the non-EFTA<sup>countries in the OECD. However, it receives far</sup> worse treatment than that accorded<sup>to other semi-industrialized economies</sup> bordering the Mediterranean,<sup>not to speak of EFTA. While the manufactured exports</sup> 7 of non-EC Mediterranean countries<sup>enter the Community duty-free and quota-free,"</sup> Hungary confronts a high frequency<sup>of NTBs applied on "sensitive imports" where</sup> it has a comparative advantage<sup>(textiles, clothing, footwear, glass products,</sup> iron and steel products, some<sup>chemicals, electric lamps and bulbs). Agricultural</sup> exports of nonmember Mediterranean<sup>countries will be subject to duty-free tariff</sup> quotas by 1996, on a par with<sup>Spain for some sensitive products and no</sup> limitations for others, while<sup>Hungarian exports will be restricted by licenses,</sup> seasonal tariffs, Community<sup>surveillance, quotas and by the Common Customs</sup> Tariff."

# V. Three Challenges to Hungary's<sup>Exports</sup>

At a time when the Hungarian authorities<sup>have opted for a further openir.g</sup> of the economy, market access<sup>to the richest nearby market is likely to be vital</sup> to ensure the success of its<sup>liberalization efforts. Hungary may thus want to</sup> improve further its position in<sup>the EC's pyramid of privilege as far as tariff</sup> preferences are concerned. Yet, such a step must be considered<sup>along with</sup> several recent or future changes<sup>in the EC environment of importance for Hungary</sup> -- the southern enlargement of<sup>the EC, the enlargement to include the GDR under</sup> German unification, and the completion<sup>of the EC's internal market, scheduled to</sup> take place by January 1, 1993.<sup>These events acquire particular relevance given</sup> the size and nature of Hungary's<sup>trade with Western markets and the former GDR,</sup> and the new industrial strategy<sup>of Hungary, which will rely on an expansion of</sup> exports to the West. The impact<sup>on Hungary's economy may go well beyond that of</sup> its direct exports to the EC. For instance, suppliers of intermediary<sup>products,</sup> machinery and equipment have<sup>a large influence in shaping the economic structure</sup> in the purchasing countries by<sup>imposing their standards, patterns, models, norms,</sup> customs, and procedures. This<sup>is what is expected to happen after "1992" with</sup> an all-pervading effect on Hungary's<sup>economic environment.</sup> Interestingly, in 1987 40% of the machinery imported<sup>by Hungary originated either in the EC or in</sup> the GDR, a share that should<sup>increase as the combined result of the agreements</sup> between the EC and Hungary,<sup>the latter's country trade liberalization, and the</sup> Is Hungary received some concessions<sup>relating to tariffs, levies and tariff</sup> quotas on goose liver, onions,<sup>cherries and several other less important</sup> products. See also Aaence Europe,<sup>April 19, 1990.</sup> _16_ However, five EC member states<sup>still apply national quotas on imports from</sup> Hungary(the FRG, Italy and the<sup>Benelux countries).</sup> _17_ There are, however, some<sup>VERagreements on textiles with several</sup> Mediterranean countries such<sup>as Morocco and Tunisia</sup> !7 Although the latter will be<sup>reduced in the future on an m.f.n basis for</sup> some selected products, or by<sup>application of the Community's GSP scheme to</sup> Hungary.
17 modernization strategies adopted by the present government.'9 If foreign direct investment originates predominantly in Western Europe -- and in particular in Germany -- there is reason to believe that machinery will also originate<sup>from</sup> there.

A. First challenge: The progressive integration of Spain<sup>and ?ortugal into the</sup> European system of division of labor According to Hungarian sources, there is ample evidence to<sup>show that, as</sup> a result of the enlargement of the EC to include Greece,<sup>Spain and Portugal,</sup> trade diversion took place aga4nst Hungary in favor of<sup>EC producers of meat,</sup> electrical and textile products in those three markets. However<sup>this will be</sup> minimal compared to the expected full impact of the southern<sup>enlargement of the</sup> EC which has not yet affected agricultural exports from<sup>Spain. In fact Spain</sup> (and Portugal) will obtain free access to the EC for their<sup>agricultural products</sup> only by 1996. Bcth countries will improve substantially on their previous, preferred Mediterranean status, which entailed very<sup>few tariff reductions.</sup> Moreover, the new members will benefit progressively<sup>from all the advantages of</sup> the CAP (e.g., they will obtain export refunds, receive<sup>guaranteed prices, and</sup> so on) which will not take effect until January 1, 1996.

Moreover, the EC has added new protocols to the agreements concluded<sup>with</sup> Mediterranean nonmembers in the mid-1970s. These new protocols provide<sup>for the</sup> progressive elimination of customs duties on traditional<sup>quantities of fruits and</sup> vegetables exported to the EC by these third Mediterranean<sup>countries. As a quid</sup> pro quo, the Canary Islands and Ceuta and Melilla will<sup>be accorded the same</sup> treatment received by other Mediterranean countries<sup>under these new additional</sup> protocols. These, therefore, must be seen as part of "Operation<sup>Enlargement."</sup> Spanish and Portuguese manufactured exports were given duty-free<sup>access in</sup> the EC and in EFTA on July 1, 1989 in advance of what had been<sup>scheduled in the</sup> respective Treaties of Accession to the EC. There are, however,<sup>some exceptions</sup> for sensitive products (which Hungary exports to the EC as<sup>well) for which free</sup> market access will be given much later to Spain and<sup>Portugal.</sup> Even for nonsensitive manufactured products the full impact on Hungary<sup>is going to be felt</sup> in the coming months if not years.2' 19 It is difficult to predict how imports of machinery from the<sup>ex-GDR will</sup> evolve once this territory will be incorporated in the<sup>EC-12. Some lower quality,</sup> lower technology imports may be replaced by Western European<sup>equipment. On the</sup> other hand, the need for spare part. will tend to maintain<sup>such flow at least in</sup> the short run. Moreover the GDR will be a partner to tne<sup>Hungary-EC agreement and</sup> benefit as a GATT member from all the liberalization measures adopted by Hungary.

N The weight of the FRG is not reflected in Hungarian import statistics, because much of the machinery is imported through Austria or produced<sup>in Austria</sup> by German multinationals. More than 75% of FDI in Hungary<sup>originates in Austria,</sup> West Germany and Switzerland.

' Duty-free access into Spanish and Portuguese industrial<sup>markets by EC and</sup> EFTA countries will take place by January 1, 1993. The two acceding<sup>countries are</sup> approximating their customs duties progressively to the level<sup>of the EC's Common</sup> Customs Tariff (CCT), and will adopt it completely by January 1,<sup>1993 as well</sup> (with the exception of some products for which the deadline<sup>is advanced by</sup> several years). This step invariably implies a reduction<sup>in tariff protection</sup> levels on non-EC countries' industrial exports. However<sup>given Hungary's trade</sup> patterns, these two future changes will be of minor significance for<sup>it.</sup>
18 The two newcomers are competitors of Hungary in some key areas. It was therefore considered useful to compare the two countries' export performances in specific sectors with that of Hungary. For this purpose we use **Balassa's** Revealed Comparative Advantage2 (RCA), which, as a proxy for comparative advantage, measures the relative share of an industry's exports of one country in the total exports of that country to the share of the same industry's exports worldwide to world exports as a whole. We computed the indices for Spain, Portugal and Hungary for the years 1986-87 in relation to the markets of the EC10. Trade data were disaggregated at the SITC four-digit level (see Annex I Table A3). As might be expected, the RCA overlap between Hungary and Spain includes a number of agricultural exports which are restricted in the EC, such as meats, fruits and juices, vegetables and wine. Other major Hungarian exports (over SlOm) to the EC for which Hungary and Spain display a similar comparative advantage in the EC-10 are: gasoline, hydrocarbons, footwear and prepared p-rts of footwear, wood manufactures, rubber tires and tubes, various iron and steel products, unwrought aluminum, domestic electrical equipment, furniture, and fur clothing.

Hungary's overlap with PortugalIs RCAs has almost no agricultural products, except wine. However, it is heavily skewed in the direction of very sensitive items in the EC, namely, various textile, clothing and footwear items. Other overlapped products where Hungary's exports exceed $10 million are animal materials n.e.s., hydrocarbons, nitrogenous fertilizers, other wood manufactures, and leather clothing.

