The establishment of free trade area between Bulgaria and the European Union

Part I

Taking into consideration the basic principles providing for the foundation of the European Union it is essential to explore the impact of trade liberalisation in the context of the political will to speed up the process of integration of Bulgaria into the European structures. With this regard liberalisation of trade between Bulgaria and the European Union is of equal importance to the political association with the EU and substantially contributes to the achievement of the goal of membership.

From a trade policy point of view the conclusion of the Association Agreement provided for the possibility of deleting Bulgaria from the list of state trading countries in the domain of commercial defence and thus recognised the process of transforming the economy on market based principles.

1. Current stage of trade liberalisation as provided for under bilateral agreements and arrangements reached so far.

1.1. The Europe Agreement between Bulgaria and the European Communities and their Member States was signed on 8 March 1993. Pending its lengthy ratification process an Interim Agreement providing for the entry into force of the trade part of the Europe Agreement was signed on the same date.

It has been anticipated that the Interim Agreement will enter into force soon after its signature (July 1993). However the date of entry was delayed for seven months due to an internal Community dispute on the application of commercial defence instruments and the Agreement with Bulgaria was taken hostage of this debate. Having reached a compromise on the disputed issue the Council of Ministers of the European Union took a decision to approve the entry into force of the Interim Agreement with Bulgaria and declared its concern at the losses unduly suffered by Bulgaria.

The process of gradual establishment of a free trade area between Bulgaria and the Community started on 31 December 1993.

The Interim Agreement ceased to apply in bilateral trade relations with the entry into force of the Europe Agreement on 1 February 1995. However for the purposes of the free movement of goods provisions the start of the trade liberalisation process is the date of entry into force of the Interim Agreement (hereinafter Europe/Interim Agreement is referred to as the "Agreement").

In accordance with the provisions of the Agreement the Community and Bulgaria shall gradually establish a free trade area in a transitional period lasting a maximum of 10 years starting from the entry into force of the Agreement and in conformity with the provisions of the General Agreement on Tariffs and Trade (GATT).

The Agreement provides for an asymmetrical tariff dismantling in favour of Bulgaria. Thus duties and measures of equivalent effect on industrial products originating in Bulgaria and exported to the Community markets will be eliminated 6 years after the entry into force of the Agreement at the latest. Quantitative restrictions and measures of equivalent effect on exports originating in Bulgaria will be eliminated upon entry into force of the Agreement with the exception of textile products for which specific arrangements are applicable.

As far as dates are concerned (starting from 31 December 1993) market access for Bulgarian industrial exports will be completely liberalised by the end of 1998.

On its part the Bulgarian side shall progressively dismantle tariffs on products imported from the Community during a period lasting nine years, i.e. by the end of the year 2001 (on 1 January 2002).

As far as trade in agricultural products is concerned the Agreement refers to the particular sensitivity of Community agricultural markets and provides only for certain improvement of market access within quantitative limitations. The agricultural concessions granted to Bulgaria are based on consolidation of the GSP treatment granted in 1991 to an insignificant part of Bulgarian agricultural exports and new concessions within quantitative limitation based on trade performance in previous years.

The Bulgarian side also granted concessions to Community imports providing for duty reductions within quantitative limitations.

For processed agricultural products the Agreement provides for tariff concessions based on phasing out of the non-agricultural component of the duties and for levy reductions applied on the agricultural component of the duty on the Community side. The Bulgarian side shall progressively reduce its import duties on processed agricultural products. These reductions shall be initiated in 1996 and be completed by 1 January 2000.

1.2. The additional Protocols

Recognising the crucial importance of trade in the transition to market economy the Copenhagen European Summit decided to accelerate unilaterally trade liberalisation with the Europe Agreement signatories. The decision resulted in the conclusion of an Additional Protocol to the Europe/Interim Agreement signed December 1993 and entered into force on 1 February 1994. The Additional Protocol provides for speeding up by one year trade liberalisation for industrial products including the so called sensitive sectors (textiles and ECSC products) and by six months the improvement of market access for agricultural products.

As a result of the efforts of the Bulgarian side based on the assessment of the consequences of the delayed entry into force of trade liberalisation and the discussion which took place in the Joint Committee meeting in Sofia 24-25 March 1994, the Community took a political decision to compensate Bulgaria with a view to alleviate the consequences of the losses suffered. Further to this decision an Agreement in the form of exchange of letters was signed on 30 June 1994 with effect as of 1 July 1994. The Agreement provided for carry over of non-utilised quantities under preferential treatment to be used in 1994 and the following years.

