II - International Trade



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North America and Global Economy

CPL2-561-781

Presented to Kenneth N. Matziorinis

By Andre Lacombe 260111284

Dominique Vezina 110152250

March 4th, 2004

I - INTRODUCTION 4

II - COUNTRY PROFILE 5

II.1 Population 5

II.2 Geography 5

II.3 Economic 5

II.4 Government finances 6

II.5 Balance of payments position 6

II.6 Politics 7

II.7 Regional trade organization participation 7

II.8 State of bilateral relations with Canada 7

II.9 Global rankings 7

III – INTERNATIONAL TRADE, ASSESSMENT AND OUTLOOK FOR TRADE 8

1 – POLAND 8

1.1- Poland – Imports/ Exports 8

1.1.1 – Imports/Exports with the World 8

1.1.2 – Imports/Exports with the United States 9

1.1.3 - Imports/Exports with Canada 9

1.2 - Foreign Direct Investment and capital flows 9

1.3 - Foreign Direct Investment and Canada 10

1.4 – Trade dispute 11

1.5 - Assessment and Outlook for trade 11

1.6 - Outlook for trade and relations with Canada 12

2 – HUNGARY 13

2.1 - Hungary – Imports/ Exports 13

2.1.1 – Imports/Exports with the World 13

2.1.2 – Imports/Exports with the United States 13

2.1.3 – Imports/Exports with Canada 14

2.2 – Foreign Direct Investment and Capital Flows 14

2.3 – Foreign Direct Investment and Canada 15

2.4 – Trade Issue 15

2.5 – Trade Dispute 15

2.6 – Assessment and Outlook for trade 16

2.7 - Outlook for trade and relations with Canada 17

3 – SLOVAKIA 17

3.1 - Slovakia – Imports/ Exports 17

3.1.1 – Imports/Exports with the World 17

3.1.2 – Imports/Exports with the United States 18

3.1.3 – Imports/Exports with Canada 18

3.2 - Foreign Direct Investment and capital flows 18

3.3 - Foreign Direct Investment and Canada 19

3.4 – Trade dispute 20

3.5 - Assessment and Outlook for trade 20

3.6 - Outlook for trade and relations with Canada 20

4 – CZECH REPUBLIC 21

4.1 – Czech Republic – Imports/ Exports 21

4.1.1 – Imports/Exports with the World 21

4.1.2 – Imports/Exports with the United States 22

4.1.3 – Imports/Exports with Canada 22

4.2 - Foreign Direct Investment and capital flows 22

4.3 - Foreign Direct Investment and Canada 23

4.4 – Trade dispute 24

4.5 - Assessment and Outlook for trade 24

4.6 - Outlook for trade and relations with Canada 25

IV – CONCLUSION 26

V – END NOTES 28

VI – BIBLIOGRAPHY……………………………………………………………………………………..29

APPENDIX A - POLAND………………………………………………………………………………….31

APPENDIX B - HUNGARY………………………………………………………………………………..42

APPENDIX C - SLOVAKIA…………………………………………………………………………..……51

APPENDIX D - CZECH REPUBLIC…………………………………………………………………...…60

I - INTRODUCTION

On May 1st 2004, the four countries of Central and Eastern Europe – Czech Republic, Poland, Hungary and Slovakia – will join the EU, along with six other countries. This historical moment will be filled with both hopes and challenges.

The CEE countries will now be part of «an internal market of more than 450 million citizens, accounting for roughly 18 % of world trade»1, sharing a set of trade rules, procedures and policies with the other EU countries. This new context should ease and promote trade with the rest of EU as well as with the rest of the world, including with Canada which counts EU as its second largest trading partner. At the same time, these countries are far poorer than the actual EU countries. With EU budgets already under pressure in order to meet the obligations of the Stability Pact, the CEE countries will not be able to count on much financial support from EU to increase their wealth. They will have to organize their economic structure in order to improve their productivity and competitiveness.

This report analyses the economic situation of the CEE countries and presents a profile of their actual trade activities. It also presents an economic outlook as well as an assessment of their potential for future trade activities, especially with Canada. The conclusion will put in perspective the similarities and differences between the four countries in relation with their economic future. A more general profile will also help to understand the situation specific to each country.

II - COUNTRY PROFILE

All statistics have been placed in appendices. The text below will focus on highlights, comparing the four countries of Central and Eastern Europe.

II.1 Population

(Appendices A.1, B.1, C.1, D.1):

Population:

Poland is by far the largest country in terms of population with close to 40 million people; having almost four times the population of the second largests (Czech Republic and Hungary). Slovakia is the smallest of the four, with a population close to 5.5 million. The growth rate is close to 0% in the four countries.

Age structure:

It is quite similar in the four countries, with Slovakia having a slightly younger median age (35 years) and Hungary having a slightly older one (38.4 years).

Religions:

Profiles are quite different with a proportion of Roman Catholics reaching 95% in Poland and of only 39% in the Czech Republic, where they are of equivalent proportion to the atheists. Calvinists are mostly present in Hungary with a proportion of 20%. Other religions are at 17.5% in Slovakia.

II.2 Geography

(Appendices A.1&A.2, B.1&B.2, C.1&C.2, D.1&D.2):

Poland is the largest country in terms of total area, with more than 300,000 sq. Km, more than three times the size of the second largest, Hungary. Slovakia is the smallest with a total area close to 49,000 sq. km. Poland is also the only one of the four countries with a coastline, the three other ones being landlocked.

II.3 Economic

(Appendices A.2, B.2, C.2&C.3, D.2):

GDP:

Although the Czech Republic has the highest GDP per capita in terms of PPP, it has the slowest growth rate. The situation is exactly the opposite in Slovakia, with a GDP almost 30% under that of the Czech Republic and a growth rate which is twice as fast. Hungary and Slovakia share a quite similar GDP per capita in terms of PPP but Hungary’s growth rate is close to 1% under the one of Slovakia.

GDP composition by sector:

All of these countries have seen the relative importance of agriculture diminishing in the past years. It now represents around 4% of GDP, with a slightly higher rate of 4.5% in Slovakia. In all four economies, Services have the largest share of GDP. Czech Republic is the country with the most important industrial sector as a percentage of its GDP.

Inflation:

Based on year 2002 statistics, Poland and the Czech Republic share a low inflation rate ranging between 1% and 2%; Slovakia and Hungary share a much higher one, at around 5%.

Unemployment:

Rates are quite high in Slovakia and Poland at around 18%. Hungary has the lowest rate at 5.8%.

II.4 Government finances

(Appendices A.3, B.3, C.3, D.3):

State budget:

All four countries record a budget deficit. Expressed in percentage of GDP, Czech Republic has the lowest deficit at 2.8% and Slovakia has the highest at 7.5%. Unfortunately, it was not possible to get this percentage for Hungary.

Public debt:

The gap between the four countries is significant. In terms of GDP’s percentage, Czech Republic has the lowest rate at 28%. Slovakia and Poland record quite higher rates at 35% and 44% respectively. Hungary’s rate is very high at 60%.

