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

Part II

6. Level of utilisation of market access for Bulgarian exports

In general terms it is considered that export growth while accelerating the economic transformation and reducing the economic pain will result in positive economic rates and contribute to locking-in market reforms.

In the 1990s when the Europe Agreement with Bulgaria was negotiated and concluded most of the intra West European industrial trade has been liberalised by means of a net of Agreements, the most recent of which is the European Economic Area (EEA) Agreement. The Agreement is based on previous trade liberalisation provisions under bilateral Agreements between the EC and EFTA (although Switzerland did not join the EEA its trade relations with the other countries are developing on liberalised terms under the EFTA Agreement and the bilateral free trade agreement with the EC).

Therefore the Europe Agreement with Bulgaria (and the other CEEC) providing for removal of border protection barriers is expected to increase export opportunities by levelling to some extent the conditions for marketing products originating in Bulgaria on the markets of the EU Member States (it is worth mentioning that duty-free access does not yet mean free trade taking into account also the non-tariff barriers).

6.1. The effect of tariff dismantling on Bulgarian exports

The tariff protection faced by Bulgarian industrial exports on Community markets before the entry into force of the Interim Agreement on a simple average basis amounted to 6.4% for all industrial products. The break-down by sector indicates level of tariff protection of 10.4% for footwear, 10.1% for textiles and clothing, 9.3% for plastics, 7.3% for chemical products, 5.8% for electrical machines and apparatus, 5.4% for iron and steel, 5.2% for non-ferrous metals, 4.1% for non-electric machinery, etc.1).( Significant tariff escalation exists in areas such as leather, rubber, textiles and metals).

As far as market shares are concerned these are very modest as compared to other Community suppliers (total exports of the six CEEC represent a small fraction of extra - Community trade nearly equal to Switzerland's exports alone). On the other side exports to Community markets account for more than one third of total Bulgarian exports (for the other CEEC EU markets account for nearly 75% of their exports in 1992-1993).

The substantial part of Bulgarian industrial exports (65-68%) was liberalised with the entry into force of the Agreement (31 December 1993). The remaining part consisting of the so called sensitive products (exports of textiles covering 21% of industrial exports to the EC, of ECSC products (coal and steel) - 7% and of some chemical products, footwear and tableware covering 5% of Bulgarian industrial exports) has been subjected to progressive liberalisation.

The latter group (chemical products, footwear, tableware) was completely liberalised on 1 of January 1995 following the acceleration of trade liberalisation under the additional to the Europe Agreement protocols. During the coarse of the year 1994 exports of these products benefited from a suspension of customs duties within the limits of annual Community tariff quotas or ceilings. For quantities in excess of the annual tariff contingents customs duties were subjected to progressive dismantling by annual reductions of 15% with a view to be abolished by the end of the fifth year following the entry into force of the Agreement. However this process was accelerated by means of the Additional protocols and thus the remaining duties were eliminated 2 years earlier.

The elimination of duties in 1995 is expected to affect positively Bulgarian exports of these products taking into account the high utilisation rate of the duty-free tariff contingents in 1994 (100% for most of the products). Exports from Bulgaria of some product groups (footwear, tableware, fertilisers) exceeded the duty-free tariff contingents nearly twice.

The speeding up of trade liberalisation affected also exports of ECSC products (duty-free access on 1 January 1996 instead of 1 January 1997 under the initial timetable) and of textiles (duty-free access on 1 January 1997 instead of 1 January 1999). Meanwhile both groups are subjected to progressive reductions with a view to arrive at complete abolition of duties on the above indicated dates.

In general terms increased market access opportunities affected positively Bulgarian industrial exports to the Community. The most significant result of market access improvement is the rapid response of the so called sensitive sectors which nearly doubled their export volumes (at the beginning of 1995 textiles and ECSC products accounted for almost 50% of Bulgarian exports due to a higher rate of increase than the average for total industrial exports).

The influence of trade liberalisation on sectors for which Bulgaria has comparative advantages and could benefit from improvement of market access is best illustrated by the performance of the respective exports during 1994 as follows:

- exports of products of the chemical industry and allied industries increased by 142% as compared to the previous period;

- of plastics and articles thereof and of rubber and articles thereof - by 136%;

- of raw hides/skins, leather and articles thereof - by 153%;

- of wood and articles of wood - by 145%;

- of pulp of wood or other cellulosic material - by 131%.

The most significant response to market access opportunities has been witnessed by the exports of vehicles (works trucks), steel and articles of base metals and machinery, mechanical appliances and electrical equipment. These exports registered remarkable increases of 554% for vehicles, of 227% for steel and steel products and 156% for machinery and equipment.

As far as exports of textiles are concerned, the trend is positive with an increase of 112% in 1994 from a level nearly double the one registered in 1991.