# B. Second challenae: The integration of the GDR in the Eurooean Community

The integration of the former GDR into the Ecunder German unity will inevitably affect Hungary, but the effects can already be assessed tentatively. First, by the GDR leaving the CMEA and adopting the EC's Common Trade Policy new barriers on trade between that part of Germany which previously constituted the GDR and Hungary will affect a number of aoods, e.g., footwear and travel goods, which were part of Hungary's exports to the GDR. It is impossible to say if the substitution of Hungary's undertakings to buy given quantities of (mainly) industrial products from the GDR under the CMEA system for GATT-approved tariff rates under the EC's Common External Tariff will ihinder or promote more exports to the GDR.~ See Balassa (1965). If the ratio or index is greater than unity this is generally interpreted to mean that there is comparative advantage for the industry/country in question, arid comparative disadvantage if the ratio is less than unity. However, some care is needed in interpreting these RCA indices. Yeats (1985) points out that the RCA index has neither cardinal nor ordinal properties. This means it iB eBsentially binary -- an RCA greater than 1 implies that the exporter has comparative advantage in the sector for which the index number is computed and does not have comparative advantaqe in other sectors. One cannot say that a country has greater comparative advantage in sectors for which the index number is higher, nor can one say that a country has greater comparative advantage in a single sector than in another country which has a lower index number (that is still greater than one). This means, for example, that we could replace the values in Annex Table A3 with a binary variable, such as 1/0 or Y/N, where 1 or Y indicates comparative advantage and 0 or N indicates no comparative advantage.

**3** In some cases, the entry of the GDR in the EC could have a very detrimental effect. For instance, the GDR has an agreement with Hungary whereby the latter endeavors to buy all its buses from Hungary, something the EC has already announced must be discontinued. The Economist, March 31, 1990.

While the EC seems to accept that there is a political imperative for reunified Germany to take over the legal obligations of the GDR to the USSR at
19 Secondly, and more important, Hungarian exporters will encounter stiffer competition in the 11 Community markets newly opened to East German exporters.' Therefore, because of its present relevance a historical comparison of the GDR's revealed comparative advantage in those **11** EC markets with Hungary's seems warranted. (Annex Table A:3 shows the products where **tne GDR** index is larger than 1).

There is little overlap in the agriculture sector in the comparative advantage of Hungary and the former GDR. The main areas where overlap occurs include: meat, n.e.s., fresh , chilled or frozen (mcstly pork), vendered pig and poultry fat, oil seeds, nuts, etc., and to a less extent live animals for food, n.e.s. Outside the food sector, there is a wide range of major Hungarian export items where there is overlapping comparative advantage with the GOR: distillate fuels, mineral jelliee and waxes, hydrocarbons, nitrogen-function compounds, nitrogenous fertilizers, rubber tires and tubes, other wood manufactures, numerous iron and steel products, harvesting machinery, several items of electrical equipment, furniture, travel goods, non-knitted textile clothing, accessories, and fur clothing. Some of these products are heavily protected in the EC, not by tariffs but rather by various NTBs, such as variable levies, **QRs, VERs.** Thirdly, under German unity the eastern part of the country will receive **&** large amount of new investment and will be eligible for EC aid distributed through the EC's structural funds. Both will contribute to increased competitiveness of former East German firms exporting the same products as Hungary. The highly protectionist Common Agricultural Policy now also covers the whole of Germany. This will impair both Hungary's exports of live animals and animal oils there as well as cattle, meat and cereal exports to the rest of the **EC.2**

# C. Third challenae : Huncary and "1992"

The Single European Act, which came into force on July 1, 1987, contains a series of amendments to the Treaty of Rome, aimed at facilitating the creation of an economic space without frontiers in the EC-12 by 1992. About two thirds of the 279 new directives, which have to be adopted to complete this ambitious project, will require only a weighted majority voting, not unanimity as in the past. The deadline imposed, December 31, 1992, does not appear totally unrealistic in view of these new voting rules. Inspite of the assurances given by the **EC** since the autumn of 1988 whereby the 1992 Program is a domestic issue and does not imply any modification in the level of protection confronted by extra-EC exporters of goods or services (including manpower), there is a direct link between internal liberalization and the trade of the EC partners, particularly those on the **EC's** periphery. Here a clear distinction must be made among different groups of traling partners, since the EC applies a regionalist philocophy to its common external trade policy. The instruments used by the **EC** to confer privilege on different groups of third countries have been mainly, out not exclusively, tariff preferences or preferential tariff quotas. Since the 1992 Program deals mainly with non-tariff barriers, there is a question whether the EC will find it useful to extend the concept of preference to NTBs. A Priori this seems highly likely, given that GATT regulations are much less pervading in least for a limited period, this **is** not the case for other CMEA members. See Financial Times, March 27, 1990. > East German exporters had virtually full access to the FRG for more than 30 years.

**2** According to The Economist, March 31 1990, the **EC** expects increased surpluses of cereals as a result of applying the CAP regime to the GDR.
20 this domain than for tariffs. There is no need, for **example,**<sup>**for the EC**tc</sup><sup>**even**</sup> try to comply with conditions laid down in Article XXVI of<sup>GATT (which relates</sup> exclusively to customs unions and free trade areas). In practice,<sup>then, the EC</sup> can make bilateral deals on NTBs with other countries whenever<sup>it</sup><sup>**wishes.**</sup> A June 1989 report2 noted that, since the adoption of the White<sup>Paper and</sup> the ratification of the Single European Act, progress **has**<sup>been hectic.</sup> The Commission had drafted 274 of the 279 directives required<sup>by the White Paper by</sup> December 1989. **By** January 1990, 142 new directives of the<sup>279 had been already</sup> adopted by the Council of Ministers, i.e., 60% of **the** Prograrmme." Those EC officials consulted do not believe that 1992<sup>per se will</sup> discriminate against Hungary. Market access is not a major<sup>issue for Hungary</sup> (except for the all-important case of agriculture, as well **as**<sup>textiles and</sup> iron/steel products) but rather the **r.eed** for its own economic<sup>adjustment. There</sup> is total agreement on this, both inside and outside of<sup>Hungary, but there is</sup> literally no work under way at the EC Commission specifically<sup>aimed at the impact</sup> of "1992" on Hungary. The EC is concentrating its effort on its role as Consultative Group chairman for emergency help to Hungary and<sup>Poland</sup><sup>**as**well as</sup> focusing on the complex East German integration.

A priori the dangers of trade diversion for Hungary as a result<sup>of "1992"</sup> are reduced because dependence on EC markets for most goods<sup>affected by the</sup> "1992 program has been relatively small up to now. Some food products<sup>(such as</sup> meat preparations or preserved fruit) are outstanding exceptions<sup>because in their</sup> case both the EC's share in total exports is significant<sup>and they will be</sup> affected by new EC directives relating to phitosanitary matters. This may explain why Hungarian experts believe that the EC should first<sup>eliminate tariffs</sup> and QRs on imports of agricultural, steel and textile products,<sup>before tackling</sup> other NTBs.

**_A_** perusal of the Checchini Report shows that the EC is expecting a decrease in extra-EC imports of 5 to 7% on average according to the assumptions<sup>made. The</sup> rate of change is much larger for eome sectors (e.g., for communications,<sup>credit</sup> and insurance) than for others. In sectors where Hungary<sup>displays comparative</sup> advantage (such as textiles or iron and steel products) the expected<sup>decrease</sup> ranges from 5 to 12%8 Note however that agriculture was excluded from the estimations. However, it seems implausible that EC imports of all textile<sup>and</sup> clothing imports should decline after 1992, particularly if<sup>there is also some</sup> opening of this and other sectors as a result of the Uruguay Round negotiations along the lines indicated by the simulation results presented earlier in<sup>the</sup> paper.

Penetrating the EC market after 1992 will require, however, even greater marketing efforts by Hungary's inexperienced exporters. There will be even greater competition before from within the Community as internal trade is<sup>further</sup> deregulated under the 1992 Program. Thus, the main "1992"-linked problem for Hungarian authorities is that they must succeed not only in making Hungarian products and services competitive with those produced currently by EC firms,<sup>but</sup>

> See Fourth Progress Report of the Commission to the Council<sup>and to the</sup> European Parliament concerning the implementation of the Commission's White Paper, COM(89) 311 final, June 20, 1989.