Following the decision of the Essen European Summit to align the timetables for trade liberalisation for Bulgaria on the timetables of the Europe Agreements of the Visegrad countries a Second Additional Protocol to the Europe/Interim Agreement was signed on 26 January 1995. The Agreement entered into force retroactively as of 1 January 1995.

As a result of the additional trade arrangements Bulgaria received equal to the Visegrad countries treatment on market access. These arrangements provided also for equal starting opportunities for all Associates in the pre-accession period.

2. Timetable for establishing a free trade area in industrial products between Bulgaria and the European Union:

The entry into force of the Interim agreement allowed for 1993 to be considered as the first year of the timetable for progressive trade liberalisation. The first year lasted only one day (31 December) and on 1 January the second step towards progressive establishing a free trade area took place.

On the export side and in accordance with the provisions of the additional protocols amending the initial timetables, market access for Bulgarian industrial exports is virtually liberalised as of 1 January 1995 with the exception of the so called sensitive sectors. The Community will offer free trade for ECSC steel products exported from Bulgaria on 1 January 1996 and for textiles (with reference to elimination of quantitative restrictions) on 1 January 1998 (however tariffs on textiles will be eliminated on 1 January 1997).

On the import side no acceleration as compared to the initial timetable is envisaged so far. According to the level of their sensitivity and the necessity to provide some protection while national industries undergo restructuring imports of industrial products from the EU are subjected to progressive tariff dismantling under three schemes:

- Scheme (1) provides for immediate liberalisation with the entry into force of the Agreement (on 31 December 1993);

- Scheme (2) is an intermediate scheme starting one year after the entry into force of the Agreement (on 1 January 1994) with a view to arrive at complete abolition of tariffs for the products concerned five years after the entry into force (on 1 January 1998)

- Scheme (3) provides for a later start of progressive liberalisation - three years after the entry into force of the Agreement i.e. on 1 January 1996. With the progressive dismantling of duties for the products falling under this scheme the free trade area on imports of industrial products from the EU will be established. According to the timetable envisaged it will be on 1 January 2002.

As far as export duties and charges with equivalent effect are concerned the Agreement provides for a transitional period of five years after entry into force and their abolition on 31 December 1997 at the latest.

Quantitative restrictions on exports from the EU to Bulgaria are eliminated on the date of entry into force of the Agreement. The Bulgarian side is expected to progressively eliminate its export restrictions five years after the date of entry into force at the latest.

At present the Bulgarian side maintains quantitative restrictions on exports of scrap of ferrous and non-ferrous metals due to critical shortages on the domestic market.

Both parties to the Agreement undertake to refrain from introducing between themselves any new customs duties on imports or exports or any charges having equivalent effect and from increasing those already applied in the trade between the Community and Bulgaria. For the purposes of the implementation of the successive duty reductions the duties actually applied are those applied on an erga omnes basis on the date preceding the date of entry into force of the Agreement (i.e. the rates applied on 30 December 1993). The same obligation has been undertaken in relation to quantitative restrictions and measures with equivalent effect. In case of market disturbances resulting from trade liberalisation the commercial defence provisions of the Agreement could be invoked (see below).

The respective provisions of the Europe Agreement follow the text of the Treaty establishing the EEC for the purposes of the establishment of the Customs Union between Member States.

With the establishment of the free trade area for industrial products between Bulgaria and the European Union will be accomplished the requirement for prohibition of customs duties on imports and exports and of all charges having equivalent effect and of quantitative restrictions and measures of equivalent effect in trade between the two parties.

This will take the integration process of Bulgaria closer to achieving the objective of membership (Articles 12-17 referring to elimination of customs duties between Member States and Articles 30-36 referring to elimination of quantitative restrictions between Member States of the Treaty establishing the EEC). Outside the provisions of the Agreement on free movement of goods remains the section related to setting up of the common customs tariff. However this element is to be treated upon accession (see below).

3. Timetable for agricultural concessions

The agricultural trade is not included in the free trade area. The Community grants duty and/or levy reductions of 20% of the applicable rates in the first year after entry into force of the Agreement (1993), of 40% in the second year (1994) and 60% in the third and following years (1995 and onwards). These reductions concern only products for which trade performance existed in the previous years. The concessions granted are within quantitative limitations increasing progressively at an annual rate of 10%. The Agreement provides for improvement in market access within a period of five years and does not envisage any additional steps to integrate the sector into the free trade area. Taking into account the additional amendments to the Agreement and the advancing by one year the timetables for Bulgaria with a view to align them on the timetables for the Visegrad countries the quantities under preferential treatment as of 1 July 1995 are those agreed for year five (instead of year three as initially stipulated). The amendments to the Agreement on raw agricultural products apply also to processed agricultural products (advancing of tariff treatment and application of quantities under preferential treatment).

