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WORLD TRADE

ORGANIZATIONWT/TPR/S/8919 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.

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CONTENTS

Page

OVERVIEW vii

I. ECONOMIC ENVIRONMENT 1

(1) RECENT ECONOMIC DEVELOPMENTS 1

(2) STRUCTURAL REFORMS – THE CAUSES OF THE FINANCIAL CRISIS AND BEYOND 7

(3) TRADE AND FOREIGN INVESTMENT PERFORMANCE 8(i) Trade patterns 8(ii) Investment patterns 10

(4) OUTLOOK 11

II. DEVELOPMENTS IN TRADE AND INVESTMENT POLICY 12

(1) INSTITUTIONAL FRAMEWORK 12(i) Institutional structure 12(ii) Policy formulation and implementation 13(iii) Transparency and openness of decision making 14(iv) Main laws and regulations 15

(2) DEVELOPMENTS IN INTERNATIONAL RELATIONS 16(i) World Trade Organization 16(ii) Regional agreements 18(iii) Bilateral agreements 24(iv) Unilateral tariff preferences 24

(3) DEVELOPMENTS IN FOREIGN INVESTMENT REGIME 25

III. MARKET ACCESS IN GOODS 28

(1) CUSTOMS PROCEDURES 28(i) Valuation, clearance, and inspection 28(ii) Rules of origin 29

(2) TARIFFS AND OTHER CHARGES AFFECTING IMPORTS 30(i) MFN tariffs (applied rates and bindings) 30(ii) Regional, bilateral and unilateral tariff preferences 33(iii) Tariff quotas and seasonal tariffs in agriculture 34(iv) Tariff concessions and exemptions 35(v) Balance-of-payments measures 35(vi) Indirect taxation 36

(3) IMPORT LICENSING AND CONTROL 37(i) Trade prohibitions 37(ii) Licensing – with and without volume limits 37

(4) CONTINGENCY MEASURES 38(i) Anti-dumping and countervailing measures 38(ii) Safeguard measures 39

(5) STANDARDS AND TECHNICAL REGULATIONS 41

(6) OTHER MEASURES AFFECTING MARKET ACCESS IN GOODS 43

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IV. OTHER POLICIES AFFECTING TRADE IN GOODS 44

(1) EXPORT MEASURES AT THE BORDER 44(i) Export licensing and control 44(ii) Duties and taxes, and minimum export prices 44

(2) EXPORT ASSISTANCE 45

(3) STATE AID 46

(4) GOVERNMENT PROCUREMENT 49

(5) PRIVATIZATION AND PUBLIC ENTERPRISE RESTRUCTURING 50

(6) BANKRUPTCY LAW AND PRACTICE 55

(7) COMPETITION LAW 56

(8) PROTECTION OF INTELLECTUAL PROPERTY 58

V. DEVELOPMENTS IN SELECTED SECTORS 63

(1) FINANCIAL SERVICES 63(i) Banking services 63(ii) Insurance services 66(iii) Other financial services 67

(2) TELECOMMUNICATIONS SERVICES 68

(3) TRANSPORT SERVICES 71

(4) TOURISM SERVICES 73

REFERENCES 75

APPENDIX TABLES 79

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CHARTS

I. ECONOMIC ENVIRONMENT

I.1 External developments, 1993-2000 4I.2 Intensity of intra-industry trade with selected partners, 1996 and 2000 9

II. DEVELOPMENTS IN TRADE AND INVESTMENT POLICY

II.1 Trade with free-trade agreement partners, 1993-2000 21

III. MARKET ACCESS IN GOODS

III.1 Frequency distribution of MFN tariffs, 1995 and 2001 31III.2 Applied MFN tariffs 1995 and 2001 and bound rates, by HS section 32III.3 Tariff escalation by 2-digit ISIC industry, 2001 33

IV. OTHER POLICIES AFFECTING TRADE IN GOODS

IV.1 Privatization and evolution of ownership structure, 1990-2000 52

V. DEVELOPMENTS IN SELECTED SECTORS

V.1 The Czech banking system, 1989-99 63V.2 Evolution of selected telecommunication services, 1994-2000 69

TABLES


I.1 Selected economic indicators, 1993-2000 1I.2 Czech Republic at a glance, 1990-2000 3I.3 Foreign direct investment by sector and country, 1995-2000 10


II.1 Promulgation of laws and treaties, 1993-2000 15II.2 The Czech Republic's main legislation related to trade, April 2001 16II.3 Sectors subject to foreign investment restrictions, 2001 26


III.1 Key features of the Czech MFN tariff structure, 1995-2001 31III.2 MFN tariffs (simple average) by stage of processing, 1995, 1998 and 2001 32III.3 Czech tariff preferences by agreement and import volumes, 2001 34III.4 Taxes levied on imported and domestic goods and services, May 2001 36III.5 Czech technical regulations and standards, 1991-2000 42


IV.1 Classification of subsidies from the State budget, 1994-2000 47IV.2 Transfers associated with agricultural policies, 1996-2000 48

Page

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IV.3 Key features of the Czech Republic's procedures on government procurement 50IV.4 Competitive and non-competitive activities 53IV.5 Main provisions of the Czech Republic's competition law 57IV.6 Summary of intellectual property protection in the Czech Republic, June 2001 59IV.7 Enforcement of Intellectual Property Rights, 1997-2000 62

APPENDIX TABLES


AI.1 Balance of payments, 1993-2000 81AI.2 Exports by destination, 1993-2000 82AI.3 Imports by origin, 1993-2000 83AI.4 Exports by group of products, 1993-2000 84AI.5 Imports by group of products, 1993-2000 85


AII.1 Selected Czech notifications to the WTO, June 2001 86AII.2 The Czech Republic's preferential trade agreements, April 2001 90


AIII.1 Average tariffs and bindings, by H.S. chapter 91AIII.2 Tariff quotas, 2001 95AIII.3 Import and export licensing, 2001 98


AIV.1 Summary of the State aid system in the Czech Republic 99

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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

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(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 May 2000 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

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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

13. 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.

14. 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.

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(1) RECENT ECONOMIC DEVELOPMENTS

Summary

15. 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%) (Table I.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.1Selected 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 8.8Inflation (consumer price index, period average) 20.8 10.0 9.1 8.8 8.5 10.7 2.1 3.9Private consumption/GDP 49.9 50.7 50.1 51.5 52.9 51.6 53.3 53.7Gross national savings/GDP 28.7 27.8 29.9 27.3 26.3 27.0 25.6 25.6Gross domestic investment/GDP 28.5 29.6 32.2 31.9 30.9 28.3 26.8 27.2Labor 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 -2.4General government balance, excl. privatization revenues 0.4 -1.9 -1.6 -1.9 -2.0 -2.4 -1.9 -4.2General 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 39.5Expenditures 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 6.5Credit to enterprises and households 19.1 16.8 13.2 10.6 9.4 -3.5 -3.9 -2.8Net 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 5.4Average lending rate 14.1 13.1 12.8 12.5 13.2 12.9 8.7 7.2Average deposit rate 7.0 7.1 7.0 6.8 7.7 8.1 4.5 3.4

Table I.1 (cont'd)

1 World Bank (1999a), Vol. 1.

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1993 1994 1995 1996 1997 1998 1999 2000

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 29.0Merchandise exports (volume change) .. 6.5 17.0 6.2 13.7 13.7 8.7 8.1Merchandise imports (US$ billion) 14.8 17.3 25.1 27.6 27.3 28.9 28.2 32.3Merchandise 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 -4.7Financial account/GDP 8.6 8.2 15.8 7.2 2.0 5.1 5.6 6.6Gross 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 4.8Reserve 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 ratesNominal 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.

a Per cent of labour force.b Per cent of goods and non-factor services exports.c Increase 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.

16. 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 Finance & Development (2000).3 Exports of goods and services increased by almost 19% in 2000. While the recovery was initially

export-led, higher oil prices and strengthening domestic demand resulted in a worsening of the current account deficit.


17. 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 (Table I.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.2Czech Republic at a glance, 1990-2000

1990 1995 2000

GDP per capita (US$) 3,366 5,036 4,820Population (million) 10.4 10.3 10.3Growth of population (percentage change) 0.0 -0.1 -0.1Fertility rate (births per woman) 1.9 1.3 1.1Life expectancy 71.5 73.2 74.8a

School enrolment ratio, secondary (per cent) 87.0 98.0 98.0Share of GDP (per cent):

Agriculture, hunting, forestry and fishing 7.7 4.4 3.4Industry 34.5 31.1 31.8Services 51.9 57.9 56.2

Construction 10.2 8.1 6.5Wholesale and retail trade, restaurants and hotels 11.5 14.0 13.2Transport, storage and communication 3.5 7.6 8.6Financial services 4.3 4.4 3.9Business services 11.1 10.8 10.7Public administration, education and health 11.3 13.0 13.3

Taxes minus subsidies 8.4 11.4 11.7FISIMb -2.5 -4.8 -3.1

Share in employment (per cent):Agriculture, hunting, forestry and fishing 11.8 6.3 4.8Industry 37.8 32.5 32.8Services 50.4 61.2 62.4

a 1999 data.b Financial intermediation services indirectly measured, calculated as the difference between interest received and paid by banks.

Source: WTO Secretariat, based on information provided by the Czech authorities.

Balance-of-payments developments

18. The Czech economy experienced large macroeconomic imbalances in the mid-1990s. Large capital inflows, amounting to some 16% of GDP in 1995, stimulated excessive growth in domestic demand (Chart I.1 and Table AI.1). Coupled with high real wage increases, the economy overheated and the current account deteriorated. The current account deficit worsened by almost five percentage points between 1995 and 1996 to 7.4% of GDP. The decline was mainly due to a sharp fall in export growth and to a strong expansion of private consumption and investment, putting pressure on import demand.4 The export slowdown was due to the worsened competitiveness associated with a fixed exchange rate. The contraction of the Czech Republic's main export markets in Europe (notably Germany) also contributed to the fall in exports. The increasing macroeconomic imbalances eventually led to a speculative attack on the currency in early 1997.5

4 The current account imbalance was not a result of fiscal pressure. It should be noted, however, that it is difficult to measure the true fiscal position of the Government. This is due to many off-budgetary activities as well as large amounts of "hidden debt" (see below).

5 It has been argued by several observers that an earlier switch to a floating regime would have prevented the large capital outflows in May and June 1997.


19. The external situation has recovered since the attack on the currency. The current account deficit improved from 6.1% of GDP in 1997 to 2.3% in 1998, partly reflecting an improved trade account. Import growth declined, due to the depressed state of the economy, and exports recovered in response to improved competitiveness associated with the depreciation of the currency as well as renewed demand from Europe. However, since then, foreign trade and current account deficits have worsened somewhat, reflecting, inter alia, the rise in world oil prices.6

20. During the recession, the stock of external debt increased substantially (Chart I.1). Gross-external debt (in convertible currencies) rose from US$7.1 billion in 1993 to US$20.8 billion in 1996. Over the same period, short-term debt tripled to US$6 billion. Nevertheless, gross public debt remained modest, at about 13% of GDP in 1996. Since then, external debt has accumulated at a slow pace (reflecting short-term debt developments). However, short-term debt in relation to foreign exchange reserves is still relatively high, estimated at 68% in 2000. Moreover, looking ahead, the public debt is expected to increase as a result of banking sector restructuring and expanding fiscal deficits.7

21. The Czech Republic remains highly integrated into the world economy (Chart I.1). Merchandise trade (exports and imports) as a share of GDP amounted to some 120% in 2000 and the ratio of total foreign investment to GDP was 5.3%. These numbers reflect a relatively open trade and foreign investment regime, with few measures restricting market access. Already in 1995, the Czech Republic signed the IMF's Article VIII obligations for current account convertibility.8

The fiscal stance

22. The Czech Republic has maintained a nearly balanced State budget (Table I.1). However, the consolidated General Government balance – including the operations of the local governments, various extra-budgetary funds, and changes in the State Financial Assets (SFAs) – provides an enhanced instrument to evaluate the Czech fiscal position, as it shows a more complete picture of the Government's fiscal stance.9 In contrast to the State budget, the consolidated General Government balance (corrected for privatization proceeds) shows a deterioration in almost every year since the early 1990s, to 4.2% in 2000 (Table I.1). On the revenue side, cuts in direct tax rates and changes in tax regulations resulted in a progressive fall of revenue to 38.4% of GDP in 1998. On the expenditure side, no major changes in the level were recorded between 1996 and 1998. Thereafter, expenditures have increased, reflecting enhanced transfers to households and increased support to financial and non-financial enterprises.

23. Looking ahead, the fiscal situation may deteriorate even further. The reliance on uncertain financing sources (i.e. privatization receipts) in a weakening global external environment could pose a threat to macroeconomic stability.10 In this regard, the authorities' efforts in the area of public finance transparency are important measures to address the fiscal situation (Box I.1).

Box I.1: Hidden government debts – the move towards more transparency in budget accounts

6 IMF (2000c).7 IMF (2001).8 IMF (1995).9 Extrabudgetary funds include the Czech Land Fund, the National Property Fund, the State Fund for

Culture, the State Fund for Environmental Protection, the State Fund for Soil Fertilization, and the State Fund for Support and Development for Czech Cinematography. The SFA comprises the central government's account at the central bank, in which the state budget surpluses from previous years are deposited (World Bank, 1999a , Vol. 2).

10 IMF (2001).


Fiscal policy in the Czech Republic appears to be blurred by a wide range of contingent liabilities held by various non-government agencies. Hidden public liabilities include those of the Konsolidačni Banka, Ceska Finacni, the National Property Fund, and various state loan guarantees. Other potential liabilities include the Government's equity position in some commercial banks (Komerčni Banka and Ceska Sporitelna) as well as some highly indebted firms (such as the state-owned railroad). Also, the effect on government debt of the funds spent on bank restructuring (equivalent to some 10% of GDP) is unclear. So far, most of the costs have not appeared in the Government's books but have been financed through the transfer of non-performing loans to Konsolidačni Banka. The full amount of the liability is unclear and the annual burden on current spending only materializes imperfectly as bank losses. Consequently, official data on the fiscal position provide a misleading picture of the overall financial position of the Government.

The large amount of off-budget activities creates several weaknesses. Hidden public liabilities generate sudden, and not always expected, claims on the budget. Thus, the Government could end up in a situation where the fiscal stability is endangered.

The widespread off-budget activities also affect the Governments' ability to conduct fiscal policy in a transparent manner. Off-budget activities are not subject to the same screening and vetting process as "on-budget" activities. Low priority activities, which would not have passed the usual screening and vetting process, could be financed through the off-budget resources.