**2** See Financial Times, December 9, 1989; Acence Eurooe, January<sup>11 1990. At</sup> the same time implementation of directives by member states<sup>is slower than</sup> predicted. Of the 88 directives which should have been implemented, only **14 have** actually been implemented by **all** the member states.

D See European Economy (1988), p. 183.
21 with those to be produced after 1992. **The challenge of "1992" for Hungarian** exporters will not only be reflected in more competition in EC markets but worldwide. A clear example is exports of railroad **equipment** to **the Third world, where** Hungary is currently competing with EC firms. The latter presumably will be able to lower costs by better exploiting econumies of scale and other productivity gains derived from EC-92. Another danger is that investor.a may play safe by locating their capital in an already deregulated post-92 EC. The potential for investment diversion ( or more simply "non-creation") is real **and may be an** important impact of "1992" on Hungary,' which the latter may counteract by requesting associate EC status, **as** specified in the next section.`0 Beyond the issue of competitiveness there are some specific problems arising from either the discriminatory abolition of NTBs in the EC or the "communitarization" of some of the individual members, policies. "Communitarization" will affect the visa policies of member states. Nowadays there is wide disparity of treatment of Hungarians wishing to travel to countries of the EC. For instance, obtaining a visa to visit France takes on average of three weeks, compared to an hour if the visa is for the FRG.<sup>3</sup> (Before German unity, Hungarians did not need visas to **viBit** East Germany).

With respect to migrant workers, although this **has** been of minor importance for Hungary in the past, the EC's desire to constrain the flow of foreign workers means that a common visa policy towards Hungary would in all likelihood hinder potential migrants from Hungary to Germany which is already heavily affected by east-west migration within the country. More restrictive visa and immigration policies would be unwelcome in Hungary at a time that massive unemployment is expected as a secondary outcome of economic reform. To put this issue in perspective, recent experience in Southern Europe shows that a critical factor in the success of liberalization programs was the possibility open to those unemployed to migrate to more prosperous parts of Europe. The best known precedent is the large-scale emigration from Spain in the early 1960s in the wake of sweeping liberalization measures adopted in the period 1957-1959 by the Spanish Government.

The EC may take a fresh look into the question of visas required from Eastern European citizens in the EC. Interestingly, Italy tends to line up with West Germany on visa issues. It decided last year that business travellers from Hungary do not need visas for periods of less than one month, a step that Austria took in the mid-1970s, before scrapping visas altogether. Italy is said to be pressing other EC countries to suppress visas on Hungary's travellers at the same time that this will be done for the GDR.<sup>3</sup> 2 The elimination of NTBs on intra-EC trade may affect Hungary in several ways; but some may be considered of critical importance:

**29** See Tomann, H.(1989), p.308.

**30** Note however that even associate status would not preclude Hungarian suppliers from being negatively affected by new local content and origin rules, which are part and parcel of some of the directives facilitating intra-EC trade in goods and services, e.g., in the domain of government procurement.

" Two years ago, the FRG was studying the possibility of suppressing **the** need for visas for Hungarian travellers, but France and the UK **opposed it on the** grounds that Germany wouli have to go back and impose visas in "1992," once **visa** policies would have to be harmonized in the EC.

32 See Aaence Europe, April 12, 1990.
22 1) Deregulation of road transport in the<sup>EC will be a challenge for</sup> Hungarocamion, Hungary's very efficient<sup>trucking firm. Hungarocamion now</sup> handles considerable road cargo between<sup>Europe and the Middle East</sup><sup>**via**</sup> Budapest. EC-92 road liberalization will permit -- for **example** -- **an** Italian firm to supply transport services<sup>from Greece to Denmark without</sup> any restriction, while this possibility<sup>will not be open to Hungarocamion.</sup> Hungary would like to reach an<sup>agreement with the EC to increase</sup> Hungarocamion' s options, but<sup>the EC may ask for some reciprocity.</sup> Viewed from another angle, the liberalization<sup>of road transport rules</sup> inside the EC will favor consumers<sup>of products that embody those services</sup> relatively intensively, like perishable<sup>products from Hungary, but it will</sup> also be advantageous for some of their<sup>competitors in Southern Europe</sup> which use trucks to convey their fruits<sup>and vegetables to Central European</sup> markets. Producers of similar products<sup>transported from further away by</sup> other transport moJes will be adversely<sup>affected.</sup> In any event the deregulation of road transport will<sup>probably stimulate Hungarian exports</sup> of products where the share of freight<sup>in costs is high such as perishable</sup> animal and vegetable products.

2) On the other hand, **the elimination**<sup>**of border formalities on intra-EC**</sup> **trade** (e.g., passport controls,<sup>exchange controls, origin controls,</sup> statistical reporting, transit noticing)3<sup>will be detrimental to</sup> Hungarian exporters of perishable products<sup>(e.g.,</sup><sup>**food exports) competing**</sup> with domestic EC producers and where<sup>prompt delivery is a key element.</sup>

**3)** Of less critical importance for Hungary<sup>are changes in</sup><sup>**the**regulatory</sup> environment concerning norms, standards<sup>and certification. It will only</sup> be an issue in A few selected cases. For instance, Hungary is not a member of such European standards<sup>organizations as CEN or CENELEC.</sup> However, Rdjusting to EC norms should<sup>not be an issue since in many</sup> instances it has adopted German norms. The high level of standards imposed by the FRG has accustomed Hungarian<sup>firms to coping with difficult</sup> technical problems. For instance, traditional exporters<sup>of electrical</sup> equipment are accustomed to Western<sup>demands. This is not true, however,</sup> for many other sectors, where firms<sup>have been producing according to CMEA,</sup> Soviet or Hungarian standards. Switching<sup>to EC standards may be more</sup> difficult in those cases.

In spite of the optimism on norms and<sup>standards, there are currently some</sup> problems with health standards in<sup>food products which must be overcome.</sup> A typical example is that the EC<sup>requires certain steel qualities to be</sup> used in some canned products which are<sup>not available in Hungary.</sup> After 1992, inspection of food products<sup>produced in the EC will be done at</sup> source, but imports from Hungary will<sup>be in general inspected at the EC's</sup> external borders and then issued a "passport"<sup>allowing for free circulation in</sup> the EC. The "passport" will then be<sup>checked at the point of arrival. This gives</sup> an advantage to the domestic EC<sup>producer because any failure to pass the</sup> inspection does not involve substantial<sup>costs as for the non-EC producer in</sup> Hungary. This puts Hungary's meat<sup>exports at a disadvantage when compared, say,</sup> to the GDR, which will be included in<sup>the Internal Market.</sup> There are some positive aspects for<sup>Hungary from the Internal Market, such</sup> as: 1) A reduction in the number of norms and standards<sup>(from 12 to 1) with</sup> which producers will have to comply<sup>once minimum European-wide</sup> 33 I.e., the obligation imposed on<sup>shippers to submit a transit notice upon</sup> entering each member state in the<sup>course of a Community transit operation.</sup>
23 standards have been adopted, allowing<sup>for free circulation in the</sup> Community for approved products. This is very important for Hunlgary's food and machinery sectors,<sup>which may be able to achieve</sup> some economies of scale, thanks<sup>to the dismantling of the EC's</sup> internal technical barriers.

2) A reduction in the number of<sup>tests and inspectiGns to be overcome</sup> for some types of products in<sup>order to sell in different EC member</sup> countries; obtaining a certificate<sup>from one of the EC-approved</sup> laboratories will be enough. The main beneficiaries in Hungary would be food, chemical, pharmaceutical<sup>and equipment industries.</sup> 3) Although there is considerable<sup>debate in the EC itself about the</sup> specific impact that the complezion<sup>of the EC's Internal Market will</sup> have on growth rates,' there<sup>is consensus that there will be a</sup> significant and positive impact<sup>on the present level of the EC's</sup> GDP.<sup>35</sup> The exact effect this increased<sup>demand will have on Hungary's</sup> exports to the EC will depend<sup>on the success of Hungary'BpreBent</sup> adjustment efforts. Nevertheless,<sup>the most positive impact could be</sup> expected on industries producing<sup>goods or services with high income</sup> elasticities of final demand<sup>in the EC--</sup> such as tourism -- but for most other Hungarian exports,<sup>pr'lary products (including food),</sup> clothing or machinery, income elasuLicities are<sup>low or verylow.36</sup> Among the measures of the EC-92<sup>program there is one likely to have a</sup> detrimental effect on Hungary's<sup>exports of agricultural exports: the doubling of</sup> the EC structural funds until<sup>1992. This may reduce export opportunities from</sup> Hungary's producers of fruit,<sup>vegetables, and spices since one of the guiding</sup> principles of the fund is to<sup>promote the diversification of production in</sup> Southern EuroPe away from products<sup>where the degree of EC self-sufficiency is</sup> already high.

