As for many other aspects of the Hungarian economy, the process of trade liberalization was characterized by gradualism. Indeed, the greater openness of Hungary compared with other economies of the region was the result of a shift toward a market economy that began on the trade liberalization front in 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 was a signatory to the General Agreement on Tariffs and Trade (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. 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 World Trade Organization (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 arising from these agreements have quickened the trade liberalization process.
Overview of the Trade Regime, 1960–971
The Hungarian economy was relatively open even in the central planning period, although the patterns of trade were disproportionately weighted toward CMEA countries. Throughout the 1960s, the limits to the strategy of economic growth through extensive industrialization and centralized economic management had become increasingly obvious to the authorities. As a result, 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, the authorities attempted 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 would be allowed to buy the requisite foreign exchange. This attempt, however, was reversed in the next few years, and the system of control and management of trade remained, to a large extent, unchanged in practice.
During the 1970s, some of the momentum for reform and liberalization that derived from experiments in the late 1960s was lost as a result of external economic conditions (primarily the increase in oil prices) and internal political pressures.2 The system of protection 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 (Nagy, 1994).
Some progress was made during the decade. In 1972, Hungary introduced a scheme of tariff preferences in favor of developing countries, covering products such as meat, fish, dairy, and aluminum. In 1973, Hungary acceded to the GATT on the basis of tariff concessions. Its Protocol of Accession, however, contained a number of provisions that reflected the fact that the country was not a market economy at the time. Hungary 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 developing countries. Hungary signed all the Tokyo Round Codes, except for the Agreements on Subsidies, Government Procurement, and Civil Aircraft.
The worsening of economic conditions during the 1980s hampered the trade liberalization process. 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 on a discretionary basis and even when licenses were granted, the foreign exchange was not always made available immediately, a problem related to the unwillingness to devalue the forint. In the face of weak export performance and energy-price related terms of trade losses, gross foreign debt increased to about $21 billion by the end of 1987.
Beginning in 1989, trade liberalization was accelerated and deepened, since it was seen as a critical element for initiating systemic changes in the context of still-emerging market structures. The initial plan had been to liberalize convertible currency im-ports 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. As of 1990, about 70 percent of production had to face import competition, and by 1991, quotas covered only 10 percent of imports. Interestingly, the reform was not linked to a drastic devaluation or to a significant increase in tariff rates. This was largely the result of the Hungarian economy being already more open than other central and eastern European countries and therefore requiring a less drastic redistribution of resources.
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 replaced with a unified system. Since then, Hungary’s trade with all countries (including the remaining centrally planned economies) is now also conducted in convertible currencies on the basis of world market prices and general rules, including the most-favored-nation (MFN) clause.3
Trade liberalization continued in the following years as a result of regional and global agreements and unilateral trade measures. 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 European Free Trade Association (EFTA) countries (in force since October 1993); and the Central European Free Trade Agreement (CEFTA) concluded with the Czech Republic, Poland, and the Slovak Republic, which has been in force since March 1993 (and with Slovenia since January 1996). More recently, the authorities implemented a new tariff agreement, aligned with the Common Customs Tariff of the European Union effective January 1, 1996. The Uruguay Round Agreements consolidated the results achieved by these regional agreements by widening the geographical coverage and expanding liberalization principles to some new areas of trade relations.
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 bindings:4 from 89 percent of tariff lines bound before the Uruguay Round (90 percent of industrial products 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 im-ports. The MFN average tariff level will decrease for industrial products from 9.6 percent in 1996 to 6.9 percent by 2001, while owing to tariffication, tariffs on agricultural products will increase on average to 45 percent (from 22 percent pre-Uruguay Round).5 Customs duties on industrial imports from the European Union and the EFTA into Hungary have been gradually lowered and will be abolished by December 31, 2000, at the latest. Under the agreement with 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. Hungary had also applied, since 1973, three different kinds of foreign trade-related fees (viz., a 1 percent licensing fee, a 2 percent customs fee, and a 3 percent statistical fee). These fees have been progressively reduced, and were eliminated early in 1997.
Despite this progress, there were some setbacks. The most important one was the introduction in March 1995 of an 8 percent import surcharge (Chapter II), which 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 and imports for reexport. The surcharge was eliminated at the end of June 1997 after having been reduced in the second half of 1996.
The overall result of the above agreements and measures was a significant reduction in the average tariff rate during the most recent period. The average tariff rate (computed as a ratio of tariff and duty revenues to imports) declined to about 5 percent in 1997, and is projected by the Ministry of Finance to fall further in 1998 (Figure 9.1).