The Bulgarian side has granted concessions within quantitative limitations under two schemes for duty reductions with regard to the sensitivity of the products concerned. Thus for a list of products which are traditionally imported from the EU the duties are reduced by 10% on 31 December 1993, by 20% on 1 January 1994 and by 30% on 1 January 1995. This tariff treatment (30% reduction of the applied rate) will apply also in the successive years. The second scheme relates to a list of products which are considered sensitive and thereforee the duty reductions are of 5% on 31 December 1993, 10% on 1 January 1994 and of 15% on 1 January 1995 and onwards. There is no advancing in preferences as far as quantities are concerned. Therefore the quantitative limitations under preferential treatment applied in 1995 are those envisaged for the third year following the entry into force of the Agreement.

For processed agricultural products the Bulgarian side has only indicated the list of products for which tariff concessions shall be granted to the Community and the period for progressive reductions (1996-2000). No provisions are made on agricultural and non-agricultural components incorporated into the processed agricultural products and actually the Bulgarian customs tariff does not differentiate between these two elements yet.

4. Recent trade developments

During the period 1990-1994 Bulgarian external trade contracted significantly as compared to previous periods.

Trade developments have been directly influenced by internal and external factors.

The shrinkage of trade volumes followed the contraction of the economy (GDP declined by 9.1 per cent in real terms in 1990, by 11.7 per cent in 1991, by 5.7 per cent in 1992, by 4.2 per cent in 1993).

On the external side, the decline in Bulgarian foreign trade during the period 1990-1993 was mainly due to the collapse of trade with its partners from Central and Eastern Europe and to the embargo towards Iraq, Serbia and Montenegro in accordance with UN Security Council Resolutions.

The disruption of trade flows with former CMEA countries (accounting for nearly 80% of total external trade) resulted in total drop in exports by 56 per cent in 1991 (exports to the former Soviet Union alone fell by nearly 60% and to the other CMEA countries by almost 70%).

Bulgaria suffered huge direct losses from the Gulf crisis and drastic direct and indirect losses due to UN Security Council embargo towards Serbia and Montenegro. The latter factor has considerably affected also key European trade flows due to infrastructural problems as a result of the embargo.

As a result of the unfavourable external developments the period 1990-1993 has been dominated by a huge decline in export earnings, bunching of debt payments, depletion of foreign exchange reserves, current account deficit.

The lack of financing in convertible currency was reflected in sharp decrease in import volumes (in 1991 alone total imports fell by 70 per cent).

This pronounced deterioration in trade performance resulted in a shrinkage of foreign trade share in GDP in 1991 to less than half of GDP. It was only in 1992- 1993 that the share of foreign trade in GDP recovered to its traditional level of 75-80%.

On the other side in the context of the economic reform a radical trade reform has been undertaken aimed at opening up of the Bulgarian economy to international competition and placing the foreign trade sector among the key factors contributing to the overall liberalisation of the economy. This provided for the possibility of establishing new trade links with the world economy and resulted in significant reorientation of trade flows.

After the dramatic contraction of external trade at the beginning of the period a gradual recovery of trade flows started since 1992 onwards. Total foreign trade turnover increased by 8 per cent in 1992, by 3 per cent in 1993 and kept at the same level in 1994 (due to a contraction of imports in 1994).

The average increase in trade volumes resulted mainly from an increase of trade with the OECD countries. These markets accounting for only 12% of total Bulgarian exports in 1990 attracted 46.7% of Bulgarian exports in 1994 (in absolute terms exports to OECD increased by 20% in 1994 as compared to 1993).

On the import side OECD suppliers accounted for 46.5% (table 2) of Bulgarian imports in 1994 (table 1) in contrast to a share of 22% in 1990 (in absolute terms in 1994 imports from OECD drooped by 2.4 per cent as compared to 1993).

Trade with CEEC including trade with the former Soviet Union also started to recover since 1992 although at a slower rate ( exports increased by 13 per cent in 1994 in relation to 1993 while imports in 1994 dropped by nearly 15%). However the share of CEEC (including the former Soviet Union) has not reached its previous levels and remained within the scope of 12-15 per cent of total exports (table 1) and 25-30 per cent of total imports (table 2).

The slow recovery of Bulgarian external trade has been dependant also on developments in the world economy. Thus trade performance with CEEC and the former USSR has been influenced by the ongoing progress of economic transformation in these countries themselves.