The average level of increase of all industrial exports destined to the EU markets in 1994 was 136% as compared to the previous period. (see Tables).

While exploring the level of market access utilisation due account should be paid to the processes taking place in Bulgaria (restructuring of the economy with the inevitable drop in output) and also in the Community (the functioning of the Single market).

6.2. The effect of elimination of quantitative restrictions and measures of equivalent effect.

Under the provisions of the Europe Agreement all residual specific (imposed under Regulation 3420/83) and non-specific (under Regulation 288/82) quantitative restrictions are eliminated. It is worth mentioning that most of these restrictions have been related to the Community regime applied towards the "State- trading countries" (with the entry into force of the Interim Agreement Bulgaria has been deleted from the list).

Quantitative restrictions still apply on trade in textiles between Bulgaria and the EC. These are governed by the provisions of the Additional protocol on quantitative arrangements and other related issues on trade in textile products which followed on the expiration of the Bilateral agreement on trade in textile products between Bulgaria and the Community initialled on 11 July 1986 and applied provisionally since 1 January 1987 (a Multifibre Arrangement - type since Bulgaria has not been a MFA signatory).

The integration of all textiles and clothing products into the GATT rules and disciplines (World Trade Organization Agreement on Textiles and clothing concluded under the GATT Uruguay Round) provided for the possibility to determine the modalities and the period for elimination of quantitative restrictions on trade in textiles between Bulgaria and the Community. For Bulgaria (and the other associated countries from Central and Eastern Europe) this period shall be equal to half the integration period as decided in the Uruguay Round, i.e. five years starting from the entry into force of the Agreement (as indicated above on 1 January 1998). However the safeguard provisions allow for imports not subject to Quantitative limits to be subjected to such restrictions when imported in such increased quantities and under such conditions as to cause serious damage or actual threat thereof to the Community's production of like or directly competitive products. 2)

According to estimations about 20% of Bulgarian textile exports to the Community fall under the restraint limitations.

In the coal and steel sector (products governed by the Treaty establishing the European Coal and Steel Community, or the ECSC products) 3) quantitative restrictions are abolished with the entry into force of the Agreement. As far as measures with equivalent effect are concerned a prior surveillance system has been introduced after the entry into force of the Agreement on an erga omnes basis (as a safeguard measure) seeking to prevent market disruption (in 1994).

In March 1995 a double checking system in bilateral trade based on export certificates issued by the Bulgarian authorities was introduced with a view to avoid further restrictive action by the Community under the specific safeguard provisions of the Agreement (under Article 5 of Protocol 2 to the Agreement when exceptional circumstances require immediate action, the importing Party may adopt forthwith quantitative or other solutions). The list of products subjected to this "double checking system" is annexed to Protocol 2.

6.3. The effect of the Single market on free circulation of goods.

Before the entry into force of the Single European Act circulation of goods within the Community was impeded by a long list of barriers such as: national trade restrictions protecting individual member States' markets from external suppliers, national registration and type approval procedures, differing technical standards and industrial requirements, capital controls, preferential public procurement, administrative and frontier formalities, VAT and excise tax rate differences, differing transport regulations, etc.

The Single market implies abolition of national restrictions and harmonisation of trading conditions among Member States. Although the legal provisions of Article 115 of the EEC Treaty (which allows Member States to erect national barriers against imports, with the approval of the Commission ) remain in force, the Single European Act provides no scope for any internal trade measures against imports from external sources.

In trade in textiles, while the bilateral restraint arrangements remain in force (these are due to expire in 1998), national import quotas within the system are abolished. The Bulgarian side (as other restrained suppliers) has agreed to co-operate to avoid sudden changes in traditional flows. At the same time the creation of a unified EC market for textiles resulted in enhanced flexibility for exporters.

In the steel sector national import restrictions do not apply and a movement towards restoring market mechanism in this sector is progressing (expiry of VRA and a tighter reign on subsidies). However due to stronger import competition and a decline in domestic demand steel deliveries are subjected to Community-wide automatic prior surveillance.

In the area of technical barriers to trade applies the principle of mutual recognition (in the absence of common rules). This implies that any product qualifies for free circulation throughout the EC whenever it conforms to regulations valid in any of the Member States (if approved in one Member State may circulate freely in all other). Where common technical regulations exist any EC or third country products meeting these requirements may circulate freely within the single market.

In the areas of health and safety applies the principle of harmonisation of technical rules or at least specification of essential common requirements. Thus a common framework for acceptance of pharmaceuticals (approval criteria and procedures and the mutual acceptance of tests) applicable as from 1995 is expected to promote market integration and to ease conditions for external trade.

Provision is made in the Single European Act for national derogations from harmonised policies "on the grounds of major needs" in areas related to national security, culture, health, commercial and industrial property. Such measures may not imply arbitrary discrimination or disguised trade barrier.