Various Measures of Protection
Sources: National Bank of Hungary; Ministry of Finance; Ministry of Industry and Trade; and IMF staff estimates.Various Measures of Protection
Sources: National Bank of Hungary; Ministry of Finance; Ministry of Industry and Trade; and IMF staff estimates.Various Measures of Protection
Sources: National Bank of Hungary; Ministry of Finance; Ministry of Industry and Trade; and IMF staff estimates.As to import quotas, 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 $200 million, and was raised to $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 raised in 1996 to about $560 million and again in 1997 to about $640 million (Table 9.1). Further liberalization of import quotas will be completed for some products in accordance with the EU Association Agreement by the end of 1997.
Global Quota on Consumer Goods
(In millions of U.S. dollars, except where indicated)
Global Quota on Consumer Goods
(In millions of U.S. dollars, except where indicated)
| Jan.–June | Proj. Year | ||||
|---|---|---|---|---|---|
| 1995 | 1996 | 1997 | 1997 | ||
| Household detergents | 25 | 35 | 23 | 45 | |
| Footwear | 65 | 70 | 39 | 77 | |
| Overwear | 94 | 104 | 57 | 114 | |
| Secondhand clothing | 27 | 29 | 16 | 32 | |
| Other clothing | 65 | 71 | 39 | 78 | |
| Haberdashery products | 17 | 17 | 11 | 23 | |
| Textile goods, carpets | 43 | 47 | 26 | 52 | |
| Jewelry, precious metals | 33 | 34 | 19 | 38 | |
| Fish, canned fish | 23 | 23 | 17 | 33 | |
| Other manufactured products | 126 | 133 | 73 | 146 | |
| Used cars and vans (in thousands of units) | 53 | 55 | 29 | 59 | |
| New cars and vans (in thousands of units) | 81 | 84 | 45 | 90 | |
| Total | 518 | 563 | 319 | 638 | |
Global Quota on Consumer Goods
(In millions of U.S. dollars, except where indicated)
| Jan.–June | Proj. Year | ||||
|---|---|---|---|---|---|
| 1995 | 1996 | 1997 | 1997 | ||
| Household detergents | 25 | 35 | 23 | 45 | |
| Footwear | 65 | 70 | 39 | 77 | |
| Overwear | 94 | 104 | 57 | 114 | |
| Secondhand clothing | 27 | 29 | 16 | 32 | |
| Other clothing | 65 | 71 | 39 | 78 | |
| Haberdashery products | 17 | 17 | 11 | 23 | |
| Textile goods, carpets | 43 | 47 | 26 | 52 | |
| Jewelry, precious metals | 33 | 34 | 19 | 38 | |
| Fish, canned fish | 23 | 23 | 17 | 33 | |
| Other manufactured products | 126 | 133 | 73 | 146 | |
| Used cars and vans (in thousands of units) | 53 | 55 | 29 | 59 | |
| New cars and vans (in thousands of units) | 81 | 84 | 45 | 90 | |
| Total | 518 | 563 | 319 | 638 | |
Finally, all export licensing (other than for industrial products required for Hungary’s international obligations) was terminated as of January 1, 1997.
Sectoral Effects of Trade Liberalization
In addition to looking at the average tariff rate, it is also useful to analyze sectoral tariff rates, taking into account trade relations across sectors. Unfortunately, reflecting data limitations, the following section focuses only on the 1990–94 period.
Effective Rate of Protection—Concept and Formula for Calculations
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 described in Cordon (1971, pp. 35–37).
Let:
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 link:
The formula used in this chapter can then be derived by substituting (5) into (4):
Data and Methods
Input/output tables for 1990–93 were obtained from the National Bank of Hungary, while tariff and duty collections for 1990–94 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.6 Import data was provided by the Ministry of Industry and Trade and is based on customs data rather than balance of payments data.7 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.
Calculations were performed for six broad economic sectors dictated by the availability of data: agriculture, food processing, chemicals, light industry, metallurgy, and machinery. The remaining observations were classified under a residual “other” category.
Results
Both implicit nominal and effective rates of protection by sector are presented for 1990–94 in Table 9.2. Overall, the simple average implicit nominal tariff declined by about 1 percentage point, from 9 percent to 8 percent between 1990 and 1994. Based on a trade-weighted average, however, the overall implicit nominal rate stayed more or less constant at about 8 percent. Similarly, the average effective protection declined over the period by about 1 percentage point and followed the same pattern as the nominal (Figure 9.1). It can also be noted that the similarity in the path of both implicit nominal and effective rates between 1990 and 1994 could indicate that changes in nominal tariff policy were applied relatively evenly between sectors.