One logistical problem that EC-1992<sup>presents for Hungary is that its firms</sup> are not well represented in the<sup>EC and that there is little time in the</sup><sup>**less**than</sup> 1000 days available in which<sup>to establish viable subsidiaries or branches in</sup> order to overcome potential<sup>discrimination between established and non-</sup> established firms deriving from<sup>"1992" or -re-empt reciprocity requests by the</sup> '4 See estimates in Commission<sup>(1988), i.e., the Cecchini Report, Centre for</sup> Business Strategy (1989), The<sup>Economist, November 18, 1989. The Checchini Report</sup> estimated that the EC's GDP<sup>would increase by a minimum of 4.5% after a period</sup> of five years.

35 Another expected source of<sup>growth is now German reunification which</sup> according to some estimations<sup>would add .5% to the EC growth rate. See Financial</sup> Times, March 31, 1990; Agence<sup>Europe, April 21, 1990.</sup> `6 Income elasticities of demand<sup>for primary products range from .3 for raw</sup> materials to .7 for nonferrous<sup>metals, with the exception of fuels(1.9). See</sup> Balassa, B. (1987). In the case<sup>of the EC, however, the income elasticity of</sup> demand for fuels is considerably<sup>lower, ranging from .5 to .8.</sup> 3 Yannopoulos, G.(1988), pp.103-12.<sup>Much of the GDR's territory would be</sup> classified as regions which<sup>are the focus of the reorganized funds. The</sup> Commission has already stressed<sup>that no aid will be granted to the detriment of</sup> the current beneficiary regions,<sup>which means an additional impact on outsiders</sup> such as Hungary.
24 EC. It is difficult to envisage such a possi.bility in Hungary, not only because capital is not the abundant factor, but also because of the tremendous balance of payment and foreign debt problems the country currently faces, with even tighter exchange controls likely to be imposed in the future.

Finally, mention should be made of two sectors for which the changes in the regulatory environment implied by EC-92 are quite cc itradictory and the same may have a substantial impact on Hungary's economy: air transport and tourism services.

# (i) Air Transport

# Three aviation issues affect Hungary:

a) Non-EC countries are worried that fifth freedom rights (the right of a carrier based in one country to offer services between two foreign countries) they have with individual EC countries may be impdired now that the EC is likely to act as a single country. Negotiation of 'anding rights with a body representing 12 countries instead of one implies a change of bargaining power in favor of the European partner. Hungary's airline, Malev, w.ll be in a very weak bargaining position with the EC.

b) The disappearance of tax-free shopping on intra-EC traffic improves the competitive position of non-EC members as a tourist destination. Airport authorities may raise EC landing fees to compensate for the disappearance of a very lucrative source of revenue. Ir sum, the post-1992 regime max divert some tourists away from the EC to alternative, Hungarian destinations.

c) On the other hand, intra-European air transport deregulation should lead, according to different studies,41 to a 10 to 20% reduction in most intra-EC air fares.'2 This implies some trade diversion against Hungary (less tourist arrivals, etc.) unless air fares to and from Hungary are also reduced.

Because of the critical importance of air transport to services exported by Hungary to the EC-12 and of the lack of competitiveness of Malev, the privatization of this airline should be a high priority. A recent World Bank i" A new directive, which is a part of the EC-92 program, is geared to conferring freedom of providing banking services by EC-based financial institutions, but this privilege will not be extended to third countries' financial firms unless those countries pass a reciprocity test.

3 According to the last EIU Hungary Country Report, foreign debt stood at $20.7 bn at the end of December 1989. The debt-service ratio is currently higher than 40%. See EIU(1990).

4 See Acence Europe, October 21, 1989. According to a study of the Netherlands Economic institute air fares on intra-EC travel could increase by 10% on this account and estimates that Greece could see its income from tourism drop by 10%. See also Financial Times, March 9, 1990.

4l See International **Herald** Tribune, June **1,** 1988; Commission(1988), p.98.

42 **EC transport ministers decided** in **early December 1989 that airlines flying** between community **destinations will be able** to **cut fares by up to 20% from January 1, 1990 without needing approval from countries at both ends of the** route, **but only from one of the two. See** International Herald Tribune, December 12, 1989.
25 study"<sup>1</sup> shows that price elasticities of air freight demand are fairly high, ranging from -0.8 to -1.6, while price elasticities of air transport for passengers on vacation stretch from -1.1 to -2.7. This points to the tremendous rewards that any policy of air transport cost reduction could have for Hungary.

# (ii) Tourism

The abolition of all exchange controls in most EC countries by 1990 is bound to increase travel. Tourism to Hungary is also likely to be affected by changes in the internal market for production factors. A unified factor market will facilitate intra-European labor mobility, which in turn will lead to a convergence of labor costs in the iC-12. In other words, the cost of laborintensive activities, like tourism in Southern Europe (particularly in the new member countries), is bound to rise substantially. Moreover, Spain and Portugal must adjust themselves entirely to the Common Agricultural Policy by 1996, a move implying a substantial increase in the price of food in the two countries. Both trends are bound to lead Northern and Central Europeans to travel further south and east. Hungary should be able to capture some of the increased demand. This is only possible if the relative price of air transport between EC countries and Hungary in terms of the price of North-South intra-EC routes does not increase, thus canceling the favorable impact of the completion of the Internal Market listed above.

# VI. Hungary's Future Trade Reaime with Western Europe

Hungary is considering strengthening its ties with Western Europe since the CMEA is disintegrating; transferable-ruble trade will soon be eliminated. Hungary's position is a difficult one. As an economic partner of the USSR up to the mid-1980s, it could obtain its energy and raw materials at very good terms, in view of the low-quality manufactured goods it was able to use to pay its CMEA partners. This has been changing. On the one hand a growing share of imports have had to be paid with "hard goods," including agricultural products or manufactured goods with import content from the West (e.g., electronic consumer goods, measuring instruments and metal-working machinery). On the other hand, the USSR has been using an increasing share of "soft goods" in its barter trade with Hungary (e.g., iron-ore with low iron content, coal aiid lumber which when delivered are frozen, so that they cannot be ignited easily; gas and crude oil have been delivered erratically). One result has been that Hungary has accumulated unconvertible ruble surpluses which cannot be used in trade with other CMEA partners and which are hard to use in future trade and payments agreements." Thus they must be considered as a non-interest bearing loan with undetermined maturity to the USSR. The government limited exports to the USSR on a temporary basis beginning January 18, 1990, after cutting subsidies to firms exporting to CMEA countries in July 1988.45 These restrictions have led to the temporary closing of plants or layoffs in plants whose output is mainly for export to the USSR. Economic adjustment will be painful and likely to create mass unemployment.

If trade with the USSR, an important trade partner, is less desirable for Hungary, it has apparently no other realistic option than to turn to the West, 41 Oum, T.H. et al.(1990).

44 **This happened for the first time in 1988, when the surplus reached 424** million TRe.