In the area of Government procurement national procurement entities are in general required to apply EC rules to all supplies worth more than ECU 200 000. However in the "excluded sectors" (water, energy, transport and telecommunications) the thresholds are higher. Besides the rejection of bids with a foreign content of over 50% from foreign countries that have not agreed equivalent access to EC supplies is permitted. Community preferences is required also if the price differential is 3% or less.

In the domain of indirect taxation (VAT and excise duties) since 1 January 1993 intra-Community trade ceased to be treated as imports and exports for fiscal purposes.

The process of harmonisation of indirect taxation within the Community consists of measures aimed to guarantee neutrality of taxation in trade between Member States.

The goods covered by the Community excise system are mineral oils, tobacco products and alcoholic beverages. For the purposes of the system minimum rates for each product group have been defined. (Member States may maintain or introduce excise duties on other products. At present there are national excise duties on certain tropical products)

All these measures (the implementation of which is in final stages) should contribute to freer trade conditions for goods produced within EC boundaries as well as for extra-Community imports. Available information suggests that the implementation of the Internal market programme has improved market access, transparency and legal security in many sectors.

6.4. The effect of improvement in market access on agricultural exports

The improvement of market access for agricultural products affected to a much lesser extent export developments than anticipated. The Community tariff quotas opened for Bulgaria (and the other associated countries) have not been utilised (the average rate of utilisation for all Europe Agreement signatories is around 50%). The successive reductions of duties and levies of 20%,40% and 60% for some products have not been sufficient to allow exports to Community markets. For other products (animal products) other barriers such as veterinary restrictions (consequences of the outbreak of foot and mouth decease in Bulgaria, delay in approval of slaughter houses, vaccination in Bulgaria against classical swine fever, etc.) hindered exports and in some cases had a prohibitive effect.

As far as tariff treatment is concerned the reduction of 60% of the duties and levies took place only on 1 July 1994 and thus exports form Bulgaria could compete on an equal footing with agricultural exports from the Visegrad countries in the second half of the year 1994. It is worth mentioning also that in spite of the achieved arrangements some delay in opening of the tariff quotas by means of Commission Regulations needed to implement these arrangements has been witnessed. This delay did not allow economic operators to be informed well in advance in order to apply for quota shares.

The list of products under preferential treatment was established on the basis of trade performance during the period 1989-1991, i.e. performance under a different market system (particularly as far as price levels are concerned). At the same time due to the process of restructuring agricultural output sharply decreased and thus influenced export volumes but also export destinations ( a shift to markets considered more profitable and easier to compete than the Community markets).

Exports of perishable products have been adversely affected by high transport costs due to the imposed UN sanctions against Serbia and Montenegro. This also contributed to the shift towards markets which could be reached without additional costs.

On the whole improvement in market access did not result in export growth due to internal and external factors. On the contrary agricultural exports contracted and the tariff quotas opened for Bulgaria were not used.

Notes:

1) For details see GATT document C/RM/S/36B

2) Council Regulation EC No 3289 of 22 December amending Regulation No 3030/93 on common rules for imports of certain textile products from third countries.

3) The Treaty establishing the European Coal and Steel Community has been signed on 18 April 1951 and has been concluded for a period of fifty years from its entry into force.

7. Commercial defence instruments - legislation and practice

The utilisation of trade concessions granted under the Agreement is often influenced by the way each party applies commercial defence instruments. In this domain the Community is much more experienced than the Bulgarian side. Some sectors of trade for which the Bulgarian side has potential advantage to benefit from market access opportunities are under imminent threat of being considered as causing injury to Community producers in case of increased imports.

Further to the concerns of the associated countries that excessive recourse to commercial defence may compromise the concessions granted the European Summit in Essen took a decision that information would be offered to any associated country before the initiation of an anti-dumping or safeguard procedure in the framework of the individual Europe Agreements. Where appropriate on a case-by- case basis a clear preference will be given to price undertakings rather than duties in order to conclude an anti-dumping case.

7.1. The provisions of the Europe Agreement on safeguards and anti-dumping

The Europe Agreement and its Protocols contain several safeguard clauses related to all trade and to specific sectors of trade as follows:

- a general safeguard clause based on GATT Article XIX allowing each party to take appropriate measures where any product has been imported in such increased quantities and under such conditions as to cause or threaten to cause serious injury to domestic producers of like or directly competitive products in the territory of one of the parties or serious disturbance in any sector of the economy or difficulties which could bring about serious deterioration in the economic situation of a region. Before taking the measures the party concerned shall supply the Association Council with all relevant information with a view to seeking a solution acceptable to the two parties. In the selection of measures priority shall be given to those which least disturb the functioning of the Agreement (Article 31 of the Agreement which is applied in accordance with the procedure stipulated in Article 34);

