Czech RepublicWT/TPR/S/xx
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WorldTrade
Organization
WT/TPR/S/89
19 September 2001
(01-4315)
Trade Policy Review Body
TRADE POLICY REVIEW
CZECH REPUBLIC
Report by the Secretariat
This report, prepared for the second Trade Policy Review of the Czech Republic, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from the Government of the Czech Republic on its trade policies and practices.
Any technical questions arising from this report may be addressed to Mr.W.Alfaro (tel. 739 5372) or Mr. C. Boonekamp (tel. 739 5226).
Document WT/TPR/G/89 contains the policy statement submitted by the Government of the Czech Republic.

Note:This report is subject to restricted circulation and press embargo until the end of the meeting of the Trade Policy Review Body on the Czech Republic.

Czech RepublicWT/TPR/S/89
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CONTENTS

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OVERVIEWvii

I.Economic environment1

(1)Recent Economic Developments1

(2)Structural Reforms – the Causes of the Financial Crisis and Beyond7

(3)Trade and Foreign Investment Performance8

(i)Trade patterns8

(ii)Investment patterns10

(4)Outlook11

II.DEVELOPMENTS IN trade AND INVESTMENT policy12

(1)Institutional Framework12

(i)Institutional structure12

(ii)Policy formulation and implementation13

(iii)Transparency and openness of decision making14

(iv)Main laws and regulations15

(2)Developments in International Relations16

(i)World Trade Organization16

(ii)Regional agreements18

(iii)Bilateral agreements24

(iv)Unilateral tariff preferences24

(3)Developments in Foreign Investment Regime25

III.MARKET ACCESS IN GOODS28

(1)Customs Procedures28

(i)Valuation, clearance, and inspection28

(ii)Rules of origin29

(2)Tariffs and Other Charges Affecting Imports30

(i)MFN tariffs (applied rates and bindings)30

(ii)Regional, bilateral and unilateral tariff preferences33

(iii)Tariff quotas and seasonal tariffs in agriculture34

(iv)Tariff concessions and exemptions35

(v)Balance-of-payments measures35

(vi)Indirect taxation36

(3)Import Licensing and Control37

(i)Trade prohibitions37

(ii)Licensing – with and without volume limits37

(4)Contingency Measures38

(i)Anti-dumping and countervailing measures38

(ii)Safeguard measures39

(5)Standards and Technical Regulations41

(6)Other Measures Affecting Market Access in Goods43

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IV.OTHER POLICIES AFFECTING TRADE IN GOODS44

(1)Export Measures at the Border44

(i)Export licensing and control44

(ii)Duties and taxes, and minimum export prices44

(2)Export Assistance45

(3)State Aid46

(4)Government Procurement49

(5)Privatization and Public Enterprise Restructuring50

(6)Bankruptcy Law and Practice55

(7)Competition law56

(8)Protection of Intellectual Property58

V.DEVELOPMENTS IN SELECTED SECTORS63

(1)Financial Services63

(i)Banking services63

(ii)Insurance services66

(iii)Other financial services67

(2)Telecommunications Services68

(3)Transport Services71

(4)Tourism Services73

REFERENCES75

APPENDIX TABLES79

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CHARTS

I.Economic environment

I.1External developments, 1993-20004

I.2Intensity of intra-industry trade with selected partners, 1996 and 20009

II.DEVELOPMENTS IN trade AND INVESTMENT policy

II.1Trade with free-trade agreement partners, 1993-200021

III.MARKET ACCESS IN GOODS

III.1 Frequency distribution of MFN tariffs, 1995 and 200131

III.2Applied MFN tariffs 1995 and 2001 and bound rates, by HS section32

III.3Tariff escalation by 2-digit ISIC industry, 200133

IV.OTHER POLICIES AFFECTING TRADE IN GOODS

IV.1Privatization and evolution of ownership structure, 1990-200052

V.DEVELOPMENTS IN SELECTED SECTORS

V.1The Czech banking system, 1989-9963

V.2Evolution of selected telecommunication services, 1994-200069

TABLES

I.Economic environment

I.1Selected economic indicators, 1993-20001

I.2Czech Republic at a glance, 1990-20003

I.3Foreign direct investment by sector and country, 1995-200010

II.DEVELOPMENTS IN trade AND INVESTMENT policy

II.1Promulgation of laws and treaties, 1993-200015

II.2The Czech Republic's main legislation related to trade, April 200116

II.3Sectors subject to foreign investment restrictions, 200126

III.MARKET ACCESS IN GOODS

III.1Key features of the Czech MFN tariff structure, 1995-200131

III.2MFN tariffs (simple average) by stage of processing, 1995, 1998 and 200132

III.3Czech tariff preferences by agreement and import volumes, 200134

III.4Taxes levied on imported and domestic goods and services, May 200136

III.5Czech technical regulations and standards, 1991-200042

IV.OTHER POLICIES AFFECTING TRADE IN GOODS

IV.1Classification of subsidies from the State budget, 1994-200047

IV.2Transfers associated with agricultural policies, 1996-200048

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IV.3Key features of the Czech Republic's procedures on government procurement50

