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Hungary: Selected Issues

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International Monetary Fund
Published Date:
November 1997
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VI. Trade Liberalization in Hungary102

A. Introduction

115. The fact that Hungary was more market-oriented than other centrally-planned economies at the time of the breakup of the Soviet Union perhaps explains why the country pursued a gradual approach to trade reform in the post-Soviet era that did not include a drastic devaluation of the forint. The greater openness of Hungary compared to other Eastern European countries was the result of a process of moving toward a market economy that began on the trade liberalization front as early as the late 1960s. While some momentum for trade reform was lost in the 1970s as a result of external economic conditions and internal political resistance, Hungary did become a signatory to the GATT in 1973 and some reforms were attempted in the decade. There were continuing attempts at introducing market mechanisms in the early 1980s, but the deteriorating economic situation made further progress difficult.

116. Since 1989, however, as a result of the changes in the political and economic environment, Hungary has entered into several important trade agreements and has expanded its trade with market-based economies. In addition to being a charter member of the WTO and committing to tariff bindings under the Uruguay Round, Hungary concluded an association agreement with the European Union. Along with unilateral trade liberalization measures, the commitments resulting from these agreements have quickened the trade liberalization process in recent years.

117. The next section of this chapter provides a general overview of the evolution of the trade regime and particularly changes that have been implemented since 1989. In this context, an attempt is made to measure the sectoral effects of the trade liberalization between 1990 and 1994. Section three presents the methodology employed and the results obtained in calculating sectoral effective rates of protection. The general conclusion that emerges from the calculations in the third section is that there has been a slight reduction in nominal implicit103 and effective rates of protection for the economy as whole between 1990 and 1994. While data are not available to extend the sectoral study beyond 1994, aggregate tariff revenue data for 1995 through 1998104 show a significant decline in the average nominal implicit tariff between 1990 and 1998, from 7.8 percent to 2.8 percent. The sectoral study also shows that there were some increases in nominal and effective rates of protection in 1992 and 1993 and there were significant differences in sectoral levels of nominal and effective protection that were maintained throughout the 1990–94 period.

B. Overview of the Trade Regime, 1960–97105

118. Hungary is a small economy and as such trade potentially plays an important role in economic activity. The economy was relatively open even in the central planning period, although the patterns of trade were disproportionately weighted toward COMECON countries. Throughout the 1960s the limits to the strategy of economic growth though extensive industrialization and centralized economic management became increasingly obvious to the authorities. As a result, Hungary embarked on liberalization strategies earlier than other centrally-planned economies. Thus at the time of the collapse of the Soviet Union the Hungarian economy already had made some initial adjustments to market-based economy and perhaps the authorities had latitude to choose a more gradual adjustment strategy than other Eastern European countries.

119. As early as 1968, the authorities launched an economic program that aimed to introduce certain elements of a market economy. In the area of trade there was some attempt to create a link between the national economy and international markets but the reforms were primarily limited to certain areas of economic management. The idea was that planned import quotas would be abolished so that companies requiring imports could apply for and receive, automatically, import licenses. In addition they were to be allowed to buy the requisite foreign exchange. To the extent that this attempt was successful, however, it was reversed in the next few years, and the system of control and management of trade remained essentially unchanged in practice.

120. During the 1970s some of the momentum for reform and liberalization that derived from the experiments in the late 1960s was lost as a result of external economic conditions (primarily the increase in oil prices) and internal political pressures.106 The system of protection that was developed in the 1970s relied on complex and “informal” methods of rationing rather than on tariffs or explicit quotas. The level of licensed imports was determined by the previous year’s imports. To increase imports, difficult bargaining was required, such as showing what losses would be incurred in the absence of more imports.107

121. Some progress, however, was made during the decade. In 1972 Hungary introduced a scheme of tariff preferences in favor of developing countries, excluding such products as meat, fish, dairy products, and aluminum products. In 1973 Hungary acceded to the GATT on the basis of tariff concessions. Its Protocol of Accession, however, contained a number of specific provisions that reflected the fact that the country was not a market economy at the time. It also became a signatory to the Multi Fiber Agreement and concluded a free trade area agreement with Finland in 1974. Beginning in 1978 Hungary extended duty free treatment to imports originating in the least developed countries. Hungary signed all the Tokyo Round Codes, except for the Agreements on Subsidies, Government Procurement and Civil Aircraft.