II.5 Balance of payments position

(Appendices A.3&A.4, B.3&B.4, C.3&C.4, D.3&D.4):

Trade and current account balance:

All four countries record a trade as well as a current-account deficit.

FDI flows:

These countries are largely net receivers of investments. Direct investments in Hungary seem to have been particularly low in 2002.

Portfolio investment flows:

Poland and Hungary are net receivers. In Czech Republic, outward investments have largely exceeded inward investments in 1999 and 2000. Slovakia also seems to be a net receiver but at a lesser degree than Poland and Hungary and with a less predictable pattern.

Foreign debt:

Once again, the gap is significant. In terms of GDP’s percentage, Poland records the lowest rate at

35%, Czech Republic and Slovakia are at 44% and 53% respectively, and Hungary records the highest rate at 63%. Hungary also recorded the highest public debt rate.

Exchange rates:

Between 2001 and 2002, just as the euro, all currencies have appreciated against the US dollar. Between 2000 and 2001 the Polish and Czech currencies appreciated; however, the Hungarian and Slovak ones depreciated.

II.6 Politics

(Appendices A.5, B.5, C.5&C.6, D.4&D.5):

Government type:

Poland is considered a republic as the three other countries are considered parliamentary democracies.

II.7 Regional trade organization participation

(Appendices A.5, B.5, C.6, D.5):

All four countries are members of the Central European Free Trade Agreement and will access EU on May 1st 2004. They are also members of numerous other international and European organizations, like the European Bank for Reconstruction and Development (EBRD), the Central European Initiative (CEI), and the Organization for Security and Cooperation in Europe (OSCE). All four countries are also members of the OECD.

II.8 State of bilateral relations with Canada

This section has been integrated in section C of each country.

II.9 Global rankings

(Appendices A.6, B.6, C.6, D.5):

Global competitiveness (ranking):

• Population greater than 20 million:

Poland is the only country in this category and ranks 27th.

• Population less than 20 million:

Czech Republic records the best performance at 21 and Slovakia records the worst at 27.

All four countries have recorded a less interesting performance than the previous year.

Human development (ranking):

The four countries follow each other closely, with the Czech Republic in front at the 33rd place and Slovakia at the end (36th).

Corruption (ranking):

Levels of corruption are high in the four countries. Hungary records the best performance (40th) and Poland records the worst (64th).

Democracy index:

All four countries record the same performance and almost get the highest ratings.

III – INTERNATIONAL TRADE, ASSESSMENT AND OUTLOOK FOR TRADE

Note: Sections on international trade and assessment and outlook for trade have been combined.

1 – POLAND

1.1- Poland – Imports/ Exports

1.1.1 – Imports/Exports with the World

Due to the fact that imports have surpassed exports, Poland has been generating a trade deficit year after year. However, the rate at which imports are growing is outweighed by the growth rate of exports; hence, diminishing the trade deficit. As shown in Appendix A.7, Polish exports of goods increased by 45% in the last 5 years reaching US$41,010m in 2002, while total imports increase of 18% reaching US$55,113m. The dominant export sector includes various types of machines, equipment, technology and production lines, means of transportation, tools, control and measuring devices, and medical and optical equipment. These exports account for the largest value and share in the structure of Polish exports representing 38% of total exports in 2002; a growth rate of 92% from 1998 to 2002. The major sector of imports, which is correlated to the modernization of domestic industry, is the machinery and transport equipment reaching a volume of US$20,699m in 2002 and representing 38% of the total. The mineral, fuels, lubricants & related materials sector, reaching imports of US$5,039m in 2002, is the one with the highest increase rate over the past 5 years. Even if the total only represents 9.1% of the imports in 2002, the volume of trade has increased by 70%.

As for the services balance, it runs at a deficit. (Appendix A.3) The net services balance for 2002 reached US$1bn; more than doubled the balance of 1998. Despite having a consistent surplus on transport services, which will likely increase with Poland’s upcoming accession to the EU, this deficit will continue to increase.[i] The major cause of this shortfall can be attributed to significant deficits in other services, which include financial & business services and payments for licenses and patents. The deficit in other services reached US$1.5bn in 2002 and is expected to increase in the future. On the tourism services sector, 2002 has been unusual. The negative trend of the past years has been broken. As a result of the depressed state of economy, less Poles traveled overseas leading to a small surplus.

Poland’s foreign trade is strongly oriented towards EU member states. With approximately 70% of exports and 60% of imports. Most particularly, Germany is one of Poland’s major partners both in exports and imports. (See appendix A.8) Their share of business declined over the last years but still accounts for 32.3% of exports and 24.3% of imports in 2002. The other trading partners for the exports are France with 6%, Italy with 5.5%, and UK with 5.2%. Russia, formerly the Soviet Union, was an important player in Poland’s trade economy in the mid eighties accounting for a third of the exports and a quarter of the imports. Although now the flow of exports toward Russia drastically fell as low as 3.2%, it continues to be the main provider of oil and gas to Poland. With 8.4% of total imports in 2002, Russia represents the second largest trade partner.[ii]

1.1.2 – Imports/Exports with the United States

The volume of US exports to Poland outweighs the volume of Polish imports; hence, resulting in a trade surplus for the US. For 2002, the total US exports into Poland were US$1,795m, representing 4.1% of the Polish imports. The same year, the US imported US$1,100m of Polish goods, representing 3.3% of the Polish exports. With Poland’s forthcoming entry in the EU, the US share in Poland’s exports is expected to increase in the future. It will result in reductions in many tariffs, down to the EU common external tariffs levels for the US goods. (Appendix A.9)

1.1.3 - Imports/Exports with Canada

For Canada, Poland is the largest market in Central and Eastern Europe after Russia. Canada has extended General Preferential Tariff status with Poland and agreed to Most Favoured Nation treatment. The Canadian main exports to Poland in 2002, totaling Cdn$123m, were composed of medicaments, jet engines and parts, durum wheat and cinematographic projectors. The imports from Poland included jet engine parts, railway rolling stock parts, wooden furniture, that amounted to Cdn$312m. (Appendix A.9)[iii]

1.2 - Foreign Direct Investment and capital flows

Poland is a net capital importer. Compared to the amount of foreign capital invested in Poland, Poland’s foreign investments are very small mostly due to the low level of savings of Polish companies. Poland’s foreign investments are principally in Great Britain, the United States, Belgium, Switzerland and Austria. Almost 50 percent of Poland’s foreign investments are connected with the financial sector; other investments are in manufacturing, transport, communications and warehouse management, trade and repairs, mining, and construction.