Complete information is not available on the size of the government's hidden debt. However, according to a government evaluation, undertaken in co-operation with the World Bank, the hidden public liabilities of Konsolidačni Banka, Ceska Finacni, the National Property Fund, and various state loan guarantees (net of provisions) amounted to 12.4% of GDP in 1998. The implications on the fiscal deficit may also be substantial. Taking into account operations of various off-budgetary institutions, the World Bank estimates that the General Government deficit in 1998 would have been 3.5 percentage points higher than indicated by official statistics.

To address these issues, the authorities have undertaken a study to estimate the size of the "hidden debt" held by the off-budget agencies. Another effort to increase fiscal transparency and accountability was to include a medium-term fiscal framework based on consolidated government accounts in the 2000 Budget. Moreover, new rules for budget implementation, which entered into force in January 2001, should, over time, impose enhanced discipline on off-budget spending and make the approval process for issuing loan guarantees stricter.

Source: World Bank (1999a), A World Bank Country Study – Czech Republic Towards EU Accession; OECD (2000), OECD Economic Surveys 1999-2000 Czech Republic; and EIU (2000), Country Report – Czech Republic.

Monetary and exchange rate policies11

24. The Czech National Bank (CNB, the central bank), which has the sole responsibility for monetary policy, has been committed to achieving a gradual reduction in inflation, while retaining its "primary objective to ensure stability of the Czech national currency" (Act No. 6/1993 on the Czech National Bank). In January 2001, a new Central Bank Act became effective and changed the central bank's primary objective to one of maintaining price stability. Until May 1997, the central bank relied on a fixed exchange rate to encourage the convergence of domestic inflation to world levels, in particular to those of the EU Member States. It also influenced the evolution of money supply (M2) through open market operations and changes in reserve requirement, as well as in its discounts and Lombard rates. As discussed above, in early 1997 external sector developments were perceived by the "market" as unsustainable. It culminated in May 1997 when, after ten days of large foreign exchange interventions and steep increases in interest rates, the authorities were forced to introduce a managed float exchange system.12

11 This section draws on OECD (1998a).


25. With the exchange rate floating, monetary policy no longer acted as a nominal anchor, a situation that persisted until 22 December 1997, when the central bank replaced M2 with an inflation-targeting framework. Within this framework, the central bank now focuses on changes in headline prices to ease targeting "net inflation", which is defined as consumer price inflation less the effects of changes in administrated prices and indirect taxes.13 The aim is to converge towards EU inflation levels by the end of 2005.

26. In the initial years of the transition, the Czech Republic handled inflation problems relatively successfully. Inflation (as measured by consumer price increases) quickly dropped below double-digit values and then continued its downward trend. The disinflationary process was disrupted by the exchange rate turbulence in May 1997. The sharp depreciation of the exchange rate, as well as rent and energy prices liberalization, put pressure on inflation in 1998 (Table I.1). To address the rise in inflation, the central bank pursued tight monetary policy with short-term interest rates kept at historically high levels (exceeding 15% until July 1998). The tight monetary policy was supported by tight fiscal and income policies. However, with the unexpected rapid deceleration in price increases (significant undershooting of the "net-inflation" target in 1998 and 199914), monetary policy was relaxed and the central bank cut interest rates.15 The fast pace of disinflation was, however, pursued at the expense of an economic slowdown, which was a sign of the structural problems in the economy. Although inflation picked up somewhat in 2000, reflecting higher prices on imported oil and food, the underlying inflationary trend does not seem to have increased.16

(2) STRUCTURAL REFORMS – THE CAUSES OF THE FINANCIAL CRISIS AND BEYOND

27. The Czech Republic has made substantial progress towards establishing an institutional structure compatible with a well-functioning market economy. In addressing the 1997 crisis, the Czech Republic largely abstained from protectionist measures.17 Instead, it took steps to address the root causes of the financial crisis. The reforms undertaken have focused on capital market reforms and bank restructuring. Important legal reforms were also implemented as part of the harmonization of legislation with EU's acquis communautaire. The already relatively liberal foreign direct investment regime was further liberalized in December 1995 when the Czech Republic acceded to the Organization of Economic Cooperation and Development (OECD). Also, trade liberalization (notably tariff reduction) has continued during the review period.

Legal reforms – enhancing the private sector environment

12 Leading up to the currency crisis, the central bank tightened monetary policy (raising its discount rate by 100 basis points to 10.5%), thereby contributing to the real currency appreciation and a rise in market interest rates. The three-month PRIBOR rate averaged 26% in May 1997 and the central bank's Lombard rate was set at 50%.

13 See Czech National Bank and IMF (2000) for a description of inflation targeting in the Czech Republic.

14 In 1998 the target was 5.5-6.5% compared with an outcome of 1.7%, while in 1999 the corresponding numbers were 4-5% and 1.5%. It has been noted that, in view of the significant undershooting of the inflation target, monetary policy could have been too slow in relaxing (OECD, 2000a).

15 Its main policy variable (the two-week repo rate) was cut seventeen times, falling from 15% in mid-1998 to 5.5% in October 1999, while short-term interest rates declined to 6.1% in October 1999.

16 IMF (2000c).17 However, a six months import deposit scheme was in place during 1997 (Chapter III(2)(v)).


28. The regulatory framework for the capital market has been improved in several steps during the period under review. Amendments to the Commercial Code and the Investment Fund Act improved disclosure and minority shareholder protection rules, and prevented a further conversion of investment funds into holding companies. Measures have also been taken to increase the transparency and regulation of capital markets by creating an independent securities exchange commission and by enhancing rules protecting minority shareholders. Transparency in the investment privatization funds market has been improved by opening the closed-ended funds whose shares were traded at significant discounts relative to the market value of the stocks held by them. The Commercial Code, the Securities Act, and the Accounting Act have been amended several times with a view to improving transparency in corporate decisions, accountability of boards, and shareholder rights.18

29. A number of other legal reforms have also been implemented during the period under review. The Czech Republic's competition rules as well as its intellectual property rights legislation have been strengthened, while the standards law has been amended providing for simplified testing and standardization procedures. Amendments to the bankruptcy law include improved creditors rights, and efforts to reduce the often long delays in the bankruptcy process. The enactment of the Public Auctions Act also serves to strengthen creditor rights. Nevertheless, weaknesses in the dispute resolution system continue to be a factor impeding the business environment.

Bank and enterprise restructuring

30. In recent years, privatization has focused on the banking sector. With the privatization of three large state-owned banks – IPB in 1998, CSOB in 1999, and a savings bank CS in 2000 – the only remaining state-owned commercial bank is Komerční Banka (KB), which is slated for privatization by mid 2001. Building on programmes from the early 1990s, progress has also been made in improving the health of the small banks. The cost of bank assistance has been substantial, estimated at 10.5% of GDP (measured as a share of 1998 GDP) during the period 1991-98.19

31. In addressing enterprise restructuring, the authorities established a Revitalization Agency in 1999 as a subsidiary of Konsolidační banka (KOB) with the objective of facilitating the financial and operational restructuring of a limited number of heavily indebted and money-losing firms for privatization. In 2001, the Agency's activities are to be incorporated into KOB's organizational structure.

32. Recognizing that the State is still active in a number of areas where the private sector could do a better job, the authorities are separating non-competitive from competitive activities. Non-competitive activities are to continue to be controlled by the State. For the time being, a number of competitive activities are also to remain controlled by the State.

(3) TRADE AND FOREIGN INVESTMENT PERFORMANCE

(i) Trade patterns

33. The geographic distribution of merchandise trade has continued to move away from the former Soviet Union towards Western Europe during the period under review. This shift reflects the Czech Republic's continued integration with Western Europe, improved conditions in Western Europe, and economic difficulties in the former Soviet block. The European Union accounted, in 2000, for almost 69% of total merchandise exports and 62% of imports (Tables AI.2 and AI.3). Germany is the Czech Republic's largest single trading partner (accounting, in 2000, for 40% of

18 World Bank (2000a).19 World Bank (1999a), Vol. 1.


merchandise exports and 32% of merchandise imports). The share of trade (in particular merchandise exports) with Eastern Europe has continued to decline since 1996. A large part of this drop is accounted for by a declining share of trade with the Slovak Republic.

34. Export growth is driven by manufacturing. The share of manufactured products in total merchandise exports increased from 84% in 1996 to 88% in 2000, at the expense of a number of traditional sectors (agriculture and mining) (Table AI.4). Within manufacturing, exports of machinery and transport equipment – such as the automotive products industry – have grown significantly. The manufacturing sector has benefited from the presence of foreign-owned firms. By contrast, the export shares of iron and steel, and chemicals have declined. The share of agriculture in total merchandise exports has also declined consistently. Manufactured products also dominate the Czech Republic's imports, accounting for close to 80% of total merchandise imports in 2000 (Table AI.5). Machinery and transport equipment and chemicals are the most important import items. The share of agriculture in total merchandise imports has continued to decline.

35. The Czech Republic has relatively high levels of intra-industry trade, accounting for more than 60% of its total merchandise trade in 2000 (Chart I.2).20 Its levels even surpass many of the EU Member States' levels.21 In 2000, Czech's intra-industry trade with the EU comprised almost 62% of the trade between these countries, while its intra-industry trade with the CEFTA member countries comprised just above half of the trade. Intra-industry trade with the former Soviet bloc, although increasing, accounted for a mere 6.5% of the 2000 trade.

(ii) Investment patterns

36. Foreign direct investment has contributed to the development of the Czech economy through several channels.22 The potential for foreign direct investment to accelerate enterprise restructuring

20 Intra-industry trade refers to the importing and exporting of goods in the same product category.21 Kaitila (1999).22 Czech law does not define portfolio investment, while foreign direct investment is defined as the

establishment, or acquisition, of an exclusive share in a business activity, or the participation in a business


was identified at an early stage of the transition. Foreign direct investment also acts as a supplement to domestic savings and raises total capital investment in the economy. FDI has contributed to the growth of exports. In addition, foreign participation in the privatization process brings in government revenues. Data on Czech firms suggest that the impact on labour productivity is predominantly due to intangible assets introduced by foreign firms, rather than simply the fixed capital investment associated with foreign direct investment.23

37. Foreign direct investment inflows have increased markedly in recent years, responding to substantial improvements in the regulatory environment, the expected accession to the EU, and a new investment incentive scheme (Table I.3). Foreign investment (net) jumped from 3.5% of GDP in 1996 to 5.3% in 2000, more than offsetting the current account deficit (Chart I.1). This development reflects the surge in net foreign direct investment, which has almost quadrupled since 1996. The Czech Republic ranked number two in terms of FDI inflow among the Central and Eastern European countries in 1999.24 The amount of foreign direct investment made by Czech nationals abroad is minor compared with the amount of inflows (Table AI.1). While net foreign direct investment rose rapidly, net portfolio investment fell to an outflow of US$1.8 billion or 3.5% of GDP in 2000 (notably debt securities).

Table I.3Foreign direct investment by sector and country, 1995-2000(US$ million and per cent)

1995 1996 1997 1998 1999 2000

Foreign direct investment, net (US$ million) 2,526 1,276 1,275 2,641 6,234 4,477

Portfolio investment, net (US$ million) 1,362 726 1,086 1,069 -1,395 -1,767

Total foreign investment, net (US$ million) 3,888 2,002 2,361 3,710 4,839 2,710

Total foreign investment, net/GDP (%) 7.5 3.5 4.5 6.7 9.1 5.3

Foreign direct investment by activity (per cent of total):

Non-manufacturing 66.5 55.2 68.6 68.5 76.0 65.6Agriculture, hunting and forestry 0.3 0.0 0.5 0.2 0.2 0.2Mining and quarrying 0.9 0.5 0.0 0.0 5.3 0.5Electricity, gas and water supply 1.6 11.2 28.8 7.8 6.1 4.4Trade, hotel and restaurants 5.7 19.8 9.5 22.1 25.3 20.8Transport, storage and communications 52.8 12.9 0.1 11.6 2.5 4.5Financial intermediation 2.5 2.3 22.9 18.6 26.8 19.5Real estate and business activities 0.0 0.0 3.2 5.6 6.6 12.4Other 2.7 8.5 3.5 2.6 3.5 3.1

Manufacturing 33.5 44.8 31.4 31.5 24.0 34.4Food and tobacco 4.8 5.1 7.2 5.1 4.4 4.1Wood, paper and publishing 0.0 5.7 7.8 3.5 2.3 1.9Refined petroleum and chemicals 3.5 23.4 3.9 2.4 4.1 1.6Non-metallic products 6.9 4.3 1.3 1.3 3.5 3.3Basic metals and metal products 0.0 0.0 6.1 10.5 2.3 4.2Machinery and equipment 18.2 4.8 1.2 1.9 5.9 17.8Other 0.1 1.6 3.8 6.8 1.4 0.4

Table I.3 (cont'd)

Foreign direct investment by country of origin (per cent of total):

Western Europe 83.2 69.0 59.9 61.1 77.3 86.3Belgium 1.0 4.0 4.3 1.8 25.3 2.5Germany 22.2 17.4 30.1 21.2 16.0 22.0Netherlands 0.0 18.1 10.3 23.9 14.9 21.9Austria 3.4 14.6 7.3 9.6 12.9 20.4Switzerland 26.5 3.9 3.6 3.3 6.3 4.1

United States 3.9 17.7 7.6 10.2 11.5 3.2

activity with at least 10% of the capital of the company, or at least a 10% of the voting rights.23 Barrell and Holland (2000). Djankov and Hoekman (2000), find that foreign direct investment in the

Czech Republic has a positive impact on total factor productivity growth.24 Czech Business and Trade (2000).


1995 1996 1997 1998 1999 2000

Other 12.8 13.3 32.5 28.7 11.2 10.5

Source: Data provided by the Czech authorities; and IMF(2000d), IMF Staff Country Report No. 00/119 Statistical Appendix.

38. Foreign direct investment has flowed into a variety of sectors, with trade, hotels and restaurants (21% of total foreign direct investment) and financial intermediation (19.5%) attracting the largest inflows in 2000 (Table I.3). Inflows continue to be heavily dominated by the EU and EFTA member countries, accounting for 86% of the total in 2000. Portfolio investment inflows have largely mirrored the waves of voucher privatization. Portfolio investment is focused on short-term debt instruments and the most liquid blue-chip shares.

