Chapter

IV Trade Liberalization in Eastern European Countries

Author(s):
International Monetary Fund
Published Date:
January 1992
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In the past few years. Eastern European countries have initiated and in some cases accelerated comprehensive reform programs designed to transform their economic systems rapidly into market-based economies.47 Liberalization of the trade and exchange system is an important component of these reforms. All six countries have eliminated the state monopoly of foreign trade, substantially reduced quantitative restrictions, and moved toward a trade regime in which price-based measures (tariffs and exchange rates) are the main trade policy instruments. Export subsidies, except those on some agricultural products, have been removed, and export licensing has been reduced significantly. In parallel with the removal of trade restrictions, all six countries have established the essential elements of convertibility for current international transactions although some restrictions remain in place.

Notwithstanding these reforms, the Eastern European countries are not yet fully integrated into the multilateral trade system. Further progress in this area will depend, inter alia, on (i) further progress in their own systemic reforms; and (ii) increased and more secure access to foreign markets, particularly those of industrial countries. The latter is of particular importance given the collapse of trade among former members of the CMEA, the adverse impact of the Middle East conflict on some of these countries, and the rapid deterioration in economic conditions in most of Eastern Europe.

At the London economic summit in July 1991 the heads of state and government of the Group of Seven and the representatives of the European Community recognized that opening their markets was the most effective way to assist Eastern European and other developing countries. They undertook to bring the Uruguay Round to an “ambitious” conclusion and to improve access to industrial country markets, including in sectors such as agriculture, steel, and textiles and clothing. As major industrial countries are reluctant to reduce barriers in these sectors unilaterally, the outcome of the Uruguay Round is critical to the success of reforms in Eastern Europe. Greater security of access to foreign markets for Eastern Europe is also linked to negotiations to revise the conditions of their membership within GATT to reflect the greater market orientation of their economies.

Historical Setting: Trade Policy in the Context of Central Planning

After World War II, the Eastern European countries were reorganized under the influence of the U.S.S.R. system of central planning. This process was largely completed by 1950 and involved large-scale nationalization of the means of production and distribution, and the introduction of a central planning system to set output targets, prices and wages, and to allocate resources among enterprises.

The coordination of imports and exports was an integral part of the central planning process. The composition and level of trade were influenced by a number of control mechanisms including central allocation of foreign exchange, and licensing. Foreign trade organizations were established and had a state monopoly on foreign trade. Firms did not trade directly with their foreign counterparts or face world prices; they exported and imported products through foreign trade organizations at ruling domestic prices, with the difference between international and domestic prices being absorbed (in the case of losses) or taxed (in the case of profits) by the government budget. Thus, although tariffs were generally low, central-plan tools and exchange controls provided a high level of protection for domestic production.

Trade with other centrally planned economies and market economies involved different arrangements. The former was largely undertaken in non-convertible currencies within the arrangements of the CMEA.48 This trade was based on five-year bilateral agreements with annual negotiations to agree on prices and other details.49 A bilateral surplus with one country could not be used to finance a bilateral deficit with another country. Trade with market economies was undertaken mainly in convertible currencies and was subject to state control.

The CMEA arrangements resulted in a considerable increase in trade among member countries but also created strong structural dependencies among member countries and added to distortions in resource allocation.50 Although some Eastern European countries were quite open, in terms of the ratio of trade to GDP, their trade was highly concentrated in transactions with other centrally planned economies, in particular the former U.S.S.R.51

The commodity composition of CMEA trade with socialist countries (mostly in the CMEA area) differed significantly from that with the market economies (Tables A20 and A21).52 Machinery and transport equipment were the most important exports to socialist countries; while food, crude materials, and manufactured articles generally were the most important exports to industrial countries. The Eastern European countries exported mainly machinery equipment and other manufactures to the former U.S.S.R. in exchange for fuels and raw materials. Although the arbitrariness of cross exchange rates used between transferable rubles and local currencies complicates the analysis, it is generally agreed that until recently the prices of Eastern European exports to the former U.S.S.R., relative to the world market prices, were set more favorably than were the prices of Eastern European imports from the former U.S.S.R., relative to world market prices. Given the importance of the former U.S.S.R. in their total trade (and provided trade patterns were unchanged), this implied that the overall terms of trade of Eastern European countries were quite favorable compared with what they would have been without the CMEA arrangements; it has been estimated that moving to world market prices would involve a terms of trade deterioration in the range of 20 to 30 percent for Eastern Europe.53

Some Eastern European countries had undertaken partial economic reforms prior to the political revolution that swept Eastern Europe in 1989. For the most part, these reforms were undertaken within the context of the socialist system, and they attempted economic decentralization and partial decontrol of prices while retaining social ownership of the means of production.54 But market freedom remained circumscribed by state orders and remaining price controls. Although planners no longer exerted total control over trade, central planning tools and administrative control measures continued to dictate trade flows and patterns. The absence of private property rights limited the role of profit incentives and discouraged entrepreneurship.