The recession in most of the developed economies affected the opportunities for trade and market access utilisation and therefore encouraged to a lesser extent trade expansion.

Substantial changes occurred in the commodity structure of Bulgarian foreign trade. These followed the market reorientation of exports and the process of economic restructuring. The share of investment goods decreased on the export and on the import side in favour of the recorded share of consumer goods.

Exports of main commodity groups developed as follows:

- exports of machinery and transport equipment continued to decline; their relative share in total exports dropped from 19 per cent in 1992 to 13 per cent in 1994 (table 3) (this group accounted for over 60 per cent of total exports in 1987-88 and gradually lost its priority role during the following years);

- exports of base metals and their products and of chemical products, plastics and rubber recorded a gradual increase; their respective relative shares improved from 15 per cent in 1992 to 17 per cent in 1994 for chemical products and from 15 per cent in 1992 to 20 per cent in 1994 for base metals;

- exports of textiles and clothing and other industrial consumer goods developed at a steady rate accounting for 13-14 per cent of total exports;

Exports of agricultural products declined following the significant drop in domestic production and also an oversupply of agricultural goods on the world markets and disruption of traditional trading relations. Exports of perishable goods towards European markets were particularly affected due to the extra costs of transportation because of the embargo towards Serbia and Montenegro. The relative share of agricultural products in total exports dropped from 27 per cent in 1992 to 22 per cent in 1994.

On the import side the group of mineral products and fuels has been prevailing during the period 1992-1994, accounting for 38 per cent in 1992 and 1993 and for 30 per cent in 1994 (table 4). It has been followed by imports of machinery and transport equipment accounting for 22-24 per cent and by the imports of chemical products, plastics and rubber.

The share of agricultural products remained within the range of 8-11 per cent of total imports.

In spite of the regressive development of agricultural exports Bulgaria continued to be a net agricultural exporter (the export/import ratio for agricultural trade ranged between 1.8 and 1.9).

Bulgaria has also been a net exporter in trade in base metals (export/import ratio of 2.5 - 2.8), in chemical products, plastics and rubber with an export/import ratio between 1.1 and 1.3, in trade with textiles (1.1 - 1.2), in trade in wood, paper, glass (1.1).

On the basis of export/import ratio Bulgaria has been a net importer of mineral products and fuels (0.2 - 0.3) and of machinery and transport equipment (0.5)

Trade data for the period 1992-1994 indicate an unsteady rate of recovery of Bulgarian external trade with exports lagging behind imports. The situation of a nearly balanced trade in 1991 reversed in 1992 and the following years.

The largest trade deficit was registered in 1993 to the amount of USD 1 336 000 000. This substantial imbalance was considerably improved in 1994 due mainly to a decrease in imports (by 15 per cent) and to a lesser extent to an increase of exports (by 11 per cent). However the balance registered in 1994 remained negative to the amount of USD 159 000 000.

4.1. Trade developments with the EU;

The EC has become the major trading partner of Bulgaria among the OECD countries accounting for 33.5 per cent of total exports (table 1) and for 34.1 per cent of total imports in 1994 (table 2) (in contrast to an insignificant share of 8 per cent of total 1990 exports and 16 per cent of total 1990 imports).

Trade developments with the EC followed the general reorientation of trade patterns and revival of trade with the OECD partners.

The rates of growth of trade volumes registered during the period 1991-1994 have been positive. On an year to year basis Bulgarian exports increased by 30% in 1991, by 18% in 1992, by 6% in 1993 (table 5) and by 36% (table 6) during the period I-IX 1994 (on an year to year basis). The registered rates are much higher than the total exports average and significantly contributed to the achievement of this average.

Following a substantial drop in 1990 to the amount of 40 per cent, imports witnessed a revival and a positive rate of growth of 8 per cent in 1992, 21 per cent in 1993 (table 5) and 23 per cent during the period I-IX 1994 (on an year to year basis).(table 7)

It is worth mentioning that while deliveries to and supplies from EC markets are playing a significant role in Bulgarian external trade, the Bulgarian share in Community trade with the Central and Eastern European countries (excl. former USSR) is the smallest one ranging between 4-5 per cent of imports from and exports to the region (in total extra Community trade Bulgarian share ranges between 0.2 - 0.3 per cent).

On a product group basis Bulgarian exports in 1994 consisted of textiles (19.2) of total exports to the EC, base metals (19.2%), machinery and electrical equipment (11.1%), products of the chemical and allied industries (8.9%), followed by the group of beverages, spirits, tobacco (6.4%) and live animals and animal products (5.3%). The 1994 commodity structure resulted from a dynamic development of the main product groups which registered huge volume increases (of 227% for base metals, 156% for machinery and electrical equipment, 142% for products of the chemical industry, 112% for textiles). (table 6).

