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Doc. 8163

9 July 1998

Central European Free Trade Agreement (CEFTA)

Report

Committee on Economic Affairs and Development

Rapporteur: Mr András Bársony, Hungary, Socialist Group

Summary

The creation of the Central European Free Trade Agreement (CEFTA) - in 1993 and now comprising the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia - signifies an important step in the effort of countries in the region to co-operate closely in the economic field. The report examines the evolution and challenges of CEFTA, and its role in bringing members closer to European Union membership. It is important, the report maintains, to ensure full compatibility between the quest to join the European Union and the need to ensure rapid development of free trade in central Europe and, beyond it, across the whole continent.

I.        Draft resolution

1.       The Assembly, in pursuance of its vocation to foster economic co-operation in all parts of Europe, welcomes the fifth anniversary of the Central European Free Trade Agreement (CEFTA) involving as it does the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia. The Assembly considers CEFTA a highly useful and efficient instrument for strengthening economic ties and economic development in central Europe, with the ultimate aim of stronger economic integration in the continent as a whole.

2.       The Assembly recognises the serious economic difficulties which CEFTA countries have been facing during their transition towards a market-oriented economy, and CEFTA's important contribution to the successful tackling of these challenges.

3.       The Assembly notes that since the establishment of CEFTA and largely thanks to it, trade among the participating countries has expanded and that their economic ties, which came under great strain at the beginning of the transition period, have now more than recovered. The Assembly in particular welcomes the compatibility between CEFTA principles and those of the World Trade Organisation, thus ensuring CEFTA's contribution to worldwide trade liberalisation.

4.       The Assembly sees CEFTA as a preparation for, not as an alternative to, its members' future membership of the European Union. In this regard it welcomes the efforts made within the CEFTA framework to avoid measures which do not conform with Community rules and legislation, even when such measures might have yielded temporary advantages.

5.       The Assembly encourages other countries in the region to join CEFTA, due attention being paid to the fulfilment of membership criteria, in particular those concerning prior membership of the World Trade Organisation and an association agreement with the EU, thus ensuring that the still vulnerable co-operation established under CEFTA is not jeopardised.

6.       The Assembly recognises the vital importance for all CEFTA states to be able, in the future, to attract considerable amounts of foreign investment, and thereby to ensure continued economic development. It encourages CEFTA to pursue policies, jointly and individually, which create the conditions to promote this process.

7.       The Assembly believes that the aims of CEFTA could be further realised by initiatives such as:

i.       accelerating the enactment of laws and regulations, essential elements for the establishment of a market-oriented economy;

ii.       the continued liberalisation in services and capital transfers, taking

Community legislation into due account;

iii.       encouraging further co-operation also in the financial field, for the purpose of

enhancing intra-regional trade and co-operation, including in the privatisation process and between companies in the region;

iv.       the further dismantling of trade obstacles in the field of agriculture.

8.       The Assembly calls on the other member states of the Council of Europe, in particular those of the European Union and EFTA, to promote trade and investment with CEFTA countries in all ways possible as part of the overall objective of fostering economic co-operation across Europe as a whole.

II.        Explanatory Memorandum by Mr Barsony

Contents

1. Introduction

2.        The origins and the evolution of the Visegrad formula for regional co-operation

3.        Co-operation vis-ŕ-vis the European Union

4.       The road to CEFTA

5.       The CEFTA agreement

6.       The First Five Years of CEFTA - an assessment

7.       Questions for the Future

8.       Concluding remarks

1. Introduction

1. The Parliamentary Assembly of the Council of Europe has always attached great importance to fostering economic co-operation across Europe and globally. In recent years, its attention has naturally come to be focussed also on the countries of central and eastern Europe.

2. In its Resolution 1093 (1996) on the activities of EFTA (Rapporteur: Mr Buzatu), the Assembly asked the Member States of EFTA to ensure better market access for exports from central and eastern Europe to the European Economic Area. In its Resolution 1101 (1996) on the WTO and the implementation of the Uruguay Round agreements (Rapporteurs: Mr Demiralp and Mrs Verspaget), the Assembly noted the increasing number of regional trade arrangements. Although these can be useful instruments under given circumstances, it is essential that they be fully compatible with, and helpful to, WTO principles and aims, in order to avoid a retreat into protectionism and an unmanageable multitude of bilateral agreements.

3. A motion for a resolution on the activities of the Central European Free Trade Agreement (CEFTA), presented to the Assembly in February 1997 by Mr. Davis and others, called on all Council of Europe member States to support the further strengthening of CEFTA and its international role. One reason for the Assembly's interest was that CEFTA, five years into its existence as a positive force in European economic development, has reached a stage which permits a first description of its achievements and perhaps even the first elements of an overall assessment. This interest was again manifest as the Committee on Economic Affairs and Development adopted the present report in May 1998. The Rapporteur thanks all his colleagues on the Committee for their valuable contributions.