Recent Reforms and Design Issues

Recent Reforms

While the extent of reform and the initial conditions have varied considerably across Eastern Europe, the process of systemic change has accelerated during the past two years.55 After decades of partial reforms, Hungary, Poland, and Yugoslavia accelerated their reform efforts in 1989, and in 1990 Poland implemented more far-reaching reform measures. Although their systems remained more centralized up to 1990, in early 1991, Czechoslovakia, Bulgaria, and Romania began to implement comprehensive reforms. In all countries, reforms are being supported by financial resources and technical assistance provided by the Fund and the World Bank.

A move toward currency convertibility and more open trade regimes are important components of reform in all Eastern European countries.56 As of June 1991, most of these countries had substantially liberalized their trade and payments systems (Table 6). In parallel with the removal of trade restrictions, all countries have established a degree of convertibility, although some restrictions remain in place. In Hungary and Poland, convertibility is largely limited to the enterprise sector, and most countries have maintained limits on travel allowances.57 Most countries have a unified official exchange rate for commercial transactions; in the 1980s Hungary, Poland, and Yugoslavia unified official exchange rates for trade with the convertible currency area, and Poland and Yugoslavia gradually eliminated various exchange subsidies, the level of which was dependent (except in the case of Hungary) on the end-user of foreign exchange. Bulgaria and Czechoslovakia unified exchange rates for commercial transactions between December 1990 and February 1991. In Czechoslovakia, Hungary, Poland, and Romania residents are authorized to hold foreign currency accounts and use them freely. In Yugoslavia, convertibility was largely established in January 1990, but various restrictions, including limitations on withdrawals from foreign currency accounts, were reintroduced toward the end of the year when foreign exchange reserves dwindled. All countries permit inward foreign investment and repatriation of dividends and profits.

Table 6.Trade and Payments Systems of Eastern European Countries as of June 19911
State Monopoly on TradeState PlanImportsExportsForeign Exchange SystemSelected Complementary Measures
Quantitative restrictionsTariffsQuantitative restrictionsSubsidiesPrice controlForeign investment
BulgariaAbolishedAbolishedAll removed in February 1991. Licenses are required for goods covered by trade agreements with the former U.S.S.R. for monitoring purposes, etc.A new customs tariff based on the harmonized system was implemented June 1, 1991. A temporary import tax of 15 percent introduced mostly on consumer goods.Most restrictions removed except for export ban on six items and licensing requirements for exports covered by bilateral agreements.No subsidies.Unified, floating exchange rate. Convertibility for most current transactions except travel. Retention scheme abolished.Most price controls eliminated. Prices under control are less than 10 percent of retail and wholesale turnover.Up to 100 percent ownership permitted. No restriction on profit repatriation.
CzechoslovakiaAbolishedAbolishedNo general import license is required except for crude oil, natural gas, narcotics, and military equipment, and (since June 1991) cattle, beef, and butter.Tariff rates unchanged since January 1989. A temporary import surcharge on consumer goods of 20 percent introduced at end of 1990, which was reduced to 15 percent in June 1991.Most restrictions removed except for licensing requirements for energy, certain raw materials, and those subject to voluntary export restraints by other countries.Abolished in January 1991. Some subsidies remain on agricultural products.Unified, fixed exchange rate. Convertible for most current transactions. Retention scheme abolished.Most price controls eliminated. Some 5 percent of total turnover subject to price controls.Up to 100 percent ownership permitted. No restrictions on profits and dividends repatriation. Capital repatriation allowed in the case of liquidation.
HungaryAbolishedAbolishedOver 90 percent of imports have been liberalized from license requirements. Global quota on consumer goods remains in place.Tariff rates remain largely unchanged since 1989. About 80 percent of individual rates are bound in the General Agreement or Tariffs arid Trade (GATT).About 30 per cent of exports subject to licensing, mainly includes goods subject to voluntary export restraint arrangements.Subsidies remain on agricultural products and processed food.Unified, fixed exchange rate. Convertibility for most current transactions. Transactions channelled through commercial banks.About 90 percent of prices are liberalized.Up to 100 percent ownership permitted. No restrictions on repatriation of profit and invested capital.
PolandAbolishedAbolishedNo restrictions except for license requirements for trade under bilateral agreements.A unified tariff introduced, in July 1990, customs duties on 4,500 items reduced or suspended until July 1991. Subsequently Poland restructured its tariff schedule, yielding an average tariff rate of 14 percent, including a temporary surcharge of 5 percent.Export quotas reduced to 5 items in April 1990 from approximately 100 items in late 1989. Licenses required for 20 items for convertible currency trade.Most subsidies abolished in January 1990.Multiple rates in place. Official exchange rate unified and fixed for convertible currency trade. Convertibility for most current transactions by enterprises. Individuals may acquire foreign exchange in the parallel market. Retention scheme abolished.Over 80 percent of consumer prices and about 90 percent of producer prices liberalized.Up to 100 percent ownership permitted. No restrictions on transfer of profits and dividends.
RomaniaAbolishedAbolishedImport licensing maintained for statistical purposes only.Various discriminatory features of tariff code were eliminated and highest tariff rates were cut. Price equalization scheme eliminated.Export licensing maintained for statistical purposes. Quotas and export bans imposed on about 120 items that are subject to price controls or imported through the official exchange market. But the level of quotas substantially increased for nonfood items.Exporters exempted from turnover tax.Dual rates with a commitment to unify. Convertibility for most current transactions except profit remittance. Retention scheme is maintained. Auction scheme introduced in February 1991.More than 80 percent (weighted production) of prices are free. 113 products remain subject to control.2100 percent ownership permitted. Some restrictions on profit transfer.
YugoslaviaAbolishedAbolishedAbout 10 percent of imports subject to quota.Reduction in tariff rates in March 1990; but simultaneous reduction in the number of exemptions to customs duties.Few restrictions. Licenses required for certain raw materials to ensure adequate domestic supply.Abolished in December 1990.Unified, fixed exchange rate. Convertibility for current transactions established in January 1990. But some restrictions imposed in 1990.At end of 1990, 90 percent of producer prices were free of control.Up to 100 percent ownership permitted. No restrictions on profit transfer.
Source: Various IMF documents.