I EIU, nr.4,1988. **Interestingly, subsidies and other incentives schemes given to exporters to the West have not been cut.**
26 and as indicated in our simulations (see below), closer relations could lead to substantially greater trade. Indeed, some Hungarian economists predict that the EC could replace the USSR as an outlet for Hungarian goods.' However, there is no question that Hungary also faces considerable supply constraints, since at least in the short term a shift of industrial exports from CMEA to Western markets can be done only at high cost. Much of the embodied technology and physical capital is unadapted and would have to be scrapped altogether. The transportation infrastructure is geared to trade with CMEA countries. But there is currently substantial uncertainty on the kind of institutional links that Hungary should strive for with Western European economies. Prime Minister Antall, expressed the wish in mid-April 1990 that his country become<sup>a member of</sup> the EC between 1992 and 1995.4' The possibility of applying for membership in EFTA was evoked by the president of the Hungarian Socialist Party<sup>in June 1989,</sup> as a stepping stone for EC membership later on." Although this view<sup>is rejected</sup> by the EC, the idea has some merit from another perspective. As a member of EFTA, Hungary would also become a member of the European Economic<sup>Space which is</sup> currently being negotiated between the EC and EFTA members. Membership in EFTA may not affect relations with the USSR, given the Finnish precedent.<sup>49</sup> However, membership in EFTA is not so attractive as it seems for Hungary since (1) agriculture is not covered by EFTA nor by present and pending EC-EFTA agreements, (2) the only important EFTA market for Hungary is Austria, which may<sup>soon opt out</sup> of EFTA to enter the EC. EFTA members, moreover, have not shown a particular interest in fostering links with European developing countries and may<sup>perceive</sup> an enlargement of EFTA as a distraction from their plans to reach an agreement on the EES with the EC. There are other reasons why EFTA may be reluctant to admit new Eastern European members. Their currencies are not convertible; their economies are not market oriented; and EFTA rules do not facilitate<sup>the entry of</sup> new members. The reason membership in EFTA is proposed by Hungary is often political: EFTA is more "neutral" than the EC, less political and more economically focussed; not at all linked with NATO.

Barring EC or EFTA membership, the possibility of defining a new kind of relationship with the EC is currently being examined in different quarters. To start with, the EC has some experience in dealing with developing countries in its periphery (which incidentally EFTA has not). The Yugoslavia-EC agreements might be a modei to be followed. Other possible models are the Greece-EC or Turkey-EC association agreements of che 1960s. This would be only a second-best, however, since discrimination in EC markets is largest for Hungarian agricultural (both horticultural and meat) exports. The main advantage of association is that it would send a very important signal to foreign investors looking for easy access to large markets.

The EC may be preparing to negotiate with each CMEA country what are called "special association agreements," which place CMEA countries somewhere in<sup>between</sup> EFTA and the Mediterranean nonmember countries in the pyramid of preferences.

**4e** See International Herald Tribune, March 24, 1989. The FRG had guaranteed a $1 billion loan to Hungary much before the EC did in early 1990. The FRG is already well represented in Hungary's cultural and academic life when -7ompared to other EC countries (Goethe Instituce, F.Naumann Foundation). German firms are deemed to be eager to expand subcontracting activities they have already with many Hungarian firms. This can be facilitated by offering to Hungary a generous EC trade agreement. About half the joint ventures of Hungarian firms are with West German firms. Financial Times, March 23, 1990.

- **4'** Aaence Europe, April 18 1990.

- 4 See Kostrzewa,W. and Schmieding,H.(1989),p.514.

- 49 Kostrzewa, W.and Schmieding, H.(1989)
27 The idea would be to go beyond the usual concessions contained in the Mediterranean agreements (in trade, finance and social security) and extend them to cultural, educational, information and technological areas. "Political dialogue" would also be institutionalized. On the other hand, there would be no mention in the agreements of the possibility of membership at a later stage, which would give them less status than the 1963 Turkey-EC agreement. There is likely to be considerable debate inside the EC concerning the extent of trade concessions to CMEA countries. In particular, the Mediterranean members of the EC (including France) want the EC to limit its generosity both because they fear new competition in agricultural and other sensitive products, but also because they want to limit the erosion of the status of Maghreb countries in the EC's system of foreign economic relations.

It is not clear yet if the association agreements would be based on reciprocity. More likely than not, Hungary would not be asked to reciprocate at this stage, pending Hungary's transition to a market economy. This would obviate the need to address in the short term the difficult question of how to treat imports from the USSR and other CMEA members once a decision to give reverse preferences to the EC-12 would have been taken.

- VII. Simulations of the Possible Effects of Changes in the EC Merchandise Trade RMaime

Following recent reforms in Eastern Europe, the EC and other Western countries have indicated their willingness to revise the treatment accorded to the East and some changes have already been implemented. There are also a number of other changes being discussed in Europe, such as the extension of the EC and the European space concept, and the GATT-sponsored Uruguay Round of trade negotiations is drawing to a close. To attempt to capture the direct trade impact of possible changes on Hungary, a series of simulations have been carried out using a standard partial equilibrium trade model for the estimation of direct trade effects of various trade liberalization scenarios for trade in goods - see Annex II for more details on the model and the data used for the simulations. This type of model does not take account of the economy-wide effects of changes, such as inter-industry effects, exchange rate effects and the stimulus to investment. On the other hand, calculations are made at a very detailed level, the national tariff line, and aggregated for reporting purposes.` on the basis of the defined scenarios and the basic parameters, the model computes the estimated direct trade effects:

- (i) trade creation (or loss) following a change in tariff rates or nontariff barriers. This results from changes in demand in the market as a consequence of price changes associated with tariff changes (it is assumed that the price change will fully reflect the tariff change, i.e., that the benefits of the tariff change are passed on to consumers); and

-

- (ii) trade diversion the substitution of goods coming from the exporter for goods from other foreign suppliers, or vice-versa, resulting from changes in relative import prices ae6ociated with changes in tariffs facing different trading partners. Changes may result from

" The national tariff line (according to the NIMEXE classification of the EC) results were then concorded to the SITC (Standard International Trade Classification) for reporting purposes. Since the concordance between the NIMEXE and the SITC is not perfect some misallocation of results to SITC categories could occur.
28 the existence of differential rates before the liberalization or from liberalization which is not equal for all trading partners.

Trade creation and trade diversion effects are summed to calculate the total effect.

The model has been designed to estimate the effects of trade liberalization scenarios in which ad valorem rates are modified. Data on ad valorem tariffs are taken from the GATT Tariff Study. However, as we have seen, the EC applies NTBs in many sectors and any realistic attempt at modeling trade liberalization needs to take these into account. The approach we have used to handle NTBs is to use data compiled from prior micro-economic studies on the ad valorem equivalent of non-tariff barriers. This was taken from a survey by Laird and Yeats (1990a).

Some comments need to be made on the studies surveyed by Laird and Yeats. Typically, these studies identify the price disadvantage of domestically produced goods relative to the goods' international prices. The ad valorem equivalent of an NTB is assumed to equal the percentage price disadvantage lees the tariff rate. Of course, this method at best gives a rough order of magnitude for the trade effects of NTBs, for several reasons. The NTBs themselves have changed (generally increased) since these studies were carried out. In addition, ad valorem "tariff equivalents" vary according to international prices. Also, NTBs - have effects that are not fu ly captured by the idea of "tariff equivalents" some NTBs operate on demand J. g., quotas) while others operate on supply (e.g., voluntary export restraints).

While international prices were used to compute price disadvantages in some of these studies, an alternative approach was used for products affected by variable levies in the EC -- mainly agricultural products. For such products, data are available on these levies over time and were used to compute average price disadvantages over a three to five year period (wit-hin the period 1975-83).

One problem needs a special mention. The NTB studies surveyed do not allow the computation of tariff equivalents of NTBs separately for each trading partner. The prices disadvantages are against the international price. Thus, we cannot say, for example, that Hungary is more or less penalized by EC NTBs on the basis of these data. The only exception to this is that we know that the MFA applies only to the main textile and clothing exporters and the "socialist" countries were similarly affected by the EC textile r6gime. Accordingly, for all products in these categories we have assumed that the ad valorem equivalent of the NTBs does not apply to OECD countries. In all other cases we have assumed that EC NTBs are equally applied to all non-EC countries.

A number of possible scenarios were modelled. First, we examined the idea of the EC granting Hungary better treatment in its trade regime than at present. Secondly, we considered possible results from the Uruguay Round and how these might affect Hungary, including in the context of possible improved treatment not associated with the Uruguay Round. Finally, we considered how Hungary might be affected within the concept of a wider European economic "space".