4. One question which the present report will seek to answer is whether the CEFTA formula for regional co-operation is indeed the most viable. A study of the developments and possible problems relating to regional economic co-operation in central and eastern Europe is crucial for a number of reasons. For one thing, the nature and implications of the CEFTA agreement are still rather imprecise and sometimes subject to disagreement among the participating countries. Some observers even go so far as to portray CEFTA as an agreement which, although technically defined as an organisation for regional co-operation, is also in part aimed at an external party, namely the European Union.

5. Secondly, an analysis of the difficulties and prospects for regional co-operation among countries with partly shared, partly varying, experiences of communism and central planning - coupled with the avowed objective of EU membership - raises the question whether there is enough common ground to sustain over the longer term CEFTA’s aims and principles. In other words, if CEFTA is indeed more than a mere ‘waiting room’ for the EU, is it a waiting room worth the waiting and are the countries preparing to leave it for the Union better off, jointly and individually, for having spent time in it?

6. A third question is whether the six CEFTA members are as much partners as they may be rivals for EU membership; whether they lay as much emphasis on working together for their common good as on competing, as the case may be, for foreign capital and access to western markets. With entry into the EU unfortunately less imminent than seemed the case only a year ago – a fact much regretted by this central European Rapporteur – and with some west European markets beginning to show protectionist tendencies, a strong and functioning CEFTA is becoming more and more urgent.

2. The origins and the evolution of the Visegrad formula for regional co-operation

7. It is worth examining the context in which co-operation started in 1990 between three countries - Czechoslovakia, Poland and Hungary – forming the so-called Visegrad triangle, especially as it was to give rise somewhat later to the CEFTA agreement.

8. The three countries met for the first time in Bratislava in May 1990. The first motive for partnership was the search for a new economic framework for co-operation following the virtual collapse of the former trade links following the dismantling of the Council for Mutual Economic Assistance (CMEA).

9. The “Declaration on the Co-operation of the Republic of Hungary, the Czech and Slovak Federal Republics, and the Republic of Poland on the Road to European Integration”, signed at the Visegrad summit of February 1991 by the Presidents of the three countries, confirmed their intention to build on common ground and to forge a joint approach towards western institutions. As such, the Declaration defined, among other things, the goals of the restoration of each state’s independence, democracy and freedom as well as the full integration into the European political, economic, security and legislative order. In October the same year the Visegrad countries met in Krakow, Poland, where they approved projects relating to economic, cultural and scientific co-operation. Over the next few years, however, the initial enthusiasm for co-operation with equally reform-minded neighbours began to wane somewhat, giving way to more individual approaches.

3. Co-operation vis-ŕ-vis the European Union

10. The common goal of becoming members of the EU and the shaping of a possible joint approach to the West in general were important factors behind the Visegrad project. Western countries, meanwhile, exerted some pressure on the three countries (and others in the region) to have them build up their mutual links as a sign of political and economic readiness for further integration within international institutions.

11. While the application of a given country to join the EU will be dealt with on its individual merits, it is understood that it will be viewed in a more positive light if the country has engaged in co-operation with its neighbours beforehand. After all, regional integration has been a fundamental tool in the post-war European construction effort.

12. Ironically enough, the desire by individual central and east European countries to join the EU ahead of others may have had a disruptive effect on the relationship among them. In addition, the present uncertainty as to the timetable for joining even as the accession negotiations have now started may foster rivalry for advantages instead of pursuing co-operation within the CEFTA or other similar frameworks. After all, why start on projects that may become obsolete through superseding EU rules? A further complicating factor is that the countries continue to perceive themselves as being in competition with one another for the financial and security attention of the West.

13. As has been repeatedly emphasised by the leaders of the CEFTA countries, CEFTA is "only" a regional multilateral trade agreement, rather than a trade area, a customs union or an entity endowed with a common trade policy. Most importantly, it has never been intended to be an alternative to the European Union. The ultimate goal of all CEFTA signatory states has been to gain EU membership as early as possible.

14. CEFTA, whose creation was also encouraged by some EU leaders, can be seen as a 'warming up' experiment before accession to the Union. At the beginning of the 1990s, some politicians suggested - perhaps with the intention to slow down the rapprochement of the central European states to the EU – that these countries should first learn to co-operate among one another, then join EFTA and, only much later, the EU. The central European states wasted no time in expressing their firm commitment to ultimately joining the EU, for which they saw no alternative.

15. They were very much in favour of fostering relations with EFTA, a desire which found its expression in the various free trade agreements with that organisation. This, however, did not mean that they were interested in joining EFTA, as this step would not have brought the same advantages for them as those expected from EU membership. In EFTA, and as possible members of the European Economic Area (EEA), they would have had to accept a part of the 'acquis communautaire', without receiving any of the political, security or financial compensation that EU membership entails.

16. Moreover, conditions for transforming CEFTA into a true institution with integration as its aim are far from met. The countries face similar economic problems, despite their different levels of economic development. The structure of their exports is similar and they all need capital inflows to make radical economic progress. It follows that they cannot count on one another to generate the necessary financial resources.