For Yugoslavia, as of December 1990, and for Czechoslovakia, as of October 1, 1991.

In July 1991, further price liberalization resulted in only 14 items that are subject to price control.

Source: Various IMF documents.

For Yugoslavia, as of December 1990, and for Czechoslovakia, as of October 1, 1991.

In July 1991, further price liberalization resulted in only 14 items that are subject to price control.

In the trade area, all six countries have eliminated the state monopoly on foreign trade and drastically reduced quantitative import restrictions.58 In Yugoslavia, the share of liberalized imports increased from 15 percent in 1986 to 88 percent by the end of 1990. In Hungary, 90 percent of imports are being liberalized over a three-year period starting 1989, with most having been liberalized by 1990. In Romania, all quantitative restrictions have been eliminated. In Poland, most nontariff restrictions were removed in January 1990, Czechoslovakia virtually eliminated import licensing in January 1991, and Bulgaria eliminated import licensing except for a small negative list of imports, in February 1991.59

The elimination of most implicit and explicit nontariff barriers and the liberalization of exchange controls means that tariffs and exchange rates have become the principal trade policy instruments in these countries. Traditionally, the level of tariffs in Eastern Europe was relatively low and domestic industry was effectively protected by central planning tools. While some modifications in tariff rates and structures have been made, average tariff rates in these countries remain relatively low.60

Modifications in tariffs include the following: Poland unified its three commercial and noncommercial customs tariffs schedules (January 1990) and suspended customs duties (June 1990) on 4,500 import items until July 31, 1991. Poland recently restructured its tariff schedule to provide an average rate of about 14 percent, including a virtual across-the-board temporary surcharge of 5 percent; this is significantly above the rate that prevailed prior to suspension of some tariffs in June 1990. Yugoslavia reduced tariff rates and the number of items exempted from tariffs, which left the average effective tariff rate largely unchanged (March 1990). Romania eliminated various discriminatory features in its tariff system, such as the application of different tariff rates depending on the end use of imports and reduced its highest rates (January 1991); a further reduction in the average tariff level and a more simplified tariff structure are expected to be introduced in the second half of 1991. Czechoslovakia introduced a temporary surcharge of 20 percent on consumer goods imports (end of 1990) to mitigate the impact of rapid import liberalization on the balance of payments;61 the rate was reduced to 15 percent in June 1991 and is to be eliminated by the end of 1991. Bulgaria introduced a temporary surtax of 15 percent on imports of consumer and some other goods (early 1991) to provide protection to industries as they restructure and to safeguard the balance of payments. Major reviews of the tariff and protective structure have been initiated by Bulgaria and Czechoslovakia in consultation with the World Bank. Further adjustments are contemplated in tariffs in some countries in the context of multilateral and bilateral negotiations.

Measures have also been taken to liberalize exports. Most export subsidies have been removed and export licensing has been significantly reduced in most countries. However, some restrictions remain in place in all Eastern European countries, in particular, to comply with VERs and quotas applied by trading partners in sectors such as textiles and clothing, agriculture, steel, and coal. In addition, temporary export bans were introduced (Bulgaria in 1990) and licensing retained (Czechoslovakia) to ensure adequate domestic supplies of products such as foodstuffs and raw materials during the adjustment process62 and to prevent the export (or re-export) of products that are subject to domestic price controls or imported at the official exchange rate (Romania).

At its 1990 meeting in Sofia, the CMEA announced that it intended to conduct all trade in convertible currencies and at world market prices beginning January 1, 1991. However, with the collapse of CMEA trade, countries have made or are making arrangements aimed at maintaining some minimum level of trade with former CMEA countries, especially the Commonwealth of Independent States (Table 7). Poland, Bulgaria, and Czechoslovakia negotiated agreements with the former U.S.S.R. that contain a selective “indicative list” of tradable goods and barter trade. Hungary and Romania are also seeking to boost trade with the former U.S.S.R. through the use of bilateral trade arrangements that may involve barter trade. In June 1991, the former U.S.S.R. lifted the ban on barter trade that applied during the first several months of 1991.