122. Despite ongoing economic reform efforts in the 1980s that introduced market mechanisms and institutions, the economic situation of the country deteriorated. The Polish military coup in 1982 created a serious balance of payments crisis for Hungary that was a turning point (for the worse) in the import licensing system. As a result, import licenses were issued by the vice premier on an item by item basis and even when licenses were granted, the foreign exchange was not always made available immediately. The latter problem was related to the unwillingness to allow the forint to devalue. Hungary’s industrial products were not competitive in world markets, overall economic performance fell well behind that of developed market economies, and, in the face of weak export performance and energy-price related terms of trade losses, gross foreign debt increased to some US$21 billion by the end of 1987.

123. After 1988, economic policies were focused on preventing a further increase in external debt, as well as macroeconomic stabilization. Trade liberalization was accelerated and deepened, especially beginning in 1989, since it was seen as a critical element for initiating systemic changes in the context of still emerging market structures. The plan had been to liberalize convertible currency imports gradually over a four-year period between 1989 and 1992 in 20–25 percent increments. In the event, the process was completed in only three years. Imports of investment goods were liberalized in 1989, intermediate goods in 1990 and a significant proportion of consumer goods sectors were open to international competition in 1990. By 1990, some 70 percent of production had to face import competition.

124. From January 1, 1991, the two-tier nature of Hungary’s trade policy regime in which a distinction was made between so.-called convertible and nonconvertible currency trade was largely replaced with a unified system. Since then, Hungary’s trade with all countries (including the centrally-planned economies of China, the Democratic Republic of Korea and Vietnam) is now also conducted in convertible currencies on the basis of world market prices, and general rules, including the Most Favored Nation (MFN) clause108, also apply to trade with these countries. There was also a swift phasing out of import licensing requirements and quotas, which covered only 10 percent of imports in 1991 as against 60 percent in 1989.

125. Interestingly, the reform was not linked to a drastic devaluation or to a significant increase in tariff rates (as a result of replacing quotas with tariff equivalents). This was largely the result of the fact that the economy was already more open than other Eastern European countries and thus there was a less drastic redistribution of resources required. In addition, the reform coincided with the collapse of the Soviet Union and the CMEA so that the recession helped dampen import demand.

126. During this initial rapid opening of the trade regime the trade balance deteriorated, but only slightly. In 1992, however, the trade balance did deteriorate sharply; from a surplus of some US$190 million in 1991 a small trade deficit of US$50 million emerged in 1992 and by 1994 the trade deficit had increased alarmingly to some US$3.6 billion.

127. Throughout the gradual process of trade liberalization, while generally moving toward an open trade regime, the authorities have employed various measures to restrict imports in response to balance of payments deterioration. As part of the economic stabilization package introduced in 1995, which included fiscal and monetary adjustment and featured an all-important incomes policy, an import surcharge of 8 percent was imposed. The surcharge applied to imports from all sources and covered all goods, except primary energy products and was reimbursable in the case of imports of machinery for investment purposes. The surcharge was eliminated at the end of June, 1997 after having begun to be reduced in late 1996.

128. The global quota on imports of selected consumer goods (which has been in force since Hungary’s accession to the GATT) amounted in 1989 to US$200 million and was increased to US$750 million in both 1993 and 1994. In 1994, the global consumer quota included clothing, footwear, jewelry, household detergents and fishery products. In 1995 several categories of products were withdrawn from the global quota, which implied a reduction in the quota in U.S. dollar terms. In 1996 and 1997 the product coverage stayed the same as in 1995 but the overall value of the quota was increase in 1996 to some $US560 million and again in 1997 to some US$640 million (Table 16).