17. The European Union welcomed the creation of the CEFTA. It approved its aims and all its provisions, including those which were at variance with EU rules. The EU stated, however, that it would not welcome it if in the future such incompatible measures were created in the CEFTA framework. Being at the threshold of EU membership, the central European countries are therefore not inclined to shape specific rules in areas not currently covered by the Agreement. Besides the many conflicts of interests, this attitude presents a further obstacle to discussing the free movement of capital, labour and services in CEFTA.

4. The road to CEFTA

18. The Ministers responsible for external economic relations of the Czech Republic, Poland, Slovakia and Hungary signed the Central European Free Trade Agreement (CEFTA) on 21 December 1992 in Krakow. On 1 March 1993 CEFTA came into effect on the basis of an interim agreement. The Agreement entered into force on 1 July 1994, following ratification by the several signatory states. Slovenia joined on 1 January 1996 and Romania on 1 July 1997. The main aspiration is to “intensify intra-regional movements of the factors of production”.

19. This ground-breaking agreement was concluded in a region where self-reliance and the natural formation of economic links with neighbours had long been suppressed. For the first time in half a century – if one includes the Second World War when relations were of course also disrupted - independent States were negotiating without outside pressure. Prior to 1991, mutual economic relations among the Visegrad group countries had represented a sub-system within the Council for Mutual Economic Assistance (CMEA), where the bilateral relations of individual countries with the Soviet Union were always more important than their relations with one another.

20. International specialisation and co-operation were subordinated to the interests of the USSR. The CMEA industrial policy therefore fostered “parallel development” in central Europe, with each country being given specific, bureaucratically decided, tasks within the ‘socialist camp’ which rarely reflected market needs. Its legacy reduced the opportunities of complementary trade and made the Visegrad countries keen competitors in certain areas such as steel production, where quality and the cost structure are fairly similar.

21. Trade in the region was based on the transferable ruble, i.e. real currency payments were not carried out. Goods were exchanged for goods in a barter system, and commodities were rarely traded according to their real market value. This artificial price system had to be dropped as soon as the state economies collapsed. From the beginning of 1991, accounts were stated in USD equivalents.

22. In the wake of this collapse and the political changes that took place, the orientation of the various central European economies changed drastically. Intra-regional trade became insignificant as commerce shifted towards the West. It has to be noted, however, that the shift had already started between 1985 and 1990, when the central European countries significantly increased the volume of their foreign trade with states outside the COMECON framework.

23. From 1990, the countries in question strove even more ardently to enhance economic ties with the European Community (as it was still called at the time), and started to increase their imports of modern machinery as well as consumer goods from EU countries. Although exports from the region to the EU rose, they did not match the level of imports from it. As a result, huge balance-of-trade deficits have accumulated with the European Union countries, a development which is all the more noteworthy as most central European countries had previously enjoyed trade surpluses vis-ŕ-vis the EC. (However, this phenomenon is sometimes observed as countries renew their industrial equipment by importing it from abroad; once the machinery is in place it can give rise to higher exports.)

24. With the disruption of previous economic relations, the mutual transfer of goods declined considerably and rapidly, in the central European region. Invoicing in dollars could only partially make up for the reduction in the volume of trade. What made the situation even more pressing was that all these sudden developments intervened at about the same time - the change of pricing system, the vanishing of the old mechanisms of state commerce, the dismantling of the ‘COMECON', introduction of trade barriers in trading with one another and, finally, the liberalisation of imports coming from the West.

25. Consequently, after realising the importance of, and the need for, greater trading among themselves, in 1991, these countries decided to halt and reverse the decline in intra-regional commerce and revive economic ties by concluding a free trade agreement. The idea of starting free-trade negotiations had been raised already in February 1991 at the previously mentioned Visegrad meeting of the Heads of State of the then-Czechoslovakia, Poland and Hungary. Eight months later, at the Krakow meeting, the parties decided to conclude a free trade agreement.

26. Another reason for signing such an agreement was that all the countries concerned had meanwhile concluded Association Agreements with the EU: Poland, Czechoslovakia and Hungary in 1991; later the Czech Republic and Slovakia separately as they had become separate countries; Romania in 1993 and finally Slovenia in 1995. The economic sections of these Agreements were implemented through so-called 'interim agreements'.

27. Through these arrangements, a system of mutual preferences was guaranteed for the country involved and the EC in the field of the transport of goods (in the case of industrial products, the goal was the gradual introduction of free trade). Each central European country was, in this way, confronted with a different situation in the markets of the other states of the region vis-ŕ-vis the EU.

28. A further reason for concluding a free trade agreement was to eliminate this unfavourable situation in the markets of the others. An overarching goal, politically and economically, for all central European countries is that of obtaining EU membership. Each country has tried to reach this goal independently of the others. Therefore, partners who had been brought together in a special economic relationship during the communist era now were becoming virtual competitors or even adversaries - with whatever ties were being formed among them and their readiness for co-operation with one another being subservient to their ambitions for privileged links with the EU.