These scenarios need some further explanation, but first a qualification about the data. For all the scenarios we have modified the base data - which - relates to the trade r6gime of the EC-10 as it existed in 1983 to include Spain and Portugal within the EC. However, we did not have data on Spain's or Portugal's imports and, therefore, were not able to alter the base to include them. Thus, we look at the scenarios modifying the behavior of the EC-10, but with Spain and Portugal getting EC treatment. In fact, as we shall see, this scenario provides an opportunity to see the diversion of trade from within the EC to other trading partners as the external barriers are removed -- and to understand the political sensitivities of Southern European countries, now in the EC, to any further opening of the market to possible compe_itors.
29 Given this starting point, the first set of scenarios **exanines the possible** effects of improved treatment for Hungary in isolation from other changes that are taking place. First, we consider the granting of GSP treatment by the EC to Hungary. We computed the average GSP rate, tariff item by item, and allocated this average rate to Hungary. Second, we consider the granting to Hungary of similar treatment to that accorded to the Mediterranean countries under bilateral arrangements with the EC, again by allocating the average tariff available to these countries. Third, we consider the implications of Hungary getting the same treatment as EFTA countries (in effect, of Hungary joining EFTA). Again, the average rate for these countries was allocated to Hungary. (This implies setting virtually all tariffs outside the agricultural sector to zero). Finally, we consider the effects of Hungisy attaining membership of the EC, in which case all tariffs are set to zero ane axternal NTBe are also eliminated for Hungary. In the other three scenarios NTBs remain unchanged.

In the second set of scenarios we consider the effects of the Uruguay Round and then we superimpose onto those the effects of changed treatment for Hungary along the lines of the first set of scenarios. The Uruguay Round is, at the time of writing, still under way and it is impossible to be precise about the type of package that might be finally negotiated. We do not make any claims as to the realism of our assumptions about the outcome of the Round, only that they give an order of magnitude along the lines that have been discussed by a wide range of countries representing different interests. We have, therefore, ventured to include in our scenarios the following assumptions:

- In the agricultural sector, the overall level of support will decrease by 20 percent. Thus we reduce the ad valorem equivalent of our package of tariffs and NTBs by some 20 percent.

- In the textiles and clothing sectors, we have left tariffs -

- unchanged, but we eliminate all NTBs along the lines of proposals for the elimination of the MFA, but we include the EC textile regime in the package.

- for all other sectors we reduce tariffs by 30 per cent - the overall objective for the Round

Our third set of scenarios concerns the idea of establishing a wider European economic space, encompassing the EC and EFTA as well as Hungary, Czechoslovakia, Poland, Romania, Yugoslavia and the GDR (which was not part of Germany in our data base). Apart from the wide geographical concept we have adopted, we have taken the trade regime of the concept to cover either of two possibilities. One is a zero tariff r6gime, including in agriculture, but with no changes in NTBs, and the second implies the elimination of NTBs as well as the establishment of zero tariffs.

The overall direct effects on Hungary's merchandise exports under these scenarios are shown in Table 12. The first column shows the import base which is used for the simulation exercises. The second column looks at the possible effects on Hungary of several possible changes in the tariff treatment which Hungary could receive bilaterally from the EC. The third column looks at the same changes, as well as the possible effects of participation wider arrangements for the whole of Europe (the "European space"), but all these results are examined in the context of the posited changes that might occur as a result of the implementation of the Uruguay Round results (as outlined earlier).

The change which would be expected to lead to the greatest expansion of imports from Hungary, a projected 48 percent increase, would come from full membership of the EC. The increase would be somewhat less under the Uruguay Round liberalization scenario - only 43 percent. The difference between **the** two results is that there is a greater gain to Hungary through the diversion of trade of third countries if Hungary alone were to join the EC, whereas Ln the Uruguay
30 Round scernario other countries also benefit<sup>from the reduction of the EC's</sup> external barriers, with the consequence of less<sup>gains for Hunga.y.</sup> Compared to its present treatment, Hungary<sup>would gain progressively more</sup> from GSP treatment, special Mediterranean<sup>preferences, and from membership of</sup> EFTA, in that order. In all of these cases the additional<sup>liberalization that</sup> would occur under the Uruguay Round scenarios<sup>is greater than in the absence of</sup> the Uruguay Round, outweighing any erosion<sup>of such preferences. The main reason</sup> for this is that in the Uruguay Round scenarios<sup>there is a reduction of non-</sup> tariff barriers in the agriculture sector<sup>and the elimination of MFA (with no</sup> tariff changes) in the textiles and clothing<sup>sector.</sup> Under the improved preference scenarios, tariffs alone are reduced,<sup>with no changas in the incidence</sup> of non-tariff barriers. It is also noted that<sup>Hungary would expect to get more</sup> from the Uruguay Round scenarios alone than it<sup>would from GSP in the absence of</sup> the Uruguay Round, i.e. MFN liberalization<sup>would serve it better than</sup> "preferential" treatment.

The final two results shown in Table 12<sup>relate to the creation of a wider</sup> European space, with a projected 24.4 percent<sup>expansion from the reduction of EC</sup> tariffs to zero for all European countries<sup>and a 37.9 percent expansion following</sup> the elimination of NTBs as well as the tariff reductions.

we now look more closely at the sectoral<sup>breakdown of the results by two</sup> digit StTC, Revision 1, categories - see Table<sup>13. In the first set of scenarios</sup> - reflecting improved preferential tariff<sup>treatment for Hungary alone, the</sup> sectoral breakdown typically reflects the overall<sup>results, namely that membership</sup> of the EFTA is better than the treatment afforded<sup>under the Mediterranean rate</sup> which in turn is better than the treatment<sup>under the GSP provisions. However,</sup> in agriculture the gains under GSP and Mediterranean<sup>country treatment are also</sup> greater than the gains that would be obtained<sup>from membership of EFTA. In the</sup> case of EC membership the sectoral results<sup>are similar to those for EFTA</sup> membership in the manufactures sub-sectors, reflecting<sup>the duty free trade under</sup> the EC-EFTA Protocol, but EC membership brings<sup>markedly greater gains in the</sup> agriculture and related sectors. The sectors<sup>where the greatest gains are to be</sup> obtained from EC membership would be, in declining<sup>order: iron and steel, meat</sup> and meat preparations, fruits and vegetables,<sup>textiles, and clothing.</sup> The second set of scenarios -- in which the assumed<sup>Uruguay Round results</sup> provide a backdrop for looking at the effects<sup>of improved treatment for Hungary</sup> in the EC. As in the first set of scenarios,<sup>the greatest gains are under the</sup> scenario in which Hungary gains EC membership.<sup>Setting this aside, and outside</sup> the food categories, the greatest gains would,<sup>with few exceptions, be from EFTA</sup> membership, receipt of Mediterranean preferences,<sup>and GSP treatment, in declining</sup> order. For products with no NTBs, EFTA membership<sup>would be as good as being in</sup> the EC itself. In the food categories, the<sup>treatment typically accorded to GSP</sup> beneficiaries and Mediterranean countries would<sup>be preferable to that accorded</sup> EFTA countries, and the treatment of the Mediterranean<sup>countries is significantly</sup> better than GSP treatment in some categories.
31 Table 12: Effects on Hungary of changes in EC merchandise trade policy r6gime

|Imports<br>1983|<br>Est<br>No U.|imated<br>R.|trade incr<br>Uruguay|ease<br>Round|
|---|---|---|---|---|
|$S000|$S000||$'000||
|969305|||||
|No special treatment|||81049|8.4|
|Hungary gets treatmentof:|||||
|-<br>GSP beneficiaries|57984|6.0|125071|12.9|
|-<br>Mediterranean<br>countries|96086|9.9|155036|16.0|
|-<br>EFTA countries|145063|15.0|187848|19.4|
|-<br>Other EC countries|465654|48.0|418055|43.1|
|Hungary benefits from:|||||
|-<br>European space (tariffs=0)|||236978|24.4|
|-<br>European space (tariffs & NTBS=0)|||367372|37.9|

In the case of EC treatment, the categories recording the greatest gains in absolute terms are, in descending order: iron and steel (SITC 67), meat and meat preparations (SITC 01), fruit and vegetables (SITC 04), clothing (SITC 84) and textiles (SITC 65). The gains in the latter category are twice as great as for the next category - electrical machinery (SITC 72). In non-EC scenarios (overlaying the Uruguay Round results in which NTBs are reduced in agriculture, textiles and clothing), the greatest gains are recorded in textiles and clothing, followed by a wide range of chemicals and other manufacturing categories. Fruit and vegetables, meat and even beverages do well in the food categories. An examination of the results for individual tariff items - not reported here because of the enormous amount of detail - show that in these sectors the results are quite widespread, i.e., they are not a consequence of the changes for a few items only. This reflects Hungary's diversified production base.

