The European Community-Hungary Free Trade Agreement, which is also known as the Hungarian-EC Agreement on Association (Europe Agreement), came into being pursuant to Article 238 of the Treaty of Rome on 16 December 1991. The Hungarian party concluded this agreement expressly with the intent to prepare for membership in the European Communities (EC) through its implementation.

The Agreement on Association entered into effect on 1 February 1994 (with its part concerning trade coming into force on 1 March 1992 as an interim agreement). The Europe Agreement, containing a preamble, 124 articles, 7 protocols, 13 annexes, joint declarations and exchanges of letters, was promulgated in Hungary in Act I of 1994.

The objectives of the Agreement can be summarized as follows: the establishment of free trade in industrial products; the extension of mutual preferences in handling agricultural imports; the gradual liberalization of the flow of capital, services and labor as well as that of establishment; the setting objectives for co-operation; and the development of a political dialogue.

In view of the differences in the level of advancement between Hungary and the EC, an asymmetry was built into the Agreement for the benefit of Hungary; i.e. the Community opens its market during the transition period more rapidly than Hungary. The original agreement has since been supplemented or amended by a number of more recent agreements with a view to further development; these cover trade in textiles and textile clothing, trade in wine, issues of the protection of the origin of wines, improvement of rules of origin on several occasions, improvement or adjustment of conditions of market access (owing, for instance, to the accession of the three EFTA countries to the EU) and Hungary’s participation in Community programs. That is to say, today the agreements related to the Europe Agreement constitute an extensive system.

Until accession, the Agreement on Association constitutes the legal basis of and the framework for Hungary's relations with the European Union (the former EC). Performance of the obligations undertaken according to the prescribed schedule is an important criterion of assessing Hungary’s maturity for membership. The Council of Europe annually reviews and assesses performance according to the Agreement on the basis of the report of the European Commission.

Antecedents

For a long while, for reasons of international and internal politics, Hungary was unable to establish organized and harmonious contacts, adequate to the interests of all parties, with the EC and its constituents, the European Coal and Steel Community and the European Economic Community (EEC). Then, from the end of the 1960s, certain elements of economic relations began to be settled under contract, leading to the conclusion of first technical – later sectoral – trade agreements in agriculture and subsequently in the textile and steel sectors. First among the former CMEA (Council for Mutual Economic Assistance) countries, Hungary entered into a comprehensive trade and economic co-operation agreement with the EEC pursuant to Article 113 of the Treaty of Rome in 1988. The Agreement was aimed at stepping up liberalization mutually. After lengthy debates, the Community undertook to dismantle restrictions, termed as discriminative against Hungary, in several rounds by 31 December 1995 at the latest. That means it agreed to meet its obligations under the GATT Accession Protocol, even though at a date later than prescribed. The Agreement in itself constituted substantial progress in comparison to the earlier situation.

As a result of the political changes (mainly the collapse of the Communist regimes that had tyrannized Eastern and Central Europe and the subsequent formation of more democratic governments) taking place across Europe, the EC introduced several measures facilitating market access from 1990. To support Poland’s and Hungary’s transition to a market economy and their economic transformation, an aid program was launched in 1989 under the name of PHARE, which was then gradually extended to other countries in Central and Eastern Europe.

An important milestone in Hungary’s approach to the EC was the Dublin meeting of the Council of Europe in April 1990 when the EC raised the idea of an agreement on association to be concluded with Hungary, the Czech Republic, Slovakia and Poland. Hungary welcomed the initiative. Negotiations aimed at the conclusion of the Agreement on Association began on 21 December 1990 and the draft text was initialed on 22 November 1991.

The Agreement affected several Hungarian laws; hence its approval required ratification by the Hungarian Parliament and its promulgation by an Act. According to Community terminology, the Europe Agreement qualifies as a mixed agreement as it includes commitments under the scope of authority of both the Community and its Member States. Therefore, ratification by the Parliament of Europe and those of all 12 Member States was also required.

The Content of the Europe Agreement

1. The Fundamentals Underlying the Agreement
The Agreement on Association is built on the system of integration constituting the very foundation of the European Communities, that is, on the four fundamental freedoms: the free movement of goods, services, labor and capital. Similarly to the establishment of the Common Market, the first package of measures (whose first elements entered into force as early as 1 March 1992) was also aimed at establishing free trade in this agreement.