(4) OUTLOOK

39. Along with economic recovery, the authorities have addressed a wide range of structural reforms. Many of the reforms are those required by the EU accession process. In this respect, the Czech Republic needs to complete the process of creating the appropriate legal regulations, and the required institutional framework, in line with EU member countries. Meeting this challenge will continue to require significant reform efforts, touching on most aspects of the economy. Other reforms, which are not formal requirements for EU membership, but are crucial for the success of Czech companies to compete on the European market, include enterprise restructuring and privatization. Moreover, the imbalance in the fiscal positions is becoming a major constraint to the Czech Republic's economic performance. In this regard, expenditure reforms (including reform of the pay-as-you-go pension system) as well as revenue measures are important.


(1) INSTITUTIONAL FRAMEWORK

(i) Institutional structure

40. The 1992 Constitution of the Czech Republic has been amended twice, in 1997 and 2000. The amendment in 1997 provided for the establishment of 14 administrative and self-governing districts/regions. The districts/regions were established in January 2000 and the Government is in the process of redistributing powers between the different levels of administration. The amendment in 2000 was motivated by the Czech Republic's membership in NATO. An amendment to the Constitution has been prepared providing for all treaties ratified by the Parliament to be an integral part of the Czech legal system if such treaties are not implemented by a domestic law. Currently, for international treaties to apply in the Czech Republic they must be incorporated into national legislation by an Act of Parliament, except international treaties on human rights and fundamental freedoms. As a result of the enactment of the proposed amendment, international treaties would be part of the Czech domestic legislation, and take precedence over domestic laws where they do not conform.

Legislative powers

41. The Constitution establishes a bicameral Parliament, consisting of the Chamber of Deputies (lower house) and the Senate (upper house).1 A resolution by a parliamentary chamber is passed by a simple majority of deputies or senators present. A constitutional bill or an international treaty on human rights and fundamental freedoms must be passed by 60% of the total number of deputies and

1 The composition of the Czech Parliament is explained in WTO (1996).


60% of senators present. Both Houses form standing and ad hoc Committees and Commissions to discuss legislation or to control Government.2 The legislative process for the enactment of laws has remained broadly as described in the previous Review of the Czech Republic in 1996. The Chamber of Deputies amended its rules of procedure in 2000 to introduce a fast-track possibility for considering EU-related legislation.

42. At Governmental level, various ministries and government offices are entitled to issue draft bills. Drafts are checked for compatibility with EU legislation at CODEC before going to the governmental Legislative Council and then to the Government itself.3 Government-approved bills are sent to the Chamber of Deputies. Passage of a government resolution requires the consent of an absolute majority of its members. The Government may, within the limits of the law, issue decrees for the execution of a law. If specifically authorized by law, ministries and other administrative offices may issue legal regulations on the basis of the law. Proposals on trade legislation are normally considered by the Government before being sent to the Parliament. The Government has exclusive legislative initiative in terms of the State Budget.

The President

43. The President is elected by a joint session of both Chambers of Parliament for a five-year period and may serve for a maximum of two consecutive periods. Presidential powers include the right to appoint and remove the Prime Minister and, upon proposal of the Prime Minister, other Ministers of the Government; and to dissolve the Chamber of Deputies. The President also has the right to appoint judges of the courts and negotiate and ratify international treaties, although (s)he may transfer the responsibility for negotiation of international agreements to the Government or, with its approval, to its individual members.

The Government

44. The Government is the supreme body of the executive power. It consists of the Prime Minister, Deputy Prime Ministers and Ministers, and it coordinates activities of the Ministries and the central bodies of the State Administration. The Government can be forced to resign by the Chamber of Deputies when a successful vote of no-confidence takes place.

The judiciary

45. The Constitution provides for full independence of the judiciary from the executive or legislature. The judicial system consists of four tiers including the Supreme Court, two High Courts, the Regional Courts, and District Courts. The Constitutional Court is separate from the system of common courts. Judges are nominated by the President for an unlimited period. The Constitutional Court can rule out any provision of law or governmental decision (central or local) that it finds unconstitutional. The Constitutional Court also decides whether laws, decrees and legally binding regulations are consistent with other laws and international agreements. Its decisions may not be appealed (except those on the observance of human rights, which can be appealed to the European Court on Human Rights). The Constitutional Court can rule on disputes between state institutions and can judge the President, based on Senate impeachment. The other courts decide cases involving civil, commercial (including competition) and criminal matters, and rule on the legality of decisions made by administrative bodies. They also settle lawsuits concerning international trade relations. The Constitution allows the Parliament to pass a law establishing a Supreme Administrative Court, which would pass decisions on the annulment of legal regulations that may be at variance with existing law,

2 European Commission (1999a).3 CODEC, the Department for compatibility with EU law, was set up in April 1993.


or on some issues concerning the scope of powers of State bodies and territorial self-administration. These powers are currently exercised by the Constitutional Court.

46. The slow functioning of the overburdened courts in commercial matters has been identified as a major problem for investors. The length of judicial proceedings and the backlog of cases are substantial. A lack of judicial expertise in commercial law as well as weak enforcement also impede the business environment, and have given rise to questions of governance.4

47. Aware that the business environment might be being negatively affected, the Czech Government is taking steps to address issues of governance. At the international level, the Czech Republic ratified, in January 2000, the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions; in September 2000 it also ratified the Council of Europe Criminal Law Convention on Corruption. At the national level, the Ministry of Justice has allocated additional funds for the establishment of a specialized unit dealing with economic crime. These measures can be expected to help bring greater accountability of managers, especially if the measures are accompanied by a speedier functioning of the legal system.5

(ii) Policy formulation and implementation6

48. The main characteristics of Czech institutions have remained broadly the same as described in 1996.7 The Ministry of Industry and Trade (MIT) remains the main governmental body responsible for the formulation, co-coordination and implementation of trade policies. It is responsible for the co-ordination of bilateral and multilateral trade negotiations and the implementation of obligations resulting from these negotiations, including those under the WTO and the EU. The MIT operates the foreign trade licensing regime and exercises control over the marketing and testing of rare metal. It also supervises the Czech Energy Inspection Authority, the Czech Trade Inspection Authority, the Patent Office, and the Licensing Office. During the period under review, the MIT has taken over some of the responsibilities of the former Ministry of Economy, which was abolished in 1996. These responsibilities include acting as the central body for matters concerning small and medium-sized enterprises, technical standardization, metrology and testing, industrial research, technical development, and export promotion.

49. The General Directorate of Customs (under the Ministry of Finance) is responsible for customs control and enforcement, investigations, and the collection and development of data. MIT is charged with initiating and conducting investigations related to anti-dumping and safeguard measures, while the Ministry of Finance is responsible for the management of countervailing measures. The Czech Office for Standards, Metrology and Testing (COSMT) is the co-ordinating state body responsible for approving standards; the preparation, approval and publication is under the responsibility of the Czech Standards Institute (CSI). Privatization policy is under the responsibility of the Ministry of Finance since June 1996, when the Ministry for the Administration of National Property and its Privatisation was abolished. The body responsible for supervising adherence to competition regulation is the Office for the Protection of Economic Competition, which assumed the activities of the former Ministry of Economic Competition on 1 November 1996. The Office has also taken the state aid monitoring role from the Ministry of Finance. The Industrial Property Office is in charge of industrial property administration, and the Ministry of Culture is in charge of the administration of copyright. The Ministry of Agriculture is responsible for agricultural trade policy

4 See for example, European Commission (2000); and IMPACT global (undated).5 According to the European Commission, in the first half of 2000, the average length of civil

proceedings in courts of first instance was 563 days.6 Details are provided in Chapters III, IV and V.7 WTO (1996).


formulation, notably with regard to the State Agriculture Intervention Fund. The Ministry of Regional Development, established in November 1996, is responsible for matters of regional development, housing policy, construction order, public procurement, and tourism (the latter activity had previously been dealt with by the Ministry of Economy). The Ministry of Transport and Communications assumed responsibility in 1996 (from the Ministry of Economy) for telecommunications and transport services, while the Ministry of Finance plays a central role in many services as well as in industrial sectors.

(iii) Transparency and openness of decision making8

50. Open access to information is guaranteed by law. All regulations – including laws, decrees, orders and reports of the Constitutional Court – are required to be published in the Collection of Laws before they enter into force. If available, non-official English translations of regulations are also published. The principle of transparency was reinforced in 1999 by providing the right of access to administrative documents (Act No. 106/1999 Coll. on Freedom of Access to Information). Moreover, the Czech authorities increasingly use the Internet to publish draft regulations or decrees. An electronic gateway, providing a common access to all sources of information, was introduced in 2001.

51. Consultations take place through various channels. Inter-governmental consultations are regulated by the Legislative Rules of the Government and the Government Rules of Procedures. According to the rules, draft regulations must be sent to other ministries and the central bank for comments. Drafts of labour-related legislation must be commented on by the Tripartite Council (an advisory body consisting of the Government, trade unions, and employers). In the area of technical regulations and standards, the ministries are required to organize public consultations in the process of preparing the regulations. As in 1996, there are no formal arrangements for channelling economic and trade policy advice from academia or from the private sector to the relevant government bodies. However, the rules invite ministries to organize consultation with interested parties. In practice, comments are sometimes sought from the Economic Chamber, the Confederation of Industry and Transport, business associations, consumer groups, and other non-governmental associations. This process of consultation has intensified in recent years.

(iv) Main laws and regulations

52. The Czech Republic has enacted a large number of trade and trade-related laws and regulations, and has also amended existing laws during the period under review, with an acceleration of the legislative process in 2000 (Table II.1). Many of the changes were made with a view to harmonizing the legal framework with the EU acquis communautaire.

Table II.1Promulgation of laws and treaties, 1993-2000

1993 1994 1995 1996 1997 1998 1999 2000

Number of laws promulgateda 283 213 250 224 265 252 298 505

Number of treaties promulgatedb 54 63 68 103 92 83 75 144Total laws and treaties 347 276 318 327 357 335 373 649

- trade and trade-related 124 102 109 129 133 112 149 258- EU-related (fully harmonized) 3 3 22 28 72 34 33 59- EU-related 17 24 35 39 86 55 124 197

a Including Acts, Constitutional Acts, Decrees, Decisions of the President, Government Regulations, Findings of the Constitutional Court, Resolutions of the Chamber of Deputies, but excluding Measures and Notices of Central Bodies.

b Communications of the Ministry of Foreign Affairs.

8 This section is based on OECD (2001).


Source: Information provided by the Czech authorities (Collections of Laws, Collection of International Treaties, Department of Compatibility of the Office of Government).

53. The main legislation related to international trade includes the Commercial Code, the Customs Act, and the newly enacted Act on Some Measures in the Export or Import of Products and on the Licensing Procedures, which provides the legal basis for the regulation and development of foreign trade and corporate activities (Table II.2). The latter law regulates procedures on, inter alia, imports under licensing, protection against increased imports, protection against imports of some agricultural products and foodstuffs, and protection of newly developed sectors and of state interest. During the period under review, the Czech Republic has also introduced specific legislation on contingency measures (anti-dumping, countervailing and safeguard measures), but whether the Czech Republic will be an active user of the legislation remains to be seen. A new law on standards provides for simplified testing and standardization procedures. The monitoring system of state aid has been strengthened as a result of the enactment of two new laws, and an incentive package for foreign investors has been introduced. Amendments to government procurement legislation provide for enhanced transparency, but regulations continue to make it possible to provide some advantages to domestic firms. Competition rules and intellectual property rights legislation have been strengthened during the period under review. The bankruptcy law has been amended several times with a view to enhancing enterprise restructuring. The new law on Public Auction provides for a broadened range of property subject to non-judicial auction procedures and potentially streamlines the foreclosures process. Nevertheless, the bankruptcy law, coupled with a weak judicial system, continues to impose obstacles to restructuring.

Table II.2The Czech Republic's main legislation related to trade, April 2001

Area Main legislation

Main trade legislation on exports and imports

Act No. 513/1991 Coll. on Commercial Code; Act No. 13/1993 Coll. on Customs; Act No. 62/2000 Coll. on Some Measures in the Export or Import of Products and on the Licensing Procedures; Act No. 38/1994 to Regulate Trade in Military Material with Foreign Countries; Act No. 21/1997 on the Control of Export and Import of Goods and Technological Products Subjected to International Control

Anti-dumping duties Act No. 152/1997 Coll. on the Protection Against Imports of Dumped Products

Countervailing duties Act No. 63/2000 on Protection Against Subsidized Imports and Amending some Other Acts

Safeguard measures Act No. 62/2000 Coll. on Some Measures in the Export or Import of Products and on the Licensing Procedures

Standards and technical regulations

Act No. 30/1968 on Products Requiring Approval by a State Testing Laboratory Before Entering Circulation; Act No. 64/1986 on Czech Trade Inspection; Act No. 142/1991 on Procedures for Setting Standards; Act No. 634/1992 Coll. on Protection of Consumers; Act No. 22/1997 on Technical Requirements for Products; Act No. 59/1998 Coll. on Liability for Damages Caused by Product Defects

Sanitary and phytosanitary measures

Act No. 20/1966 on People's Health; Act No. 147/1996 Coll. on Phytosanitary Care; Act No. 166/1999 on Veterinary Care

Government procurement Act No. 199/1994 Coll. on Public Procurement

Customs free zones Act No. 13/1993 Coll. on Customs; Act No. 72/2000 Coll. on Investment Incentive Act

Privatization Act No. 427/1990 on Small-scale Privatization; Act No. 92/1991 on Large-scale Privatization

Bankruptcy Act No. 328/1991 Coll. on Bankruptcy and Settlement, Act No. 120/2001 Coll. on Execution Procedures Code

Public Auction Act No. 26/2000 Coll. on Public Auction

Competition Act No. 63/1991 Coll. on the Protection of Economic Competition

State aid Act No. 59/2000 Coll. on State Aid; Act No. 248/200 Coll. on Support to Regional Development; Act No. 72/2000 Coll. on Investment Incentive; Act No. 586/1992 Coll. on Income Tax; Act No. 58/1995 Coll. on Insurance and Financing with State Support; Act No. 58/1995 Coll. on Export Insurance and Financing with State Support; Act No. 300/1992 Coll. on State Support for Research and Development; Act No. 388/1991 Coll. on State Environmental Fund; Act No. 241/1992 on State Fund of the Czech Republic to Assist and Promote Czech Cinematography

Intellectual property rights Act No. 35/1965 on Literary, Scientific and Artistic Works (the Copyright Act); Act No. 121/2000 Coll. on Copyright, Rights Related to Copyright and on the Amendment of Certain Laws; Act No. 527/1990 on


Inventions, Industrial Designs and Rationalization Proposals; Act No. 529/1991 on Protection of Topographies of Semi-conductor Products; Act No. 137/1995 on Trademarks; Act No. 159/1973 on Protection of Appellations of Origin; Act No. 132/1989 on New Plant and Animal Variety Protection; Act No. 478/1992 on Utility Models

Price control Act No. 526/1990 on Price

Tax system Act. No. 212/1992 on the Tax System; Act No. 588/1992 on Value-added Tax; Act No. 587/1992 on Excise Tax

Foreign investment No law specifically for foreign investors. Some basic legislation that needs to be observed include Act No. 513/1991 Coll. on Commercial Code; Act No. 455/19991 on Trade Licensing; and Act No. 219/1995 on Foreign Exchange, while individual laws define the specific features of certain kinds of business

Source: Czech authorities.