Nominal and Effective Rates of Protection
(In percent)
The implicit nominal rate was derived by dividing actual tariff and duty revenues by (customs-based) imports.
Includes import surchage for 1995–97.
The figures for 1997 and 1998 were derived from Ministry of Finance customs import projections in U.S.dollars and budgetary projections of revenues from tariffs and duties.
Nominal and Effective Rates of Protection
(In percent)
| 1990 | 1991 | 1992 | 1993 | 1994 | |||
|---|---|---|---|---|---|---|---|
| Effective rate of protection | |||||||
| Agriculture | 12.12 | 3.61 | 18.42 | 8.10 | 9.57 | ||
| Food processing | 10.56 | 14.16 | 28.68 | 16.90 | 9.44 | ||
| Chemical industry | 2.57 | 4.61 | 4.84 | 6.10 | 3.71 | ||
| Light industry | 11.78 | 3.66 | 5.95 | 5.78 | 4.69 | ||
| Metallurgy | 4.38 | 4.59 | 5.41 | 6.79 | 3.70 | ||
| Machinery | 5.92 | 6.84 | 9.46 | 4.44 | 5.20 | ||
| Other | 5.04 | 3.72 | 5.34 | 5.60 | 6.85 | ||
| Simple average | 7.48 | 5.88 | 11.16 | 7.67 | 6.16 | ||
| Trade-weighted average | 6.16 | 5.46 | 8.07 | 5.92 | 5.26 | ||
| Minimum | 2.57 | 3.61 | 4.84 | 4.44 | 3.70 | ||
| Maximum | 12.12 | 14.16 | 28.68 | 16.90 | 9.57 | ||
| Standard deviation | 3.91 | 3.82 | 9.10 | 4.22 | 2.52 | ||
| Implicit nominal tariffs1 | |||||||
| Agriculture | 12.77 | 4.34 | 19.57 | 9.22 | 10.51 | ||
| Food processing | 11.38 | 14.75 | 30.09 | 18.26 | 10.52 | ||
| Chemical industry | 4.65 | 7.10 | 8.59 | 10.55 | 7.91 | ||
| Light industry | 14.97 | 5.24 | 8.44 | 8.45 | 7.01 | ||
| Metallurgy | 5.64 | 5.91 | 7.28 | 9.52 | 5.76 | ||
| Machinery | 7.44 | 8.77 | 12.70 | 7.40 | 8.07 | ||
| Other | 5.98 | 4.65 | 6.55 | 7.00 | 8.25 | ||
| Simple average | 8.98 | 7.25 | 13.32 | 10.06 | 8.29 | ||
| Trade-weighted average2,3 | 7.81 | 7.13 | 10.69 | 8.75 | 7.91 | ||
| Without import surcharge | 7.81 | 7.13 | 10.69 | 8.75 | 7.91 | ||
| Minimum | 4.65 | 4.34 | 6.55 | 7.00 | 5.76 | ||
| Maximum | 14.97 | 14.75 | 30.09 | 18.26 | 10.52 | ||
| Standard deviation | 4.03 | 3.64 | 8.65 | 3.82 | 1.74 | ||
The implicit nominal rate was derived by dividing actual tariff and duty revenues by (customs-based) imports.
Includes import surchage for 1995–97.
The figures for 1997 and 1998 were derived from Ministry of Finance customs import projections in U.S.dollars and budgetary projections of revenues from tariffs and duties.