29. However, this being said, it must be recognised that a third impulse toward the establishment of CEFTA came from the EU itself, as it wanted to see the countries of the region co-operate with one another in the first place, test their capacity to work together on the international scene, and to allow them to realise their economic potential. At that time, the idea of many European leaders was that these countries could not be let into the Union before they had learned how to trade with one another and before they had restructured their internal markets into a fully-fledged market economy. The EU, therefore, suggested that they collaborate in the region, parallel to pursuing EU membership.

30. With all these considerations in mind, a free trade agreement in central Europe had to meet the following objectives:

- to put a halt to the decline in intra-regional trade, to reinvigorate economic ties through the reciprocal liberalisation of commerce, and to reap joint benefit from a potential market of over 100 million people;

- to grant the other central European countries the same preferences as those given to the Member States of the EU as a result of the Association Agreements;

- to prove the capacity for co-operation in a region which had just experienced a transition to democracy and a market economy.

31. In conclusion, the purpose of CEFTA was to remedy a dramatic situation, in which numerous domestic products and imports from other Visegrad countries were being squeezed out by a contraction of demand as economies shrank and as competition from EU intensified. In contrast to the Europe Agreements, which are asymmetrical (in the sense that one side may be granted more protection than the other), CEFTA is symmetrical. And yet for many of the same types of products free trade has not yet been reached among the CEFTA countries. It remains to be seen whether the gradual removal of duties and tariffs and even quotas will proceed in the same way as under the Europe agreements.

32. One member of the Committee on Economic Affairs and Development in this context pointed to the need to ensure better co-ordination between the EU and all the CEFTA countries in order to facilitate EU enlargement and to avoid the risk of eventual asymmetry among EFTA countries. And another, from an EFTA country, emphasised the very constructive agreements concluded between the EFTA and the CEFTA areas, suggesting they might some day join forces.

5. The CEFTA agreement

a. The Agreement

33. CEFTA deals exclusively with trade in commodities; it does not touch other domains of economic co-operation. However, the signatory states do not exclude the future extension of the Agreement to other areas. Since the major objective is to liberalise intra-regional trade, the treaty envisages the complete dismantling of tariffs, obstacles equivalent to them as well as non-tariff barriers through the gradual introduction of free trade for industrial products by the end of a transition period ending on 1 January 2001. As for agricultural goods, it was decided to grant mutual preferences only for limited quantities of certain products. Full liberalisation in this field is not foreseen in the Treaty.

34. The pace in dismantling tariff barriers in the contracting countries follows those in the agreements concluded with the EU. The aim in CEFTA is to grant at least the preferences agreed with the EU under the several Association Agreements. The mutual preferences, based on the same principles for each relationship but differing as far as the specific items are concerned, are established in bilateral protocols to the Agreement, whether it be industrial products, agricultural concessions or rules of origin.

35. Already during the first year of the implementation of CEFTA, there was the clear intention to accelerate the liberalisation process, leading to the adoption of additional protocols. The first was signed in April 1994 in Budapest, the second and third in August and December 1995 in Warsaw, and the fifth in September 1996 in Jasna, Slovakia. There is an additional fourth protocol signed in Jasna in September 1996, dealing with rules of origin. Finally, modifications of the protocols on the rules of origin and the commercial preferences can be effected by substituting them, making it possible for CEFTA to remain up to date.

36. When establishing CEFTA, the founding countries did not count on the accession of other states, and for this reason no clause on the subject was included in the treaty. In the meantime, however, the question of enlargement had arisen. In order to meet this challenge, the Agreement had to be modified. The possibility of admitting new countries was enshrined in an Amending Agreement of September 1995 signed in Brno, which was soon followed by the conclusion of a treaty with Slovenia in November 1995. Slovenia entered CEFTA on 1 January 1996. The signing of the admission agreement with Romania in Bucharest in April 1997 made it possible for that country to join CEFTA from 1 July 1997.

b. How CEFTA functions

37. CEFTA is a multilateral commercial agreement and not an international trade institution. Moreover, it does not strive for political or economic integration as such among its Member States. It has no staff of its own and no headquarters. Last year the idea of setting up a permanent CEFTA secretariat was raised, but the idea was eventually abandoned.

38. The implementation of the Agreement is the responsibility of a Joint Committee. The Joint Committee is composed of representatives of the Member States. Its permanent members are the Ministers responsible for external economic relations. The Committee meets at least once a year but can also be convened at the request of any of the parties.

39. In the Joint Committee the parties give continuous attention to the fulfilment of the objectives of the Agreement. They evaluate the processes, exchange information, sort out disagreements and examine the possibilities of further dismantling of trade barriers. The Joint Committee is entitled to take decisions in cases specified in the Agreement and can draft recommendations on the following subjects:

- determination of the criteria for application of provisions related to state subventions;

- waivers from the Agreement's provisions as regards 'infant industries' and the restructuring of economic sectors;

- the prevention of the introduction of protectionist measures;

- the regulation of its own activities.

40. As can be seen, all these subjects relate to trade, such as subsidies, competition and the possibility of introducing provisional market safeguards.