In most recent years, the current account deficit has been covered by inflows of foreign direct investment (FDI); net FDI covered 97% of the current account deficit in 2001, mostly due to the privatization trend. In 2002 though, it fell back to 57% due to the present government’s more cautious approach to privatization combined with the weaker international economic environment. According to the cash flow balance-of-payments data produced by the National Bank of Poland (NBP), the FDI inflows rose to US$8,1293m in 2000 before falling during the economic downturn to US$4,119m. Almost half of the US$8,1293m was related to the telecommunication sector with the sale of Telekomunikacja Polska.[iv]

In reaction to this dipping trend, Poland has formulated a number of economical incentives for foreign businesses.[v] Since May 19, 2002, foreign investors have the possibility to obtain financial support. The incentives are offered under four different types of aid, each having some pre-established conditions to meet. There are investment grants, covering between 15% and 25% of the investment pay out depending on the city of investment, employment grants for new job creation, training grants for the employees, and grants for infrastructure development.

At the end of 2002, the largest amount of cumulative FDI (38%) was registered in the manufacturing sector, led by transport equipment (25% of manufacturing total) and food processing (24% of manufacturing total). The biggest investor by the end of 2002 was France (18.7% of cumulative FDI), followed by USA (13.4%), Germany (12%), Netherlands (9%), Great Britain (6.2%), and Italy (5.7%). Details on the top 20 investors in Poland and the top US investors in Poland are shown in Appendices A.10 and A.11.

In terms of the portfolio investments, they have been much less important than the FDI. Over the last 5 years, the net portfolio investment balance covered between 7.5% and 25% of the current trade deficit. The net amount for 2002 was US$1,671m, approximately at the same level as 1998 at US$1,694m. As per a CEE report though, this trend changed in 2003 with the high borrowing requirements of the state. In the first quarter of 2003, the portfolio investment in debt instruments reached EUR 3.2 billion, or US$ 3.456billion (converted at March 31, 2003 rate). Out of this amount, EUR1.4bn (US$1.97bn) was a 10-year euro government bond and the remaining was investment in zloty government bonds.

Since the opening of the Warsaw Stock Exchange (WSE) in 1991, the number of listed joint stock companies has increased from five to more than 200 at the end of June 2003; over the same period the capitalization of the WSE has grown from $142 million to around $20 billion.[vi]

1.3 - Foreign Direct Investment and Canada

The latest statistics available on Canadian investments in Poland estimate them over Cdn$600m. The country’s dynamic economy offers many opportunities for Canadian investors. The major investments projects include the Europort Grain Terminal - a grain handling facility and terminal at the port of Gdansk, McCain Poland - frozen French fry factory in Strzelin valued at US$54m, and Royal Europa representing a US$34m investment from Royal Technologies Group of Ontario in a manufacturing facility producing building products. Pratt & Whitney Canada, in Poland for nearly 30 years, is the largest Polish exporter to Canada. [vii]

1.4 – Trade dispute

Over the years, Poland has been involved in 4 World Trade Organization (WTO) disputes.[viii] The oldest, a dispute on Poland’s imports regime for automobiles filed by India in 1995, reached a mutually agreed solution in 1996. As plaintiff, Poland has 3 open disputes. In 1998, the country requested consultations on Thailand’s Anti-dumping Duties on Angles, Shapes and Sections of Iron or Non-Alloy Steel and H-Beams and in 2001 Poland requested consultations on Hungary’s Safeguard Measure on Imports of Sugar. The latest complaint was filed on April 16, 2003 against Czech Republic. Poland requests consultations concerning additional duty levied on imports of pig-meat from Poland. The basis of this request is the Decree published in March 2003 by the Czech government. It stipulates that the customs duties levied under tariff on pig-meat imports from Poland should be 50% above the established tariff schedule. Since no other source of imports has been mentioned in the Decree, Poland finds it discriminatory. Poland also finds this measure inconsistent with the WTO Agreement on Agriculture. Moreover, it finds it an impediment to its rights and benefits it is entitled to under GATT. Furthermore, this Decree was implemented without any prior bilateral notice or consultations. As of February 2004, no dispute settlement was recorded.

1.5 - Assessment and Outlook for trade

Poland, once the fastest growing economy in Central and Eastern Europe is now on a downfall. Economic growth, averaging over five percent between 1996 and 2000, fell to only 1.1% in 2001 and 1.2% in 2002. Growth, driven by double-digit rates of investment growth as well as substantial rise in private consumption in the past, is now suffering from the global economic slowdown and the rigid labor market. High level of taxes, onerous labor laws, and continuing job losses in Poland's old-line heavy industries are now part of the reality. Furthermore, unemployment is more than double the level of Hungary. In reaction to this, the government has announced its intention to stimulate the economy over the next two years by slashing business taxes. It is also looking at ways to reduce bureaucracy.[ix]

The longer-term prospects for the Polish economy are promising. Poland is one of the youngest countries on the continent. 35% of the Poles are under 25 years of age; result of the 1982 baby boom. (Outcome of the long, dark curfews of martial laws)[x] The level of education of the workforce is significantly high in both skilled and unskilled sectors. Wages remain low by Western European standards. Although it is nearly twice the rate paid in the early 1990s, it is still far behind France(7 times less) and Germany (10 times less). At the same time, productivity has been rising; labor productivity in industry was up by 4% in 2001, continuing its constant rise of previous years.

Rafal Antczak, a Polish economist with the Center for Social and Economic Research, foresees three possible scenarios. “First, the current struggle between the central bank and the government could worsen, with ballooning deficits and higher interest rates. (..) A Brazil-like currency crisis could follow, causing the zloty to plummet, and throwing Poland’s course towards the euro into doubt.”[xi] A more likely scenario would be a long period of slow growth, 1% to 3% a year. Unfortunately, these rates would be far less than required to meet Western Europe’s living standards, and more young people could go unemployed. The best scenario, though the least likely, would be a return to strong growth, around 4-6%, same as seen in the late 1990s. In order to achieve this, radical changes for labor inefficiencies would be required.[xii]

Poland, with 39 million people, accounts for half of the population and almost half of the economic output of the ten-countries comprising the EU enlargement zone. For Poland, EU accession signifies ongoing structural modification of the economy and harmonization of its administrative and regulatory systems with those of Acquis Communitaire. Furthermore, with a current highway system requiring huge investments, Poland will benefit from financing and assistance aimed at infrastructure development.

1.6 - Outlook for trade and relations with Canada

The bilateral relations between Canada and Poland are excellent. When Canada approved Polish accession to the North Atlantic Alliance, it enhanced the importance of the bilateral relations for the Polish government. Canada has become a leader in peacekeeping and language training in Poland. Moreover, the Canadian International Development Agency (CIDA) has funded 276 projects worth over Cdn$77m since 1989. The different programs touched education, training, private sector development and agriculture sectors. Finally, Canadian Studies Centers and programs are booming in Polish universities.[xiii]

2 – HUNGARY

2.1 - Hungary – Imports/ Exports

2.1.1 – Imports/Exports with the World

As shown in Appendix B.7, the Hungarian exports of goods increased of 47% in the last 5 years reaching US$34,832m in 2002. Due to rapid industrial transformation in the country the composition of exports have changed in the last years. Now, more than half of the exports –59%- are machinery and equipment, with electrical goods making up for approximately one quarter.