- a specific safeguard clause in agricultural trade which given the particular sensitivity of the agricultural markets allows the party concerned in case of imports causing serious disturbance to its markets to take the measures it deems necessary pending the outcome of bilateral consultations aimed at finding an appropriate solution (Article 22 of the Agreement which may be invoked immediately notwithstanding the provisions of Article 31 );

- a specific safeguard clause in trade with ECSC products which given the particular sensitivity of the steel markets allows the party concerned in case of imports of specific steel products causing or threatening to cause serious injury to domestic producers of like or directly competitive products or serious disturbance to its steel markets to adopt forthwith quantitative or other solutions strictly necessary to deal with the situation pending the outcome of the bilateral consultations aimed at finding an appropriate solution (Article 5 of Protocol 2 on ECSC products which may be invoked immediately notwithstanding the provisions of Article 31 and 34 of the Agreement).

- safeguard measures in trade in textile products not subject to quantitative limitations may be taken in case of imports taking place in such increased quantities and under such conditions as to cause serious damage or actual threat thereof to the Community’s production of like or directly competitive products. Such imports may be made subject to quantitative limits under the conditions laid down in the Additional Protocol on textiles.

- an exceptional safeguard clause allows only the Bulgarian side to take measures in the form of increased customs duties in order to safeguard infant industries or certain sectors undergoing restructuring or facing serious difficulties particularly where these difficulties produce important social problems. These measures may not exceed 25% ad valorem and shall maintain an element of preference for products originating in the Community;

- safeguard measures on exports may be adopted in case of serious shortage or threat thereof of a product essential to the exporting party or re-export towards a third country against which the exporting party maintains, for the products concerned, quantitative export restrictions, export duties or measures having equivalent effect and the situations referred to are likely to give rise to major difficulties for the exporting party, that party may take appropriate measures under the conditions described in Article 34. The measures shall be non-discriminatory and be eliminated when conditions no longer justify their maintenance (Article 32 of the Agreement).

If one of the parties to the Europe Agreement finds that dumping is taking place in trade with the other party within the meaning of Article VI of the GATT, it may take appropriate measures against this practice in accordance with the Agreement relating to the application of Article VI of the GATT with related internal legislation and with the conditions and procedures laid down in Article 34 of the Europe Agreement.

The Agreement describes the procedure to be followed in case of trade remedy actions. Before taking the measures the party concerned shall hold consultations with the other party with a view to seeking a solution acceptable to the two parties. If no satisfactory solution has been reached within 30 days of the matter being referred the party concerned may adopt the appropriate measures to remedy the problem not exceeding the scope of the difficulties that have arisen. The safeguard measures shall be notified immediately to the Association Council and shall be the subject of periodic consultations, particularly with a view to establishing a timetable for their abolition as soon as circumstances permit.

In case of dumping the Agreement provides for notification of the Association Council as soon as the investigation procedure is initiated by the importing party. This provision has been amended by the decision of the Essen Summit that the exporting party shall be informed before the initiation of the anti-dumping investigation.

Where exceptional circumstances requiring immediate action make prior information or examination impossible the party concerned may apply forthwith the precautionary and provisional measures strictly necessary to deal with the situation and the Association Council will be immediately informed.

The specific safeguard provisions of the Europe Agreement relating to the sensitive trade sectors may serve as a basis for concerted trade actions. Therefore in the course of the practical application of the Agreement it may be preferable to moderate exports with a view of pre-empting possible invocations of the safeguard clause by the Community.

In 1994 in order to avoid the invocation of the specific safeguard in agricultural trade the Bulgarian side (and the other associated countries) agreed to the introduction of minimum import prices on imports of sour cherries intended for processing. The price levels had been determined after consultations with the associated countries following the decision of the Community to introduce an early warning system in case of difficulties arising in trade with agricultural products. The duration of the measure was one year aiming to safeguard Community producers during the marketing year 1994-1995.

In 1995 in order to avoid triggering the specific safeguard clause in trade with steel products the Bulgarian side agreed to the introduction of a double-checking licensing system in trade with steel products. Romania also agreed to introduce such a system while Slovakia introduced a price surveillance system in its trade in steel products with the Community.

Before the entry into force of the Interim Agreement the Community initiated anti-dumping proceedings against imports from Bulgaria of urea-ammonium nitrate solution (fertiliser UAN). The proceedings against Bulgaria were undertaken under the provisions of Community legislation for non-market economies. The matter was referred for examination in the Joint Committee after the entry into force of the Interim Agreement, but the Community did not change its position and considered the case on the basis of determinations for non-market economy arguing that the investigation had been initiated when Bulgaria was still in the list of state trading countries (for the purposes of determining the normal value the Czech Republic has been considered as a reference market economy). The case was completed with the introduction of voluntary price undertakings from the Bulgarian exporter jointly with the Bulgarian producer.