41. The Joint Committee can set up permanent or ad-hoc Sub-committees and working groups. The co-ordination of the work done in the framework of the Joint Committee, in the Sub-committees and in the working groups is the responsibility of the President-in-office of the Joint Committee, a position filled by the Member States on a one-year rotation basis, according to the English alphabet. In 1998 the Czech Republic holds the Presidency.

42. The CEFTA - similar to other free trade agreements - provides for the possibility of introducing measures aiming at the protection of the internal economy, production and commercial interests. It specifies in which cases, under which conditions and following which procedure such measures can be taken or revoked. Since CEFTA's establishment, all Member States have indeed taken advantage of this possibility (e.g. an import surcharge in Hungary, an import deposit in the Czech Republic and Slovakia and recently increased duties on steel imports in Poland).

c. CEFTA preferential arrangements

43. On the basis of a further protocol of 1 January 1997, 90% of the trade in industrial products is now exempt from trade barriers. As for the remaining 10% (the so-called exemption lists), the gradual dismantling of tariffs has already started (this year the preferences amount to 40%). The complete elimination of tariffs is expected to take place by the beginning of the year 2000, a year earlier than originally foreseen. The only exceptions are between Hungary and Slovenia and, in the case of certain products, between Poland and the other CEFTA States. In these two instances, tariffs will remain in place until 2002.

44. As regards trade in agricultural products, a significant step was taken in the signing of a third additional protocol, whereby as from January 1996, 80% of the agricultural trade among the Czech Republic, Poland, Slovakia and Hungary enjoys some kind of preferential treatment.

- for certain products, tariffs were eliminated by all contracting parties;

- in the case of other products, all countries apply tariffs which are lower than the most favoured nation tariffs and are not linked to quotas;

- in the case of a third group of products, bilateral preferences are established, sometimes linked to quotas.

45. There are, however, products for which no preferences are given at all, and total liberalisation of the agricultural trade is not foreseen. Slovenia is not yet applying the preferential system prevailing for agriculture among the other CEFTA member States, although negotiations are continuing.

46. On the basis of the fourth additional protocol signed in September 1996, the rules of origin applied in CEFTA have changed as from January 1997. The new rules are in line with the those of origin applied by the EU, making pan-European cumulation possible.

6. The First Five Years of CEFTA: an Assessment

47. The gradually growing number of preferences have already started to have a positive impact on intra-regional trade among the CEFTA Member States. Trade among the signatory countries has become more dynamic. In most cases it has grown faster than the total foreign trade of the Member States. Indeed, some countries have increased their CEFTA exports and imports more rapidly than those with the EU. In 1996, the value of intra-CEFTA transport of goods was double that of the year before CEFTA's creation. The CEFTA countries have also managed to regain a bigger share of one another's foreign trade. Between some countries bilateral trade has risen by more than 50% since 1994. (The Appendix to this report shows the development of trade with the EU, intra-EFTA trade and foreign direct investment into the CEFTA area.)

48. CEFTA owns its relative success in part to the fact that most trade barriers, especially tariffs and quotas have come down considerably or been eliminated altogether. What has also helped is of course that almost all CEFTA Member States have experienced growth rates significantly higher than the European average. The driving forces have been more stable exchange rates, productivity gains, rising imports as well as macroeconomic stabilisation.

49. At the same time it should be remembered that the impressive growth rates of intra-CEFTA exports and imports are relative - with the 1996 trade volume level not larger than that of 1990. The CEFTA countries still account for small shares in one another's foreign trade, but these shares are growing.

50. Although all CEFTA Member States have increased their trade with their partners in the Agreement, not all have drawn the same benefits from it. The Czech Republic and Slovakia have accumulated trade surpluses, while Poland, Hungary and Slovenia have shown deficits.

51. Between 1993 and 1995, the Czech Republic managed to increase its overall trade with the EU more than with the other CEFTA countries. However, its exports to CEFTA states grew more than those to the EU. It is to be noted that highly processed goods represent the biggest share in the composition of Czech exports to the region. CEFTA has thus provided an important export market for the Czech Republic.

52. Poland doubled the volume of its trade with its CEFTA partners between 1993 and 1995. Nonetheless, as imports have grown more than exports, a significant trade deficit has been accumulated. The composition of Polish exports to CEFTA countries has been less favourable than that of overall Polish trade: raw materials and only partially processed goods represent the biggest share.

53. Similarly, Slovakia's trade in the CEFTA framework is significant, not least due to the Czech-Slovak customs union. The composition of its exports and imports in this relationship is similar: steel, chemical products and machinery. Slovakia enjoys a surplus in its trade balance with all its CEFTA partners, with the exception of the Czech Republic.

54. Hungary succeeded in increasing its trade with the CEFTA countries more rapidly than with the EU. Imports are dominated by raw materials and energy, while exports of agricultural products, machinery and other processed goods are not as high. Hence, Hungary has a trade deficit within CEFTA. Some of these imports are, however, essential for exports to the West.