The mix of imports has adjusted to reflect this new trend, with rising imports of raw and semi-processed materials, which are parts of the machinery & equipment sector. They reached US$19,571m in 2002, which represented 52% of total imports.

In the past, a number of trade incentives were implemented in Hungary in accordance with an agreement with the OECD. Interest subsidies to small and medium-sized enterprises and reclaim of import duties were some of the ways to promote exports. In the recent years though, other agreements signed with the EU and the Central European Free-Trade Agreement (CEFTA) have limited some of these practices. [xiv]

On the service balance, Hungary experienced consistent surplus. (Appendix B.3) The exports have outgrown the imports over the recent years and were the principal reason behind the strong economy recovery. Tourism has been the most dynamic service export, but there also has been some success in the domestic substitution of service imports, such as the financial and business services.

Since 1991, the foreign trade markets have shifted towards to West. In 2001, the EU partners accounted for almost 75% of the Hungarian exports and 58% of imports. Germany is Hungary’s major partner in trade, both in exports and imports, accounting for 35.5% of exports and 24.3% of imports in 2002. Austria and Italy are also important trading partners while Russia’s ranking as a key import source varies with the price of oil. (See appendix B.8)

2.1.2 – Imports/Exports with the United States

Total trade between the 2 countries reached over US$4,000m, with approximately 68% going into the United States; hence making the US a net importer of Hungarian goods. The US imported US$2,698m of Hungarian goods in 2002, representing 7.8% of Hungary’s exports. The total US exports into Hungary for 2002 were US$1,379m, representing 3.7%. (Appendix B.9)

2.1.3 – Imports/Exports with Canada

Canada’s trading position with Hungary has changed over the last few years. Canadian exports, which before outweighed the imports, have decreased significantly in the last decade passing from Cdn$96m to Cdn$75m in 2002. The decrease in pork exports is the most substantial cause of this decline, passing from Cdn$17m in 1998 to less than Cdn$2m in 1999. Other exports from Canada to Hungary include telecommunication equipment, computers, machinery and agri-food products. On the other hand, the imports from Hungary to Canada have been increasing steadily from Cdn$45m in 1995 to Cdn$167m in 2002. The major products imported include computers, hard disks, light bulbs, pharmaceuticals and wine. (Appendix B.9)

2.2 – Foreign Direct Investment and Capital Flows

Even if Hungary lost its regional lead to Poland in 1997 in terms of absolute inflows of FDI, and was surpassed by the Czech Republic in 2002, it remains ahead of Poland on a per-capita basis. Its stock of inward FDI is US$2,237 per head in 2002, compared to an estimate of US$1,212 for Poland. In 1995, large FDI inflows were recorded as a result of many utility privatizations, reaching an exceptional US$4.5bn. Since then, the volume of FDI inflows has fallen; dropping to less than US$1bn in 2002. The decline is a result of the privatization programs coming to an end combined with a loss of appeal to foreigners. Indeed, the real wage rates have recently outgrown productivity and the business environment is now undergoing the consequences of the reduction in the public investment in education, training, transport, and other infrastructures done in the 1990s.[xv]

To counteract this trend, Hungary still has some attractive incentives to offer. It still guaranties the free repatriation of after-tax profit and capital investment, and no industrial or service sectors are entirely inaccessible to foreign investors. However, certain limitations still exist, such as prohibition for foreigners to buy farmland and government approval of investments in banking, securities trading and insurance sectors.

Despite all this, it is expected, in the medium term, that the volume of FDI stay above US$2bn. However, the success in reaching this level greatly depends on Greenfield and follow-on investments rather than privatization.

Presently, of the world’s 50 largest multinationals, 40 are present in Hungary. The following U.S.-based companies have made major direct investments in Hungary: AES, Alcoa, Bristol Myers-Squibb, Coca-Cola, GE Capital, General Electric, General Motors, Guardian Glass, Hungarian Tel/Cable Corp., IBM, Jabil Circuit, Lear Corporation, Marriott Hotel, Media One, Pepsico, Phillip Morris, Sara Lee, and Visteon.[xvi]

In terms of portfolio investment, the total market capitalization as of December 2001 was US$10.4 billion, amounting to 19.8% of the GDP. Net portfolio investment in 2002 amounted to more than US$1.5 billion, which is almost equal to that of 2001. Foreign investors can buy forint-denominated Hungarian government bonds of any maturity and foreign investment funds can establish offices in Hungary in order to attract additional Hungarian investors.

2.3 – Foreign Direct Investment and Canada

In terms of Canadian FDI, a significant number of companies have established themselves in Hungary. Either on their own or with the collaboration of Hungarian partners, they have set up production activities or operation facilities in the country. The latest figure published by the Department of Foreign Affairs and International Trade states the Canadian FDI at approximately Cdn$5.321bn. Some of the Canadian companies listed on that same report are Atronyx, Coldmatic, Gresco and La Caisse de Depot et Placement du Quebec, just to name a few.[xvii]

2.4 – Trade Issue

Trade tariffs are the major trade issues affecting the business climate for the US products and services in Hungary. Because of tariffs still imposed on its goods, the US finds itself in a disadvantaged position vis-à-vis the EU. Even if Hungary is not a member of the EU yet, it already has modified its tariffs system with them. Since 2001, Hungary has completely eliminated tariffs on industrial products from the EU. As for the non-industrial products, they can be imported to Hungary with reduced tariff rates on a selective basis. However, until Hungary adopts the EU common external tariff (CXT), most U.S. products are still subject to Hungary’s MFN rates (Most Favoured Nation). For the US, this creates significant tariff differentials versus EU products. To deal with the issue, on January 30, 2002 the US and Hungary signed a trade package that reduced tariffs on approximately $180 million annually in key sectors of U.S. exports to Hungary. In most cases, this translated in reduction of tariff to the EU CXT. With Hungary becoming a EU member in May 2004, this issue will disappear as EU CXT tariffs will apply to all American products.

2.5 – Trade Dispute

Hungary is involved in WTO disputes as respondent as well as plaintiff. The most recent one as plaintiff is with Croatia, in 2003, on import measure on live animals and meat products introduced by Croatia to prevent the spread of the TSE disease. This ban on imports is very damaging for Hungary and is resulting in major losses to agricultural producers and exporters of live animals. Hungary finds this measure inconsistent with the obligations of Croatia under GATT. Moreover, this import measure was introduced without any preliminary notification to the Sanitary and Phytosanitary Measures (SPS) Committee. As of February 2004, no dispute settlement documents were yet available. Hungary also requested consultation on Turkey’s Import ban on Pet Food in 2002, and on Measure Affecting Import Duty on Wheat in Czech Republic in 1998. As a respondent, Hungary is in dispute with the Czech Republic on Safeguard Measure on Imports of Steel Products (1999), and with Argentina, Australia, Canada, New Zealand, Thailand and the United States on Export Subsidies in Respect of Agricultural Products (1996).[xviii]

2.6 – Assessment and Outlook for trade

For more than a decade now, Hungary has experienced rapid growth. This was a result of strong foreign investment, an economy focused on exports and trade openness mentality. In fact, Hungary was the pioneer in Central Europe to privatize extensively its state-owned industries and companies. Unemployment is below that of bordering countries and inflation has been brought under control. Labor costs have been lower than West European averages, while labor productivity is higher than its Central and East European neighbors.