The Community has become the main market for Bulgarian exports of live animals and animal products (about 42% of total exports are effected on the Community markets), of raw hides and skins (54% of total exports), of textiles and textile articles (about 60%), of footwear (70-80%).

The ratio between industrial and agricultural exports has also changed. In 1991 industrial products accounted for 74 per cent and agricultural products - for 26 per cent of total exports. In 1994 the share of industrial exports increased to 85 per cent due to slower developments in agricultural exports in contrast to the recorded rapid rise of industrial exports (table 5). As a consequence the value added group of products slightly improved its share in Bulgarian exports to the EC.

On the import side the supplies from the EC in 1994 consisted mainly of machinery and equipment (25.4%), textiles (12.2%), products of the chemical industry (10%), vehicles and transport equipment (9.2%), products of the food processing industry, beverages (8.1%), vegetable products (5.9%).(table 7)

Imports from the EC of some product groups registered substantial increases in 1994 as compared to the previous year (imports of vegetable products increased by 299%, of animal or vegetable fats and oils - by 164%, of wood and articles of wood - by 158%, of base metals and articles of base metals - by 143%, of plastics and articles thereof - by 140%).(table 7)

The Community has become the main supplier to Bulgaria of live animals and animal products(about 53% of total imports of live animals are supplied from the Community), of plastics, rubber and articles thereof (52%), of raw hides and skins(50%), of textiles and textile articles (65%), of footwear (76%),of machinery and appliances (47%), of transport equipment (48%), of precise apparatus and instruments (50%).

According to the registered export/import ratios in 1994 Bulgaria was a net importer from the EC both in industrial and agricultural trade. The reverse in export/import ratio in agricultural trade was registered in 1993 while in 1991 and 1992 Bulgaria was a net agricultural exporter to the EC.

For some industrial product groups Bulgaria has also been a net exporter (the export/import ratio has been as follows: for raw hides and skins between 1.4 - 1.7; for wood and articles of wood - 3.2; for textiles and textile articles - 1.4; for articles of stone - between 1.7 - 2.8; and for base metals and articles of base metals - between 2.3 - 4.1).

For machinery and transport equipment Bulgaria has been a pronounced net importer.

The revival of exports to the EC provided for the possibility to finance imports and thus resulted in overall trade expansion.

At the same time trade deficits have been maintained during the whole period 1991-1994. The experienced imbalances indicate that the rate of export growth has not been sufficient to improve the substantial trade deficits traditionally ran with the EC. Moreover a negative for Bulgaria balance was registered in agricultural trade in 1993 and 1994.(table 5)

Among individual Member States the main trading partner of Bulgaria has been Germany (more than 1/3 of total trade with the EC), followed by Greece, Italy, France and the United Kingdom.

4.2. Trade developments with other trading partners

In 1994 the main markets for Bulgarian exports (besides the EC) were: former USSR (accounting for 17.3 per cent of total exports), former Yugoslavia (13.8 per cent) other OECD, excluding EC and EFTA (13.2 per cent), Arab countries (5.3 per cent, CEEC (4.6 per cent) (table 1).

The main suppliers in 1994 were: former USSR (accounting for 31.6 per cent of total imports), developing countries (13.2 per cent), EFTA (6.2 per cent), other OECD (6.2 per cent), CEEC (5.4 per cent). (table 2)

Trade developments during 1991-1994 indicate a gradual diminishing of the shares of the former USSR and the CEEC, while in 1990 Bulgarian exports to former USSR and to CEEC accounted respectively for 64 and 14.5 per cent of total exports with imports from the same region accounting for 71 per cent.

The annual rate of trade developments with CEEC during the period 1992-1994 has been quite unsteady. Thus 1993 exports were 5 per cent less than 1992 exports, while in 1994 exports increased by 13 per cent in relation to 1993. On the import side an increase of 49 cent was registered in 1993 and a drop of 15 cent in 1994.

The biggest trading partner of Bulgaria among the CEEC (but also among the rest of the individual partners) has been the Russian Federation. Its share in total exports decreased from nearly 50 per cent in 1991 to 17 per cent in 1992, 14 per cent in 1993 and 12 per cent in 1994. At the same time for some main items of Bulgarian exports Russia has remained the most important market (nearly 70 per cent of Bulgarian exports of pharmaceuticals, 40 per cent of exports of cigarettes and 35 per cent of exports of wine are effected on the Russian market). Some other products, traditionally exported to this market, have gradually diminished their share (some types of work trucks, soda ash, electrical appliances, fresh and processed fruit and vegetables).