The winners and losers among countries other than Hungary are not reported in detail for the various scenarios, but we comment on some of the more interesting results. Under all the Uruguay Round scenarios, the major trade diversion losses -- a combined total of some $1.3 billion -- accrue to Portugal and Spain which are now within the EC. The negative effects -- some $75 million -- are much smaller for Sweden and smaller again for Norway ($27 million), both of which benefit from the EC's special arrangements for duty free entry of manufactures from EFTA countries. These losses -- which result from the erosion -- of the preferential margin these countries have over Hungary in the EC market are the largest we estimate under any of the scenarios. There are only modest losses through trade diversion for some ACP countries which currently are at the top of the EC's pyramid of preferences because of the Lome Convention arrangements. (The greatest losses are $5 million for Uganda, $3 million for Ethiopia and $2.7 million for Somalia). However, under non-Uruguay Round scenarios the losses are much more modest and spread among a wider group of countries, e.g., losse3 are recorded for the US ($26 million), Spain ($36 million), Portugal ($12 million) if Hungary were to join the EC, but under the pure GSP scenario the losses to Spain and Portugal are estimated at only $3.1 million and $1.1 million, respectively. This suggests that fears of trade losses to Southern European members of the EC from its possible expansion to cover Hungary at least are greatly exaggerated.
32 It is emphasized that theme results are based on a simulation model<sup>and are</sup> directly linked to the assumptions and the parameters used.<sup>Moreover, the model</sup> is of a comparative static type. There is no implication<sup>that these results</sup> would be expected to occur overnight. Moreover, with progressive implementation -- which is more likely -- the results would also be progressively achieved.
33 Table 13: Effects of changes in EC trade regime on Hungary, by SITC 2 Digit