Table 7.Bilateral Trade Arrangements Between Eastern European Countries and the Former U.S.S.R.1
Bulgaria
Negotiated an agreement with the former U.S.S.R. in January 1991, which contains an indicative list of tradable goods. Trade under the agreement is effected at world market prices in U.S. dollars on a clearing basis in convertible currencies. A trade agreement was signed with Belarus and the Russian Federation, and discussions are under way with Ukraine.
Czechoslovakia
“Indicative lists” of products in which trade between Czechoslovakia and the former U.S.S.R. would be of mutual benefit have been drawn up, and a temporary clearing arrangement denominated in U.S. dollars is in operation for these goods. In addition, clearing accounts in national currencies are to be established for goods outside indicative lists with prices to be negotiated between trading parties involved and without guarantees by authorities. Efforts are being made to establish barter trade between Russia and Czechoslovakia and to set up a foreign trade bank to help develop trade between the republics.
Hungary
The authorities are seeking to boost trade, particularly exports, with the former U.S.S.R. by bilateral contracts involving barter deals.
Poland
Negotiated an agreement with the former U.S.S.R. in early 1991, which contains a selective indicative list of tradable goods. The mode of trade and payments (cash, countertrade, barter, etc.) has been left at the discretion of the traders themselves. In addition, Poland recently signed an agreement with the former U.S.S.R. (July 1991) to supply (i) medicine in exchange for oil and natural gas, under a barter deal; (ii) food in exchange for metals; (iii) textiles in exchange for petroleum products; and (iv) railway wagons in exchange for natural gas.
In September 1991, Poland signed agreements with the former U.S.S.R. to supply (i) medicine and electric engineering products in exchange for iron ore, natural gas, cellulose, and other raw materials; and (ii) fruit and agricultural products in exchange for natural gas.
Romania
The authorities are discussing with the former U.S.S.R. a “mini-clearing” arrangement whereby the two countries would agree on a list of products that would comprise their mutual trade; any imbalances would be settled in U.S. dollars. In addition, other arrangements including barter, countertrade, and special clearing for military goods are being sought.
Yugoslavia
The bilateral clearing arrangement with the former U.S.S.R. was terminated in January 1991.
Source: Based on information provided by national authorities.

Following the dissolution of the Council for Mutual Economic Assistance (CMEA), and the breakdown of trade among former members, the former U.S.S.R. announced its intention to return to clearing arrangements in national currencies with former CMEA countries. The former U.S.S.R. has allowed its banks to establish correspondent accounts in national currencies with banks in Czechoslovakia and Poland, which would serve for settlement in national currencies of certain trade in goods and services, including tourism expenditure.

Source: Based on information provided by national authorities.

Following the dissolution of the Council for Mutual Economic Assistance (CMEA), and the breakdown of trade among former members, the former U.S.S.R. announced its intention to return to clearing arrangements in national currencies with former CMEA countries. The former U.S.S.R. has allowed its banks to establish correspondent accounts in national currencies with banks in Czechoslovakia and Poland, which would serve for settlement in national currencies of certain trade in goods and services, including tourism expenditure.

By and large, the Eastern European countries now have relatively open trade and payments systems. However, with the collapse of CMEA trade and the deterioration in their domestic economies and external accounts, some of these countries are facing pressure to provide protection for domestic producers.63 In addition, partly in response to access difficulties in industrial country markets and EC export subsidies, some of the Eastern European countries have introduced measures to protect their agricultural sectors. In Czechoslovakia (pending amendments to customs tariffs and other forms of protection), export subsidies and import quotas were introduced on agricultural products in June 1991 to deal with mounting surplus production. Poland has reintroduced tariffs on some agricultural products, under pressure from its farm lobby.

Issues in the Design of Trade Reform

A broad consensus has emerged both on the need for a rapid and comprehensive reform in Eastern Europe and on the main elements of such a reform package.64 The latter include macroeconomic stabilization and control; liberalization of trade and establishment of convertibility for current account transactions; price liberalization and the development of a competitive private enterprise sector; the creation of efficient financial institutions and the liberalization of financial markets; deregulation of labor markets, and the establishment of a social safety net. Reform programs must be credible and specify the long-term objectives and transition path at the outset of the reform.65

Within this context, there is a broad consensus that trade liberalization should be implemented early in the reform process66 An accelerated pace of trade liberalization in reforming socialist economies is considered essential because, compared with market economies, relative prices are highly distorted, factor markets function poorly, domestic production is more highly concentrated, the extent of state ownership is much greater, and trade has been distorted by arrangements among former CMEA members.67 In these circumstances, liberalization of the trade and payments system helps to establish a rational set of relative prices for traded goods and to prevent distortions due to monopolistic pricing and the loss of productive efficiency. In addition, access to imports and foreign investment facilitates the acquisition of foreign technology.

Notwithstanding the above considerations, it has been suggested that temporary tariff protection might be provided in the short run to avoid the move to world prices being disruptive. McKinnon (1991a), for example, notes that enterprises in Eastern Europe have long faced distorted relative prices and argues that the tariff structure should initially continue to provide some protection to those industries that were heavily protected under the old system; this would involve differential tariff increases—not across-the-board surcharges—for industries that would be viable if provided a temporary adjustment period.68 Tariffs would subsequently be unified and phased down according to a preannounced schedule. In this connection, it has been noted that devaluation is not an option because it increases the price of all goods, including inputs for production, which would still result in negative value added in certain industries under the new world price structure.69

Others point out that consideration of the above approach also needs to take into account its potential costs and risks, as well as any GATT implications.70 In particular, this approach has risks if the preannounced schedule of tariff reductions lacks credibility; a perception that the weakened links between domestic and world relative prices could be extended for longer periods would reduce pressure for adjustment in precisely those enterprises facing the largest adjustment tasks and delay their integration into the world economy; in this context, even if a schedule is preannounced, a phased approach would allow time for political opposition to further liberalization to be mobilized. Apart from these considerations, experience elsewhere suggests that governments are not well placed to determine which industries are likely to be viable over the medium term. In addition, high average tariff rates, whatever the degree of dispersion, act as a tax on exports. A final point of particular importance to reforming socialist economies is that this approach would partly negate the positive contribution trade liberalization can make toward eliminating distortions due to monopolistic market structures.