On the import side the Russian Federation is still a very significant supplier although its share in total imports drooped from 47 per cent in 1991 to 19 per cent in 1994. However more than 50 per cent of total crude oil deliveries, 50 per cent of cotton deliveries and 42 per cent of vehicles are imported from Russia.

The significance of neighbouring countries as important trading partners of Bulgaria has also increased. Taken as a region (i.e. including Greece) the Balkan States accounted for more than a quarter of total exports and between 9 and 12 per cent of total imports during the period 1992-1994.

The markets of the developing countries attracted between 12 and 17 per cent of total exports (Arab countries alone accounted for about 5-7 per cent).

Trade balances with most of the trading partners remained negative for Bulgaria (surpluses were registered only in trade with Arab countries in 1993 and 1994 and with some developing countries in Africa).

5. Trade liberalisation and its impact on the economy;

5.1. The effect of trade liberalization under the Europe Agreement.

As indicated above imports of industrial products from the EU are subjected to three different schemes of tariff dismantling.

The 10 years period for the progressive liberalisation of Bulgarian market is considered as a reasonable length of time to allow Bulgarian industries to adapt gradually to more competitive imports.

An immediate liberalisation would have drastically increased the adjustment cost in the short run which the economy would not have been able to withstand during the process of its restructuring.

In general terms border barriers (tariffs, quantitative restrictions and measures with equivalent effect) serve the purposes of domestic market protection by raising the internal prices above the international price levels and thus making imports less attractive to domestic demand. The consequent impact of removal of these barriers is an increase of competition on domestic market as a result of the shift of demand also towards external suppliers. In case of imported products being more competitive than the domestically produced ones the immediate effect may be a very high adjustment cost (including the social impact as a result of reducing production capacities and closure on non-competitive enterprises).

On the other side the increased competition contributes to the restructuring of domestic production away from the highly protective market, towards activities where the country has an actual or potential comparative advantage. The pursuance of such a policy results in more efficient use of national resources, increase of productivity and economic growth.

Thereforeee and taking into account the reallocating effect of the establishment of a free trade area as well as the current level of the economic potential of Bulgaria it is considered that the ten years period is a reasonable length of time for the opening up of the domestic market towards competitive pressure coming from the Community. This is the philosophy behind the three different schemes grouping imports according to the process of gradual adapting of the national economy to market forces.

The frontloading scheme (immediate liberalisation) covers about 22% of total industrial imports from the EU according to 1991 statistics. The list of products concentrates on:

- inputs for the domestic industry: mineral products; ores; mineral oils; inorganic and organic chemicals; tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other colouring matter; raw hides and skins; wood and articles of wood; cork and articles of cork; paper and paperboard; wool, fine or coarse animal hair; cotton; man-made filaments; man-made staple fibres; wadding, felt and nonwovens; impregnated, coated, covered or laminated textile fabrics;

- machinery and equipment, instruments and apparatus (the substantial part relates to spare parts for different type of machinery): steam turbines and other vapour turbines; other moving, grading, levelling, scarping, excavating, compacting, extracting or boring machinery for earth, minerals or ores; machinery for making pulp of fibrous cellulosic material or for making or finishing paper or paperboard; printing machinery; machines for preparing textile fibres, spinning, doubling or twisting machines and other machinery for producing textile yarns; machinery for washing, cleaning, drying, ironing, pressing, bleaching, dyeing, coating or impregnating textile yarns, fabrics or made up textile articles; machines for assembling electric or electronic lamps, tubes or valves in glass envelopes; machinery for working rubber or plastics; primary cells and primary batteries; diodes, transistors and similar semiconductor devices; parts and accessories for motor vehicles; instruments and apparatus for physical or chemical analyses; oscilloscopes, spectrum analysers; measuring or checking instruments, appliances and machines;

- product varieties not produced in Bulgaria such as: some pharmaceutical products; some fertilisers (mineral), essential oils; pulp of wood or of other fibrous cellulosic material; glass and glassware; some iron and steel products; some copper products; tin and articles thereof; other base metals, cermets;

- traditionally imported from the EU such as: photographic or cinematographic goods; plastics, rubber and articles thereof; printed books, newspapers, pictures and other products of the printing industry; precious or semi-precious stones, precious metals and articles thereof; optical fibres; frames and mountings for spectacles; image projectors, other than cinematographic; orthopaedic appliances; apparatus based on the use of X-rays.

The list of products for duty free access to the Bulgarian market is elaborated with a view to create favourable conditions for domestic industries with potential advantages for exports.