55. Slovenia also has a trade deficit with its CEFTA partners. Its exports are mostly highly processed products, while it imports mainly raw materials and agricultural products.

56. The existence of the Czech-Slovak customs union did not have a negative effect on the implementation of CEFTA. As the two countries apply common tariffs, they negotiate together vis-ŕ-vis third parties. Problems have arisen, however, from the different economic structures of the two countries. The Czech Republic would be ready to pursue a more open policy as regards its agricultural imports, but the less open character of the Slovakian market puts a limit to this ambition. Despite the customs union, Czech-CEFTA trade is developing more quickly than the Slovak-CEFTA one.

57. Compared with trade in the former COMECON framework, CEFTA trade is characterised by a reduction in the share of machinery, equipment and consumer goods and by an increase in the share of raw materials, energy, chemical and food products. One of the features of current trade in the region is the reduced exchange of processed goods. The proportion of highly processed products in trade in CEFTA is smaller than in these countries' trade with the European Union. The trade structure has changed for the following reasons:

- the volume of trade dropped to varying degrees in the different commodity groups after 1990. The trade in machinery, equipment and consumer goods, which had been artificially protected from Western competition before the transition, suffered the biggest loss.

- the new price system has changed the relative significance of different types of production.

- the decline in the production of the central European economies has adversely affected both investments and the demand for imports from the region, especially for machinery, which is often disfavoured by comparison with western products.

- there have not been any alternative sources or substitutes for raw materials and energy, not even following the liberalisation of western imports. Trade in these items, therefore, did not face the same drop as that in others, e.g. machinery.

58. It is also worth mentioning that the share of trade managed through western intermediaries has been high, sometimes allowing CEFTA managers to benefit from highly developed market techniques. The frequently lacking confidence between CEFTA trading partners is compensated for by the capacity of western intermediaries to grant credits, their knowledge of markets and their flexibility. This means that CEFTA companies, when selling or buying in the region, often trade with western enterprises rather than directly with one another.

59. The growing exchange of goods and division of labour among affiliated firms of multinational companies (Nestle, Unilever, Procter and Gamble, etc.) has had a positive effect on trade in CEFTA. Many companies owned and managed by CEFTA nationals have, unfortunately, not shown the same degree of specialisation. Indeed, many links from the COMECON times, have not survived.

60. CEFTA is playing an increasingly important role for multinationals in deciding where to locate operations, in particular when it comes to establishing large production facilities capable of supplying the entire region. Export markets and macroeconomic stability encourage investment and increase access to external technology and management methods.

61. Therefore, in theory, the creation of a free trade area results in a better division of labour, diversified supply, increased competition, and divestiture of state-owned enterprises. In practice, however, the conditions for attaining trade creation effects under the CEFTA agreement are rather uneven. Productive structures in the respective countries do not always complement one another due to the “parallel development” paradigm imposed under the CMEA.

7. Questions for the Future

a. Potential for enhanced co-operation

62. Each year since 1994, Prime Ministers of the Member States have met to establish guidelines for the future development of CEFTA. In September 1996 in Jasna, Slovakia, they repeated their commitment to further liberalisation and identified areas where deepened co-operation is desirable. They are:

- further trade liberalisation, also in services and capital flows;

- mutual recognition of quality certificates and measurements;

- increasing security of commerce in order to prevent frontier violation and customs fraud;

- modernising CEFTA's organisation and working methods.

63. In September 1997 at a meeting in Portoroz, Slovenia, the Prime Ministers expressed their appreciation of the tangible contribution by CEFTA to the development of trade among their countries. They also reaffirmed and made more concrete their plans drawn up a year earlier for accelerating bilateral negotiations concerning the certification of industrial and agricultural products, including mutual recognition of test results and certificates. They emphasised their commitment to continuing co-operation in the trade of services and the free movement of capital. Finally, CEFTA would be given greater means for the organisation of conferences on investment opportunities in the region and for other promotional activities.

64. Beside these long-term tasks, it is of key importance to finalise negotiations on the extension to Slovenia of the concessional agreement on agricultural trade which has been applied as from 1 January 1996 among the original CEFTA countries. It is worth highlighting this, since despite the original plan to conclude these talks by the end of 1996, no results were achieved, even after hard efforts. Therefore Slovenia still enjoys exemptions that normally would have come to an end by 1 July 1996. At their meeting in Portoroz, CEFTA leaders noted that the talks were approaching a successful conclusion, possibly meaning that the exemptions would cease to exist by 1 January 2000.

65. Another hot issue on the agenda has been the prospects for enlargement of CEFTA. The extension of the agreement to new countries would, of course, also increase the volume of trade and bring with it other benefits. In a statement of September 1996, the CEFTA leaders repeated their earlier position, according to which (European) countries wishing to join CEFTA have to be members of WTO and have to hold an association agreement with the European Union. Bulgaria declared its intention to become a member in May 1996 and, as it is reaching compliance with these accession criteria, it is hoped that negotiations can be started and concluded soon.