7.2. The EC legislation and practice

In the context of the common commercial policy measures to protect trade such as those to be taken in case of dumping or subsidies shall be based on uniform principles. Further to this provision of the Treaty establishing the European Economic Community in its relations with third countries the Community applies common rules for protection against dumped or subsidised imports from countries which are not members of the European Community.

The common Community rules have recently been amended in the light of the multilateral trade negotiations concluded in 1994 in order to ensure an adequate implementation of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 ("the Anti-Dumping Agreement") and the Agreement on Subsidies and Countervailing Measures ("the Subsidies Agreement"). Pursuant to the international obligation of the Community the Council adopted Regulation 3283/94 on protection against dumped imports from countries not members of the European Community and Regulation 3284/94 on protection against subsidised imports from countries not members of the European Community. Both Regulations entered into force on 1 January 1995.

In the light of the new Agreement on Safeguard after the completion of the GATT Uruguay Round and the Community’s obligations deriving from it the Council adopted Regulation 3285/94 on the common rules for imports in force from 1 January 1995. Whereas the Agreement on Safeguard also covers ECSC products the common rules for imports especially as regards safeguard measures apply also to those products.

Safeguard measures in trade in textiles are applied in accordance with the provisions of Regulation 3289/94 on common rules for imports of certain textile products from third countries.

In order to ensure the exercise of the Community’s rights under international trade rules, in particular those established under the auspices of the WTO the Council adopted Regulation 3286/94 laying down Community procedures in the field of common commercial policy (on actions taken under the New Commercial Policy Instrument). The mechanism under the Regulation aims to provide procedural means to react to obstacles to trade adopted or maintained by third countries which cause injury or otherwise adverse trade effects, provided that a right of action exists, in respect of such obstacles, under applicable international trade rules. The exercise of Community’s rights under international trade rules aims at: responding to obstacles to trade that have an effect on the market of the Community with a view to removing the injury resulting therefrom; and responding to obstacles to trade that have an effect on the markets of a third country, with a view to removing the adverse trade effects resulting therefrom. These procedures shall be applied in particular to the initiation and subsequent conduct and termination of international dispute settlement procedures in the area of common commercial policy.

The recently adopted Regulations are aimed at conformity with the international rules and disciplines of GATT 1994 (previously applied community legislation has been repealed).

The recorded actions of trade defence undertaken by the Community in its trade relations with third countries indicate that safeguard actions are relatively rare (in particular in the industrial sector) while anti-dumping procedures are of relatively frequent use.

7.3. The Bulgarian legislation on trade remedy actions

The Bulgarian side adopted in September 1993 Regulation 181 on protection against dumped or subsidised imports. The provisions of the Regulation follow the provisions of the Anti-Dumping Code of the GATT (1979) and of the GATT Code on Subsidies and Countervailing duties (1979). The provisions of the Regulation are based on the casual link between dumped or subsidised imports and the material injury or threat thereof sustained by domestic producers. No amendments have been introduced since then in particular to reflect the conclusion of the GATT Uruguay Round.

Safeguard measures are adopted in compliance with the provisions of Regulation 180 in force as of 15 September 1993 on implementation of safeguard measures on imports into the Republic of Bulgaria. Under the legal provisions of the Regulation measures against market disruption may be taken if the product in question is imported into Bulgaria in such increased quantities and under such conditions as to cause or threaten to cause serious injury to the Bulgarian producers of like or directly competitive products. The duration of the safeguard measures shall be one year.

The Bulgarian practice in the area of trade remedy actions indicates a clear preference to safeguard measures. During the period following the adoption of the two Regulations no anti-dumping action has been initiated while several safeguard measures against imports of products taking place in such increased quantities and under such conditions as to cause injury to domestic producers of like or directly competitive products have been introduced (steel pipes and tubes, electrical bulbs, motor tyres, matches, steel balls).

The reason for not resorting to anti-dumping actions is on one side the lack of competent expertise and on the other side lack of financing to hold the necessary investigations. In this area additional efforts are needed not only for adopting and implementing the legislation but also for creating an experienced team dealing with the application of this legislation in compliance with the international obligations of Bulgaria. In general the currently applied legislation on trade-remedy actions is still in its early stages.

The national legislation on commercial defence has to be consistent with the relevant GATT rules (the Agreement on the Implementation of Article VI of the GATT 1994; the Agreement on Subsidies and Countervailing Measures; the Agreement on Safeguards). Therefore in this area the respective legislation has to be further developed.

As far as protective actions in bilateral relationship are concerned the application of measures (against dumped or subsidised imports) may be prohibited after the adoption of Community competition rules. Having achieved that a political decision will be needed to adapt the provisions of the Europe Agreement in order to ban anti-dumping and anti-subsidy measures between the two parties.

