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.
|