Tariffs have been increased in some cases to protect the balance of payments, to reduce budget deficits (Bulgaria and Poland), and to discourage imports of consumer goods. Those who argue against the use of tariffs for these purposes note that devaluation supported by appropriate fiscal and monetary policies is normally a better option to protect the balance of payments and contain inflation, in that it provides a neutral incentive structure,71 and that domestic taxes are a less distortionary instrument to increase fiscal revenue and discourage consumption.

To the extent that the domestic tax instruments and other indirect policy instruments necessary for macroeconomic control are not in place, however, and that the administrative capacity to put such systems in place quickly is lacking, some temporary increases in tariffs may be unavoidable.72 In this connection, as a mechanism to control the balance of payments, price-based measures, such as tariffs, are preferable to quotas and other quantitative restrictions, in that they are more transparent and, provided tariffs are not prohibitive, they maintain the link between domestic and international prices.

As indicated above, Eastern European countries have negotiated or are seeking new bilateral trade and barter agreements with the former U.S.S.R. or the Commonwealth of Independent States (and in some cases with other former CMEA countries) as a way of cushioning the impact of the collapse of CMEA trade. In the current circumstances, with the collapse of trade due to the shortage of foreign exchange and disorganization in the Commonwealth of Independent States, these arrangements are considered necessary to maintain a certain level of trade and avoid unnecessary enterprise closure. In most cases, barter trade appears to involve inter-enterprise arrangements. These agreements tend to sustain the distorted production structures and trade flows and to delay the process of adjustment. To limit the possible adverse effects of such arrangements, it has been suggested that where they involve government agreements, they should ensure that they do not limit the autonomy of individual enterprises to negotiate with the foreign enterprises and that trade is conducted at world market prices and imbalances settled in convertible currencies within a relatively short period.73

With the collapse of CMEA, interest has re-emerged in regional clearing and payment arrangements covering Eastern Europe alone or together with the Commonwealth of Independent States. Two basic alternatives have been suggested: (i) a simple clearing arrangement with a relatively short interval between settlement dates (one to three months); and (ii) payments arrangements, where clearing is supplemented by a facility that provides short (one year) or even medium-term credit to the participants—similar to the European Payment Union (EPU) after World War II.74 It is widely recognized, however, that there are large differences between the postwar situation in Western Europe and the present situation in Eastern Europe. In particular, the combined market size of Eastern Europe is relatively small; the combined trade of Eastern Europe (in both convertible and nonconvertible currencies) was estimated at less than 4 percent of total world trade in 1988, while members of the EPU accounted for about 35 percent of world exports in 1950.75 Even if the former U.S.S.R. is included, the combined market size covered is relatively small;76 moreover, to the extent that trade with the former U.S.S.R. has been interrupted by administrative problems, there is great uncertainty regarding new clearing schemes that rely on better administration and communications. Thus, while such schemes may be somewhat less distortionary than bilateral ones, they are unlikely to resolve the underlying problems and could slow the process of integration of former CMEA countries into the international trade system.

Integration into the Multilateral Trading System

The full integration of the Eastern European countries into the multilateral trade system will depend on (i) further progress in their own systemic reforms; and (ii) increased and more secure access to Western markets. While the trade reforms already implemented will take time to have their full impact, further domestic reforms to make markets more competitive are required to enable Eastern Europe to realize the full benefits of the exchange and trade reforms recently implemented. In this connection, privatization, the development of competitive factor markets, and the establishment of the legal framework necessary to secure a competitive market environment are of particular importance.

As the Eastern European countries reform their economies, their trade expansion and changing trade pattern will need to be accommodated mainly by western industrial markets. Several recent studies estimate that, with the disappearance of the CMEA arrangements and the transition to market economies, the pattern of trade of Eastern Europe would be substantially changed, shifting from centrally planned economies to industrial markets, especially to Western European countries.77

The recent collapse of CMEA trade, especially with the dissolution of the U.S.S.R. and East Germany, and the disruption of trade with Iraq (a significant trade partner for Czechoslovakia, Bulgaria, and Romania) makes access to western markets of even greater importance. The volume of exports to former CMEA trading partners in 1991 is expected to decline by 35–65 percent in Bulgaria, Czechoslovakia, Hungary, and Romania, and by about 75 percent in Poland.78 This was mainly due to dislocation and foreign exchange shortage in the former U.S.S.R. (as well as in other CMEA countries, notably Romania and Bulgaria); the unification of Germany, which partly diverted east Germany’s trade from Eastern Europe; the inexperience of traders in managing trade under the new trade rules; and the expected adjustment of trade flows to the removal of controls and distortions that previously characterized the CMEA regime. This situation has been aggravated by the extension of tied aid and export credits by industrial countries to the former U.S.S.R., which may have diverted trade from Eastern Europe to industrial countries.