Nominal and Effective Rates of Protection
(In percent)
| 1990 | 1991 | 1992 | 1993 | 1994 | |||
|---|---|---|---|---|---|---|---|
| Effective rate of protection | |||||||
| Agriculture | 12.12 | 3.61 | 18.42 | 8.10 | 9.57 | ||
| Food processing | 10.56 | 14.16 | 28.68 | 16.90 | 9.44 | ||
| Chemical industry | 2.57 | 4.61 | 4.84 | 6.10 | 3.71 | ||
| Light industry | 11.78 | 3.66 | 5.95 | 5.78 | 4.69 | ||
| Metallurgy | 4.38 | 4.59 | 5.41 | 6.79 | 3.70 | ||
| Machinery | 5.92 | 6.84 | 9.46 | 4.44 | 5.20 | ||
| Other | 5.04 | 3.72 | 5.34 | 5.60 | 6.85 | ||
| Simple average | 7.48 | 5.88 | 11.16 | 7.67 | 6.16 | ||
| Trade-weighted average | 6.16 | 5.46 | 8.07 | 5.92 | 5.26 | ||
| Minimum | 2.57 | 3.61 | 4.84 | 4.44 | 3.70 | ||
| Maximum | 12.12 | 14.16 | 28.68 | 16.90 | 9.57 | ||
| Standard deviation | 3.91 | 3.82 | 9.10 | 4.22 | 2.52 | ||
| Implicit nominal tariffs1 | |||||||
| Agriculture | 12.77 | 4.34 | 19.57 | 9.22 | 10.51 | ||
| Food processing | 11.38 | 14.75 | 30.09 | 18.26 | 10.52 | ||
| Chemical industry | 4.65 | 7.10 | 8.59 | 10.55 | 7.91 | ||
| Light industry | 14.97 | 5.24 | 8.44 | 8.45 | 7.01 | ||
| Metallurgy | 5.64 | 5.91 | 7.28 | 9.52 | 5.76 | ||
| Machinery | 7.44 | 8.77 | 12.70 | 7.40 | 8.07 | ||
| Other | 5.98 | 4.65 | 6.55 | 7.00 | 8.25 | ||
| Simple average | 8.98 | 7.25 | 13.32 | 10.06 | 8.29 | ||
| Trade-weighted average2,3 | 7.81 | 7.13 | 10.69 | 8.75 | 7.91 | ||
| Without import surcharge | 7.81 | 7.13 | 10.69 | 8.75 | 7.91 | ||
| Minimum | 4.65 | 4.34 | 6.55 | 7.00 | 5.76 | ||
| Maximum | 14.97 | 14.75 | 30.09 | 18.26 | 10.52 | ||
| Standard deviation | 4.03 | 3.64 | 8.65 | 3.82 | 1.74 | ||
The implicit nominal rate was derived by dividing actual tariff and duty revenues by (customs-based) imports.
Includes import surchage for 1995–97.
The figures for 1997 and 1998 were derived from Ministry of Finance customs import projections in U.S.dollars and budgetary projections of revenues from tariffs and duties.
The share of imports in total production at basic prices (i.e., without taxes or import tariffs, etc.) increased over 1990–94 for every category in this study. 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.
While changes in tariff policy might have been applied evenly over 1990–94, 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 increase was related to the switchover to market-based trade with the former Council for Mutual Economic Assistance (COMECON) countries. MFN customs duties were applied to trade with these countries starting in 1992. The chemical, machinery, and “other” categories show an increase in nominal tariffs between 1990 and 1994. 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 1990–94. In the case of nominal protection, the decline was over 2 percentage points, while in the case of effective protection, it was less (about 1.5 percentage points) but still noteworthy.
Conclusions
Hungary has made significant progress in the last few years in liberalizing its foreign trade regime as a result of unilateral measures and the impetus created by commitments to multilateral trade agreements, including the Uruguay Round and the EU Association Agreement. While authorities have, at times, resorted to measures to restrict imports, these measures have been gradually removed (in the case of the import quota and various statistical fees) or made less restrictive (in the case of global consumer quotas).
The disaggregated calculations in this chapter show that both implicit 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 1994 and 1998. The data also could be interpreted to imply that tariff policy was applied in a relatively even-handed manner between sectors during 1990–94. The agricultural and food sectors, however, continued to receive significantly higher nominal and effective protection than other sectors.
References
Cordon, Max, 1971, The Theory of Protection (Oxford: Clarendon Press).
GATT, 1991, Trade Policy Review Mechanism: The Republic of Hungary—Report by the Secretariat (Geneva: International Trade Centre UNCTAD/GATT).
Nagy, A., 1994, “Import Liberalization in Hungary,” Acta Oeconomica, Vol. 46 (1–2).
OECD, 1996, Examination of Trade Policy Aspects Concerning Countries Requesting OECD Membership: Hungary (Paris: OECD).
For more details on the evolution of trade policy and trade agreements entered into by Hungary, see OECD (1996) and GATT (1991).
In the 1970s, 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 external shocks. By the end of the 1970s, Hungary’s external debt stood at about $10 billion.
The most-favored-nation clause states that the contracting par-ties 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.
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.
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.
Implicit tariff rates were employed rather than stated nominal tariffs because of data availability problems at the sectoral level regarding the latter.
In Hungary, trade flow data from custom sources and from balance of payments sources differ significantly. The difference cannot be fully accounted for, but arises in part from the exclusion in the customs data of imports of goods for reexport and the subsequent exports.