8. The consequences of the GATT Uruguay Round and the latest enlargement

The free trade area between Bulgaria and the Community shall be established in conformity with the provisions of the GATT. With this regard the Agreement provides for an examination to take account of the consequences of the multilateral trade negotiations under the auspices of General Agreement on Tariffs and Trade.

As far as enlargement is concerned the Agreement provides for consultations in between the parties in the Association Council in the event of a third country acceding to the Community so as to ensure that account can be taken of the mutual interests of the Community and Bulgaria stated in the Agreement. Upon accession the new Member State while accepting acquis communautaire will become a party to the Europe Agreement and will apply the Europe Agreement as of the date of accession.

Further to the discussions between the associated countries and the European Union on the strategy to be followed with a view to preparing these countries for accession (following the decision of the European Summit in Copenhagen June 1993 that future relationship with the countries from Central and Eastern Europe shall be geared to the objective of membership) the European Summit meeting in Essen (December 1994) decided that the Association Agreements will be adapted in the light of enlargement of the Union at the beginning of 1995 in order not to disrupt traditional trade flows and of the conclusion of the Uruguay Round, and to further develop trade.

Further to this conclusion negotiations were opened on trade in textiles and trade in agricultural and processed agricultural products. These negotiations are to be considered in the framework of the pre-accession strategy as further building upon the Europe Agreement.

8.1. The impact of the GATT Uruguay Round

The commitments on market access while contributing to further liberalisation of international trade will influence the free trade area between Bulgaria and the European Communities by diminishing (and in some cases eliminating) the margin of preference vis-И-vis third trading partners. Such tariff reductions taking place on an erga omnes basis will be automatically applied for the purposes of the establishment of the free trade area (Article 8 of the Agreement). Those products of Bulgarian origin for which the Community has granted duty free access under its international commitments will face increased competition on Community markets. Therefore the GATT Uruguay Round results will affect exports of industrial products with the Community to the extent of offering equal market access opportunities to all Community suppliers for the products under duty free treatment on an erga omnes basis (erosion of the preferences granted).

In trade in agricultural products the commitments on market access (Agreement on Agriculture under the WTO Multilateral Trade Agreements) provide for converting all non-tariff border protection measures into tariff measures (tarification of non-tariff measures) and granting tariff reductions in the course of the successive five years.

As a result of the substantial modification of the system of border protection Bulgarian agricultural exports to the Community will be affected as follows:

- the tarification (conversion of variable levies into specific duties) will result in greater transparency of the border protection system; the effect of tarification on the margin of preference in some cases is neutral (the margin is maintained vis-И-vis third countries);

- however for some products the tarification will result in lesser market access opportunities on the Community markets as the levels of the specific duties are higher than the levels of the variable levies applied during the last years (pig meat, poultry meat and eggs);

- for products subject to border protection in the form of tariffs (meat of game, fatty liver of geese or ducks, fresh, dried or provisionally preserved fruit and vegetables, prepared or preserved fruit and vegetables, fruit and vegetable juices, tobacco) the GATT commitments of the Community will result in diminishing or eliminating the margin of preference; in some cases the erga omnes levels allow to maintain the margin in relative or even in absolute terms); in other cases (for example fatty livers of geese which are traditionally exported to the Community markets) the margin of preference could not be re-established;

- the system of reference prices applied on imports of some fresh fruit and vegetables which has been considered as having more restrictive effect than the applied duty rates has been replaced by the system of entry prices; the tarification resulted in such a high level of the specific duty which would apply in addition to the ad valorem duty that it would have been impossible to export; (the Europe Agreement provides for reductions of the tariff element of border protection; there are no provisions on non-tariff protection such as the reference prices; simply the Bulgarian exporters had to comply with the reference prices; in case of non-observance of these prices countervailing duties were introduced); therefore Bulgarian exporters observing the new system of entry prices will benefit from the ad valorem reductions (in case of import prices falling below 92% of the announced entry price levels the full amount of the specific duty which is the tariff equivalent of the reference prices, would have to be paid);

- as a result of the tarification the voluntary export restraint imposed on Bulgarian exports of sheep and goat live animals and meat thereof has been converted into a country specific tariff quota; the additional restrictions on observing sensitive periods and regions were eliminated in parallel to the expiry of the restraint Agreement.