Access to Industrial Country Markets

During the past three years industrial countries have taken a number of steps to improve the access of Eastern Europe to their markets (Table 3). Previously, the lack of MFN tariff status was the major obstacle to the United States market. In 1989, only Hungary, Poland, and Yugoslavia had MFN status; imports from Romania, Bulgaria, and Czechoslovakia were subject to substantially higher-than-MFN rates of duty.79 The United States extended MFN status to Czechoslovakia in November 1990 and to Bulgaria in April 1991 and is expected to extend it to Romania soon. (It extended permanent MFN status to Hungary and Czechoslovakia in October 1991.) It also extended GSP treatment to Hungary (November 1989), Poland (January 1990), and Czechoslovakia (May 1991).80 In addition, the United States has increased the quantities of steel products subject to VERs that may be imported from Hungary and Poland. It plans to further relax quotas on textiles and steel imports from Czechoslovakia, Poland, and Hungary, and to expand the list of imports under GSP from these countries.81

Major changes in EC relations with Eastern Europe have occurred in the past three years. Prior to the Luxembourg Declaration between the EC and CMEA in June 1988, trade with CMEA countries was subject to extensive quantitative restrictions of both a selective (discriminatory) and nonselective nature. Between 1988 and 1991, the EC entered into separate Cooperation Agreements with Bulgaria, Czechoslovakia, Hungary, Poland, and Romania (Table 8).82 These agreements contained an MFN clause and provided for the phasing-out over a ten-year period of all selective quantitative restrictions. The implementation of these agreements was overtaken by the dramatic developments since 1989. In 1990, the EC abolished the application of selective quantitative restrictions, except in sensitive sectors, such as agriculture, textiles and clothing, steel, and coal, and suspended the application of nonselective quantitative restrictions to Czechoslovakia, Hungary, and Poland. It also granted GSP treatment to all Eastern European countries.

Table 8.Market-Opening Measures Taken by Industrial Countries for Eastern European Exports
CountryMFN TreatmentGSP TreatmentBilateral Agreements for Market Opening
BulgariaAll OECD countries (United States in April 1991)Australia, Austria, Canada, EC (January 1991), Finland, Japan, New Zealand, Norway, Sweden, SwitzerlandEC (April 1990),1 United States (October 1990)2
CzechoslovakiaAll OECD countries (United States in November 1990)EC (January 1991), United States (May 1991)EC (December 1988),1 United States (April 1990).2 EFTA (June 1990)3
HungaryAll OECD countries (United States in 1978)Australia, Austria (July 1988), Canada, EC (January 1990), Japan, New Zealand, United States (November 1989)EC (September 1988),1 EFTA (June 1990)3
PolandAll OECD countries (United States in 1987)Australia, Austria, Canada, EC (January 1990), Japan, New Zealand, United States (January 1990)EC (September 1989),1 EFTA (June 1990)3
RomaniaAll OECD countries except United States4Australia, Austria, Canada, EC, Finland, Japan, New Zealand, Norway, Sweden, SwitzerlandEC (May 1991)1
YugoslaviaAll OECD countries (United States in 1948)United States (1976)
Sources: United Nations Conference on Trade and Development (1990b); and national authorities.Note: EC = European Community; EFTA = European Free Trade Association; GSP = Generalized System of Preferences; MFN = most favored nation; OECD = Organization for Economic Cooperation and Development.

Cooperation agreements with the EC that contained an MFN clause and provided for the phasing out over a ten-year period of all selective quantitative restrictions.

The agreements provide for the mutual extension of MFN treatment and will generally improve the capacity of American businesses to operate in the corresponding countries.

Cooperation agreements that cover trade promotion and economic, industrial, technological, and scientific cooperation.

MFN status suspended by United States on July 3, 1988 by mutual agreement. It is expected that the United States will resume MFN status soon.

Sources: United Nations Conference on Trade and Development (1990b); and national authorities.Note: EC = European Community; EFTA = European Free Trade Association; GSP = Generalized System of Preferences; MFN = most favored nation; OECD = Organization for Economic Cooperation and Development.

Cooperation agreements with the EC that contained an MFN clause and provided for the phasing out over a ten-year period of all selective quantitative restrictions.

The agreements provide for the mutual extension of MFN treatment and will generally improve the capacity of American businesses to operate in the corresponding countries.

Cooperation agreements that cover trade promotion and economic, industrial, technological, and scientific cooperation.

MFN status suspended by United States on July 3, 1988 by mutual agreement. It is expected that the United States will resume MFN status soon.

In addition, the EC has concluded Association Agreements with Czechoslovakia, Hungary, and Poland.83 In the trade area, these agreements will provide for a move to free trade between the EC and each of the three countries in most industrial products, but separate protocols are likely for agriculture, textiles and clothing, steel, and coal; the extent to which these sectors will be covered in the agreements is still under discussion. They are also expected to contain provisions on safeguards, rules of origin, antidumping rules, subsidies, intellectual property, the legal protection of nationals from the three Eastern European countries in the EC, and competition policy. The agreements are expected to be implemented over a maximum period of ten years, but the EC will likely reduce tariff and non-tariff barriers faster than its partners.