Despite this successful past, Hungary now faces some significant economic challenges. The foundation upon which it built its strong economy—large foreign investment flows, export driven growth and increasing trade openness—are currently being confronted with changes in policy climate and macroeconomic conditions. Hungary, who once was a preferred destination for foreign investment, still must be considered as a very competitive location for regional service operations. However, there is very little attractive state-owned privatization left to promote, unlike in other Central European countries. Hungary has lost its forerunner position with its rising costs (real wages jumped approximately 12% in 2002) and the investment climates enhancement of neighbors. As in the rest of the world, FDI has slowed noticeably and the Hungarian government is actively searching for ways to reinstate its attractiveness to foreign companies. At the same time, the forint has appreciated significantly since 2001 (approximately 10% against the euro and 30 percent against the USD, even after the devaluation in June 2003). Hence, with manufacturing relocating to lower cost countries, the exports performance dropped. [xix]

This situation, combined with a slow growth in Europe, which is the market for more than 75% of Hungary’s exports, and a global decline in FDI have held back Hungarian growth. Projections of growth have been revised downwards all through 2003, and the government projection’s for 2004 is at 3%.

The most important event driving the Hungarian economy over the last few years was the groundwork for its accession to the EU. Although the country will benefit from the larger market, the accession will not bring huge tariff concessions from Hungary or the EU. In fact, they already have agreement in place eliminating or reducing the tariffs between themselves. In addition though, the accession should serve as an extra guarantee to outside investors that they will find a fairer, more transparent and more predictable commercial environment in Hungary.[xx]

2.7 - Outlook for trade and relations with Canada

The bilateral relations with Canada are excellent. Canada’s early supports for NATO enlargement and the fact that Canada received many refugees after the uprising against the Communism in 1956, are some of the reasons why Hungarians are well disposed towards Canada. Canada, through projects managed by the Canadian International Development Agency (CIDA), has a Technical Assistance Program in Hungary. These projects have concentrated on issues such as of good governance, private sector development, financial sector reform, education and training. The technical assistance programs concentrates on the transfer of knowledge, expertise, skill and technology to facilitate capacity building rather than opting for the traditional route of large capital projects. So far, around 140 projects have been approved valued at Cdn$21m.[xxi]

In the future, the Canadian exporters should be attentive to other areas that may represent important opportunities. Such sectors would be the transportation equipment, construction and building products, health-related goods, and services and environmental technologies.

3 – SLOVAKIA

3.1 - Slovakia – Imports/ Exports

3.1.1 – Imports/Exports with the World

«Following the collapse of eastern markets, trade has been rapidly reoriented to the west (EU) and economic linkage with the Czech Republic has steadily weakened»[xxii]. Consequently, lower EU demand played an important role in the rapid widening of Slovakia’s trade deficit in 2001. However, this deterioration has been fuelled primarily by high imports of capital goods, mainly Machinery and transport equipment. The increase in imports was also a result of the phase out of the import surcharge at the end of 2000. In the past, Slovakia had resorted to protectionist trade measures at various times, such as the reintroduction of a trade surcharge of 7% in the mid-1999. Slovakia’s ability to erect such barriers has since been limited by its membership of the WTO and the CEFTA (Central European Free-Trade Agreement), as well as by its EU association.

As showed in Appendix C.3, the trade deficit for the whole year 2002 amounts to US$2,131m or Sk96,627m. The same table also shows that export values are rising faster than import values; Slovak exports of goods increased by 34% in the last 5 years reaching US$14,365m in 2002, while the imports increased by 26% reaching US$16,497m. This situation is promising for the future of the trade balance. The dominant sector, for both imports and exports, includes various types of machinery and transport equipment. This sector accounts for the largest value and share in the structure of Slovakia’s trade; the exports represent 40% of total exports in 2002, a growth rate of 82% from 1998, and the imports represent 38% of the total, a growth rate of 54%. (Appendix C.6)

Slovakia’s foreign trade is mostly oriented towards EU members with approximately 61% of exports and 50% of imports in 2002. Most particularly, Germany is the major partner followed by Czech Republic both in exports and imports. Italy come third on the export side, while it falls in 4th place behind Russia on the imports. (See Appendix C.7)

3.1.2 – Imports/Exports with the United States

The United States is a net importer of goods from Slovakia. Before 2003, the volume in trade was constant averaging to a net balance around $US150m. In 2003, this trend changed with the imports from Slovakia reaching a high level of US$1,013m. This increase is mainly due to a new category of imports – Passenger car, new and used, totaling US$714m and representing 70% of the total. The US exports in 2003 reached US$115m. The most important sectors in exports are the civilian aircrafts (16%) followed by the telecommunication equipment (10%). (Appendix C.8)

3.1.3 – Imports/Exports with Canada

Bilateral trade between Canada and Slovakia decreased from $87M in 1998 to $42M in 2000. Canada’s anti-dumping action against steel products in 1999 had a significant effect on the volume of Slovak exports»[xxiii]. At $42 million, the trade volume with Slovakia is less than five times the volume Canada enjoys with the Czech Republic, which is considered a minor trading partner. The Canadian exports are made of wood pulp, machine parts and precision instruments. The volume of exports to Slovakia reached Cdn$11,743,563 in 2002. The Slovak exports to Canada consist of iron, steel, machine parts, chemicals and glass and the volume reached Cdn$56,077,018 in 2002. (Appendix C.8)

3.2 - Foreign Direct Investment and capital flows

As it is the case in other Central and Eastern European countries, corruption is definitely a reality in Slovakia. The first wave of privatization conducted by the previous Meciar’s government led to the sale of state-owned enterprises to political allies at below market prices and to the development of obscure ownership structures. The new government is pushing hard to accelerate the reform of these companies. Imminent accession to the EU and pressures of the OECD will definitely help to bring necessary structural and legal reforms, paying special attention to the corrupt and inefficient bureaucracy that hinders the execution of these reforms.

Nevertheless, Premier Dzurinda’s interventions since 1998 have already permitted to restructure a number of corporations and emphasize the role of foreign capital, a movement that should accelerate in the coming years as the business environment improves. «Accordingly, in 2000, FDI inflows came to US$2bn, up from US$354m in 1999. Inflows of FDI in 2001 amounted to US$1.5bn, before soaring to more than US$4bn in 2002, (... ), following the sale of a US$2.7bn stake in the SPP gas monopoly»[xxiv].