The bilateral negotiations to formally adapt the Europe Agreement to take account of the results of the GATT Uruguay Round in agricultural trade are well under way. The Community is considering further tariff reductions to the amount of 80% besides the technical adaptation due to modification of border protection. No compensation of the erosion of preferences has been envisaged. The formal conclusion of an Agreement (in the form of an additional protocol) is conditional on applying the principles of Community preference and reciprocity ( conclusions of the Cannes European Council, June 1995). The requirement is that Bulgaria (and the other associated countries) will continue to apply on imports from the Community the duty rates in force on the date of entry into force of the Agreement (Article 26 of the Europe Agreement), i.e. will observe the provision on standstill for all agricultural products for which the GATT commitments allow an increase of tariff rates. In this case the argument of the Community is that the Europe Agreement commitments are prevailing to international commitments. However it is worth mentioning that maintaining the tariff rates prior to Uruguay Round in relations with the Community will result in additional concessions for products subjected to tariff increases. With this respect further improvement in market access (as initially suggested by the European Commission) will balance the concessions granted (in the form of introducing flexibility provisions for tariff quotas allowing for better utilisation and progressive increase of these quotas with a view to arrive at unlimited concessions thus aiming at progressive integration of agricultural trade into the free trade area). The prospect of integrating the agricultural trade into the free trade area with the Community will ease the pressure on Bulgaria from the other GATT contracting parties to lower its m.f.n. rates. At the same time GATT tariff bindings of Bulgaria comparable to those of the Community will help future alignment of tariffs upon accession of Bulgaria to the European Union (there will be no need to compensate other GATT contracting parties, therefore the GATT tariff increases are in the interest of the Community).

The market expansion of Community exports to the markets of the associated countries in parallel with the low level of utilisation of tariff quotas opened for these countries resulted in substantial trade deficits (only Hungary registered a surplus in its agricultural trade with the Community in 1993). While addressing trade imbalances account should be taken also of the system of export refunding applied by the Community on exports destined to the associated countries with a view to avoid market disruption while these markets are undergoing restructuring.

The progress achieved so far (four rounds of bilateral discussions) indicate that a more flexible approach will be needed in order to arrive at a substantial improvement of the agricultural trade part of the Europe Agreement.

On the basis of the GATT Agreement on the Application of Sanitary and Phitosanitory Measures an agreement between Bulgaria and the European Union in the area of veterinary and phytosanitory measures could contribute to facilitating trade in agricultural products (some of the associated countries e.g. Poland, Romania have started negotiations of such an agreement).

In the area of movement of goods and pending the formal adaptation of the Europe Agreement interim and autonomous measures will be taken to avoid disruption of trade flows following implementation of the results of the Uruguay Round on 1 July 1995 on the part of the Community (the Bulgarian side has not completed yet its WTO accession negotiations and therefore continues to apply its current tariff rates thus observing the standstill requirement).

8.2. The impact of the enlargement

The accession of the free former EFTA States (Austria, Finland and Sweden) to the European Union affected export rather than import trade flows between Bulgaria and these countries. With the exception of Finland with which Bulgaria had already established free trade in industrial products under the bilateral Agreement on Reciprocal Removal of Obstacles to Trade (signed 26 April 1974) the tariff treatment for industrial products on imports coming from these countries has been identical to the treatment granted to the European Union. This has been achieved during the negotiations on Bulgaria-EFTA Free Trade Agreement on the basis of the principle of parallelism between the Europe and the EFTA Agreement. In trade with agricultural products Bulgaria has concluded bilateral arrangements with each one of the EFTA States. In this sector of trade Bulgarian exports have lost their margin of preference vis-И-vis Community economic operators enjoying the opportunities of the Internal market after the accession of the three new member States (for industrial products the free trade area has already been established under bilateral Agreements). Besides for some main agricultural products Bulgarian exports have received unlimited duty-free access (e.g. exports of wine to the Scandinavian markets, of some fresh fruit and vegetables to the Austrian market)

On the export side the situation is as follows:

- in trade in textiles Bulgarian access to the markets of the three countries has not been subjected to quantitative restriction; upon their accession to the Union quantitative limitations are applied; negotiations were held with a view to adapt Community wide quotas to take account of the enlargement; nevertheless the introduction of quantitative limitations has a restrictive trade effect;

- the market access opportunities for textiles on the Finnish market have been additionally diminished as a result of the re-establishment of duties insofar as these Bulgarian exports enjoyed duty-free access prior to Finland’s accession; exports of textiles to Austria and Sweden were partially affected by the re-introduction of duties (under the Agreement with EFTA a part of textile products has been immediately liberalised with the entry into force of the Agreement);

- in trade with ECSC products the precautionary safeguard measures undertaken in bilateral trade with the Community (the double checking licensing system) are applied also on Bulgarian exports to these markets;

- all contingent protection measures (e.g. anti-dumping on exports of fertilisers, voluntary restraint in sheep and goat meat sector) apply also to the market territories of the new Member States;

- in trade in agricultural products the import protection of the three new member States has been based to a large extent on non- tariff barriers (e.g. extensive licensing system with more restrictive trade effect than tariffs); in some cases it has been considered that their import regimes for agricultural products are much more protective than the regime of the Community; with this respect their accession to the European Union will affect adversely mainly the price based elements of market access opportunities for Bulgarian products.