(2) DEVELOPMENTS IN INTERNATIONAL RELATIONS

(i) World Trade Organization

54. The Czech Republic, a founding member of the WTO, made extensive commitments during the Uruguay Round, both in goods and services (Box II.1). During the period under review, it has continued to undertake major commitments within the multilateral framework. In 1997, it became a participant to the WTO Declaration on Trade in Information Technology Products (commonly referred to as the Information Technology Agreement (ITA)). In this context, it agreed to eliminate tariffs by 2002 on a range of imported information technology products covering 359 (eight-digit) tariff lines, including computers, telecommunications equipment, semiconductors, software, and scientific instruments. In 1996 and 1998 the Czech Republic made further concessions on pharmaceutical products under the Pharmaceutical Initiative.9 It also participated in the 1997 WTO negotiations on basic telecommunications and on financial services. Regarding the Agreement on Government Procurement, at the time of the previous Review the Czech Republic had indicated that it was considering the possibility of joining; this did not materialize. However, the Czech Republic participates as an observer in the Committee on Government Procurement since August 2000. The Czech Republic has not yet joined the Agreement in Trade in Civil Aircraft. Its intention is to accede to both plurilateral agreements by the time of its accession to the EU. The most recent WTO notifications by the Czech Republic are presented in Table AII.1.

Box II.1: Main commitments under the Uruguay Round

The Czech and Slovak Federal Republic (CSFR) was an original member of the GATT. As its membership of the GATT predated the period of central planning, the Czech Republic acceded to the GATT under normal market economy conditions in April 1993 following the dissolution of the CSFR (the GATT Protocol is contained in GATT document L/7183, March 1993). The General Agreement and relevant instruments were applied on an interim basis prior to the formal accession.

The Czech Republic is a founding Member of the WTO. The WTO Agreement was approved by Parliament, ratified by the President, and promulgated in the Collection of Laws (No. 191/1995 Coll.).

The Czech Republic's main commitments on trade in goods in the Uruguay Round were to: (i) increase the share of bound tariff lines from 97% to 100% – almost all applied rates are currently at bound rates; (ii) reduce the simple average MFN tariff rate from a base rate of 8.2% to 6.3%; (iii) replace variable levies on several agricultural goods with bound ad valorem tariffs; (iv) limit domestic support to agriculture by 20% in value terms by 2000; and (v) cut agricultural subsidies on 15 agricultural product groups (including dairy products, malt, beef, and poultry and eggs) by 36% in value and 21% in volume.

9 WTO documents G/MA/W/10, 11 October 1996 and G/MA/W/18, 13 November 1998.


In services, the Czech Republic undertook a relatively large number of obligations. Its schedule covers 81 activities out of a total of 161 in nine sectors. Sector-specific commitments on market access and national treatment were made in areas such as professional services and distribution services. Horizontal limitations applying across all scheduled service sectors were made regarding the acquisition of real estate and the presence of foreign natural persons. MFN exemptions apply to audio-visual services and some forms of passenger and freight transportation.

Source: WTO (1996), Trade Policy Review – Czech Republic; and GATT (1994), The Results of the Uruguay Round of Multilateral Trade Negotiations.

55. The Czech Republic has been involved as a complainant in one consultation in the WTO. The dispute concerned the imposition of quantitative restrictions by Hungary on a broad range of steel products from the Czech Republic.10 The Czech Republic was a respondent in one case initiated by Hungary. The dispute was in respect of a regulation adopted by the Czech Republic that allegedly increased the import duty on wheat originating in Hungary, exceeding the bound rates. 11 In both cases, the disputes were resolved through bilateral consultations.

56. In the multilateral trading system, the Czech Republic is concerned by a number of measures maintained by importing countries. In the area of anti-dumping, Czech exports face duties on: seamless steel pipes and tubes, polypropylene binder or baler twine and malleable cast iron tube or pipe fittings in the EU; certain pipes in the United States; gauge shotshells in Canada; and industrial sewing machine needles, sodium cyanide, and seamless tubes in India. Moreover, the Czech Republic's exports of textiles and clothing are restricted by Canada and the United States under the Agreement on Textiles and Clothing.

57. At the WTO Ministerial meeting in Seattle, the Czech Republic reiterated its support for a comprehensive, time-bound round of multilateral trade negotiations based on the principle of a single undertaking.12 The authorities are of the view that only a sufficiently broad-based agenda, covering market access and rule making, could produce satisfactory results. On agriculture, experience gained through the implementation of the reduction commitments has shown the differences in the levels of effective market openings. These differences need to be narrowed down in the next round of negotiations. Also, new commitments on agricultural tariff reductions should take into account the degree of market openness. The Czech Republic attaches great importance to the timely implementation of the WTO Agreements. At the same time, the problems encountered by developing countries in their efforts to cope with Uruguay Round commitments need to be settled in appropriate mechanisms. On intellectual property, the Czech Republic seeks to expand the additional protection for geographical indications to other products than wines and spirits. It is also interested in developing multilateral rules on foreign direct investment, competition, trade facilitation, and transparency in government procurement. The Czech Republic does not support the establishment of any institutional links between trade and labour or the inclusion of the issue in the next round.

(ii) Regional agreements

(a) Relations with the Slovak Republic

58. The Customs Union Agreement between the Czech and Slovak Republics entered into force in 1993 (Table AII.2).13 It preserves the status quo at the moment of the creation of the Czech

10 WTO document WT/DS159/1, 27 January 1999.11 WTO document WT/DS148/1, 15 October 1998.12 WTO document WT/MIN(99)/ST/46, 1 December 1999.


Republic and the Slovak Republic as it provides for a common external tariff and free trade, with a few exceptions, between the two countries. The Agreement, inter alia, also stipulates:

no discrimination between State enterprises and monopolies in government procurement or marketing between the two countries by the end of 1997. National treatment is to apply and the two parties are to "endeavour to accede" to the WTO's Agreement on Government Procurement;

anti-competitive practices and the abuse of monopoly positions (as defined by national legislation) are incompatible with the Agreement;

national and MFN treatment are established in the area of intellectual property protection;

conforming legal norms are to be adopted with regard to customs procedures and statistics, import and export licensing, intellectual property, and anti-dumping and countervailing duties;

regulations are to be co-ordinated in the areas of foreign exchange, economic competition, State aid, public procurement and agricultural policies (including export subsidies, prices and domestic support);

conforming commercial policy towards third countries (including non-tariff barriers, export policy, and action against dumping and subsidies) is to be pursued;

free trade in services, including national treatment, is to prevail; and

each contracting party collects customs duties for its respective budget.

59. Since the previous Review in 1996, the rules of origin have been amended. In January 1997, rules of origin based on the pan-European system of cumulation were introduced. An agreement between the Czech Office of Standards, Meteorology and Testing and the Office for Standardization, Meteorology and Testing of the Slovak Republic entered into force in September 1997, providing for cooperation in the area of certification and state trading.14 Although trade in agricultural and food products has proved to be a sensitive bilateral issue during the period under review, the parties have largely managed to preserve free trade in agricultural products. In this regard, the only quantitative restrictions maintained by the Czech Republic apply to imports of sugar and isoglucose, while the Slovak Republic restricts imports of non-alcoholic beverages, beer, and sugar.

60. The customs union is unusual in several respects and deviates from most other cases of regional integration. First, it does not provide for the free flow, between the parties, of goods originating in third countries. The rules of origin applied are those used by the parties in their agreements with the EFTA States (Chapter III(1)(ii)). Second, import limits on products subject to non-automatic licensing vary between the two countries, as do the import volumes from developing countries eligible for GSP, as well as imports eligible for tariff quotas. Third, during the review period Czech exports of goods to Slovakia faced a temporary import surcharge. The surcharge, which was introduced in March 1994, was reduced in several steps until it was eliminated in January 2001. Another feature of the customs union is the decline of the share of bilateral trade in total trade

13 The text of the Agreement is contained in GATT documents L/7212, 30 April 1993 and L/7212/Add.1, 12 May 1993.

14 WTO document WT/REG89/R/B/1, 14 March 2000.


(Tables I.3 and I.4). Finally, in case of earlier accession of the Czech Republic to the EU, the customs union is to be dismantled before the Czech Republic joins the EU.

(b) Relations with the European Union (EU)

61. In recent years, the Czech Republic's reform agenda has been driven by its goal of EU membership. The strive towards EU membership has provided a fresh opportunity for implementation of important reforms to strengthen economic growth. The World Bank noted that joining the EU makes the country potentially less risky, as membership assures well-defined property rights, levels of competition, and a coherent-state aid policy.15 EU harmonization, which requires absorption of the EU acquis communautaire, is well under way.

Trade and related aspects of the Europe Agreement

62. The first Europe Agreement establishing an association between the European Communities (and their Member States) and the Czech and Slovak Federal Republic (CSFR) was signed in December 1991. Some of the provisions of this Agreement (such as on trade) were put into operation on 1 March 1992 in the form of the Interim Agreement, which was valid until it was replaced by the Europe Agreement. Following the dissolution of the CSFR, the Czech Republic renegotiated the Europe Agreement with the European Community. A new agreement entered into force on 1 February 1995. Trade-related elements of the former CSFR/EC Agreement were not affected by the renegotiation.

63. In the area of trade and related aspects, implementation of the Europe Agreement brought the following results16:

phased liberalization of trade in industrial products: the method applied by the EU on Czech products was the elimination of duties by the end of 1996 with most duties eliminated upon entry into force. The method applied by the Czech Republic on EU products was the elimination of duties by the end of 1996, with a slower pace of elimination than the EU; duties on a few items (such as some chemical products, some plastics, some textiles and clothing, and passenger cars) were eliminated by the end of 2000;

elimination of quantitative restrictions by the EU from March 1992, except on textiles and clothing until January 1998 and for ECSC coal products until January 1994. Import restrictions by the Czech Republic on uranium ores and concentrates, natural and enriched uranium, waste and scrap of paper, and ferrous and other waste and scrap were gradually lifted, the last of them by the end of 2000;

full or partial liberalization in agriculture: As a result of an enhanced preferential regime, which entered into force on 1 July 2000, close to half of the bilateral trade in agricultural products benefits from preferences.17 The methods applied by the EU on selected Czech products are: (i) tariff quotas with constant volumes or with pre-set annual increase; (ii) tariff preferences; (iii) tariff preferences dependent on minimum import-price arrangements; and (iv) tariff quotas with variable quota and enforced on a plurilateral basis.

15 World Bank (1999a).16 For details see WTO (1996). The text of the agreement is contained in WTO document

WT/REG18/6, 10 May 1996.17 European Commission (2000).


The methods applied by the Czech Republic on selected EU products are preferential rates of duty and tariff quotas. For processed agricultural goods and fishery products, negotiations are ongoing;

the progressive liberalization of the supply of services across national borders including the granting of national treatment for rights of establishment (temporary derogation for financial services for up to ten years in the Czech Republic) and some general exemptions, such as for air and inland-waterway transport. Steps are being undertaken to liberalize the temporary movement of personnel among the parties; and

WTO consistent anti-dumping, countervailing, and safeguard measures are allowed.

64. During the period under review, the rules of origin have been amended and agreements have been reached in the area of standards. In January 1997, the system of pan-European cumulation of origin entered into force. The implementation of this origin network implies that semi-finished products originating in any other partner country may be considered as originating products. It also implies that originating products can be traded between any of the countries involved in the system. A Protocol to the Europe Agreement concerning sanitary, phytosanitary, and animal welfare measures in relation to trade entered into force in August 1998. The objective of the Protocol is to facilitate trade in live animals, animal products, plants and plant products pending the finalization of the approximation of laws. A Protocol on conformity assessment and acceptance of industrial products has been concluded and is expected to enter into force in 2001.

65. The trade preferences between the Czech Republic and the EU have contributed to the EU being not only the most important market for the Czech Republic, but also one of the main sources of imported goods (Chart II.1). As trade in industrial products has already been liberalized, further integration between the EU during the accession process may have limited effects on trade in industrial products. However, trade potential in services and agriculture is yet to be explored.


Steps towards EU accession

66. In January 1996, the Czech Republic became the ninth Central and Eastern European Country (CEEC) to apply for EU membership.18 The European Commission published its first opinion on the Czech Republic's preparedness to join the EU in July 1997. Subsequently, at the Luxembourg European Council meeting (1997) the Czech Republic and five other applicant States ("first wave" of countries) were invited to launch an accession process to the EU.19 In July 1997 the Commission recommended that negotiations with the Czech Republic should be opened.

67. The Czech Republic has drawn up a National Programme for the Preparation of the Czech Republic for membership in the European Union (National Programme for the Adoption of the Acquis, NPAA) as an instrument for further intensification of the development of national prerequisites and conditions for integration into the EU. The NPAA, composed of 26 chapters, was approved by the Government and presented in March 1998, the same day that negotiations on Czech membership began. In June 2000, the Czech Republic presented a revised NPAA; the 2001 revision is under preparation.

68. The negotiation focuses on the acquis communautaire, the body of laws and regulations that underpins the EU. It is composed of 31 chapters, covering, for example, policies in specific sectors, social polices, external relations, customs union, and economic and monetary union. Regarding economic and monetary union, the candidate countries are not expected to become full members of the EMU, adopt specific exchange rate regimes, or meet the convergence requirements set out in the

18 Following Hungary, Poland, Romania, Slovakia, Latvia, Estonia, Lithuania, and Bulgaria, in that order.

19 The first wave countries are the Czech Republic, Cyprus, Estonia, Hungary, Poland, and Slovenia.


Maastricht Treaty, as precondition for EU membership. They are likely to enter the EU with derogations regarding these aspects of the acquis communautaire.20 The bilateral negotiation works through the chapters, starting with the "screening process" in which each country sets outs its position (including proposed derogation from the acquis communautaire or transitional periods). As with the other "first wave" countries, there are no commitments as to the precise date of accession.