IV.4Competitive and non-competitive activities53

IV.5Main provisions of the Czech Republic's competition law57

IV.6Summary of intellectual property protection in the Czech Republic, June 200159

IV.7Enforcement of Intellectual Property Rights, 1997-200062

APPENDIX TABLES

I.Economic environment

AI.1Balance of payments, 1993-200081

AI.2 Exports by destination, 1993-200082

AI.3Imports by origin, 1993-200083

AI.4Exports by group of products, 1993-200084

AI.5Imports by group of products, 1993-200085

II.DEVELOPMENTS IN trade AND INVESTMENT policy

AII.1Selected Czech notifications to the WTO, June 200186

AII.2The Czech Republic's preferential trade agreements, April 200190

III.MARKET ACCESS IN GOODS

AIII.1Average tariffs and bindings, by H.S. chapter91

AIII.2Tariff quotas, 200195

AIII.3Import and export licensing, 200198

IV.OTHER POLICIES AFFECTING TRADE IN GOODS

AIV.1Summary of the State aid system in the Czech Republic99

Czech RepublicWT/TPR/S/89
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OVERVIEW

  1. The Czech economy is recovering from the 1997-99 recession: led by exports and a surge in foreign direct investment, GDP grew by 2.9% in 2000 following three years of negative growth. The recession was caused by both microeconomic factors, such as an insufficient restructuring of the corporate and banking sectors, and macroeconomic imbalances, including a deterioration in the General Government accounts.
  2. In addressing the recession, the Czech Government took significant steps to enhance the economic climate, both through domestic reform and by further trade and investment liberalization. The legal environment for economic and trade activities has also substantially improved since the Czech Republic's previous Trade Policy Review in 1996. A broadly coherent body of commercial and trade law is now in place. Much of the progress can be attributed to the Czech Republic's goal of accession to the European Union (EU). EU harmonization, which requires absorption of the EU acquis communautaire, has proved to act as a catalyst to speed up the implementation of the reform agenda. While the legal environment is good on paper, it appears that weaknesses in the dispute resolution system continue to be a problem. The slow functioning of the overburdened commercial courts and weak enforcement has been identified as a factors hampering the business environment.
  3. The Czech Republic remains highly integrated into the world economy. Merchandise trade (exports and imports) were the equivalent of 120% of GDP in 2000 (up from 105% in 1994), and the ratio of foreign investment to GDP was 5.3% (9% in 1999). The geographic distribution of merchandise trade has continued to move towards western Europe, reflecting the Czech Republic's continued integration with western Europe. In 2000, the EU accounted for almost 69% of total merchandise exports and 62% of total imports.
  4. The Czech Republic participates actively in the work of the WTO. It grants at least MFN treatment to all WTO Members, as to several other countries with which bilateral agreements have been signed. During the period under review, the Czech Republic has continued to undertake major commitments within the multilateral framework, including in basic telecommunications and financial services. Under the WTO dispute settlement mechanism, the Czech Republic has been involved in two cases, one as a complainant and one as a respondent. In both cases, the disputes have been resolved through bilateral consultations.
  5. Trade liberalization has been an important element in the reform agenda during the period under review. The average Czech MFN tariff rate has been lowered by two percentage points, to 6% in 2001. Moreover, both tariff dispersion and the number of rates have decreased since the previous review. With no specific, composite or other non-ad valorem rates, the Czech tariff system remains transparent. All tariff lines are bound (almost all at the applied MFN rates), fostering a more predictable trading environment for businesses.
  6. Most agricultural goods, however, are protected by relatively high tariffs. The simple MNF tariff average for agriculture products (WTO definition) in 2001 was 13.4%, compared with an average rate of 4.3% for non-agricultural goods.
  7. Given the large number of preferential trading agreements to which the Czech Republic participates, MFN rates apply only to a limited share of Czech imports (78% of total imports in 1999 were from free-trade agreement partners). The Czech Republic has continued to build up its network of preferential trade agreements. As part of its efforts to accede to the EU, the Czech Republic has to adopt all of the preferential agreements concluded by the EU with third countries. Towards this end, the Czech Republic has concluded several free-trade agreements during the period under review (Estonia, Latvia, Lithuania, Israel and Turkey), while continuing liberalization within the framework of previous agreements. Although these have helped further open the Czech market, such arrangements may also distort trade and investment patterns as they involve different margins of preferences. The impact on net trade creation of the Czech's possible accession to the EU is not completely clear. Non-tariff barriers on an MFN basis are expected to fall. On the other hand, EU membership is most likely to raise the level of protection in agriculture as the current overall MFN tariff on agricultural goods is higher in the EU than in the Czech Republic; agricultural assistance is also likely to increase significantly. Nevertheless, integration with the EU should accelerate the Czech Republic's economic development and provide renewed opportunities for further economic and trade reforms.