Negotiations on the formal adaptation of the Europe Agreement are under way. In trade in textiles these negotiations are completed and the enlarged Community wide quantitative limitations are de facto applied. In trade in agricultural products the formal adaptation due to enlargement will be accomplished in parallel to the adjustment to take account of the Uruguay Round. Meanwhile autonomous and temporary measures deemed necessary to bridge the gap between the date of accession and the formal adaptation are being implemented. The first series of these measures (tariff quotas opened under the bilateral arrangements on agriculture) has already been introduced. The second series (based on trade performance) is still under consideration. The substantial part of Bulgarian exports to the markets of the new Member States is falling under the second series which is expected to be applied retroactively as of 1 January 1995 for a period of one year (till the end of 1995). The Bulgarian side has also opened tariff quotas according to the provisions of bilateral agreements with Austria, Finland and Sweden. As far as trade performance is concerned the Bulgarian side confirmed its readiness to implement autonomous measures as of the date Community implementation takes place.

On the whole the adaptation due to enlargement is negotiated on the basis of the Europe Agreement without counting debits and credits in relation to trade regimes prior to and after the accession of the new Member States. Compensations for Bulgaria (and for the other associated countries) are not envisaged.

9. Conclusions

9.1. The significance of the Europe Agreement

- with the entry into force of the Europe Agreement the progress of political and economic reforms in Bulgaria has been recognised;

- while approving the Agreement the Council of Ministers of the European Union decided to grant Bulgaria the treatment of market economy in the area of commercial defence; moreover all residual restrictions applied under Community trade regimes for state trading countries were abolished with the entry into force of the Agreement;

- further to the decisions of the European Council meeting in Copenhagen the ultimate goal of Bulgaria to join the European Union has become a shared objective; with this regard the establishment of the free trade area between Bulgaria and the European Union will substantially contribute to the achievement of the objective of membership;

- the Europe Agreement is the main instrument for accomplishing this objective as in the area of free movement of goods the provisions of the Agreement follow the text of the Treaty establishing the EEC for the purposes of the establishment of the Customs Union between Member States;

- upon completion of the process of progressive trade liberalisation will be possible to meet the requirement of prohibition as between Member States of all customs duties and quantitative restrictions and charges of equivalent effect;

- however it has to be emphasised that the provisions of the EEC Treaty cover all trade, while the free trade area between Bulgaria and the European Union covers substantially all trade excluding trade in agricultural and processed agricultural products;

9.2. The implementation of the Agreement and its impact on the Bulgarian economy

- while exploring the effects of the Agreement and taking into account the increasing share of trade with the European Union in total Bulgarian trade it is anticipated that trade liberalisation will contribute to the overall liberalisation of Bulgarian economy and will provide for revitalisation and economic growth;

- under the provisions of the Europe Agreement Bulgaria will gradually open up its market to imports from the Community during a period lasting a maximum of ten years which is considered as a reasonable length of time to allow Bulgarian industries to adapt to increased competition while diminishing the adjustment costs;

- at the same it is considered that increased competition will assist the process of restructuring the domestic production away from a highly protective market, towards activities where the country has an actual or potential comparative advantage;

- taking into account the agreed upon timetable for phasing out tariffs for the bulk of Bulgarian imports from the Community the process of duty dismantling has not started yet; Bulgaria will grant free trade to the Community in the year 2002;

- on the export side in line with the agreed upon principle of asymmetry the substantial part of Bulgarian exports to the Community was liberalised with the entry into force of the Agreement; for the remaining part including products of the so-called sensitive sectors of trade Bulgaria will be granted liberalised access to Community markets in 1998;

- on the whole it may be considered that increased market access opportunities affected positively Bulgarian exports to the Community; trade liberalisation according to available data has been of great significance for the exports of the so-called sensitive sectors (a notable exception is the agricultural sector) which rapidly responded to market access opportunities;

- it has become evident that the utilisation of the concessions granted is greatly influenced by the way the Community applies its trade defence instruments; in some cases it turned out that in order to avoid the invocation of its specific safeguard clauses it is preferable to restrict or modify exports.

9.3. Further building upon the Europe Agreement

- a re-assessment of the trade package may be undertaken in the light of inter alia the results of the GATT Uruguay Round;

- in the short run a balanced assessment of the trade provisions is needed to take account of the marked expansion of Community agricultural exports;

- in the medium run the prospect of integrating the agricultural sector into the free trade area may be considered; this will allow for gradual adaptation of price levels and thus reduce the cost of accession to the Common agricultural policy of the EU;

- with a view to approximate policies, but also to facilitate trade an agreement in the area of veterinary and phytosanitory measures should be negotiated.