69. As part of the accession process, the European Commission undertakes periodic reviews of the candidates' progress. The first report on the Czech Republic, published in November 1998, noted that the Czech Republic "should be able to take on the obligations of the membership provided that the momentum in the adoption of the acquis communautaire and the strengthening of related administrative structures is resumed rapidly".21 A second report, released in October 1999, noted that "The pace of legislative alignment in the Czech Republic has not picked up significantly and progress is uneven across sectors…. Attention should also be paid to developing an effective policy to combat economic crime and corruption".22 The third report, published in November 2000, noted that there had been a signficant acceleration in the rate of legislative alignment with the acquis communautaire, although further efforts were needed in a number of areas. The report also pointed out that the fight against corruption has been insufficient.23

70. By April 2001, negotiations had been opened for 29 chapters, and 15 had been provisionally closed (science and research, education and training, small and medium-sized enterprises, statistics, industrial policy, telecommunications, fisheries, consumer protection, free movement of goods, customs union, external relations, common foreign and security policy, EMU, free movement of services, and company law). Negotiations continue for the remaining chapters. The areas that pose most problems include agriculture, regional policies, and the free movement of labour.

71. One of the main challenges facing the Czech Republic is the need to strengthen its administrative capacity to implement and enforce the acquis communautaire. To assist in this process, the EU member countries are involved in the process of twinning with Czech administrations and agencies.

(c) Central European Free Trade Agreement (CEFTA)

72. The Czech Republic, along with Hungary, Poland, and the Slovak Republic, is a founding member of CEFTA, which was established in 1992. During the review period, the CEFTA has expanded its membership, accelerated the liberalization process, and introduced a new system of rules of origin.24 Slovenia joined on 1 January 1996, Romania on 1 July 1997, and Bulgaria on 1 January 1999.25 The primary objective of CEFTA is to establish a free-trade area by the end of 2001 (Table AII.2). It is based on a system of bilateral liberalization schedules, which eliminate trade barriers symmetrically between members. All parties to the CEFTA Agreement had already negotiated their association agreement with the EU prior to the signing of the CEFTA. Thus, liberalization of trade under CEFTA was primarily concerned with the prevention of the mutual trade discrimination that

20 IMF (2000e).21 European Commission (1998).22 European Commission (1999b).23 European Commission (2000).24 The original text of the agreement is contained in GATT document L/7495/Add.1, 30 June 1994. 25 The Czech Republic had already signed bilateral free-trade agreements with Bulgaria on

15 December 1995 (WTO document WT/REG41/1, 29 May 1997), Romania on 24 October 1994 (WTO document WT/REG26/1, 7 June 1996); and with Slovenia on 4 December 1993 (GATT document L/7447/Add.1, 4 May 1994). From the date of the application of the CEFTA, the bilateral free-trade agreements ceased to be applied (WTO document WT/REG11/2, 30 October 1997).


could have occurred if, upon their entry into force, the Europe Agreements had not been accompanied by similar agreements concluded among the countries of Central Europe.

73. The Agreement covers all goods (HS Chapters 1-97), except for a few agricultural items. Some 94% of the Czech Republic's total tariff lines are covered by concessions under CEFTA.26 In September 1996, it was decided that customs duties on most industrial products were to be abolished by 1 January 1997 (instead of 1 January 2001)27, except on a few items (such as cars), by 1 January 2002.28 In the area of agriculture, progress on an accelerated liberalization timetable is yet to be achieved.29 According to the original Agreement, the parties have negotiated tariff concessions, subject to quotas, on such goods. Two tariff reduction schemes have been applied on agricultural products. In 1997, tariff preferences applied to four fifths of trade in agriculture between the Czech Republic, Hungary, Poland, Romania, and the Slovak Republic.

74. Import quotas on industrial goods were abolished on the date of entry into force, with some exceptions. The Czech Republic undertook to abolish quantitative restrictions on all industrial products, except for uranium or thorium ores, natural or enriched uranium, waste and scrap paper or paperboard, and ferrous waste and scrap, on which quotas will be removed by 2002. Czech quantitative restrictions (in the form of export licences) on certain mining products, iron and steel, electrical energy, medicaments, fertilizers, hides and skins, wood, and musical instruments were removed in January 1997.30

75. In 1997, rules of origin were harmonized with the rules applied within the European Union, allowing multilateral cumulation among the CEFTA countries and participants in the pan-European diagonal cumulation of origin.

(d) European Free Trade Agreement (EFTA)

76. The Agreement between the EFTA States and the CSFR came into effect on 1 July 1992 and the Czech Republic and Slovakia each succeeded to the Agreement following the dissolution of the CSFR.31 The share of EFTA members States (Iceland, Liechtenstein, Norway and Switzerland) in Czech trade was 2.2% in 2000 (Chart II.1).

77. The Agreement covers mainly trade in industrial products as well as some marine and processed agricultural products (Table AII.2). EFTA members eliminated customs duties on most Czech imports with the entry into force of the Agreement in November 1993.32 Under the Czech Republic's transitional period, tariff duties and quantitative restrictions on EFTA imports were gradually phased out, starting on the date of entry into force of the Agreement, and ending by 1 January 2001. All export taxes were abolished upon entry into force of the Agreement with a few exceptions eliminated in 1996. In the area of agriculture, the Czech Republic has bilateral

26 WTO document WT/REG11/9/Add.3, 5 August 1998. 27 Additional Protocol No. 5 signed on 13 September 1996 [Online]. Available at:

http://www.cefta.org/agreemnt [26 September 2000].28 Automobiles of ten years or older and chassis and bodies thereof, utility cars of six years and older,

two-stroke engines for automobiles, and certain automobiles with two-stroke engines (WTO document WT/REG11/9, 16 February 1998).

29 Additional Protocol No. 6 contains a draft of liberalization of trade in agricultural and food products between the initial CEFTA member countries and the Republic of Slovenia. Available online at: http://www.cefta.org/agreemnt.

30 WTO (1996).31 The text of the Agreement is contained in GATT document L/7041/Add.1, 3 July 1992.32 The main exceptions were tariffs maintained by Norway on some polymer products until 1996 and,

along with quotas, on textiles and clothing until end 1997; and tariffs on oil products imposed by Iceland.


arrangements with individual EFTA members that either remove or lower tariffs on certain products. Quantitative restrictions on bilateral imports and exports were abolished on the entry into force of the Agreement.33

78. During the review period, EFTA members have adopted the rules of origin on pan-European cumulation, in 1997. Other amendments to the agreement include enhanced concessions in the trade of processed agricultural products.34

(iii) Bilateral agreements

79. Before it can join the EU, the Czech Republic has to adopt all the preferential agreements concluded by the EU with third countries. Since its previous Review, the Czech Republic has concluded free-trade agreements with Estonia, Latvia, Lithuania, Israel, and Turkey, while continuing liberalization within the framework of the existing free-trade agreements.35 All agreements provide for phased reduction of tariff duties on industrial products, with duty-free entry by January 2001 at the latest. The agreements also provide for liberalization in agricultural trade, also in the form of tariff quotas. Table AII.2 provides an overview of the key features of the Czech Republic's bilateral preferential trade agreements.

(iv) Unilateral tariff preferences

80. The Czech Republic grants Generalized System of Preferences (GSP) treatment to 87 developing countries and 48 least developed countries.36 Imports from developing countries are classified into three groups: (i) non-sensitive products, equivalent to 15.3% of tariff lines, entering at a preferential duty free rate; (ii) less sensitive products, equivalent to 28.7% of tariff lines, facing a tariff equal to 50% of the MFN rate; and (iii) sensitive products, equivalent to about 56% of all tariff lines, receiving no preferences, including mainly agricultural products but also certain industrial products (such as mineral products, fertilizers, pulp of wood, carpets, most footwear, umbrellas, and iron and steel).37 Regarding products from least developed countries, all products are granted duty-free and quota-free access under the scheme. GSP imports from least developed countries account for a minor share (0.06%) of total Czech merchandise imports. Preferences are granted only if the products can fulfil the rules of origin requirement (Chapter III(1)(ii)).

33 Exceptions included: (i) EFTA imports: brooms and brushes imported into Iceland (phased out by 1 January 2001) and some categories of textiles imported into Norway (phased out by 31 December 1997); (ii) Czech imports: including uranium or thorium ores and concentrates; natural or enriched uranium and its compounds, alloys, and products; waste and scrap of paper or paperboard; and ferrous waste and scrap and remelting scrap ingots of iron and steel (phased out by 1 January 2001); (iii) EFTA exports: all ferrous waste and scrap and remelting scrap ingots of iron or steel exported from Liechtenstein and Switzerland (phased out by 10 June 1998); and (iv) Czech exports: many minerals and mining products, hides and skins, wood products, and musical instruments (phased out by 1 January 1998).

34 For further details see WTO document WT/REG87/R/B/1, 6 March 2000.35 The text of the agreements is contained in the following WTO documents: WT/REG62/1, 6 August

1998 (Estonia), WT/REG45/1, 13 November 1997 (Latvia), WT/REG46/1, 13 November 1997 (Lithuania), WT/REG56/2, 21 April 1998 (Israel), and WT/REG67/1, 24 March 1999 (Turkey).

36 The Czech Republic follows the United Nations Conference on Trade and Development (UNCTAD) definition of least-developed countries. For a listing of the countries see UNCTAD online information. Available at: http://www.unctad.org/en/subsites/ldcs/country/sub1.htm

37 In 2000, products that received no preferences covered 91.5% of all agricultural tariff lines (HS 01-24) and 45.3% of all industrial lines (HS 25-97).


(3) DEVELOPMENTS IN FOREIGN INVESTMENT REGIME

Domestic regulatory regime

81. 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 standards for equal treatment of foreign and domestic investors, and restrictions on special investment incentives. As a result, foreign and domestic investors are basically treated identically and are both subject to the same tax codes and other laws (Table II.2).38 Under the Commercial Code, foreign investors can establish themselves in the Czech Republic as a limited liability company, joint-stock company, branch of a foreign company, limited partnership or co-operative or sole proprietorship. The most common types used by foreign investors are joint-stock companies, limited liability companies, and branches.

82. Foreign investment in some sectors (mainly services) remains restricted or controlled (Table II.3). The areas closed to foreign investors by law are those covering some financial sector services, real estate, air and road transport, inland waterway freights, architectural and engineering services, and certain gaming. Investments in broadcast media and banking require a licence, while investments in cable and satellite media require registration. The Government also screens foreign investment projects in the petrochemical industry. For most forms of business, a Czech language requirement for trade licences has been in place since 1995. This requirement can be fulfilled by a Czech partner.39

83. The Czech Republic has signed bilateral investment treaties for the protection and promotion of foreign direct investment with most of its trading partners (71 countries as of October 2000; 29 have been signed since March 1996).40 These treaties mainly regulate profit repatriation and protection in case of nationalization.

Table II.3Sectors subject to foreign investment restrictions, 2001

Sectors Legal source

A. Prohibited

- Mortgage banka Act No. 21/1992 Coll. on Banking, Act No. 530/1990 Coll. on Bonds

- Some operations in securities on capital marketsb, operations in collective investment securitiesc, and operations in foreign exchanged

Act No. 248/1992 Coll. on Investment Companies and Investment Funds; Act No. 530/1990 Coll. on Bonds, Act No. 219/1995 Coll. on Foreign Exchange

- Real estate Act No. 219/1995 Coll. on Foreign Exchange- Air transport Act No. 49/1997 Coll. on Civil Aviation- Inland waterway freights, including chartering Act No. 114/1995 Coll. on Inland Navigation- Road transport (passenger and freight)e Act No. 111/1994 Coll. on Road Traffic- Underwriting and broker/dealer services Act No. 591/1992 Coll. on Securities; Act

38 Foreign equity is limited to 49% in the commercial air-transport sector (Civil Aviation Act No. 49/1997 Coll.).

39 Tradeport (2000).40 Investment treaties are in force with the following countries: Albania, Algeria, Argentina, Australia,

Austria, Belarus, Belgium/Luxembourg, Bulgaria, Canada, Chile, China, Costa Rica, Croatia, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Israel, Italy, Jordan, Kazakhstan, Republic of Korea, Korea Democratic People's Republic, Kuwait, Latvia, Lebanon, Lithuania, Malaysia, Mauritius, Moldova, Mongolia, Netherlands, Norway, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Russia, Salvador, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Tadjikistan, Thailand, Tunisia, Turkey, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, Venezuela, Viet Nam, Yugoslavia, and Zimbabwe.


No. 513/1991 Coll. on Commercial Code- Settlement, clearing, custodial and depository services As above- Asset management Act No. 21/1992 on Banking- Architectural and engineering services Act No. 50/1976 Coll. on Building; Act No. 360/1992

Coll. (on Practice of profession of authorised architects and authorised engineers and technicians working in the field of building constructions in wording of Act No. 164/1993 Coll.)

- Operation of lotteries and similar games (except "small" lotteries and betting gaming in casinos)

Act No. 202/1990 Coll. on Lotteries and Similar Games; Act No. 63/1999 Coll.

B. Licensing

- Broadcast media Act No. 468/1991 Coll. on Operating Radio and Television Broadcasting

- Banking (new establishment or purchase of more than 15% of the capital of existing banks)

Act No. 21/1992 Coll. on Banking

C. Registration

- Cable and satellite media Act No. 468/1991 Coll. on Operating Radio and Television Broadcasting

D. Sensitive sectors (special screening)

- Petrochemicals Government Regulation No. 185/2000 Coll.

a The operation of a branch as a "mortgage bank" to the extent that a "mortgage bank" is defined under Czech law as an institution authorized to issue mortgage securities on domestic markets, which is reserved to financial institutions incorporated under domestic law.

b These are issues of mortgage securities through placing or public sale of foreign securities on the domestic capital market; and purchase of shares and other securities that may be affected by regulations on direct investment and establishment in air transport.

c Issue through placing or public sale of foreign collective investment securities on the domestic securities market.d Sale of foreign currency for domestic currency abroad by residents. The restriction only applies to foreign currency acquired

abroad that has not been deposited in an account with a foreign credit institution.e Applies to the following for passengers: transit, "closed door" tours, picking up or setting down on an international journey, and

transport within the country. Applies to the following for freight: transit, delivery on an international journey, collection on an international journey, return cargo where collection is authorized, return cargo where delivery is authorized, and transport within the country.

Source: Information provided by the Czech authorities; and OECD (2000b), "Position of the Czech Republic Under the OECD Codes of Liberalisation of Capital Movements and Current Invisible Operations", document DAFFE/INV(2000)14.