  8. The Czech import regime has relatively few non-tariff barriers. Some items have been removed from the list of automatic licensing during the review period. A non-automatic licence continues to apply to imports of, inter alia, certain: sugar, coal, explosives, and firearms. As part of the accession to the EU, the Czech Republic is harmonizing its standards and technical regulations with those of the EU. Towards that end, several new laws have been enacted, simplifying the testing and standardization process. The Czech Republic has also concluded mutual recognition agreements for the results of conformity assessments with several countries. Amendments to the government procurement legislation provide for enhanced transparency, but the system appears to discriminate, in some instances, against foreign firms. The Czech Republic became an observer to the WTO Agreement on Government Procurement in August 2000. Competition rules as well as intellectual property rights legislation have been strengthened during the period under review. Regarding contingency measures, the Czech Republic has recently enacted legislation pertaining to anti-dumping, countervailing and safeguard measures. It is yet to be seen if the Czech Republic will be an active user of contingency measures.
  9. Along with liberalization of the foreign investment regime, total foreign investment (net) has jumped in recent years to around 9% of GDP in 1999. As part of its accession to the Organization of Economic Cooperation and Development (OECD) in December 1995, the Czech Republic agreed to meet, with a few exceptions, the OECD's standards for equal treatment of foreign and domestic investors, and on restrictions on special investment incentives. Foreign investment in a few sectors (mainly services) remain restricted or controlled.
  10. The Czech Republic has progressively changed its policy on foreign investment incentives during the period under review. In May2000 a package of incentives was approved, changing the previous policy of offering investment incentives on a case-by-case basis (subject to governmental approval), a major change from the "no incentives" policy during 1992-98. The package appears to have been designed to bring the Czech Republic into line with its competitors for inward investment. However, it is not clear if the benefits of the incentive package outweigh the associated costs. Investment incentives are typically not the best solution.
  11. The deficiencies in the banking sector were among the factors behind the 1997 recession. Imprudent lending by state-owned banks enabled enterprises to postpone restructuring. The unreformed enterprise sector was also a result of the State involvement through indirect ownership (state-owned banks owned investment funds which in turn owned enterprises). Moreover, it was apparent that weaknesses in regulation and supervision of capital market institutions (investment funds, pension funds and insurance companies) would prevent the build up of strong governance structures and faster enterprise restructuring. Against this backdrop, a number of bank and capital market reforms were implemented in several steps. Many of the reforms were also implemented with the aim of harmonizing Czech law and regulations with those of the EU. In particular, the central bank strengthened the regulatory framework for bank supervision, moved towards a consolidated supervision, incorporated market risk into the capital adequacy requirement, tightened provisioning requirements, and revoked a number of bank licenses. The deficiencies in the banking sector were also addressed with privatization. With the privatization of three large state-owned banks during the review period, there is only one remaining state-owned commercial bank left, which is also slated for privatization for the second half of 2001.
  12. In addressing enterprise restructuring, the Government set up a Revitalization Agency, with a mandate to prepare a limited number of heavily indebted companies for privatization. An inadequate bankruptcy legal framework was perceived as impeding
    enterprise restructuring. Thus, the bankruptcy law has been amended several times since 1996, aimed at facilitating and speeding up the bankruptcy process. Notwithstanding the recent changes to the bankruptcy law, the present law appears to still suffer from some weaknesses.
  13. Regarding other areas of services, the Czech Republic has embraced competition in the telecommunications sector by gradually opening up its markets to national and foreign investors. The telecom monopoly company has been partly privatized, and, most recently, additional operators were allowed in the provision of international and long-distance services. Progress has been made in liberalizing transport services. As in 1996, the sector portrays a mixed picture. While the Czech Republic has a relatively competitive trucking industry and a non-subsidized airline company, passenger railway services and, to a lesser extent, bus services require large amounts of transfers to cover their losses.