2. Trade Liberalization of Industrial Products
As far as industrial products are concerned, the Agreement creates a zone of absolute free trade between the Community and Hungary by 31 December 2000. Goods may flow freely exempt from duties, levies, quantitative restrictions and equivalent measures (e.g. export and import licensing) even in the sectors whose trade has traditionally been managed by the Community under a special scheme (textile and steel products). The creation of the free trade zone is effected in an asymmetric manner: the Community grants preferences more rapidly, which Hungary will reciprocate later

With respect to the Hungarian export of general industrial products, which constituted 60% of all Hungarian exports at the time of the conclusion of the Agreement, quantitative restrictions were abolished on 1 March 1992. About 75-80% of trade in these products became exempt from customs duties. The Agreement regulated trade in the remaining industrial products (with respect to a total of 93 ”sensitive” industrial products groups) through customs quotas and customs ceilings. Free trade entered into force in the case of the 93 product groups in Hungarian exports as early as 1 January 1995.

As to products subject to the Treaty establishing the European Coal and Steel Community (ECSC) constituting about 3% of Hungary’s exports at the time of the execution of the Agreement, quantitative restrictions and customs duties were abolished on 1 March 1992 and on 31 December 1995, respectively.

In the case of textile and textile clothing products, free trade took longer to become reality: quantitative restrictions were abolished on 31 December 1997; in the meantime, however, the quantitative quotas were continuously expanded due partly to the provisions of the original agreement and partly to two subsequent supplementary exchanges of letters. Processing was exempted from customs duties on 1 March 1992 and textile and textile clothing products were made exempt from 31 December 1996.

Customs duties in Hungary on imported industrial products originating from the EC have been dismantled in three rounds while classifying goods into three groups. For about 15% of goods, duties were abolished by 31 December 1994 and for another 25% by 31 December 1997. With respect to the remaining product groups, the dismantling of customs duties began on 1 January 1995 and it is to be completed on 31 December 2000, that is to say, full exemption from customs duties with respect to the import of industrial products will be effective from 1 January 2001.

Hungary is to abolish quantitative restrictions and equivalent measures (individual licenses, global quota for consumption) in the period between 1995 and 2001; in other words, the process has already begun.

Import related fees and levies were abolished in three steps between 1995 and 1997.

Under the Europe Agreement, with a view to mutually easing the conditions of trade further, negotiations began with the EU concerning the mutual recognition of certificates of compliance of industrial products in 1997.

3. Trade Liberalization of Agricultural and Food Products
With respect to agricultural products, the parties only granted one another mutual preferences in the Agreement as, owing to the Common Agricultural Policy of the Community, free trade can be set as a target only together with membership.

The food economy was the most difficult and most sensitive area of the association negotiations. It has been a task of outstanding importance for both the Hungarian economy and society to create improving market conditions for food economy exports traditionally constituting 20-25% of Hungary’s total exports. To this very day, any measure affecting agriculture has constituted the source of continuous domestic political tension in every one of the member states of the EC, even though the significance of this sector is much less in these countries in terms of both production and the number of employees than in Hungary.

The easing of market access, as originally set forth in the Agreement on Association, which affected nearly two thirds of the products of Hungary’s agricultural exports, consisted of several elements in line with the fact that the entry of Hungarian export products to the EC market was influenced first and foremost by customs duties and the lift-offs, which frequently reached or even exceeded 100% and were often prohibitive (making exportation totally impossible in economic terms).

First of all, as a contractual obligation the Community granted preferences which it had extended since 1990 annually on the basis of unilateral decisions. Secondly, the EC granted customs and lift-off preferences for agricultural products which did not enjoy preferences but have played or will potentially play an important role in Hungary’s exports (most pork cuts, poultry and beef, cheese, wheat, most of vegetables and fruit, sheep and mutton). The preferences were extended within the quantitative limits deducted from the level of traditional deliveries. (The customs and lift-off preference increased by an annual 20% to a total of 60% over three years from 1992, while the quantitative quota rose by 10% a year.)

Hungary’s agricultural and food-processing import was basically regulated through the quota system; the role of customs duty was of a secondary nature. This was reflected also in the preferences facilitating market entry granted to the EC asymmetrically by Hungary in the agreement, which entered into force on 1 March 1992.

This system of mutual preferences in the trade of agricultural and food products had to be adjusted due to two international events a few years after the entry into force of the Agreement on Association.

The first of these was that both parties began to apply the agreements that were established in the Uruguay Round of GATT in 1995. The most important element of the changes was that quantitative restrictions and equivalent measures were turned into customs duties. (In Hungary’s case, this meant the elimination of the licensing procedure and the raising of customs duties instead. For the EU, the lift-off system was turned into customs duties. That was why customs duties were raised.) Since January 1997, the newly agreed system has been in operation.

The second event was that Austria, Finland and Sweden acceded to the European Union on 1 January 1995 whereby Hungary’s bilateral preferential agreements concluded earlier lost effect or rather, their substance had to be incorporated in the Europe Agreement.