84. The Czech Republic has also signed 61 tax treaties, drafted in accordance with the OECD model treaty, covering most topics in international aspects of income and capital gains tax. 41 The treaties generally eliminate double taxation by crediting the foreign tax paid on passive income (dividends, interest, and royalties) against the Czech tax dues and by exempting active income from Czech taxation. All treaties reduce withholding taxes on income paid to foreign corporations, and no advance clearance is needed to apply treaty rates. The standard withholding tax of 25% is usually reduced to between zero and 15% on dividends, to 5-10% on royalties, and to zero on interest. From 1 January 2000, a 15% withholding tax is levied on most types of income. Tax treaties take precedence over domestic legislation.42

Incentives

41 Treaties are in force with the following countries: Albania, Australia, Austria, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Republic of Korea, Latvia, Lebanon, Lithuania, Luxembourg, Malaysia, Malta, Moldova, Mongolia, Netherlands, Nigeria, Norway, Poland, Portugal, Romania, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Tunisia, Ukraine, United Arab Emirates, United Kingdom, United States, Uzbekistan, Venezuela, Viet Nam and Yugoslavia (former).

42 PricewaterhouseCoopers (1999).


85. The Czech Republic has changed its policy on foreign investment incentives progressively during the period under review. In May 2000, 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 1992-98.43 In addition to the foreign investment incentive package, foreign investors are offered a wide range of other incentives, such as grants and loans at interest rates below market rates (Chapter IV(3)). All investment incentives are equally available to foreign and domestic investors.

86. The foreign investment package includes a tax break of up to ten years, duty- and VAT-free imports of certain machinery and equipment, job-creation and training benefits and opportunities to obtain low-cost land (Table AIV.1). Eligibility conditions for investment incentives include (a) green-field investments and joint-venture manufacturing investments pursuant to the OECD Classification of High-Technology Products and Industries; (b) total investment shall equal at least CZK 350 million (around US$9 million in April 2001) within a three-year period, or CZK 175 million if in an area with high unemployment; (c) 40% of total investment must go into plant machinery; and (d) investment only into environmentally friendly production.44 The incentives are available separately or collectively. The cost of the incentives was estimated at CZK 120 billion in 2000, of which CZK 17 billion was forgone revenue. The Czech Invest, as the state agency responsible for promoting foreign direct investment, is authorized by the Ministry of Industry and Trade to handle all applications for investment incentives.45

87. It is not clear whether the benefits of the incentive package outweigh the costs. Investment incentives are typically not the best solution. While the economic rationale for incentives is generally based on the need to correct market failures through taxes and subsidies, alternative policies may do the same job in a more efficient manner. One problem is that incentives must be financed and taxes have distortionary effects. However, it is the view of the Czech authorities that the benefits of the incentive package outweigh the costs, and that investment incentives are vital for the modernization and restructuring of the Czech economy.

OTHER POLICIES AFFECTING TRADE IN GOODS

EXPORT MEASURES AT THE BORDER

Export licensing and control

Export prohibitions

The Czech Republic maintains export prohibitions in the context of U.N. Security Council Resolutions (Chapter III(3)(i)). No other export prohibition measures are currently in force.

Export licensing

43 Changes to the incentive package include, inter alia, lowered investment threshold; allowed incentives to be applied to the expansion of production facilities already in operation (previously only newly founded companies with new production facilities qualified); and 40% of total investment must go into plant machinery.

44 A green-field investment means building of a new plant, purchase, or lease of current production facilities, while a joint-venture investment means investment of two or more organizations into joint business.

45 According to the Czech authorities, from April 1998 (when investment incentives started) until 31 March 2001, 57 investors received incentives. It is expected that these projects (totalling around US$2.8 billion) will create 18,000 new jobs. Currently, applications from 37 firms are being processed.


As a result of the enactment of Act No. 62/2000, Coll. (on Some Measures in the Export or Import of Products and on the Licensing Procedures), some items were removed from the list of automatic licensing. These items are electric energy, certain common metals, iron, steel products and waste.

Licences are required for products on the negative lists (as given in Government Regulation No. 185/2000 Coll., as amended). Automatic licensing requirements exist for exports of goods such as raw materials and products, raw leathers, wood and wooden products, precious metals, common metals, poisons, auxiliary chemical substances and precursors, and pharmaceutical products. Licences also apply, for monitoring purposes, to certain common metals, iron and steel products exported to the EU and the United States. Non-automatic export licensing requirements (with volume limits) apply to live animals and other animal products, and certain plant products. These licences are in place to address shortages on the domestic market. Within the framework of the WTO Agreement on Textiles and Clothing, non-automatic export licences also apply to some textiles and clothing products exported to the United States and Canada. Furthermore, non-automatic licences (without volume limits) are required for the exportation of propellant powders, prepared explosives, safety fuses, detonating fuses, percussion, other telescopic sights, revolvers and pistols, other firearms, arms, parts and accessories. These latter restrictions are motivated by security reasons. The procedures for granting non-automatic export licences are the same as those applied for non-automatic import licensing (Chapter III(3)(ii)).

Other export restrictions reflect the Czech Republic's international commitments. Act No. 21/1997 (on the Control of Export and Import of Goods and Technological Products Subjected to International Control) stipulates the terms for exports of items such as nuclear, chemical, and biological weapons, and toxic substances.

Voluntary restraints, surveillance, and similar measures

According to the authorities, the Czech Republic does not participate in any arrangements designed to limit or control exports to third countries at the request of foreign governments. The authorities are not aware of any such arrangements between private Czech firms and foreign countries.

Duties and taxes, and minimum export prices

During the period under review, the Czech Republic has not imposed any duties, taxes or other charges on exported goods; nor has it maintained any official minimum or reference export prices.

EXPORT ASSISTANCE

The Czech Republic has enacted a new export policy during the period under review. 1 The policy, which was enacted in 1999, is aimed at enhancing the competitiveness of Czech products. It also entails a more pro-active stance with the aim of removing tariffs and non-tariff barriers affecting Czech exports. According to the authorities, the objective was primarily to create export conditions for Czech exporters similar to those enjoyed by their foreign competitors. So far, the policy has not affected the State's outlays for exporters.

Agricultural export subsidies

1 Government of the Czech Republic (2000a).


As in 1996, explicit export subsidies remain limited to some agricultural products. The annual amount of export subsidies was just above US$40 million, or less than 0.1% of GDP, during the period 1995-98, dropping to US$25 million in 2000. In 2000, export subsides were extended to milk powder, butter, cheeses, other dairy products, potato starch, pork, and malt.2 The outlays are below the Czech Republic's export subsidy commitments made under the WTO Agreement on Agriculture.

Export finance, insurance and guarantees

During the period under review, Act. No. 58/1995 on Insuring and Financing Export with State Support has been amended and Government Decision No. 747 of 18 November 1998 has been adopted in an effort to harmonize the existing rules and regulations on export assistance to those of the EU. As a result, the rules related to the Arrangement on Guidelines for Officially Supported Export Credits (OECD-Consensus) were implemented in 1999. Opportunities have been created to provide several new services, including the provision of insurance of export-contract-related bonds, insurance of credits to finance production for export, and the insurance and financing of Czech investments abroad. 3 The amendment also enabled the provision of active reinsurance in relation to partner export credit agencies.4 The requirements for receiving State-supported insurance or financing was liberalized as the minimum level of domestic supplies in total export value of 60% was deleted from Act No. 58/1995.

Export credit insurance is provided by the Export Guarantee and Insurance Corporation (EGAP). The EGAP insures export credits against political risk and against a combination of political and non-marketable commercial risk. In this area, EGAP provides 11 basic types of insurance based on the risk classification of the country and length of the credit (Table AIV.1).5 All Czech-based enterprises are eligible, regardless of ownership. The insurance is realized with major state support in the form of a state guarantee for EGAP's obligations arising from insurance of those risks. During 1992-99, an amount of CZK 4.3 billion was paid to the EGAP in the form of state budget appropriations to support the insurance reserve funds.6

According to the authorities, the long-term objective of the insurance scheme is to secure its overall financial balance. A second area of EGAP's activities is insurance against short-term marketable risks, commercial risks, and short-term political risks in selected countries. This insurance is offered on a commercial basis with reinsurance arranged with major international reinsurance companies and, thus, exempt from any state support. The share of all credits insured against commercial and political risks by the EGAP as a portion of total Czech merchandise exports grew from 2.2% in 1996 to 6.3% in 2000.

Officially supported financing – conditional on export credit risk insurance provided by EGAP – is carried out by the Czech Export Bank (ČEB), which provides credits on terms more favourable than market conditions. In case of suppliers' credits above two years, an exporter can receive compensation for up to 50% of the interest rate differential resulting from interest expenses and interest income in relation to a particular export transaction.7 Short-term (below two years) financing, introduced in 1999, is on a purely commercial basis. The

2 WTO document G/AG/N/CZE/31, 25 June 2001.3 Government of the Czech Republic (2000a).4 EGAP (2000).5 EGAP (2000).6 EGAP (2000).7 The settlement of the interest rate differential is carried out by the Ministry of Finance through the

ČEB. The last payment for this purpose was made in 2000 for losses arising from an interest rate differential incurred in 1998.


Government pays to ČEB only the difference between its costs of funds and the actual interest rates applied when providing officially supported export credits.

In addition to export loans, the ČEB provides related non-payment export guarantees (bonds). Usually, guarantees are granted only for a certain portion of the export contract (mostly for 5-10%, based on the type of guarantee).

Export promotion and marketing assistance

The Czech Trade Promotion Agency (CzechTrade), a government agency established in 1997, promotes and assists in the development of mutual trade and industrial cooperation between the Czech Republic and other countries. At the time of its establishment, CzechTrade assumed its predecessor's (Infocentrum) responsibilities. Its activities include support to Czech enterprises operating abroad, through its 16 foreign offices, as well as the provision of export information, export consulting services, and export education to companies operating in the Czech Republic. For small and medium-sized enterprises, CzechTrade contributes to foreign-trade-related marketing costs in a number of areas. Other activities include the provision of information and consulting services on the EU; and development, promotion, and distribution of sectoral directories. In 2001, the total budgeted amount for export promotion and marketing assistance was CZK 230 million.

Customs-free zones

Czech law (the Customs Act) provides for the establishment of customs-free zones and customs-free warehouses into which goods may be imported and later exported without payment of customs duties and other taxes. According to the authorities, there are currently nine customs-free zones.

STATE AID

The cost of the Czech Republic's state aid system has continued to be substantial during the period under review. The direct cost of the system has been hovering around 2% of GDP, except in 1998 when producer subsidies as well as loan guarantees peaked (Table IV.1). In addition to the direct cost, there are substantial indirect costs as a result of forgone revenues (associated with, for example, duty and tax exemptions). However, except for the investment incentive package, no estimates are available on the indirect costs. For the investment incentive package, the estimated amount of forgone revenue in 2000 was about 1% of GDP. The already large number of programmes providing for state aid has increased.8

Table IV.1Classification of subsidies from the State Budget, 1994-2000

1994 1995 1996 1997 1998 1999 2000

Total subsidies (CZK billion) 27.5 28.6 27.3 34.3 49.1 33.9 38.3

Producer 27.5 28.6 27.3 34.3 43.9 30.7 35.3

Agriculture and foodstuffs 5.1 6.2 6.9 7.2 10.3 8.9 13.7Forestry and water 0.3 0.4 0.5 0.3 0.7 0.9 0.7Mining 4.8 4.8 5.1 4.3 4.4 3.8 3.9

Residential heating 6.6 7.3 7.0 5.2 0.1 0.0 0.0

8 There are around twelve different programmes, and within each group there are up to13 different types of incentives.


Transportation 7.2 6.7 5.4 5.5 5.9 6.2 6.9

Railways 5.8 5.2 5.2 5.3 5.8 6.1 6.8Export promotion 1.0 0.9 0.9 0.9 1.3 0.1 0.9

Called loan guarantees 0.5 0.8 0.1 1.6 6.7 1.0 1.9

Small business development 1.2 1.5 1.2 0.9 0.8 1.3 1.9

Other non-investment 0.8 0.5 0.7 13.6 20.6 11.7 8.9

Total subsidies/GDP (per cent) 3.5 2.1 1.7 2.1 2.7 1.8 2.0

Source: IMF (2000), IMF Staff Country Report No. 00/119; and information provided by the Czech Government.

A positive development during the period under review is the establishment of an independent system for monitoring state aid. The state aid monitoring role (except with respect to agriculture and fishery) has been transferred from the Ministry of Finance to the Office for the Protection of Economic Competition (Act No. 59/2000 Coll. on State Aid). The Office has been given additional power regarding assessment and withdrawal of state aid. 9 In this regard, it has published guidance notes, setting out the criteria applicable for state aid notifications in certain areas. Preparations for a state aid inventory have also been carried out.10 Another development during the period under review is the enactment of a law laying down the conditions for support to regional development (Act No. 248/2000 Coll. on Support to Regional Development). Under the law, which became effective on 1 January 2001, all regional support will be provided under an umbrella programme – the State Regional Development Programme – providing subsidies, credits on advantageous conditions, and returnable financial assistance.

Assistance to agriculture

Agriculture is a large beneficiary of state aid. Some CZK 13.7 billion was allocated in 2000 from the State Budget for producer support to agriculture and food producers (Table IV.1). A more complete picture of the degree of support is provided in Table IV.2. The most recent OECD estimates on transfers to the agriculture sector in the Czech Republic indicate a declining trend since 1998. Total transfers associated with agricultural policies exceeded CZK 25 billion, or the equivalent of 1.3% of GDP, in 2000. The Producer Support Estimate (PSE), which captures the value of transfers to agriculture resulting from agricultural policies in a given year, stood at CZK 21.5 billion in 2000. The implicit tax on consumers as measured by the Consumer Support Estimate (CSE), capturing the value of money transfers to consumers resulting from agricultural policies in a given year, was around CZK 11 billion.11 Assistance to agriculture is provided mainly through market price support and payments based on input.12

Table IV.2Transfers associated with agricultural policies, 1996-2000

1996 1997 1998 1999 2000a

PSE CZK billion 22.3 5.7 27.0 25.1 21.5

(US$ billion) 0.8 0.2 0.8 0.7 0.6

9 Prohibited state aid, subject to certain exemptions, is aid provided in a manner that distorts, or may distort, economic competition by placing a certain business or industrial sector at an advantage (OECD, 2001).