Czech RepublicWT/TPR/S/89
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II.Economic environment

(1)Recent Economic Developments

Summary
  1. The Czech economy is recovering from the 1997-99 recession. The performance of the economy in recent years has been influenced by the 1997 currency crisis, and the subsequent restrictive macroeconomic stabilization measures implemented by the Government. These macroeconomic developments resulted in negative growth in 1997-99 but, combined with important structural reforms, served to promote a significant restructuring of the economy. The Czech Republic was perceived, until 1996, as the most successful transition economy.[1] Until then, the authorities were moving speedily with the structural reform agenda in a seemingly stable macroeconomic environment. By 1995, the country had relatively low inflation (9.1%) and unemployment (2.9%) (TableI.1). The GDP growth rate was high (5.9%), while the external current account deficit was moderate (2.6% of GDP). Structural reforms included an innovative privatization programme (voucher system), liberalization of foreign trade, wages and prices, and reforms in the social sectors. However, in 1997 the economy started its downward trend, contracting by 0.8% in 1997 and 1.2% in 1998.

Table I.1

Selected economic indicators, 1993-2000

1993 / 1994 / 1995 / 1996 / 1997 / 1998 / 1999 / 2000
Real economy / (Percentage change)
Real GDP growth rate / 0.1 / 2.2 / 5.9 / 4.3 / -0.8 / -1.2 / -0.4 / 2.9
(Per cent)
Share of non-state sector in GDP / 45.1 / 61.3 / 66.5 / 71.9 / 76.0 / 77.6 / 77.2 / 76.2
Unemployment rate (end of period)a / 3.5 / 3.2 / 2.9 / 3.5 / 5.2 / 7.5 / 9.4 / 8.8
Inflation (consumer price index, period average) / 20.8 / 10.0 / 9.1 / 8.8 / 8.5 / 10.7 / 2.1 / 3.9
Private consumption/GDP / 49.9 / 50.7 / 50.1 / 51.5 / 52.9 / 51.6 / 53.3 / 53.7
Gross national savings/GDP / 28.7 / 27.8 / 29.9 / 27.3 / 26.3 / 27.0 / 25.6 / 25.6
Gross domestic investment/GDP / 28.5 / 29.6 / 32.2 / 31.9 / 30.9 / 28.3 / 26.8 / 27.2
Labor productivity (percentage change) / .. / 1.1 / 5.2 / 4.6 / -0.3 / -0.8 / 1.4 / 3.8
Public finances / (Per cent of GDP)
State budget balance, excl. privatization revenues / 0.1 / 0.9 / 0.5 / -0.1 / -0.9 / -1.6 / -1.6 / -2.4
General government balance, excl. privatization revenues / 0.4 / -1.9 / -1.6 / -1.9 / -2.0 / -2.4 / -1.9 / -4.2
General government balance, incl. privatization revenues / 2.6 / 0.8 / 0.3 / -0.3 / -1.2 / -1.5 / -0.6 / -3.1
Revenues / 43.8 / 42.6 / 41.9 / 40.5 / 39.4 / 38.4 / 40.3 / 39.5
Expenditures / 41.2 / 41.9 / 41.5 / 40.8 / 40.6 / 39.9 / 40.8 / 42.7
Gross public debt / 18.8 / 17.6 / 15.3 / 13.2 / 12.9 / 13.1 / 14.5 / 16.9
Money and credit / (Percentage change)
Broad money (M2) / 19.8 / 19.9 / 19.8 / 9.7 / 9.8 / 5.4 / 8.1 / 6.5
Credit to enterprises and households / 19.1 / 16.8 / 13.2 / 10.6 / 9.4 / -3.5 / -3.9 / -2.8
Net foreign assets / .. / 68.0 / 60.2 / -9.5 / 20.1 / 25.6 / 34.1 / 18.0
Interest rates / (Per cent)
Interbank offer rate (3 months PRIBOR) / 13.1 / 9.1 / 10.9 / 12.0 / 16.0 / 14.3 / 6.8 / 5.4
Average lending rate / 14.1 / 13.1 / 12.8 / 12.5 / 13.2 / 12.9 / 8.7 / 7.2
Average deposit rate / 7.0 / 7.1 / 7.0 / 6.8 / 7.7 / 8.1 / 4.5 / 3.4
Table I.1 (cont'd)
Balance of payments / (Per cent, unless indicated otherwise)
Trade balance/GDP / -1.5 / -3.4 / -7.1 / -10.1 / -8.6 / -4.5 / -3.5 / -6.5
Merchandise exports (US$ billion) / 14.2 / 15.9 / 21.5 / 21.7 / 22.8 / 26.4 / 26.3 / 29.0
Merchandise exports (volume change) / .. / 6.5 / 17.0 / 6.2 / 13.7 / 13.7 / 8.7 / 8.1
Merchandise imports (US$ billion) / 14.8 / 17.3 / 25.1 / 27.6 / 27.3 / 28.9 / 28.2 / 32.3
Merchandise imports (volume change) / .. / 20.2 / 27.0 / 12.5 / 10.7 / 8.0 / 6.0 / 6.4
Current account balance/GDP / 1.3 / -1.9 / -2.6 / -7.4 / -6.1 / -2.3 / -2.9 / -4.7
Financial account/GDP / 8.6 / 8.2 / 15.8 / 7.2 / 2.0 / 5.1 / 5.6 / 6.6
Gross official reserves (US$ billion, end of period) / 3.9 / 6.2 / 14.0 / 12.4 / 9.8 / 12.6 / 12.8 / 13.1
Reserve cover (in months of merchandise imports) / 3.2 / 4.2 / 6.7 / 5.5 / 4.7 / 4.8 / 5.7 / 4.8
Reserve cover (in months of current payment) / .. / 3.1 / 5.3 / 4.1 / 3.3 / 4.0 / 4.1 / 4.1
Gross external debt (convertible currencies)/GDP / 24.9 / 25.4 / 31.9 / 36.4 / 44.0 / 39.1 / 43.1 / 41.1
External debt serviceb / .. / 8.7 / 9.3 / 10.9 / 15.7 / 15.1 / 12.5 / 12.2
Exchange rates
Nominal exchange rate (CZK per US$, average) / 29.2 / 28.8 / 26.5 / 27.1 / 31.7 / 32.3 / 34.6 / 38.6
Nominal effective exchange ratec / 99.3 / 99.9 / -0.9 / 1.0 / -3.7 / -0.6 / -3.6 / 6.0
Real effective exchange rate (ULC)c / 87.3 / 3.1 / 3.9 / 5.8 / -0.4 / 8.1 / -0.7 / ..
Memo: Gross domestic product (current US$ billion) / 34.9 / 41.1 / 52.0 / 57.9 / 53.0 / 56.9 / 54.5 / 50.8