Table 16.Hungary: Global Quota on Consumer Goods, 1995–1997
199519961997

Jan-Jun
1997

Proj. year
Household Detergents25352345
Footwear65703977
Overwear9410457114
Second-hand Clothing27291632
Other Clothing65713978
Haberdashery Products17171123
Textile goods, carpets43472652
Jewellery, percious metals33341938
Fish, tinned fish23231733
Other manufactured products12613373146
Used cars and vans53552959
New cars and vans81844590
Total518563319638
Sources: Ministry of Industry and Trade; and staff estimates.
Sources: Ministry of Industry and Trade; and staff estimates.

129. Hungary has also applied, since 1973, three different kinds of foreign trade-related fees (viz., a one percent licensing fee, a two percent customs fee, and a three percent statistical fee). These fees have been progressively reduced and were eliminated early in 1997.

130. In addition to unilateral trade measures related to economic stabilization packages, much impetus to trade reform has resulted from regional agreements, in particular the Europe Agreement (EA) signed with the EU in December 1991 (with the Interim Agreement regulating trade aspects having been applied since March 1992), the Free Trade Agreement with the EFTA countries (in force since October 1993) and the Central European Free Trade Agreement (CEFTA) concluded with the Czech Republic, Poland, and Slovakia, which has been in force since March 1993 (and with Solvenia since January 1996). The Uruguay Round Agreements consolidated different trade liberalization results by widening the geographical coverage and expanding liberalization principles to some new areas of trade relations.

131. As a founding member of the WTO in January 1995, Hungary started to implement its Uruguay Round commitments since this date. These include in particular further tariff bindings109: from 89 percent of tariff lines bound before the Uruguay Round (90 percent of industrial and 25 percent of agricultural products) the number was increased to 93 percent of total tariff lines. Duty-free imports will increase from 19 percent to 21 percent of total imports. The MFN average tariff level will decrease for industrial products from 9.6 percent in 1996 to 6.9 percent by 2001, while due to tariffication, tariffs on agricultural products will increase on average to 45 percent (from 22 percent pre Uruguay Round). Among industrial products, tariff reductions of more than 30 percent affect chemicals, textiles and clothing, footwear, nonelectric machinery and metals. After the agreed reductions, the following categories will have a tariff level above the 6.9 percent average: transport equipment (16.9 percent), electric machinery, textiles and clothing, and fishery products.

132. More recently, the authorities implemented a new tariff agreement, aligned with the Common Customs Tariff of the European Union effective on January 1, 1996. The third, out of five, step reductions on industrial tariffs was also implemented in 1997 consistent with WTO commitments. Average industrial tariffs are scheduled to decline to 6.9 percent in 2000 from 9.6 percent in 1995. Customs duties on industrial imports from the EU and EFTA into Hungary have been gradually lowered and will be abolished by December 31, 2000, at the latest.110 Under the Agreement with the CEFTA countries, duties for more than 80 percent of industrial products were abolished as of January 1, 1996. All trade in industrial goods, with a few exceptions, between CEFTA members will be free by January 1, 2000 and trade in agricultural goods will be liberalized substantially.

133. In 1997, in addition to the removal of the import surcharge and statistical fees mentioned above, all export licensing (other than for industrial products required to Hungary’s international obligations) was terminated as of January 1. Further liberalization of import quotas will be completed for some products in accordance with the EU Association Agreement by the end of 1997.