66. At their meeting in Portoroz, the Prime Ministers approved the launching of talks. It is interesting to note that in addition to Bulgaria, the Heads of Government of Croatia, Lithuania, Macedonia, Ukraine and the Foreign Minister of Latvia also participated in that meeting as guests. Some of these countries expressed their interest in CEFTA. However, as none of them meets both admission conditions, further enlargements have not yet been placed on the agenda. Developments in CEFTA do not give any indication that this trade agreement is likely to become a formal institution aiming at the closer integration of the economies of its member States.

b. Challenges

67. One of the shortcomings of this method of intra-regional co-operation has been that foreign trade has hardly ever been accompanied by co-operation among enterprises, for instance, through the joining of capital resources. Two exceptions are the assembly of Hungarian Ikarus buses and Czech Skoda cars in Poland.

68. One means of fostering trade in CEFTA framework would be to guarantee the free flow of factors of production. If barriers could be abolished, then direct investment would most certainly increase. The lack of appropriate financial techniques and institutions, as well as the underdevelopment of the banking sector, form serious obstacles to intra-regional trade. The fact that a great deal of trade has had to be channelled through western intermediaries, would indicate that it is extremely difficult for commercial partners to find the proper financial and credit schemes as well as payment conditions.

69. A further obstacle has been the lack of confidence among the CEFTA partners. The sad fact is that they seem to trust a western partner more than they do their business counterparts in another CEFTA country, and that in order to avoid being cheated, they do not seem to mind spending large amounts of money to pay for this intermediary activity.

70. One of the most important obstacles to increased trade within CEFTA has been the lack of capital exports. Capital movements among the countries of the region have been minimal. Enterprises in one CEFTA State have in most cases been left out of the privatisation in other member States. Company links have dropped considerably. In the COMECON, the so-called specialisation among the countries - whereby the production in the several states was centrally decreed - was not based on the interests of the enterprises involved. After 1991 this artificial co-operation among companies was not replaced by any true co-operation among companies, based on such factors as proximity, complementarity of markets or a similar level of development. Increasing trade within multinational companies has, however, been an important achievement.

71. In order to foster trade in CEFTA, however, methods should be found to strengthen relations among central European companies also in the field of production. Multinational enterprises will always find the means to do this, while fledgling companies often need additional support for undertaking foreign activities. But here we are talking about more than financing; in the final analysis it is the mentality of the central European entrepreneur that needs to change. Nowadays, trade of goods in CEFTA amounts to several billion dollars, whilst capital movements hardly exceed a few tens of millions of dollars.

72. Realistically, a solution for all the problems described above will not be found in the near future. A fundamental problem is the lack of capital. This holds true for all central European economies, and it is the major obstacle not only to increased co-operation within the CEFTA framework, but also to economic development in general. It is therefore of the utmost importance to attract foreign direct investment to the region and to strengthen domestic small and medium-sized enterprises. Each country should find its own means to promote potential or existing entrepreneurs.

8. Concluding remarks

73. The first five years of CEFTA have shown that there is significant potential in intra-regional trade in Central Europe and that the benefits from it can be drawn by each signatory state. The first steps have already been taken to fulfil the aims of CEFTA. These are to establish stronger economic co-operation and to stimulate growth through economies of scale and the elimination of trade barriers.

74. Trade in CEFTA has developed dynamically, although it still shows many particular features. For example, energy, raw materials and semi-processed products represent an exceptionally high share. Trade has in many instances been made possible only through the intermediary of foreign operators. The overall value of commerce in CEFTA has been dominated by foreign trade transactions, with integration among companies being the exception rather than the rule. The central European states are mostly excluded from the privatisation occurring on the territory of their neighbours. Finally, capital exports into the region have been insignificant.

75. One might reach the tentative conclusion that CEFTA is not only a trade instrument but also a political creation, at least in part aimed at an external audience, in particular the EU. This does not prevent it from having the potential of doing even more good in the future for its member states than it has so far, namely if it can serve as a vehicle for establishing fully free trade among the participating countries and in general foster closer co-operation. An increase in regional trade is now a priority for all the CEFTA countries, as most of them have a trade deficit with the EU and as a certain dissatisfaction with the terms of the “Europe Agreements” is emerging.

76. Despite the encouraging growth in the volume of trade, the share of each member State in the foreign trade of the others is still low. With regard to the structure of trade in CEFTA and the aspirations of all signatories to join the European Union, no radical change in this respect can be expected. However, the geographical proximity, the similar, although far from identical, level of economic development, the traditional commercial ties, the knowledge of one another’s markets, the balanced mutual relations as well as the indubitable future growth in the region all offer promises of mutual benefit resulting from increased economic contacts. By dismantling trade barriers as well as harmonising rules of origin, the central European countries are not only creating the conditions for enhanced trade, but are taking a significant step on the road to EU membership.

Reporting committee: Committee on Economic Affairs and Development

Budgetary implications for the Assembly: none

Reference to committee: Doc. 7760 and Reference No. 2169 of 19 March 1997.

Draft resolution unanimously adopted by the committee on 7 May 1998.