|SITC|Description<br>Im|iports<br>83|<br>GSP|Med.|EF1A|EC|Urugu<br>UR|ay Round<br>GSP|plus rat<br>Med.|e for:<br>EFTA|<br>EC|
|---|---|---|---|---|---|---|---|---|---|---|---|
||TOTAL TRADE|969305|57984.2|96086.4|145062.6|465653.9|81048.7|125070.6|155035.5|187847.9|418054.7|
|00|<br>LIVE ANIMALS|4379|348.6|355.0|0.0|1445.3|53.7<br>|<br>334.4<br>|<br>339.6<br>|<br>53.7<br>|1218.2<br>|
|01|<br>MEAT & PREPARATIONS|75857|3120.9|<br>2905.2|<br>0.0|55102.6|3320.0|5846.1|5669.3|3320.0|48223.6<br>|
|02|<br>DAIRY PRODUCTS&EGGS|8|0.0|0.0|0.0|6.0|0.1|<br>0.1|<br>0.1|<br>0.1|<br>4.9<br>|
|03|<br>FISH & PREPARATIONS|3232|32.0|133.5|<br>0.0|503.5|27.9|<br>53.5|<br>135.2|<br>27.9|<br>432.9<br>|
|04|<br>CEREALS AND PREPARATIONS|11322|0.0|0.0|0.0|0.0|0.0<br>|<br>0.0<br>|<br>0.0<br>|<br>0.0<br>|<br>0.0<br>|
|05|FRUIT & VEGETABLES|48667|5027.5|<br>9473.9|<br>4.5|50659.6|4455.3|8554.8|12191.8|4459.0|46088.4|
|06|<br>SUGAR, PREPARATIONS<br>& HONEY|6930|464.2|4551.6|<br>0.0|10338.3|329.0|<br>710.3|4068.2|<br>329.0|8829.8|
|07|<br>COFFEE, TEA, COCOA, SPICES|5063|511.6|1092.4|<br>0.0|2286.3|314.5|<br>727.2|1196.0|<br>314.5|2159.1|
|08|<br> <br>ANIMAL FEEDING STUFF|10382|29.2|41.5|0.0|8516.5|510.1|<br>534.7|<br>544.9<br>|<br>510.1<br> <br>|7576.2<br>|
|09|<br>MISC FOOD PREPARATIONS|6419|36.0|219.8|<br>152.5|<br>5156.0|473.8|<br>503.0|<br>651.8|<br>597.4|4721.4|
|11|<br>BEVERAGES|15334|1631.3|<br>2088.5|<br>67.8|<br>12576.9|1511.0|2832.1|3204.0|1567.4<br>|11731.4<br> <br>|
|21|<br>HIDES,SKINS,<br>INC. FUR, UNDRESSED|1213|0.0|0.0|0.0|0.0|0.0|<br>0.0|<br>0.0|<br>0.0|<br>0.0|
|_22_|<br> <br>OIL SEEDS,NUTS,KERNELS|14326|0.0|0.0|0.0|0.0|0.0|<br>0.0<br>|<br>0.0<br> <br>|<br>0.0<br> <br>|<br>0.0<br> <br>|
|23|<br>RUBBER CRUDE,SYNTHETIC|230|4.2|0.0|11.9|<br>11.9|2.9|<br>5.6|<br>2.9|<br>10.6<br>|<br>10.6<br> <br>|
|24|WOOD,LUMBER & CORK|24661|37.8|38.8|98.0|98.0|29.0|<br>53.7|<br>54.4|<br>92.9|<br>92.9|
|25|<br>PULP AND WASTE PAPER|346|0.0|0.0|0.0<br>|0.0<br> <br>|0.0<br>|<br>0.0<br> <br>|<br>0.0<br> <br>|<br>0.0<br> <br>|<br>0.0<br>|
|26|<br>TEXTILE FIBRES (NOT YARN, THREAD)|10766|365.9|515.5|<br>1047.7<br>|<br>3940.8<br>|282.2<br>|<br>520.9<br> <br>|<br>618.5<br> <br>|<br>965.5<br> <br>|3862.8<br> <br>|
|27|<br>CRUDE FERTILIZERS<br>&MINERALS|1798|0.3|1.3|<br>2.1|2.1|0.2|<br>0.4|<br>1.1|<br>1.6|<br>1.6|
|28|<br>METALLIFEROUS ORES, METAL SCRAP|9683|0.0|0.0<br>|0.0<br>|0.0<br>|0.0<br>|<br>0.0<br>|<br>0.0<br>|<br>0.0<br>|<br>0.0<br>|
|29|CRUDE ANIMAL VEG MATERIALS NES|54373|338.3|341.5|0.0|2526.6|136.8<br>|409.5<br>|412.2<br>|136.8<br>|2172.2<br>|
|32|COAL,COKE,BRIQUETTES|71|0.1|0.6|3.7|3.7|0.3<br>|0.4<br>|0.7<br>|2.7<br>|2.7<br>|
|33|PETROLEUM<br>& PETROLEUM<br>PRODUCTS|43767|3024.2|3242.2|8174.2|8174.2<br>|1680.3<br>|3657.2<br>|3799.5<br>|7022.7<br>|7022.7<br>|
|34|GAS NATURAL AND MANUFACTURED|11764|235.1|234.8<br>|672.6<br>|672.6<br>|117.7<br>|270.8<br>|270.6<br>|555.7<br>|555.7<br>|
|41|ANIMAL OILS & FATS<br> <br>|3436<br>|137.2<br>|136.0<br>|1.5<br>|39,.2<br>|17.7<br>|127.7<br>|126.7<br>|19.0<br>|332.0<br>|
|42|FIXED VEGETABLE<br>OILS & FATS|1926|136.0|107.4|0.0<br>|4569.6<br>|210.2<br>|322.8<br>|299.1<br>|_210.2_<br>|3988.6<br>|
|43|PROCESD<br>ANIMAL, VEG OIL & FATS|8|0.1<br>|0.2<br>|0.1<br>|_0.2_<br>|0.0<br>|0.1<br>|_0.2_<br>|0.1<br>|0.2<br>|
|51|CHEMICAL ELEMENTS&CONPOUNDS<br>|81702<br>|4206.1<br>|8652.6<br>|11883.0<br>|11913.2<br>|2522.3<br>|5309.7<br>|8260.7<br>|10388.5<br>|10412.7<br>|
|52|MINERAL TAR & CRUDE CHEMICALS<br> <br>|17867<br> <br>|272.8<br>|284.0<br>|790.5<br>|790.5<br>|127.6<br>|305.5<br>|312.8<br>|643.0<br>|643.0<br>|
|53|DYEING, TANNING&COLORING<br>MATRLS<br>|<br>856<br>|147.4<br>|178.6<br>|421.5<br>|421.5<br>|96.6<br>|194.2<br>|214.9<br>|375.8<br>|375.8<br>|
|54|MEDICINAL&PHARM PRODUCTS<br> <br>|6095<br>|780.5<br>|1069.8<br>|2188.1<br>|2201.4<br>|472.1<br>|990.0<br>|1181.6<br>|1922.4<br>|1931.1<br>|
|55|ESSENTIAL OILS & PERFUME<br>MATRLS|1739<br>|_112.2_<br>|171.6<br>|294.1<br>|294.1<br>|77.1<br>|151.0<br>|190.4<br>|270.8<br>|270.e<br>|
|56|FERTILIZERS MANUFACTURED<br> <br>|32895<br>|1896.6<br>|4725.6<br>|11918.4<br>|11918.4<br>|3415.7<br>|4661.0<br>|6506.0<br>|11213.5<br>|11213.5<br>|
|57<br>|EXPLOSIVES, PYROTECH<br>PRODUCTS<br>|_277_<br>|44.4<br>|68.6<br>|127.1<br>|127.1<br>|35.2<br>|64.3<br>|80.1<br>|118.4<br>|118.4<br>|
|58|PLASTIC MATERIALS ETC|8735|1928.2|4267.5|5796.5|5796.5|1578.8|2846.8|4379.5|5385.6|5385.6|
|<br>59<br>|<br>CHEMICALSNES<br> <br>|2267<br>|286.6<br>|729.1<br>|815.3<br>|815.8<br>|187.2<br>|376.7<br>|668.8<br>|725 5<br>|725.8<br>|
|61|LEATHER/FURS<br>INC MANUFS|7744|609.7|713.7|1727.8|2168.0|484.0|881.4|949.1|1609.9|2050.7|
|<br>62|<br> <br>RUBBER MANUFACTURES|10281|1089.6|1763.4|3194.5|3196.5|957.8|1667.7|2106.7|3039.0|3039.0|
|<br>63|<br>WOOD<br>**IL**CORK MANUFACTURES|11068|940.7|1178.7|2702.1|2702.1|617.4|1233.7|1390.5|2387.2|2387.2|
|<br>64|<br> <br>PAPER/BOARD<br>&MANUFACTURES|3125|417.7|452.1|1172.5|1209.0|342.0|615.2|637.8|1108.6|1132.7|
|<br>65|<br> <br>TEXTILE YARN, FABRICS&ARTICLES|33921|3668.3|6651.5|10283.6|47674.2|18788.9|23314.8|26994.1|31456.7|31456.7|
|<br>66|<br>NON-METALLIC<br>MINERAL MANUFACTUR|ES 22141|1943.8|3983.0|7088.7|10998.7|1794.7|3068.2|4405.8|6437.0|10364.1|
|67<br>|<br>1RON £ STEEL<br> <br>|68360<br>|3270.2<br>|<br>4228.2<br> <br>|<br>12155.7<br> <br>|<br>82250.0<br> <br>|3396.7<br>|5527.8<br>|6152.1<br>|11317.9<br>241|81618.8<br>29413|
|68|<br>NON-FERROUS<br>METALS|20595|1055.9|<br>1391.4|<br>3071.8|<br>3071.8|930.7|1622.2|1841.4|9.3|.|
|<br>69|<br> <br> <br> <br>METAL ANUFACTURES NES|17300|1340.3|<br>1829.5|<br>4113.9|<br>**4318.0**|1085.8|1962.3|2282.4|3775.1|3979.6|
||||||34|||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|**71**<br>72|**MACHINES NON-ELECTRIC**<br>MACHINERY ELECTRIC|41943<br>65130|2088.7<br>41013|<br>**3350.3**<br>52920|**5948.5**<br>116904|**5948.5**<br>|**1568.4**<br>|2933.5<br>|**3757.1**<br>|**5455.7**<br>|**5455.7**<br>|
|**73**|TRANSPORT EQUIPMENT|<br>13554.0|.<br>16299|.<br> <br>16767|.<br>46532|18061.3<br>|3Z28.0<br>|5906.3<br>|6684.1<br>|10861.8<br>|17250.9<br>|
|81|SANITARY,PLUMBG,HEATNG,jGHTNG<br>**EQU**|<br> <br> 5267.6|.<br>4903|<br>.<br>9146|.<br>1282Z|4653.Z<br>|1567.4<br>|2627.4<br> <br>|**2658.0**<br>|**4594.7**<br>|**4594.7**<br>|
|82|<br>FURNITURE|<br>21624.8|.<br>9664|.<br>18081|.<br>47674|2199.0<br>1|405.9<br>|<br>725.3<br>|1001.3<br>|1241.2<br>|2160.8<br>|
|83|TRAVEL GOODS, HANDBAGS|<br>3065.0|.<br>2261|.<br>2805|.<br>6439|6537.7<br>|1522.2<br>|2150.9<br> <br>|2698.5<br> <br>|4623.7<br> <br>|16402.7<br>|
|84|CLOTHING|<br>46034.2|.<br>54773|.<br>100044|.<br>156294|643.9<br>2|179.6<br>|<br>326.9<br>|<br>362.4<br>|<br>599.2<br>|<br>599.2<br>|
|85|FOOTWEAR|<br>15788.4|.<br>17070|.<br>20116|.<br>55319|4084.6<br>107891|19047.8<br>|24702.7<br>|29360.8<br>|35180.9<br>|35180.9<br>|
|86|PROF. SCIENTIFIC ETC INSTRUMENTS|<br>5654.0|.<br>3849|.<br>6829|.<br>10728|.<br>10728|1682.0<br>|2796.0<br> <br>|2994.9<br> <br>|5291.4<br> <br>|10561.3<br>|
|89|MISC MANUFACTURES<br>NES|23739.0|.<br>13544|.<br>21711|.<br>36694|.<br>6131|269.9<br>|<br>522.0<br>|<br>717.2<br>|<br>972.6<br>|<br>972.6<br>|
||||.|.|.|5.|1101.5|1985.4|2518.1|3495.9|5380.3|

Source: Estirates by the authors. See text for wthodology.

(Disk Grace#11\wp5l\tabLes.hec)
35

# VIII. Conclusions

Recent political changes in Eastern Europe will help to cement improving economic relations Detween those countries and the EC. They will accelerate a trend which flows in part from the economic pull of the EC and in part from the continuing economic difficulties in Eastern Europe. In our view Hungary has little alternative but to seek to continue strengthening these ties. The final integration of Portugal and Spain in t:ie Communities, the unification of Germany and the completion of the internal market in 1992 will pcse some challenges for Hungary. Moreover, it faces important supply constraints and nee.s injections of fresh capital to help it gear up to seize market opportunities.

In the past Hungary has been somewhere near the bottom of the EC's pyramid of privileges as far as tariff and NTB treatment are concerned, although this has changed modestly with the granting of GSP tariff treatment. Hungary has been examining the options of applying for EC membership, EFTA mermbership, and examining other forms of association such as those the EC has with a number of Mediterranean countries. From a simulation exercise, we conclude that membership of the EC could lead to an expans.on of Hungarian exports to the Communities of some 48 percent, with meats, iron and steel, fruit and vegetables, textiles, clothing being the main sectors to gain, in declining order. This results from setting tariffs to zero and eliminating non-tariff barriers. The largest projected export expansion under other forms of relationship with the EC would be more than one third less. This would occur under EFTA membership which would mainly benefit manufactured exports. If EC or EFTA membership is ruled out, for whatever reason, Hungary must seek some closer relationship with the EC, encompassing agriculture as well as manufactures, and covering tariffs and nontariff barriers.