10 European Commission (2000).11 The OECD's PSE estimate includes both transfers from consumers of agricultural products (through

domestic market price support) and transfers from taxpayers (through budgetary or tax expenditures).12 OECD (2001c), PART2. Total per capita transfers related to agricultural policies are estimated to be

higher in EU countries than in the Czech Republic.


CSEb CZK billion -11.5 -1.9 -15.8 -15.3 -11.1

(US$ billion) -0.4 -0.1 -0.5 -0.4 -0.3

Total transfersc CZK billion 25.7 9.2 30.5 28.7 25.3

(US$ billion) 0.9 0.3 0.9 0.8 0.7

Memo: Total transfers/GDP (%) 1.6 0.5 1.7 1.6 1.3

a Provisional.b The CSE, when negative, measures the implicit tax imposed on consumers by agricultural policy.c Total transfers are not the sum of PSE and CSE; they cover the total value of production and include not only transfers to

agriculture, as measured by PSE and CSE, but also other transfers associated with agricultural policies.

Source: WTO Secretariat, based on information provided by the Czech Government (for 1996 and 1997); OECD (2001c), "Agricultural Policies in OECD Countries", document AGR/CA/APM(2001)2/PART3; and OECD (2000c), Agricultural Policies in OECD Countries – Monitoring and Evaluation 2000.

Act No. 256/2000 on the State Agriculture Intervention Fund, which entered into force in August 2000, established the basis for a new system of market regulation for agricultural and food products. As a result of the new law, the State Fund for Market Regulation (SFMR) was replaced by the State Agricultural Intervention Fund (SAIF). Although the SAIF has been provided with enhanced powers to regulate the market (including production quotas, set-aside schemes, and providing direct payments to farmers), these new instruments were not used in 2000.13 The domestic support system is maintained under several categories (Table AIV.1 provides details):

Direct market intervention (notably price regulation) by the SFMR or SAIF respectively is currently the main instrument of intervention, covering bread-wheat, milk, and potato starch. In the case of bread-wheat, until 1998 farmers were provided with advance payments by the SFMR before the sowing period and intervention purchases at guaranteed prices after harvest.14 Since 1999, they receive advance payments only after the delivery of harvested grain. In the case of milk, all the processors are required to pay farmers a minimum price for all milk deliveries. To a lesser extent, potato starch exports are also subsidized: the subsidies are paid directly to the exporters provided that farmers have been paid the set minimum price. In 2000, the SFMR/SAIF spent in total around CZK 2.4 billion (up from CZK 1.6 billion in 1999) for market regulation.

Subsidized credits and guarantees on loans from commercial banks, administered by the Support and Guarantee Fund for Farmers and Forestry (SGFFF), are provided to agriculture under six different programmes.15 In 2000, a total amount of CZK 1.6 billion (down from CZK 2.2 billion in 1999) was spent on interest subsidies, and the average interest rate paid by farmers for credits granted through the fund was 1.98%;

Assistance and subsidy programmes: in 1999, support was provided for the use of environmentally sound fuels, and other activities such as maintenance and improvement of livestock and seed genetic potential, sale of diesel for farmers, production of potato starch, vineyards, maintenance of agriculture land, beef cattle farming, and ecological agriculture. The total cost for these programmes in 1999 was CZK 6.5 billion.

Assistance to other activities

13 OECD (2001c), PART2.14 OECD (2000c).15 Act No. 576/1990 Coll. on Budgetary Regulations, Decision by the Government Establishing the

Farming and Forestry Support and Guarantee Fund (PGRLF), Principles of State Support in the Agriculture.


In addition to schemes targeting agriculture, the state aid system covers a broad number of other programmes as listed in Table AIV.1. The conditions for export promotion programmes are, according to the authorities, in accordance with the OECD Arrangements on Guidelines for Officially Supported Export Credits and Berne Union rules. Moreover, all incentives are available equally to foreign and domestic investors.

GOVERNMENT PROCUREMENT

During the period under review, the Czech procurement law (Act No. 199/1994 Coll. on Public Procurement), which entered into force on 1 January 1995, has been subject to three major amendments. The amendment in 2000 has introduced two important improvements: first, it enhanced transparency by requiring all public tenders and awards to be published on the Internet, and secondly it extended its coverage to include utilities (water, energy, transport, and telecommunication). It appears that under the amended law, regulations continue to discriminate against foreign firms; a contractor may restrict a tender only to domestic tenderers. According to the authorities, this is mainly limited to public works. A preference clause for domestic tenderers is included in the Act. The contracting authority may stipulate a price advantage for domestic tenderers; the advantage may amount to a maximum of 10%.16 According to the authorities, this provision benefits domestic entities and foreign companies registered in the Czech Republic. A new draft law on public procurement, transposing the EU public procurement directives, was approved by the Government on 3 January 2001 and submitted to Parliament. It is expected to be in force as of 1 January 2002. The Czech Republic became an observer to the WTO Agreement on Government Procurement in August 2000.

According to the existing law, a public procurement contract is awarded on the basis of a public tender in which an unlimited number of parties can participate. The law also provides for other methods of procurement, depending on the situation. The key features of the procurement methods are provided in Table IV.3. The law applies to purchases made by central government bodies, local-governments (at all levels), the Supreme Control Office (the independent authority responsible for the supervision of state property and funds), courts, and other public organizations.

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

Method Instances when the method is applied Advertisement requirement

Public tender(open procedure)

Contracts above CZK 20 million (equivalent to US$0.5 million in April 2001) for real estate (except lease) or machinery and equipment forming a separate unit and CZK 5 million in other cases.

Commercial Bulletin

Invitation to several parties(no less than five parties)

Contracts CZK 2.5 million up to CZK 20 million for real estate (except lease) or machinery and equipment forming a separate unit and contracts above CZK 1 million up to CZK 5 million in other cases.

No requirement

Simplified award of contract(no less than three parties)

Contracts above CZK 0.5 million up to CZK 2.5 million for real estate or machinery and equipment forming a separate unit, and contracts above CZK 0.5 million up to CZK 1 million in other cases.

No requirement

Small-scale public procurement(one party)

Contracts up to CZK 0.5 million. No requirement

Invitation to a single candidate Method applied if: (i) urgent need (such as when human lives or No requirement

16 A price advantage of 20% is applicable to all bidders if more than half of the employees have an impaired work ability.


(one party) health are threatened); (ii) only one party can execute the procurement; (iii) supplementary or repeat procurement, provided it does not exceed 50% of the price of the original procurement and provided the invitation is effected within 12 months of the execution of the procurement; (iv) partial renovation of the object of the original public procurement, if a change of applicant would result in difficulties; (v) state secret; (vi) a winner of an architectural competition pertaining to the procurement; or (vii) execution for the State Material Reserves (body acting in emergency situations).

Source: WTO Secretariat, based on WTO document WT/WGTGP/W/12, 16 January 1998; and Act No. 199/1994 on Public Procurement.

The terms of a public tender have to be published in the Commercial Bulletin. The period for introducing bids must not be shorter than 36 days (counting from the day of publication in the Commercial Bulletin). The tendering process may be of one or two rounds. Two-round tendering takes place in the event of an extensive, complicated, technically sophisticated and challenging public order requiring a step-by-step clarification of technological aspects. Complaints against the contracting authority's decision may be brought to the Office for the Protection of Economic Competition. An appeal can be filed against the decision of the office, its Chairman decides on such appeals. In the last instance, a decision of the office may be challenged by the relevant High Courts.

It has been noted that while the revised law has helped standardize government tenders, there is still a lack of executing regulations to guide the tender process.17 Problems of transparency, accountability, and shortages of experienced personnel have been noted. A proposed new law is aimed at addressing these shortcomings.

PRIVATIZATION AND PUBLIC ENTERPRISE RESTRUCTURING

Transfer of funds

The privatization programme was initiated in 1991 as one of the cornerstones of the economic reform programme of 1990.18 Following the restitution of some property to the original owners, and the privatization of some 24,000 "small enterprises" through public auctions19, the authorities launched an ambitious privatization programme for its medium and large enterprises.20 The innovative programme allowed a wide range of privatization methods, including auction, public tender, direct sale, and distribution of "vouchers" to Czech nationals (Box IV.1). The voucher system, which was carried out in two stages, resulted in the privatization of part or all the shares of about 1,800 enterprises, with a market value estimated at about 30% of GDP in 1997.21 As a result, the non-state sector increased dramatically during the 1990s, accounting for more than three quarters of GDP at the end of 1999 (Chart IV.1). The bulk of the privatization took place between 1992 and 1995, when privatization proceeds accounted for some 2.5 to 3% of GDP.22

17 Bureau of National Affairs (2000a).18 For details on the privatization programme, see, for example, Schütte (2000).19 Conducted under Act No. 427/1990 on Small-scale Privatization.20 The privatization of large-scale enterprises has been conducted according to Act No. 92/1991 on

Large-scale Privatization. The law covers all state enterprises not explicitly excluded (the property of the State Administration, natural resources, some cultural institutions, certain health care and social institutions, post, and railways).

21 World Bank (1999b).22 Privatization revenues have not been used to retire debt. Instead, the revenues have been used to

finance government expenditures, such as re-capitalization of troubled banks, writing-off bad debts, providing


Box IV.1: The voucher privatization programme

The "voucher" privatization was one of the main pillars of the Government's privatization programme launched in 1991. The scheme was carried out in two waves. In both waves, the number of shares for sale in each enterprise was set so that all shares were of equal value. Three per cent of the shares were set aside for potential restitution claims and a pre-determined amount of equity shares remained with the National Property Fund (NPF), responsible for the implementation of the privatization policy. Most enterprises were not restructured before they were privatized.

Under the voucher scheme, shares of the enterprises were auctioned for vouchers, which were distributed to the public at a low price. All permanently resident citizens over the age of 18 were entitled to buy a booklet of 1,000 voucher points, for a fee of CZK 1,035 (or US$34) in the first wave, and CZK 1,050 in the second wave. Individuals could either bid directly for enterprise shares in the auctions or place their vouchers in investment funds (Investment Privatization Funds, IPF), which then used the vouchers to bid for enterprises.

The first voucher wave (in 1991-92) covered 988 enterprises in the former Czechoslovakia. The auction's shares represented half of the book value of the companies. About 60% of the population (6 million citizens) became shareholders: approximately 4.2 million placed their vouchers in IPFs and the remaining 1.8 million bid directly for shares. The second voucher wave was implemented in 1993-94 and involved the sale of 861 enterprises, using a similar method. Approximately 6.2 million citizens participated in the second wave, of which 64% placed their vouchers in IPFs and unit trusts and 36% bid directly for shares. In total, the two waves resulted in the privatization of all or part of the shares of some 1,800 companies, with a market value estimated at around 30% of GDP in 1997.

The main intention of the scheme was to move enterprises quickly away from the State into the private sector. The authorities also saw the scheme as a tool to prevent managers from exercising too much power and to ensure that the new owners would play an active role in the needed restructuring of enterprises. Also, by involving a large share of the population in the privatization process, the authorities were hoping to avoid the opposition to privatization observed in some other transition countries.

Source: WTO (1996), Trade Policy Review – Czech Republic; IMF (1999), IMF Staff Country Report No.99/90; and World Bank (1999b), Czech Republic – Capital Market Review.

loans and guarantees to the "transformation" companies, and improvement in infrastructure (World Bank, 1999a, Vol. 2).


Shortcomings

The Czech Republic's privatization programme enabled an unprecedented large-scale transfer of enterprises to the private sector within a short period. Although it has been shown that the programme improved the firms' management and profitability23, the needed restructuring of enterprises has not been forthcoming. The normal entry and exit of firms seen in a functioning market economy was not taking place to the same extent in the Czech Republic. In fact, the underlying factors behind the currency crisis of May 1997 were the lack of restructuring of Czech companies. Major impediments to a more rapid restructuring included24:

many large industrial enterprises with State involvement survived through lending from state-owned banks. The banks were a source of access to easy credit, enabling firms to postpone the needed restructuring. Since the beginning of the transition, banks have tended to roll over the outstanding loans of troubled companies rather than take legal action, such as bankruptcy, in order to force repayments;

a diffuse corporate governance structure. The majority of the vouchers for the privatization programme were placed with investment funds, which then bought up the shares. As a result, the role of the investment funds in firms' management was extensive. Since the investment funds were largely owned by state-owned banks, there were potential conflicts of interest as banks were both owners and creditors;

an inadequate legal framework for bankruptcy (section (6) below); and

23 Claessens, et al. (1996).24 See for example OECD (1998a); World Bank (1999a), Vol. 2; IMF (1999); and Nellis (undated).


access of healthy firms to new capital was limited by weaknesses in the capital market.

Recent reforms and outstanding agenda

Privatization of large banks has recently gained momentum. Until the privatization process began for the large state-owned bank, IPB, in 1996, Government control over the four largest banks was seen by officials as a means for maintaining financing of the enterprise sector and for ensuring that the transition to a market economy would be irreversible.25 With the involvement of international strategic investors, privatization of three large state-owned banks was concluded during 1998-2000 (Investiční a Poštovní Banka in 1998, Československá obchodní Banka in 1999, and Česka spořitelna in 2000). According to the authorities, the privatization process of the last state-controlled bank (the Komerční banka) should be finalized in the summer of 2001.

Although privatization is by and large complete, the State still retains a significant holding in a number of entities.26 In this regard, the Government approved a restructuring programme in May 1999 with the creation of the Revitalization Agency. The main objectives of the agency were recapitalization and restructuring of selected state enterprises, cleaning-up of loan portfolios of commercial banks and preparing them for privatization, and creation of an enabling environment for efficient enterprise performance. A limited number of heavily indebted companies were to be prepared for privatization by the agency. However, in March 2001, the agency ceased to exist, well before the date when its operations were to be wound up (end-2002).27 No company was privatized during the period of the agency's existence.

Also, in addressing enterprise restructuring, the authorities are separating non-competitive from competitive activities and will subsequently privatize the companies created (Table IV.4). Non-competitive activities are to continue to be owned by the State; and, for the time being, a number of competitive activities are also to be controlled by the State. In parallel with privatization, prices are to be liberalized (Box IV.2). The privatization of a number of state-owned assets is being held back by delays in the creation of an appropriate regulatory framework, including a framework for so-called natural monopolies.

Table IV.4Competitive and non-competitive activities

Sector Non-competitive activities Competitive activities

Railway No competition in the operation of the infrastructure and transport. The infrastructure and the rolling stock are partially owned by the State.

Road transportation Communications and infrastructure are fully owned by the State.

Freight and bus transport are fully open to competition.

Postal services No competition in the delivery of consignments below 350 grammes, for a price lower than five times the public tariff for a postal item in the first weight step.