C. Sectoral Effects of Trade Liberalization

Effective rate of protection—concept and formula for calculations

134. This section presents the methodology and results of a sectoral analysis of the nominal and effective rates of protection. Effective protection is defined as the increment in value added at market prices made possible by the structure of protection as a proportion of the free trade value added. The formula can be derived as follows 111:

Pvft =Value added per unit of j in activity j in the absence of tariffs (i.e., at the free trade effective prices)
Pvd =Value added per unit of j, in activity j made possible by the tariff structure (i.e., the effective price after tariffs have been imposed)
gj =Effective protection rate for activity j
Pj =Nominal price of a unit of j in free trade
aij =Share of I in the cost of j at free trade prices
aijd =Share of I in the cost of j after tariffs have been imposed
tj =Nominal tariff rate on j
ti =Nominal tariff rate on I

The following definitions hold:

Combining the first three equations gives:

Since the coefficients obtained from the input/output tables are those that arise in the presence of tariffs, a relationship between the so-called free trade technical coefficient and the so-called distorted one must be made. The following expression establishes this connection:

The formula used in this chapter can then be derived by substituting (5) into (4):

Data and methods

135. Input/Output tables for 1990–1993 were obtained from the NBH, while tariff and duty collections for 1990–1994 were provided by the Ministry of Finance. It should be noted that the tariff rates used in these calculations are the implicit tariff rates, which are obtained by dividing the tariff and duty revenues by the value of imports. Thus, while implicit tariffs might show increases in some years, this could be the result of the desirable elimination of loopholes or exemptions. Import data was provided by the Ministry of Industry and Trade and is based on customs data rather than balance of payments data.112 In the case of 1994, the input/output coefficients used were from the 1993 matrix since there is no Input/Output table available for 1994. This implicitly assumes that the structure of production did not change between 1993 and 1994 (a necessary simplification given the lack of availability of the 1994 input/output matrix).

136. The calculations were performed for six broad economic sectors dictated by the availability of data: Agriculture, Food processing, Chemicals, Light Industry, Metallurgy, Machinery. The remaining observations were put into a residual “other” category.

Results

137. Both nominal and effective rates of protection by sector are presented for 1990–1994 in Table 17. Overall, the simple average nominal tariff declined by about one percentage point from 9 percent to 8 percent between 1990 and 1994. Based on a trade-weighted average, however, the overall nominal rate stayed more or less constant at around 8 percent. Similarly, the average effective protection declined over the period by around one percentage point and followed the same pattern as the nominal (Figure 27). Based on aggregate data, which is available for a longer period, tariff levels will drop sharply between 1990 and 1998. Relying on Ministry of Finance projections, the average trade-weighted nominal tariff will have dropped from 8 percent to 3 percent between 1990 and 1998 (Table 17). It can also be noted that the similarity in the path of both nominal and effective rates between 1990 and 1994 could indicate that changes in nominal tariff policy were applied relatively evenly between the sectors. Since, however, the structure of production did change over the period, the above observation might not necessarily hold.

Figure 27.Hungary: Various Measures of Protection

Sources: National Bank of Hungary; Ministry of Finance; Ministry of Industry and Trade; staff estimates

Table 17.Hungary: Nominal and Effective Rates of Protection 1990–98(in percent)
199019911992199319941995199619971998
I. Effective Rate of Protection
Agriculture12.123.6118.428.109.57
Food Processing10.5614.1628.6816.909.44
Chemical industry2.574.614.846.103.71
Light industry11.783.665.955.784.69
Metallurgy4.384.595.416.793.70
Machinery5.926.849.464.445.20
Other5.043.725.345.606.85
Simple Average7.485.8811.167.676.16
Trade-Weighted Average6.165.468.075.925.26
Minimum2.573.614.844.443.70
Maximum12.1214.1628.6816.909.57
Standard Deviation3.913.829.104.222.52
II. Implicit Nominal Tariffs 1/
Agriculture12.774.3419.579.2210.51
Food Processing11.3814.7530.0918.2610.52
Chemical industry4.657.108.5910.557.91
Light industry14.975.248.448.457.01
Metallurgy5.645.917.289.525.76
Machinery7.448.7712.707.408.07
Other5.984.656.557.008.25
Simple Average8.987.2513.3210.068.29
Trade-Weighted Average 2/3/7.817.1310.698.757.919.256.004.982.81
without import surcharge7.817.1310.698.757.916.774.704.982.81
Minimum4.654.346.557.005.76
Maximum14.9714.7530.0918.2610.52
Standard Deviation4.033.648.653.821.74
Sources: National Bank of Hungary; Ministry of Finance; Ministry of Industry and Trade; and Staff estimates