The likely provision of separate protocols for agriculture, steel, coal, and textiles and clothing, reflects the “sensitivity” of these sectors in EC member states. For agriculture, the coverage of products, particularly those covered by the CAP, has been subject to intensive discussion. A limited coverage of agriculture may raise doubts about the conformity of these agreements with GATT, in that Article XXIV of GATT requires, inter alia, that free trade agreements cover substantially all trade. The extension of these agreements to cover all agricultural products would, however, in the absence of a fundamental reform of EC agricultural policies, add to the surplus EC production, increase the budgetary costs of the CAP, and further depress world market prices.84 A significant increase in access to the EC market for Eastern European agricultural products would thus seem to be linked to the reform of the CAP and the outcome of the Uruguay Round negotiations.85

The inclusion of a separate protocol on coal and steel partly reflects institutional factors.86 In addition, in the case of coal, the move to free trade creates difficulties for EC member states (Germany and Spain) that have heavily subsidized coal sectors and limit imports of coal from Poland through bilateral agreements. Although steel will likely be covered by a separate protocol, the EC council decided (April 15, 1991) that this product would be treated as any other industrial product, provided the three Eastern European countries abide by EC rules on prices and subsidies. A question yet to be decided is whether the three Eastern European countries will be required to commit themselves to capacity reductions in steel.87 In the case of textiles and clothing, the EC and other industrial country markets are currently protected by the MFA and VERs. The main issue to be decided in the negotiations between the EC and the Eastern European countries involves the length of the transitional period to free trade.

Czechoslovakia, Hungary, and Poland also signed cooperation agreements with the EFTA in June 1990 and agreed to jointly examine the conditions for gradually establishing a free trade area. For a transition period of ten years, tariff reductions by the EFTA members are envisaged to proceed more rapidly than in the partner countries.

In spite of measures taken so far, Eastern Europe still faces substantial barriers to industrial country markets, particularly in agriculture, textiles and clothing, and steel products, which are important export items of Eastern Europe to industrial countries.88 These barriers take the form of quotas, VERs, and other restrictions, as well as tariff peaks and escalation and also affect other developing countries (Table 9). In this connection, the EC quota on beef from Eastern Europe was cut in April 1991 to avoid a futher growth in stockpiles in the EC.

Table 9.Industrial Countries’ Nontariff Barriers to Exports by Eastern Europe1
CountryVoluntary Export Restraint/Quota2Antidumping3
Investigations initiatedProvisional measuresDefinitive dutiesPrice undertakings
BulgariaEC (meat, textiles and clothing, steel)

Austria (textiles)

Canada (clothing)

Sweden (textiles and clothing)

Switzerland (textiles and clothing)

United States (woolen coats)
EC (3)EC (4)EC (2)EC (1)
CzechoslovakiaEC (meat, textiles and clothing, steel)

Canada (clothing)

Norway (textiles)

Sweden (textiles and clothing)

Switzerland (textiles and clothing)

United Kingdom (footwear, leather)

United States (steel, steel products, textiles)
EC (4)

Australia (2)

Sweden (2)
EC (2)

Australia (1)
EC (2)

Australia (1)
EC (1)
HungaryEC (meat, steel)

Sweden (textiles and clothing)

Switzerland (textiles and clothing)

United Kingdom (footwear, leather)

United States (steel, steel products)
EC (3)

Australia (1)

Sweden (2)
EC (1)

Australia (1)
PolandEC (meat, steel)

Denmark (table porcelain)

Sweden (textiles and clothing)

Switzerland (textiles and clothing)

United Kingdom (footwear, leather)

United States (steel, steel products)
EC (3)

Australia (1)

Canada (2)

Finland (1)

Sweden (2)
EC (1)

Australia (1)

Canada (1)

Finland (1)

Sweden (1)
EC (1)

Canada (1)

Finland (1)
EC (1)
RomaniaEC (meat, steel)

Australia (canned ham)

Sweden (textiles and clothing)

Switzerland (textiles and clothing)

United Kingdom (footwear, leather)

United States (steel, steel products)
EC (5)

Canada (2)

Finland (1)

Sweden (1)

United States (1)
EC (3)

Finland (1)

United States (1)
EC (4)

Finland (1)

United States (1)
EC (1)
YugoslaviaEC (meat, textiles and clothing)

United States (steel)
EC (13)

Australia (1)

Canada (1)

United States (1)
EC (4) United States (1)EC (10)

Canada (1) United States (1)
EC (2)
Sources: Bureau of National Affairs, International Trade Reporter, various issues; General Agreement on Tariffs and Trade, Review of Developments in the Trading System, various issues; European Community (EC), Bulletin of the European Communities, various issues; and European Report, various issues.

Excluding bilateral quota agreements under the Multifiber Arrangement (MFA).

Measures effective during 1988–91.

Measures taken during the period of 1988–90. Figures in parentheses indicate the number of cases under each category.

Sources: Bureau of National Affairs, International Trade Reporter, various issues; General Agreement on Tariffs and Trade, Review of Developments in the Trading System, various issues; European Community (EC), Bulletin of the European Communities, various issues; and European Report, various issues.

Excluding bilateral quota agreements under the Multifiber Arrangement (MFA).