Members of the committee: Mrs Degn (Chairperson),Mr Elo, Mr Bloetzer, Mr Valleix

(Vice-Chairmen), Mr Aliko, Mr Andreoli, Mr Barsony, Mr Behrendt, Mr Billing, Mrs Blattmann, Mr Bonet Casas, Mr Brunhart, Mrs Calner, Mr Cunliffe, Mr Cusimano, Mr Dumitrescu, Mrs Durrieu, Mr Eyskens, Mr Figel, Mr Frey, Mrs Freyberg, Mrs Frimannsdottir, Mr Galvao Lucas, Mr Gonzalez Laxe, Lord Grenfell, Mr Gusenbauer, Mr Gylys, Mr Kacin, Mr Kiratlioglu, Mr Kirilov, Mr Kittis, Mr Koucky, Mr Kuznetsov (Alternate: Mr Averchev), Mr Lambergs, Mr Leers, Mr Liapis, Mr Mautner Markhof, Mr Merkushov, Mr Mitterrand, Mr Muravschi, Mr Nothomb, Mr Obuljen, Mr Pereira Coelho, Mr Poppe, Mr Puche, Mr Regenwetter, Mr Rigo, Mr Rutskoy, Mr Sceberras Trigona, Mr Shokhin, Mr Siebert, Mrs Squarcialupi, Mrs Stepova, Mrs Stoyanova, Mr Sungur, Mr Szalay, Mr Telgmaa, Mr Townend, Mr Tripunovksi, Mr Upton (Alternate: Mr Connor), Mr Vasile, Mr Verivakis, Mrs Verspaget, Mr Wielowieyski, Mr Yavorivsky

N.B. The names of those members present at the meeting are printed in italics.

Secretaries of the committee: MM Torbiörn, Bertozzi and Ms Ramanauskaite.

APPENDIX

CEFTA-EU TRADE

EU IMPORTS, bn ECU, from

 

1993

1994

1995

1996

1997

Poland

8.5

10.1

12.3

12.3

14.2

Czech Republic

5.6

7.4

9.0

9.8

11.7

Hungary

4.9

6.1

7.6

8.8

11.5

Slovenia

3.2

3.8

4.2

4.3

4.7

Romania

1.8

2.8

3.4

3.6

4.4

Slovakia

1.4

2.2

3.1

3.4

4.0

Total

25.4

32.4

39.6

42.2

50.5

EU EXPORTS, bn ECU, to

 

1993

1994

1995

1996

1997

Poland

11.1

12.3

15.3

19.9

25.0

Czech Republic

7.1

9.2

11.7

14.0

15.8

Hungary

6.4

8.1

8.7

10.0

13.5

Slovenia

3.6

4.3

5.2

5.4

6.3

Romania

2.5

2.9

3.8

4.4

5.0

Slovakia

1.6

2.2

3.2

4.0

4.8

Total

32.3

39.0

47.9

57.7

70.4

EU-CEFTA TRADE BALANCE, million ECU, with

 

1993

1994

1995

1996

1997

Poland

2657

2189

3045

7605

10831

Czech Republic

1452

1846

2657

4221

4083

Hungary

1570

2006

1119

1174

1991

Slovenia

441

550

933

1107

1630

Romania

717

100

404

848

599

Slovakia

166

-45

105

578

810

Total

7003

6646

8263

15533

19944

N.B.: A positive figure indicates a trade surplus for the EU; a negative figure indicates a trade deficit.

Source: EUROSTAT

FOREIGN DIRECT INVESTMENT INTO CEFTA COUNTRIES,
million $

 

1993

1994

1995

1996

Czech Republic

Hungary

Poland

Romania

Slovenia

Slovakia

552

2329

580

95

112

134

749

1097

542

347

140

170

2526

4410

1134

417

140

70

1165

1986

2205

410

145

66

Total

3802

3042

8697

5977

Source: IMF, International financial statistics

INTRA-CEFTA TRADE

 

EXPORTS, million $

IMPORTS, million $

 

1994

1995

1996

1997

1994

1995

1996

1997

 

To Hungary

From Hungary

Czech Republic

Poland

Romania

Slovenia

Slovakia

378

184

161

96

365

360

267

174

115

n/a

390

310

160

105

n/a

393

165*

110*

171

221

197

193

111

206

352

357

267

n/a

280

426

242

239

n/a

325

300*

268*

 

To Poland

From Poland

Czech Republic

Romania

Slovenia

Slovakia

502

17

96

189

892

25

105

381

1150

71

142

433

139*

456

32

22

159

698

58

38

279

847

74

48

280

53*

 

To Slovenia

From Slovenia

Czech Republic

Romania

Slovakia

178

n/a

58

247

33

82

237

25

92

216*

96*

83

3

30

132

21

52

147

22

57

134*

51*

 

To Slovakia

From Slovakia

Czech Republic

2330

~2800

3120

 

2091

~2850

2651

 

*January-November 1997

Source: EIU Country Reports

(NB: trade figures between Slovakia and Romania are not readily available)