..Not available.

aPer cent of labour force.

bPer cent of goods and non-factor services exports.

cIncrease indicates depreciation.

Source:Information provided by the Czech authorities; IMF (2000a), Public Information Notice (PIN) No. 00/60; IMF (2000b), IMF Staff Country Report No. 00/96; and World Bank (1999a), A World Bank Country Study - Czech Republic Towards EU Accession.

  1. Both microeconomic fundamentals and macroeconomic imbalances caused the recession. Among the microeconomic factors were an unreformed enterprise sector (resulting from the diffuse ownership that emerged from the voucher privatization programme) and imprudent lending by state-owned banks. These factors permitted excessive wage increases (growth in real wages outstripped GDP growth) and labour hoarding (i.e. firms being reluctant to lay off excess workers).[2] As a result, the external competitiveness of domestic firms deteriorated, which worsened the current account position and undermined confidence in the currency. At the same time, large capital inflows rendered monetary policy difficult and led to a continued appreciation of the real exchange rate, which contributed to the decline in competitiveness. Driven by investors' perception of an unsustainable current account deficit (7.4% in 1996), the authorities were forced to abandon the pegged exchange rate policy regime and to introduce a strict austerity programme. Tight fiscal and monetary policies that followed the currency crisis, contributed to the recession. A subsequent loosening of these policies and movement on the structural agenda (including bank and enterprise restructuring) contributed to the recent recovery. Following three years of contraction, the economy recovered by 2.9% in 2000 and is estimated to expand by 3.5-3.8% in 2001-02. The recovery of demand in the EU, the Czech's most important trading partner, and a surge in foreign direct investment have helped to turn the economy around.[3] Unemployment, which increased sharply during the recession, reached its peak in January 2000 at 9.8%, it had decreased to 8.1% by May 2001.
  2. The economic recession took a heavy toll on GDP per capita. Agriculture continues to play a diminishing role in the Czech economy: its share of GDP dropped from 4.4% in 1995 to 3.4% in 2000, while industry's share remained at about the same level (TableI.2). Over the same period, services fell slightly, mainly construction and wholesale, but still accounted for more than half of GDP in 2000.

Table I.2