Measures effective during 1988–91.

Measures taken during the period of 1988–90. Figures in parentheses indicate the number of cases under each category.

Without substantial improvement in the access of Eastern Europe to industrial country markets, the economic reforms of these countries could be jeopardized. The major remaining barriers to industrial country markets are concentrated in sensitive areas, such as agriculture, steel, and textiles and clothing. Given the reluctance of major industrial countries to remove restrictions in these sectors on a unilateral basis, increased access to these sectors is dependent, in part, on the outcome of the Uruguay Round.

As indicated above, bilateral credits and easy financing terms offered by industrial countries that are tied to imports from industrial countries may have diverted trade from Eastern Europe. In this connection, the United States recently provided farm aid credit to the former U.S.S.R. that is tied to purchases of U.S. farm goods. The German authorities have put in place special export insurance facilities to support east German exports to the former U.S.S.R.; these facilities, which were granted a waiver from normal rules followed by OECD members until the end of 1991, permit zero cash down payments, a grace period on long-term credits, and extended repayment periods. In addition, budget subsidies granted by the German federal government for exports to the former U.S.S.R. by east Germany increased east German exports to the former U.S.S.R. in 1990, possibly displacing Eastern European exports.

Full Integration into GATT

All Eastern European countries, except Bulgaria, are Contracting Parties to the GATT. Bulgaria has been an observer to GATT since 1967 and applied for membership in 1986; a Working Party on its accession was established in 1986. With the exception of Czechoslovakia and Yugoslavia, special provisions were applied to these countries when they acceded to GATT to ensure that reciprocal trade concessions would not be impaired by non-market mechanisms (state-trading, artificial prices, bilateral trade arrangements, allocation of exports and imports). The five Eastern European countries joined GATT at different times and the conditions of membership differed, as did the concessions made to them by the Contracting Parties (Table 10). Czechoslovakia was an original contracting party and the terms of its accession were not renegotiated even though it substantially modified its foreign trade system after 1948.89 Yugoslavia acceded to GATT, in effect, as a market economy.

Table 10.Current Situation of Eastern European Countries in GATT
CountryAccessionCustoms Tariff As Trade Concession1Conditions Applied to Eastern European Countries Under Protocol of AccessionConcession from Contracting Parties
Review processImport commitmentsDiscriminating safeguards2Suspension3Elimination of quantitative restrictions4
Czechoslovakia1948No Protocol
Yugoslavia1966YesNoNoNoNoNo
Poland51967NoAnnualYes6YesYesNo deadline
Romania1971NoBiannualYes7YesYesEnd of 1975
Hungary1974YesBiannualNoYesYesEarly 1975
Nonmember
BulgariaObserver status granted in 1967. It requested accession in 1986. Working Party on its accession established in April 1990.
Source: General Agreement on Tariffs and Trade (GATT).

In the case of Hungary and Yugoslavia, the customs tariff was considered by Contracting Parties as their main concession when they acceded.

A discriminatory safeguard provision allowing Contracting Parties to restrict exports from the corresponding country which cause or threaten serious injury to domestic producers.

The suspension of concessions or other obligations under the protocol in case of disputes not settled in consultation.

A concession from Contracting Parties applying prohibition or quantitative restrictions against the corresponding country’s exports, which are inconsistent with GATT Article XIII, that these restrictions would be progressively eliminated within a certain time period.

Poland is currently renegotiating its protocol of accession.

Under its present protocol, Poland is required to increase its imports from Contracting Parties at an annual average compound rate of 7 percent in every three year period from 1973–75. Annual increase of imports value should be not less than 7 percent.

Romania committed to increase its imports to an amount that is not smaller than the expected total imports provided for in the Five-Year Plans.

Source: General Agreement on Tariffs and Trade (GATT).

In the case of Hungary and Yugoslavia, the customs tariff was considered by Contracting Parties as their main concession when they acceded.

A discriminatory safeguard provision allowing Contracting Parties to restrict exports from the corresponding country which cause or threaten serious injury to domestic producers.

The suspension of concessions or other obligations under the protocol in case of disputes not settled in consultation.

A concession from Contracting Parties applying prohibition or quantitative restrictions against the corresponding country’s exports, which are inconsistent with GATT Article XIII, that these restrictions would be progressively eliminated within a certain time period.

Poland is currently renegotiating its protocol of accession.

Under its present protocol, Poland is required to increase its imports from Contracting Parties at an annual average compound rate of 7 percent in every three year period from 1973–75. Annual increase of imports value should be not less than 7 percent.

Romania committed to increase its imports to an amount that is not smaller than the expected total imports provided for in the Five-Year Plans.

As the Eastern European countries transform their economies into western-style market-based economies these special provisions in GATT will become unnecessary. For example, in the case of Poland the requirement to guarantee that imports increase by a certain percentage in value terms conflicts with the principles of a free market economy. Poland and Hungary are in the process of renegotiating their Protocols of Accession to reflect changes toward the greater market orientation of their economies (Appendix I).

Membership in GATT on normal terms is essential to provide Eastern Europe with greater security of access to markets of other Contracting Parties. At the same time, acceptance of the full obligations of GATT membership may enable Eastern European governments to lock in trade reforms and to resist protectionist pressures that may arise to backtrack on reforms.

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