The second scheme for gradual liberalisation of imports from the EC started on 1 January 1994 providing for 20% reduction of the basic duty for the products included in the scheme. The next steps of duty dismantling will take place respectively on 1 January 1996 providing for 60% reduction and on 1 January 1997 providing for the elimination of the remaining duties.

The process of gradual opening up and thus exposure of the Bulgarian market to the competitive pressure of EU imports starts with the entry into force of the intermediate scheme.

The product coverage is comparatively limited (approximately 6% of industrial imports falling under this scheme are imports of vehicles (not produced in Bulgaria). Thus the scope of products directly influenced by trade liberalisation is about 10-11% of industrial imports. The list consists of products produced (group I) and products mainly imported in Bulgaria (group II).

Products falling under group I relate to the following industries:

- chemical industry: production of inorganic substances; production of colouring matter; production of soap, organic surface-active agents, washing preparations; production of plastics and articles thereof; production of some rubber products and articles thereof;

- production of paper and paperboard;

- textile industry: limited opening up of the market for wool yarn and woven fabrics and of cotton yarn, of man-made filaments, of man-made staple fibres, of knitted or crocheted fabrics, of articles of apparel and clothing accessories knitted or crocheted and of articles of apparel and clothing accessories not knitted or crocheted;

- glass industry: partial opening up of the market for cast glass and rolled glass, of float glass and surface ground or polished glass;

- steel industry: very limited opening up of the market for ferro-alloys, flat-rolled products of iron or non-alloy steel, wire of iron or non-alloy steel, flat-rolled products of stainless steel, articles of iron and steel (the scope is less than 1% of total imports)

Products falling under group II are as follows:

- photographic or cinematographic goods;

- miscellaneous chemical products;

- some machinery and equipment;

- motor cars and other motor vehicles, motor vehicles for the transport of goods;

- optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof;

- clocks and watches and parts thereof.

For the bulk of Bulgarian imports from the EU (61%) trade liberalisation will begin only on 1 January 1996 according to the timetable provided for under the third scheme. The scheme provides for certain even steps in duty dismantling. Thus on 1 January 1996 the duties for the products concerned will be reduced to 80% of the applied rates and these levels will apply also in 1997. On 1 January 1998 the duties will be reduced to 60%, on 1 January 1999 - to 45%, on 1 January 2000 - to 30%, on 1 January 2001 - to 15% and on 1 January 2002 the remaining duties will be eliminated.

These gradual steps of diminishing the level of protection are expected to contribute to the progressive adjustment of domestic industries to external competitive pressures as trade liberalisation will result in attracting imports which are much more competitive. Taking into account also the limited consuming capacity of the national economy the progressive development of the ability to withstand competitive pressures will help domestic industries prepare for a market environment providing for redistribution of resources on the basis of improving their efficiency.

As far as infant industries and sectors undergoing restructuring are concerned the Agreement provides for the possibility of exceptional measures of limited duration in the form of increased duties for a period not exceeding five years. However the total value of imports of the products subjected to these measures may not exceed 15% of total imports from the EU.

This specific provision is intended to safeguard Bulgaria's efforts to develop its economy and to successfully complete its effective restructuring.

The entry into force of the Agreement and its application during 1994 (according to statistical data) did not affect substantially industrial imports from the Community. The registered increases are related to product groups traditionally imported from the Community.

As far as agricultural products are concerned the imports effected in 1994 were mainly of products outside the tariff concessions granted by Bulgaria (products falling outside the scope of the Agreement). For products for which Bulgaria has opened tariff quotas for the Community the level of utilisation is very low (according to information received from the customs authorities). For some tariff quotas there has been no application for quota shares.

The summarised record of submitted applications for shares of the 1994 quotas on imports of products subjected to duty reductions of 20% indicate that these are related to imports from the Community of cheeses (level of quota utilisation of 23%), of mandarins (level of quota utilisation of 81%), of lemons (only 1% of the quota amount was used), of vegetable seeds (24%), of rape oil (only 4% of the quota amount); the record of applications for quota shares on imports subjected to 10% duty reductions indicate that these were related to imports of frozen meat of bovine animals (20% of the tariff quota was used in 1994), of milk and cream in powder (less than 5% was used), of oranges (18%), of olives, prepared or preserved (5%), of orange juice (11%),of other juices (38%). The list is exhaustive, i.e. for other products included in the Agreement no applications for quota shares were submitted.

On the basis of the information received on the utilisation of the tariff quotas it may be assumed that the increase of agricultural imports from the Community was mainly due to products outside the concessions granted by Bulgaria (vegetable products, foodstuffs and beverages).