The Agreement on Association did not extend to issues of trading in wine. The wine trade agreement supplementing the Europe Agreement entered into effect on 1 December 1993, and the agreement on the protection of the origin of wines—as Act XI of 1994—on 1 April 1994.

4. Issues Related to and Accompanying Free Trade
As is usual in the case of free trade agreements, the Agreement on Association enables the acceleration of the established liberalization schedule but strictly defines the conditions of retreat from the already established status of liberalization.

The Agreement on Association also provides for issues related to trade and measures accompanying free trade: the rules of origins (which determine the conditions under which, when met, a product can be regarded as originating from the Community or from Hungary), protective clauses (to emerging or restructuring industries and sectors and to "sensitive" sectors), anti-dumping procedures, undertakings related to intellectual property rights, rules of competition to be followed and guarantees of non-discrimination, etc.

5. The Integration with respect to Capital, Labor and Services
The Agreement on Association envisages important steps in the direction of integration in the field of the other three basic freedoms, the free movement of capital, labor and services as well as establishment.

In relation to the movement of labor, the Agreement on Association envisages the improvement of the employment and social conditions of those legally employed abroad and the enabling of the transfer of pensions among the member countries.

As a general goal, the chapter on services prescribes that the parties should gradually dismantle the barriers, which restrict the provision of services by Community and Hungarian companies, financial institutions and citizens.

Albeit with some exceptions and proceeding gradually, the contracting parties shall mutually ensure that companies and individuals be enabled to establish themselves in the territory of the other contracting party with the objective of pursuing business activities and enjoying national treatment.

As far as capital movements are concerned, the parties mutually guarantee the repatriation of profits arising from investments abroad and repatriation of the invested capital itself.

6. The Approximation of Legislation
The Agreement on Association paid particular attention to designating the tasks related to the approximation of legislation. As the prospects of membership appear to be realistically close, the task of law harmonization has been gradually exceeding the tasks and framework prescribed in the Europe Agreement. The first tangible sign was that the Council of Europe made available the White Paper to the associated countries of Central and Eastern Europe wishing to accede, which it had adopted at its June 1995 meeting in Cannes in order to facilitate their preparations for accession. With the commencement of the accession negotiations, practically the White Paper has become a program designed to help catch up with the entire body of Community law.

7. Pre-accession Assistance to Hungary
The Agreement opened up an exceedingly wide scope of co-operation for Hungary to catch up with the quality requirements of Western markets (e.g. in standardization, technological and scientific research and development, co-operation in the energy sector, education and training). One of the important instruments of preparation for accession and co-operation has been participation in community programs, for which the protocol supplementing the Europe Agreement provides an opportunity in principle from 1995.

8. The Agreement also created the set of association institutions, including the Association Council, the Association Committee and the Parliamentary Committee for Association.

The Agreement gave rise to regular political dialogue and co-operation between the parties including issues of foreign and security policy.

Recent Development and Prospect

The Europe Agreement with Hungary has entered its second stage in June 2000. This means further liberalization in particular as regards the provisions on establishment.

Additional trade concessions with Hungary (and other Central and Eastern European candidates) in the field of agricultural products were granted, on an autonomous and reciprocal basis in July 2000 (January 2001 in the case of Lithuania), pending the entry into force of additional protocols to the Europe Agreements.

Negotiations with each of these countries to broaden the scope of the agricultural trade concessions are being prepared.

Additional trade concessions on processed agricultural products with regard to Hungary, Bulgaria, Slovakia, Latvia and Lithuania additional trade concessions for these products are in the process of being decided.

Protocols to the Europe Agreements on European Conformity Assessment (PECA) entered into force on 1 June 2001 with Hungary, aiming at extending internal market rules on conformity assessment for manufactured goods to Hungary (candidate countries in other cases) before accession to the European Union.

With respect to Hungary's pending access to the European Union, the Berlin and Helsinki meetings of the European Council in 1999 adopted major decisions to prepare the Union for the next round of admitting new members. Berlin approved the financial provisions facilitating enlargement, while Helsinki undertook the political commitment to reform EU institutions and decision-making process to suit the requirements of an enlarged Union. Hungary, on its part, of course, wishes to join an efficient and well-functioning European Union. The Nice European Council probably successfully outlined the framework for the new institutional system. Consequently, a major obstacle on the road leading to the accession of Hungary and the other most prepared candidates has been removed. Moreover, a clear road map for the further stages of negotiations has been approved committing both the Union and the candidates to a concrete timetable.

Having received consistently high marks in the Commission’s Regular Reports, Hungary is determined to speed up and complete its preparation for membership by the end of 2002 and expects to join the Union among the first new members.