The implicit nominal rate was derived by dividing actual tariff and duty revenues by (customs-based) imports.

Includes import surchage for 1995–1997.

The figures for 1997 and 1998 were derived from Ministry of Finance customs import projections in $US and budgetary projections of revenues from tariffs and duties.

Sources: National Bank of Hungary; Ministry of Finance; Ministry of Industry and Trade; and Staff estimates

The implicit nominal rate was derived by dividing actual tariff and duty revenues by (customs-based) imports.

Includes import surchage for 1995–1997.

The figures for 1997 and 1998 were derived from Ministry of Finance customs import projections in $US and budgetary projections of revenues from tariffs and duties.

138. It is interesting to note that the share of imports in total production at basic prices (i.e., without taxes or import tariffs, etc.) increased over the 1990–94 for every category in this study (Table 18). This is an indication that even though the levels of protection did not fall significantly in this period the economy was becoming more open in the sense that imports were playing a more important role in the structure of production. This is partly the result of a reduction in nontariff barriers over the period.

Table 18.Hungary: Import Coefficient Matricies 1/
AgricultureFoodChemicalsLight Ind.MetallurgyMachinesOther
1990
Agriculture0.0140.0220.0000.0080.0000.0000.001
Food Industry0.0120.0300.0100.0070.0000.0000.000
Chemical Industry0.0250.0120.1980.0540.0270.0180.013
Light industry0.0060.0050.0050.1870.0000.0020.009
Metallurgy0.0010.0030.0060.0010.1060.0260.003
Machinery0.0210.0110.0210.0250.0290.1540.057
Other0.0150.0130.2730.0370.0460.0470.078
Total0.0850.0930.3830.3040.2250.2340.142
1991
Agriculture0.0230.0210.0010.0270.0000.0000.001
Food Industry0.0120.0210.0010.0040.0000.0000.000
Chemical Industry0.0370.0160.1730.0620.0200.0330.020
Light industry0.0160.0050.0040.1650.0030.0050.012
Metallurgy0.0020.0070.0060.0030.1320.0440.006
Machinery0.0150.0060.0060.0120.0170.1650.034
Other0.0150.0130.2730.0370.0460.0470.078
Total0.1100.0820.4550.2850.2350.2660.166
1992
Agriculture0.0080.0140.0020.0180.0000.0000.001
Food Industry0.0150.0370.0010.0040.0000.0000.000
Chemical Industry0.0390.0210.2090.0500.0340.0340.023
Light industry0.0100.0110.0100.1540.0030.0100.014
Metallurgy0.0030.0080.0080.0070.1650.0490.010
Machinery0.0160.0050.0150.0160.0120.1900.025
Other0.0150.0130.2730.0370.0460.0470.078
Total0.1080.1080.5100.2860.2620.3390.161
1993
Agriculture0.0090.0190.0020.0180.0000.0000.001
Food Industry0.0170.0420.0010.0040.0000.0000.001
Chemical Industry0.0420.0230.2240.0680.0540.0370.025
Light industry0.0080.0130.0100.1640.0040.0110.014
Metallurgy0.0050.0090.0120.0080.1840.0540.011
Machinery0.0270.0120.0220.0240.0330.2430.060
Other0.0150.0130.2730.0370.0460.0470.078
Total0.1210.1320.5440.3230.3210.3910.189
Sources: National Bank of Hungary; and staff estimates.