Since 1998, the Dzurinda government has adopted a series of measures to promote inward FDI: the foreign investment tax credit, the industrial park law helping municipalities to develop special industrial zones, the strategic investor’s tax law offering a 10-year tax holiday and the reform of previous laws that were inhibiting the privatization of a broad-range of state-owned enterprises. Moreover, by its strategic position in Europe, Slovakia has a main advantage as a location to attract investors. Slovakia also has a competitive labour force, offering relatively highly qualified but inexpensive workforce. «ING Bank calculates that total costs, including wages and social contributions, were about US$4.90 an hour in Slovakia in 2003 (…)»[xxv]. Nevertheless, the country has to accelerate its economic reforms to become more productive and develop its infrastructures. Its relatively small domestic market also makes Slovakia more vulnerable to competing exports. In summary, a lagging privatization process in comparison with the three other CEE countries combined to a broad range of incentives and a relatively inexpensive and qualified workforce should still boost FDI for the near future.

A positive signal for other potential Greenfield investment has been set lately with an important French investment. (US$752m) PSA Peugeot-Citroen has chosen to locate its new auto plant in Bratislava. The production is planned to start in 2006.

The Slovak capital market is one of the emerging capital markets of Central and Eastern Europe. Slovakia's integration efforts result in a need to determine such goals for the development of the capital market that will be in compliance with the EU's fundamental objective - the creation of a uniform financial services market and the free movement of capital.[xxvi]

In terms of portfolio investment, the total market capitalization of shares amounted to 17.46% of GDP at the end of 2000. The main marketplace is the Bratislava Stock Exchange for shares and bonds.[xxvii]

3.3 - Foreign Direct Investment and Canada

«Although there has been relatively little Canadian investment in Slovakia in the past, there has been an increase recently with investments by Bombardier, Nortel, Semex (cattle semen), Bel Novamann (pharmaceuticals), Candom (prefab houses), McCain, Argosy (geological works), Spacejoist and Torovil (fibre optic lighting), totalling several million»[xxviii]. This increase in Canadian Direct Investments should continue, as Slovakia definitely has interesting assets and needs foreign capital to pursue its development. Its accession to EU will make access easier to EU’s 24 other countries from its territory.

3.4 – Trade dispute

Over the years, Slovakia has been involved in WTO disputes such as the Safeguard Measure on Imports of Sugar with Poland (2001), Measure Affecting Import Duty on Wheat from Hungary (1988) and Measures concerning the Importation of Dairy Products from Switzerland (1988). In all of these disputes Slovakia is acting as a respondent. No disputes where the country would act as a plaintiff were found on the WTO site. [xxix]

3.5 - Assessment and Outlook for trade

Prime Minister Mikulas Dzurinda rapidly adopted its «Strategy for Accelerating Economic Reform» to facilitate Slovakia’s transition to a market economy and correct the imbalances inherited from the previous government. He also had to implement austerity measures which led to a decline in living standards and household consumption. However, if we look at the increase in the GDP’s growth rate since 2000, it seems that the toughest years are behind (see Appendix C.2). This growth should accelerate at 4.6% in 2004 and 5% in 2005 while the government plans to complete structural reforms and privatization of corporations. Unemployment, which peaked at 19.2% in 2001, is still high but down at 17.7% in 2002. «Inflation is expected to pick up to an average of 8.8% in 2003, owing to excise increases and price deregulation»[xxx]. It should dip below 5% in 2005. Overall, the economic future of Slovakia looks promising and wealth should improve as the positive effects of reforms become reality.

Like it is the case for the neighbouring Czech Republic, we have to assess the future of trade relations with Slovakia through EU enlargement. We also have to keep in mind that Slovakia is twice as small as Czech Republic (approximately 5 million vs 10 million) and that GDP per head is much lower (US$3,997 vs US$ 6,798 – 2002), therefore limiting the potential for the immediate future. However, as we saw previously in this section, wealth and employment are improving in Slovakia and privatization is more than ever on the agenda, all factors that bode well for an increase of exports to this country.

3.6 - Outlook for trade and relations with Canada

Relations between Canada and Slovakia are considered excellent. Several bilateral accords as well as a Memorandum of Understanding on trade and investment cooperation link both countries. They also work together through a multitude of multilateral institutions such as the UN, OSCE and the OECD. Canada played a major role in promoting Slovakia’s entry into the OECD and was the first to ratify Slovakia’s membership in NATO. Since 1989, Canada has cooperated on 151 projects worth Cdn$16m funded by the Canadian International Development Agency (ACDI). Together, the two countries have worked in good governance, private sector development, financial sector reform and education.

Slovakia trade priorities reflect its current expansion. These sectors, such as telecommunications, environment, construction, machinery, medical instruments, agri-food, transportation and energy development are sectors that may be presenting the best prospect of trade for the future. «Telecommunications equipment and services have represented a profitable line for such firms as Nortel and CmaC»[xxxi].

4 – CZECH REPUBLIC

4.1 – Czech Republic – Imports/ Exports

4.1.1 – Imports/Exports with the World

Traditionally, raw materials and basic products such as steel, chemicals and low value-added manufactured goods dominated exports to the advanced market economies. However, since 1995, «industrial production and services have undergone a steady shift toward higher value-added output, with strongly rising inflows of Foreign Direct Investments in 1999-2002, both in acquisitions and Greenfield projects, contributing to an acceleration in this trend»[xxxii]. In terms of trade balance, as shown in Appendix D.7, the country still suffers a deficit. In 2002, the export growth is still insufficient to balance rapid import growth resulting in a negative balance of US$3,078m. In 2001, fossil-fuel prices fell by 3.9% and import prices fell by 1.9%, helped by the appreciation of the koruna. The main factors boosting import volumes remains capital investment by foreign-owned firms, and the strong real wage growth. The imports are mainly composed of purchases of machinery and transport equipment, including private motor vehicles, accounting for 42% of total imports. Exports held up quite well despite the economic slowdown in the EU and the appreciation of the local currency, a clear effect of the shift toward higher value-added output. Same as for the imports, the main sector of exports is machinery and transport equipment adding up to US$15,777m in 2002, or more than 47% of total exports. Indeed, Czech Republic is becoming more and more competitive and this shift will help to «insulate the economy from external price shocks and bodes well for further gains in export competitiveness in the near term»[xxxiii].

Over the years, Czech Republic faced consistent surplus on invisibles, the main element of which were tourism and transport. Even if the number of visitors has fallen over the years, their average expenditure has increased and Czech tourism spending abroad has fallen, resulting in an increasing surplus. In 2002, the net balance amounts to US$1,524m and covers almost 50% of the trade deficit. (Appendix D.3)

As with the three other countries of Central and Eastern Europe, Germany is Czech republic’s main trading partner, both in imports and exports. In 2002, the volume of exports to Germany represented 38.1% of the total while the imports corresponded to 32.9%. The other trading partners are Slovakia, Austria and Italy. (Appendix D.8)

4.1.2 – Imports/Exports with the United States

The United States is in a trade surplus position with the Czech Republic. As shown in Appendix D.9, even though the volume in trade has decreased between 2002 and 2003, the decrease in imports from Czech Republic has outweighed the decrease in the export level. Manufacturing machinery and transport equipment is still by far the largest US import item into the Czech Republic.