For products under preferential treatment the reason for the low level of quota utilisation may be the lack of information among Bulgarian importers and Community exporters as most of the products falling under the scope of the Agreement are traditionally imported from the Community (such as meat of bovine animals, certain types of cheeses, lemons, oranges, olives prepared etc.)

5.2. The Europe Agreement and beyond; how to match the current state of the Bulgarian economy with the necessity of further trade liberalisation when acceding to the EU. A question also relevant to the smooth implementation of the already existing Europe Agreement.

To join the EU means also further trade liberalisation, i.e. greater than the one to be achieved through the implementation of the Europe Agreement.

It is an open question to what extent the transforming Bulgarian economy is prepared for further import liberalisation. The country still struggles with serious transformation problems, the competitiveness of the domestic producers is at least uneven, and the economy has already witnessed the situation when high imports cause serious trade (and current account) imbalances. In addition there is developing a growing pressure on the government to curb imports. Various main sources of this pressure can be identified. First, there are domestic producers who either fear growing competition due to scheduled (or envisaged) import liberalisation, or, mainly for financial (liquidity) problems cannot keep pace with financially much stronger foreign competitors. Second, to an increasing extent, foreign companies (both fully foreign-owned and joint ventures) try to limit competition in order to build up quasi-monopolistic positions on the actually small domestic market. Third, also economic policy makers may tend to accept arguments for import restrictions under growing fear of a widening of the trade deficit where the inflow of external resources is not in a position to cover trade (and current account) deficit.

Under these circumstances, the serious consequences of an overhasty trade liberalisation are becoming manifest. Obviously, the raising of tariffs and/or the reintroduction of quotas would not only violate the spirit of the already existing Europe Agreement, but they would seriously question the maturity of the Bulgarian economy for the EU-membership. The latter would also certainly lead to the necessity of a country-differentiated approach towards the accession of the Central and East European countries in the process of transformation from a centrally-planned into a market, free-enterprise economy (according to experience, membership in the EU requires almost full adjustment in two key areas: trade policy and the acquis communautaire).

Certainly, the exchange rate policy seems still to remain a resort, though a very delicate one. But in this case the anti-inflationary stabilisation priorities are likely to collide with a higher level of protection for domestic production. In addition, and not less important, devaluations would be necessary not in order to increase exports but in order to decrease imports. However, at present, there is a large gap between higher consumer price and lower producer price inflation. Devaluation as an export incentive should be adjusted to the difference in domestic and international producer price inflation rates. Therefore, small devaluations are unlikely to protect the domestic market, while large devaluations, in open economies, have strong inflationary pressures.

Under these conditions, the sustainability of already undertaken commitments under the Europe Agreement and further liberalisation envisaged through accession to the EU are crucially dependent on the financing of the "modernisation deficit" which already becomes apparent in the Bulgarian economy. The economic modernisation is a precondition for sustainable stability, growth and transformation, and requires high imports of investment goods in order to establish an efficient export-based production. Experts in Hungary, the economy in transition which first in late 1994 experienced the "modernisation deficit", based also on international experience, calculate a time lag of 5 to 8 years as a minimum, between investment and export revenues. It is an open question how this gap is to be financed.

Evidently, a massive inflow of foreign direct investment (FDI) could be the most appropriate instrument. There is limited evidence that strategic investors already located in the associated countries have already taken into account the large EU market. Most investments have been orienting either to the domestic markets or have developed intra-firm subcontracting deals. Clear prospects for and commitments to large markets would be a major breakthrough in the behaviour of FDI towards transforming economies. In this respect, a clear timetable for a EU-membership would extremely increase the predictability of European developments for potential strategic investors. In addition, such an announcement would reinforce the EU’s commitment that no reversal of the trade liberalisation process is possible. Given this sign, it can be supposed that FDI may start a large-scale investments in some low-cost and skill-intensive sectors of the transforming economy.

The Bulgarian prospects for a successfully implemented Europe Agreement, followed eventually by a EU membership are fundamentally influenced by the success of an investment-led and export-oriented growth. It requires domestic policy measures and international support.

In the domestic context, savings have to be generated and used for investment purposes. In economic policy discussions, two basic views can be identified. One is emphasising the reduction of budget deficit at any price, while the other can live with budget deficit, if it finances investment activities and not consumption. After years of passive trade policy, an active, export-supporting strategy, making use of all devices allowed by valid international treaties (mainly the GATT/WTO and the Europe Agreement) has to be implemented.

In the international context, clear timetable and conditions for EU membership and at least medium-term resources to finance the modernisation process are needed.