The share in total cost of imports (i.e., value of imports divided by total output in each category at basic prices)

Sources: National Bank of Hungary; and staff estimates.

The share in total cost of imports (i.e., value of imports divided by total output in each category at basic prices)

139. While changes in tariff policy might have been applied evenly over the 1990–94 period, the sectoral structure of protection was, and remained, skewed toward the agricultural and food sectors. These two sectors show consistently higher nominal and effective protection rates over the entire period, and it is particularly noteworthy that the nominal tariffs in these sectors increased significantly in 1992. This might have been partly the result of replacing nontariff barriers with tariffs. The chemical, machinery and “other” categories show an increase in nominal tariffs between 1990 and 1994.

140. It is also interesting to note that the dispersion of both nominal and effective protection, as measured by the standard deviation of the samples, diminished over the 1990–1994 period. In the case of nominal protection, the decline was over 2 percentage points, while in the case of effective protection it was less (some 1.5 percentage points) but still noteworthy.

D. Conclusions

141. Hungary has made significant progress in liberalizing its foreign trade regime as a result of unilateral measures implemented in the context of various stabilization measures (particularly the 1995 economic package) and the impetus created by commitments to multi-lateral trade agreements, including the Uruguay Round and the European Association Agreement. While the authorities have, at times, resorted to measures to restrict imports, these measures have been gradually removed (in the case of the import quota and the various statistical fees) or made progressively less restrictive (in the case of the global consumer quotas).

142. The disaggregated calculations in this chapter show that both nominal and effective protection diminished only slightly between 1990 and 1994 but aggregate data show a substantial reduction of 5 percentage points in the average tariff between 1990 and 1998. The data also could be interpreted to imply that tariff policy was applied in a relatively even-handed manner between sectors in the 1990–94 period. The agricultural and food sectors, however, continued to receive significantly higher nominal and effective protection than other sectors.

102

Prepared by Perry Perone.

103

For the purposes of the calculations in this chapter, implicit, rather than stated, tariff rates were used. The implicit rates were obtained by dividing actual tariff and duty collections by the value of customs-based imports. This method, to some extent, takes into account various exemptions to the published tariff rates for various entities or sectors.

104

The tariff revenue data and customs-based import data for 1997 and 1998 were projections made by the Ministry of Finance.

105

For more details on the evolution of trade policy and trade agreements entered into by Hungary see the following documents: 1. Examination of Trade Policy Aspects Concerning Countries Requesting OECD Membership: Hungary, OECD 1996; 2. Trade Policy Review Mechanism: The Republic of Hungary-Report by the Secretariat, GATT 1991.

106

It was in the 1970s that the large external debt burden began to be accumulated. This was the result of a dramatic deterioration in the terms of trade related to increases in energy prices, weak export performance, and the authorities’ policy choices in response to the external shocks. By the end of the 1970s Hungary’s external debt stood at some US$10 billion.

107

See “Import Liberalization in Hungary,” by A. Nagy in Acta Oeconomia, Vol. 46 (1–2), 1994 for a detailed discussion of this period.

108

The Most Favored Nation clause states that the contracting parties are bound to grant each other treatment as favorable as they extend to any other country regarding the application of import and export duties and other trade regulations.

109

A tariff line is bound when the authorities commit not to raise the tariff on the particular good above the level set in the Tokyo or Uruguay Round. In many cases, the bound level is set well above the actual level of the tariff.

110

Trade in agricultural products with the EU and individual EFTA states is subject to special arrangements.

111

This derivation follows the presentation in The Theory of Protection, by Max Cordon, 1971. Oxford University Press, pp. 35–37.

112

In Hungary there is a significant difference between imports and exports reported on a customs basis and those reported in the balance of payments. The discrepancy has not been entirely accounted for by the authorities, but arises in part from the exclusion in the customs statistics of imports of goods for re-export and the subsequent exports.

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