4.1.3 – Imports/Exports with Canada

The volume of bilateral trade between Canada and Czech Republic has remained unchanged over the past 5 years. Canada’s main exports to the country are aircraft and aircraft parts, pharmaceuticals, electronic data processing equipement, electrical machinery, textiles and agri-food products. The Canadian trade balance with Czech Republic is a deficit; the volume of Canadian exports in 2002 amounted to Cdn$83,667,092 while the volume of imports amounted to Cdn$178,378,413. (Appendix D.9)

4.2 - Foreign Direct Investment and capital flows

Foreign investment has played a major role in the development of the Czech economy by providing both management expertise and the capital needed to restructure many Czech firms. Through the 1990s, FDI has been related to the privatization of state-owned companies. Even if privatization started to slow down at the end of the 1990s, FDI inflows continued to grow mainly because of two factors: the FDI incentives program created by the government in 1998 and the start of EU accession negotiations. As a result, the Czech Republic has attracted a significant proportion of inward FDI in Eastern and Central Europe (US$4,924m in 2002) second behind Poland. Despite these efforts, «the effectiveness of the government’s FDI incentives program is still marred by excessive red tape»[xxxiv]; approval of applications can take up to a year. For Greenfield investors purchasing land, the weakness and slowness of the country’s legal system is also a problem. As the date of the country’s accession to the EU is approaching, the prospect of higher wages is having a negative effect on inward FDI. Foreign direct investment fell sharply in 2003 for the first time in seven years. «This reflects a diminishing stock of privatizations but also worries among investors that entry into the EU will push up wages and other costs»[xxxv]. Although Czech Republic has locked in enough investment, particularly in the car industry, to attract a rising number of related investments (ex: component manufacturers and suppliers), the country’s productivity and competitiveness will become more and more important in order to attract a growing number of investors.

While foreign inflows from the EU are considerable, the US remains among the largest investors in the Czech Republic with US$3.6bn of cumulative direct investment from 1990 through 2002, according to the Czech National Bank. Over the years, the most important transactions were in the automobile industry with investment from Volkswagen (Germany), the tobacco industry with Philip Morris (US), the petrochemicals industry with investment from a consortium of Agip (Italy), Royal Dutch/Shell (Netherlands/UK) and Conoco (US), and in the telecommunications industry with investment from a Dutch-Swiss consortium.[xxxvi]

The portfolio investment has also followed the privatization current. Although the foreign capitals helped finance the current account deficit, the investments are still oriented towards short-term debt instruments and the most liquid blue-chip shares; hence, not improving the management of the enterprises and not financing restructuring or expansion projects. The main trading platform is the

Prague Stock Exchange for shares and bonds and RM-System for shares. The Prague Stock Exchange currently has 151 listed companies. At the end of the year, the market capitalization of shares amounted to 22.6% of GDP.[xxxvii]

4.3 - Foreign Direct Investment and Canada

«Canadian direct investment in the Czech Republic is currently estimated at Cdn$400 million. This amount does not include all investments made through European subsidiaries of Canadian companies or some consortium investments»[xxxviii]. This country has a strategic location in Central Europe from which 100 million customers can be reached. With the enlargement of EU, investing in Czech Republic will give easier access to all EU’s 25 countries. «More and more, Canada is gaining a reputation as a top-notch supplier of high tech products. Promising sectors in the Czech Republic for Canadian companies are information and communication technologies, construction, environment, security, sporting goods, biotechnology, plastics industry, agri-food products and transportation»[xxxix]. Based on these facts, there seems to be an interesting potential for Canadian direct investments in Czech Republic in the coming years. In the recent years, successful Canadian companies invested in the Czech Republic[xl]. They are:

• Celestica – a world leader in electronics manufacturing services (EMS) for industry leading original equipment manufacturers (OEMs), primarily in the computer and communications sectors;

• Telesystem International Wireless (TIW) – a global mobile communications operator;

• Bombardier Transportation – global leader in the design, manufacture and delivery of railway vehicles and services;

• Magna – a global supplier of technologically-advanced automotive systems, components and complete modules;

• Four Seasons Hotels – world’s leading operator of luxury hotels and resorts; and

• Canstar – a leading manufacturer of sporting equipment.

4.4 – Trade dispute

Czech Republic is involved in WTO disputes as respondent as well as plaintiff. The most recent one as respondent is with Poland in 2003, on additional duty levied on imports of pig-meat. (See section 1.4) The other one is Measure Affecting Import Duty on Wheat from Hungary. As plaintiff, Czech Republic entered into a dispute with Hungary in 1999. Hungary imposed a safeguard measure in the form of import quotas on imports of a broad range of steel products of the Czech Republic's origin effective as of 1 January 1999. The only country subject to this measure is the Czech Republic.[xli]

4.5 - Assessment and Outlook for trade

GDP growth has slowed in 2002, reflecting the impact of Western Europe economic slowdown (see Appendix D.2). Even so, Czech Republic’s growth since 2000 has outpaced the OECD’s average. Real GDP growth accelerated to 3.4% year on year in the third quarter of 2003, mainly because of sustained household consumption and of an expansion in investment and exports. «Real GDP growth is set to accelerate to about 4% per year in 2004-05, as investment and EU import demand recover.»[xlii] GDP per head places the Czech Republic’s level of economic development in front of the four Central and Eastern Europe countries (Appendix D.2).

However, this growth seems to hide certain problems. As reported in The Economist, quoting a Budapest resident: «Much of the new wealth has shady origins, corruption is endemic and the quality of Central Europe’s politicians, civil servants and judges is poor to dire»[xliii]. Like the other Central and Eastern European countries, Czech Republic has indeed a high corruption index. Although it ranks 54, its performance remains better than Poland (64) and Slovakia (59). Many farmers, factory workers and pensioners are also wondering when they will get a share of the benefits of capitalism. In summary, although wealth is increasing in the region and many are taking advantage of it, the sharing out of this wealth still has to improve.

Even with a relatively strong GDP per head in comparison to its neighbours and potential for sustained growth in the coming years, Czech Republic will need many years to catch up with Western Europe. With EU budgets already strained, the country will not be able to count very much on EU’s financial contribution to improve its wealth.

Right now, one of the government’s main tasks is to prepare for EU accession. «This will require wide-ranging legislative and administrative reform, as well as an improvement in industrial productivity to accelerate growth and continued vigilance to restrain the economy’s tendency to overheat and absorb imports»[xliv]. Indeed, EU enlargement will bring promises and challenges. The new members will benefit from a larger internal market with countries sharing a single set of trade rules, a single tariff and a single set of administrative procedures. At the same time, this structure will be more competitive and will require that the new members improve their productivity and competitiveness. In preparation for the eventual conversion to the euro, this challenge will only be increasing.

4.6 - Outlook for trade and relations with Canada

Canada and Czech Republic enjoy very good relationships. Canada supported the Czechs at different occasions in the past: sheltering of Czechoslovak political refugees in 1948 and 1968, support for dissidents throughout the Communist period and strengthening of Canada-Czech personal and family ties since 1989. There is also regular ministerial-level contact between Canada and the Czech Republic. Both countries collaborate in a number of programmes. Since 1993, CIDA’s technical cooperation programme in the Czech Republic has generated about Cdn$20m with over 230 projects aiming to support the country in its transformation to a free market democracy.

Beyond these facts, the future of trade relations with Czech Republic has to be assessed through EU enlargement. The EU is Canada’s second most important trading partner, with annual two-way trade in goods and services over $ 78 billion. «The Canada-EU Trade and Investment Enhancement Agreement, now in the design phase, is a wide-ranging, forward-looking proposal that will address new generation issues as well as outstanding barriers»[xlv]. As trade with EU expands, Czech Republic should get its share of this expansion. This share should increase, as the country will catch up with the rest of Western Europe, as exposed previously in this document.

IV – CONCLUSION

The accession of these 4 Central and Eastern European countries (CEECs) to the European Union in 2004 will bring some important benefits. The addition of more than 100 million people to the EU’s market of 370 million should contribute to boost economic growth for both current and new members. A single set of trade rules, a single tariff, and a single set of administrative procedures will also be in place. The new members will benefit from reduced barriers to trade and investment. Moreover, the addition of 10 members in total will increase EU’s authority and influence in trade talks. But accession to the EU is neither a necessary nor a sufficient condition for economic growth. The combined effects of market access and economic liberalization, not EU membership, would optimize economic growth.

Unfortunately, the EU accession will also generate costs to these countries. Existing economic borders between the applicant countries and the current EU members will have to be broken down, leaving no room for the protection of non-viable industries. Compliance with centralized EU regulations in three areas —labor, agriculture, and the environment —will impose the most significant costs on the CEECs.[xlvi] Western European more strict labor regulations will make many workers in the less-productive CEECs less competitive, agricultural subsidies will favor current EU members over future ones, and strict environmental regulations will impose a cost of up to 120 billion euros on CEECs. From this perspective, EU accession will worsen the 4 countries finances. Without receiving any financial help from the EU’s budget, these costs would contribute to increase their actual budget deficit and high public debt rates. Hungary, with already 60% of GDP in public debt in 2002 would be the most affected.

But then again, the “non-enlargement” could also bear costs for both the EU and the candidate countries. By not being part of a single market, the CEECs would lower their economic growth and at the same time diminish the current members’ economic growth too. Failure to join EU could discourage foreign investment and even be an impediment to fight against corruption, organized crime, illegal immigration and terrorism.

The real impact of EU accession on these 4 countries will only be known with time. Different scenarios exist, each one having its own share of costs and benefits and offering different opportunities and challenges to the countries. All 4 countries actually run with a trade balance deficit. Having access to a larger market under the same set of rules should give them the opportunity to increase their exports to the other EU members. The reduction in tariff when trading with the rest of the world offers them new possibilities for expansion in exports. Consequently, these new openings in trade could favorably impact the countries’ trade balances. The success though will greatly depend on the country’s continuous ability to adapt its composition of trade to the rest of the world and its competitiveness.

The EU represents Canada’s second most important trading partner. The EU accession of these 4 countries, with which Canada has good relationship, should lead to an increase in bilateral trade. Although changes in trade partners do not happen overnight, both Canada & the EU accession countries stand to win by working together.

The 4 countries are also net receivers of investments, which contribute to their balance of payment results. With the EU enlargement, FDI could take 2 different paths. Being part of the EU can be appealing to foreign investors. The four countries could then see an increase in the number of FDI inflows from foreigners, including Canada. These new investments would bring in more money into the country and contribute to the economic growth. With the actual lowest growth rate of the 4 countries analyzed, Czech Republic could benefit from an accelerated growth rate. The increase in FDI would also have favorable impact on employment. Poland and Slovakia would benefit the most having the highest actual unemployment rate. Having new production facilities in the country would also impact the trade balance with increases in exports. If we compare the 4 countries under this scenario, Hungary may be the one having the least benefits with very little attractive state-owned privatization left to promote.

On the opposite side, being part of the EU can dissuade foreigners to invest. The possible increase in wages and other costs can become a barrier for investors. Also, tariff barriers that once were an appeal to FDI are no longer an issue for companies. The introduction to single tariff for all trade with EU members will no longer be the purpose for foreign companies to locate abroad.

In all major changes, uncertainties exist; risks are taken, concessions are part of negotiation and compromises are made. This new economic dimension is not different. The outcome of EU enlargement will soon start to be known, and only then will the countries be able to state if this accession is beneficial or not to them.

V – END NOTES

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[i] country briefingsPoland; from the Economist Intelligence Unit

[ii]Idem as 1.

[iii]

[iv] economics/poland macro economics investmentbasicinformation

[v]

[vi]

[vii] Idem as 3

[viii]

[ix] , “Westward, look, the land is bright”, Oct.24, 2002

[x] Idem as 9

[xi] Idem as 9

[xii] Idem as 9

[xiii] Idem as 3

[xiv] country briefings, Hungary; from the Economist Intelligence Unit

[xv] Idem as 14

[xvi]

[xvii]

[xviii]

[xix]

[xx] Idem as 19

[xxi] Idem as 17

[xxii] Economist .com country profiles, Slovakia; from the Economist Intelligence Unit, February 2004.

[xxiii] - dfait..., Countries in Europa: Canada Slovakia relations, last updated 2003-11-24

[xxiv] Idem as 22

[xxv] The Economist-print edition; Cooling Down, Dec. 11th 2003

[xxvi]

[xxvii]

[xxviii] Idem as 23

[xxix]

[xxx] country briefings, Slovakia; from the Economist Intelligence Unit, dec. 29th 2003

[xxxi] Idem as 23

[xxxii] country briefings, Czech Republic; from the Economist Intelligence Unit, dec. 29th 2003

[xxxiii] The Economist – print edition, Westward, look, the land is bright; Oct. 24th 2002

[xxxiv] Idem as 30

[xxxv] The Economist-print edition; Cooling Down, Dec. 11th 2003

[xxxvi]

[xxxvii]

[xxxviii]

[xxxix]

[xl] Idem as 39

[xli]

[xlii] The Economist – print edition, Westward, look, the land is bright; Oct. 24th 2002

[xliii] Idem

[xliv] country briefings, Czech Republic-factsheet; from the Economist Intelligence Unit, Oct. 27 2003

[xlv] dfait...., Countries in Europa: Canada Czech Republic relations, last updated 2003-11-24

45 EU Enlargement: Costs, Benefits, and Strategies for Central and Eastern European Countries, September 18, 2003

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