Other activities are fully open to competition.

Table IV.4 (cont'd)

25 World Bank (1999a), Vol. 2.26 The National Property Fund (NPF) remains the single largest shareholder in the Czech Republic.

The Ministry for the Administration of National Property and its Privatisation – which was abolished on 30 June 1996 and whose policy responsibilities were transferred to the Ministry of Finance – was responsible for the privatization policy. The NPF, founded in 1991, implemented the decisions, temporarily managed the enterprises, and settled ecological obligations from privatization (National Property Fund online information. Available at: http://www.fnm.cz/fnm/web.nsf/ UvodAN?OpenPage [6 November 2000]).

27 Financial Times, 12 April 2001.


Sector Non-competitive activities Competitive activities

Telecommunications Competition is limited to a certain degree in the provision of universal service.

All other services are fully open to competition (starting in 2003 there will be free access to fixed telephone networks and transferability of numbers).

Broadcasting Transmission of TV and radio signal is concentrated mainly in a single entity controlled by the State (full privatization intended for the end of 2001). Competition started to appear in this area.

Provision of content services is fully open to competition.

Electrical energy Transmission is performed by ČEPS, which is a separate accounting unit but is interconnected with generation at ČEZ; a separation is being prepared. Regarding distribution, third party access to networks is being prepared.

Generation is fully open to competition (but restricted by the integration of generation and transmission).

Gas Transport of gas is separated from distribution and a state-owned company transports gas. Conditions and rules for competition are set in the new Energy Act (No. 458/2000).

Air service A state-owned company manages four international airports.

Airport airside and landside services are operated on commercial basis and services opportunities are generally open for competition.

Water management Various infrastructure owners who enter into agreements on its operations. Potable water supply, collection and treatment of waste water are local network monopolies, no competitors have access to networks.

There is competition among operators in the conclusion of agreements with individual infrastructure owners.

Waste management The operator for the collection of communal waste is appointed by the municipality (local monopoly).

Large scale collection of waste and refuse dump management are fully open to competition.

Source: Information provided by the Czech authorities; and OECD (2000d), "Vertical Separation in Regulated Industries – Czech Republic", document DAFFE/CLP/WP2/WD(2000)41.

Box IV.2: Price regulation

The Price Act (Law No.526/1990) authorizes the Ministry of Finance and, in some cases, local administrative bodies, to regulate prices when the functioning of the market is endangered by the effects of registered economic competition or in the case of an extraordinary market situation. Price controls are applied equally to domestic and imported products. Controlled prices take the form of fixing maximum prices or minimum prices or the setting of formulas for the calculation of prices.

The authorities have continued to liberalize domestic prices toward cost-recovery levels since 1996. The items covered by price regulation account for about 5% of GDP. Activities regulated by price-caps include telecommunication and radiocommunication tariffs, rents in non-cooperative apartments, certain medically related goods and pharmaceuticals, health services, electricity and natural gas supply, taxi, cab-stand services, towing of cars, urban public transport, and funeral services. Moreover, for central heating, water from surface sources, railroad passenger tariffs, bus passenger tariffs, post tariffs, and certain medically related goods and pharmaceuticals, the price must reflect justified costs and reasonable profit. Sugar is regulated by a minimum price. During the review period, certain prices have been completely liberalized (including chimney-sweepers' services and cartage of garbage), while prices for other goods and services have been partly liberalized.

At their current level, administered prices do not fully reflect the costs of production. For example, heat supplies to households are subsidized from the State Budget. Electricity prices for industrial consumers approximate costs, while prices for households are, for social reasons, set at less than half the costs. Some changes were introduced (for households) on 1 July 2000, and new prices are expected to be applied as from 1 January 2002.

Source: OECD (2000d), "Vertical Separation in Regulated Industries – Czech Republic", document DAFFE/CLP/WP2/WD(2000)41; and WTO (1996), Trade Policy Review – Czech Republic.


BANKRUPTCY LAW AND PRACTICE

The Czech bankruptcy law (Act No. 328/1991 Coll. on Bankruptcy and Settlement) has been revised on average almost once a year since it first entered into force in October 1991.1 During the period under review, two major amendments have taken place, in April 1998 and in April 2000, representing a shift towards stronger creditors rights, and aiming at speeding up the bankruptcy process (Box IV.3).

Notwithstanding the recent improvement of the bankruptcy law, the present law suffers from weaknesses in several areas.2 A major problem that has been identified is the slow and expensive court-driven process.3 Bankruptcy statistics show, however, that courts were gaining experience with the procedures and were disposing of cases more efficiently. Nevertheless, it has been suggested that to further improve the situation consideration should be given to the creation of special courts to handle this type of business. 4 Training programmes for bankruptcy judges and court officials would also improve the system.

Another problem identified with the current law is that creditors have little input in the bankruptcy proceedings. Thus, creditors-driven debt restructuring is made very difficult. This type of bankruptcy normally involves a restructuring agreed upon by a qualified majority of creditors who then receive bankruptcy-court certification to make the agreement binding on all unsecured creditors and on the debtor.5 The bankruptcy process in the Czech Republic is essentially a liquidation by means of periodic auctions of assets. Other problems related to the role of the creditor include the vague definition of the circumstances under which a creditor can initiate bankruptcy proceedings, the absence of the right of creditors to appoint a bankruptcy administrator, the power of the court to dismiss the creditor's committee, and the limitation of the value that can be recovered by secured creditors to 70% of realized assets.

Box IV.3: Major amendments to the bankruptcy law

The 1998 amendment to the Bankruptcy and Settlement Act No.328/1991, which entered into effect on 1 April 1998, was the ninth amendment since 1991. It provides courts with enhanced powers to speed up the bankruptcy process. It assists creditors in the liquidation of their debtors’ assets in light of the current backlog of pending bankruptcy cases. The amendment introduced three important changes:

- Changed definition of when a company becomes bankrupt. Prior to the amendment, a debtor was considered bankrupt if (s)he could not meet the financial obligations within "a long period of time". Under the amendment, an entity is considered bankrupt if (s)he is unable to meet the financial obligations and there is a reasonable expectation that they will not be met in the future;

- Duty to file with the court. The amendment requires any debtor (whether a legal entity or an individual entrepreneur) who determines that (s)he is bankrupt to file immediately a petition with the court. This obligation also applies to a company’s liquidator if (s)he discovers that the company’s liabilities exceed its assets. Civil law action may be initiated against a debtor who fails to file such a petition and the company is then declared bankrupt; and

Box IV.3 (cont'd)

1 OECD (1999).2 See for example the World Bank (1999a), Vol. 2; and IMF (2000b).3 IMF (2000b).4 World Bank (1999a), Vol. 2; World Bank (1999b); and IMF (1999).5 World Bank (1999a), Vol. 2.


- An 18-month time limit for appointed bankruptcy administrator. The amendment requires a court-appointed bankruptcy administrator to submit a report on the company’s debtors and creditors, and the associated expenses and debt priorities, within a period of 18 months. The court may extend this time limit. Prior to the amendment, bankruptcy administrators were not subject to time limits.

The 2000 amendment, which went into effect on 1 May 2000, is aimed at further speeding up the bankruptcy process as well as yielding greater proceeds. Some of the changes to the law are:

- in the event of bankruptcy, the debtor need not file for bankruptcy provided that (s)he files a petition for settlement, which ought to ensure wider use of the mechanism;

- a provision allowing creditors to dismiss court-appointed trustees;

- institution of a preliminary trustee, whom the court may appoint immediately upon filing of the bankruptcy petition for the purpose of securing and asserting the debtor's assets and reviewing the debtors' accounting;

- banks are obliged to immediately notify the trustee of information about the debtors' accounts;

- in a liquidation, secured creditors will be paid at least 70% of the proceeds from realization of the security falling to their share;

- a provision enabling the court to permit a partial repartition even before approval of the final report, which should enable creditors to gain quicker access at least to a part of their money; and

- in the event of settlement, the threshold for satisfaction of creditors has been decreased from 45% to 30% (in the event of compulsory settlement from one third to 15%).

Source: Baker & McKenzie (1998), Central European and CIS Legal Update, Spring 1998; IMF (2000b), Staff Country Report No. 00/96; and the Czech National Bank (undated), 1999 Banking Supervision.

A related problem is the impediments to seeking an out-of-court settlement. The Czech tax law treats a debt write-down as a taxable receipt by the debtor. Also, the threat of bankruptcy as an alternative should be credible and enforceable. This would require a strengthening of the legal framework for bankruptcy and steps to improve the functioning of the court system.

COMPETITION LAW

The Czech Republic's competition rules (as laid down in Act No. 63/1991 Coll. on the Protection of Economic Competition) have been amended since its previous Trade Policy Review in 1996, to approximate the competition policy framework, rules and enforcement capacities, with those of the European Union. A new Act on the Protection of Competition (Act No. 143/2001 Coll.) entered into force on 1 July 2001. According to the authorities, the Czech legislation is now fully harmonized with EU competition legislation. The Czech law contains the main principles of the EU anti-trust rules as regards restrictive agreements, abuse of dominant position, and merger control.6

The key features of the law, which covers both goods and services, are provided in Table IV.5. It applies both to private and public undertakings and all sectors are treated equally under the law. The legislation applies not only to activities that have taken place in the Czech Republic, but also to activities that have taken place in other countries but have effects on the market conditions in the Czech Republic.7 Under the Act, misuse of a monopoly or a dominant position is prohibited. According to Act No. 63/1991 Coll., a dominant position is

6 European Commission (2000).7 OECD (2001a).


held by an enterprise if that entity provides 30% or more of a specific product or service to the Czech market. In the new Act No. 143/2001 Coll., a dominant position is defined on the basis of market power. However, block exemptions are allowed for certain categories of agreements. The Office for the Protection of Economic Competition is in charge of authorizing block exemptions in respect of certain categories of vertical agreements, agreements on specialization, research and development, transfer of technology, distribution and service of motor vehicles, and agreements on insurance and on transportation. The current competition law directs privatization authorities to submit to the competition authorities, for their approval, proposals to transfer state property .8

The Office for the Protection of Economic Competition is empowered to supervise adherence to competition regulation. In addition to economic competition itself, the Office also has a role with regard to public procurement (supervision of public tenders) and state aid (aid monitoring). Its Chairman is appointed by the President, upon proposal by the Government. In order to enhance its capacity in disclosing cartel agreements, a separate cartel department was established in 2000. The office may request information, open investigations, and impose penalties. It has published certain communiqués, including guidelines for entrepreneurs on the control of concentration. The office publishes all its Collection of Decisions as well as relevant legislation in force on its website (www.compet.cz). The Chairman's decisions may be reviewed by the High Court on the basis of a suit, and the court decision is final.9

The office has examined a large number of anti-trust cases. Between November 1996 and end-2000, there were 578 applications in total, of which 258 concerned mergers and acquisitions. Of the 258 merger and acquisition applications, 247 have been given permission, while there are 11 still in the process of examination. In the area of block exemptions, the office has granted such an exemption for a franchise agreements (entered into force in March 2000).

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

Prohibition Examples of prohibition

Agreements distorting competition(Art. 3 = Art. 85/1 of EEC Treaty)

Fixing prices or setting business terms

Making the conclusion of contracts subject to limiting or controlling sales or investments

Sharing the market

Making the conclusion of contracts subject to limiting market access to competitors

Monopoly and dominant market position(Art. 9=Art. 86 of EEC Treaty)

A competitor is considered to have a dominant position if its share amounts to at least 30% of deliveries of identical, comparable or mutually replaceable goods

Examples of prohibitions include:

- imposition of unfair terms and conditions in contracts - making the conclusion of contracts subject to the acceptance of some unjust conditions- applying dissimilar conditions to equivalent transactions- limiting production of products for the purpose of attaining unjustified economic benefits

Table IV.5 (cont'd)

8 WTO document WT/WGTCP/W/67, 26 March 1998.9 WTO document WT/WGTCP/W/71, 30 March 1998.


Prohibition Examples of prohibition

Dominant position and abuse of dominance(Art. 10=Art. 82 of EEC Treaty)

One or more undertakings jointly are deemed to have a dominant position, if their market power enables them to behave (to a significant extent) independently of other undertakings or consumers

Examples of prohibitions include:

- same as above

Concentration(Art. 12=EEC Reg. No. 4064/89)

Operations that would be assumed as concentration:

- mergers of companies, co-operatives or other legal persons

- transfer of an undertaking

- acquisitions by one or more persons or undertakings, already controlling at least one undertaking

- concentrative joint ventures

Exceptions include business whose activities include dealing in securities holding, or holding on a temporary basis shares that they have acquired in another undertaking with a view to reselling them, provided they do not exercise the voting rights in order to determine or influence the competitive behaviour of such undertaking

Thresholds for "mergers": (i) if the aggregate worldwide net turnover of all the undertakings concerned (for the last accounting period) exceeds CZK 5 billion; or (ii) if the aggregate net turnover of all the undertakings concerned achieved in the Czech market (for the last accounting period) exceeds CZK 550 million and each of at least two of the undertakings concerned achieved a net turnover of a minimum of CZK 200 million

Source: WTO Secretariat, based on Act No. 63/1991 Coll. On the Protection of Economic Competition, as amended; and information provided by the Czech authorities.

PROTECTION OF INTELLECTUAL PROPERTY

Overview

During the period under review, the Czech Republic has passed new laws or amended existing laws in order to strengthen the protection of intellectual property rights.10 All areas of intellectual property rights have been reformed (Table IV.6). The Czech Republic has extended its already extensive membership in the plurilateral agreements on intellectual property, by signing additional international treaties: the Trademark Law Treaty, the Patent Law Treaty, the WIPO Copyright Treaty, and the WIPO Performance and Phonograms Treaty. In addition, the member States of the European Patent Organisation (EPO) have invited the Czech Republic to accede to the European Patent Convention (EPC), with the earliest date of accession of 1 July 2002.11 The changes to the legal framework have been implemented by the Czech Republic with a view to bringing its intellectual property rights regime in line with the EU acquis communautaire. In the WTO, the Czech Republic did not seek the special transitional provisions available under the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS). Thus, according to the authorities, the provisions of the TRIPS Agreement were applied from 1 January 1996. The Czech Republic, together with some other countries, is seeking increased protection of geographical indications to cover products other than wine and spirits.12 While the authorities have brought laws for the protection of intellectual property towards international standards, enforcement appears to

10 See WTO (1996) for a detailed description of the intellectual property rights legislation in place in 1996.

11 Bureau of National Affairs (1999).12 The countries have argued that the issue is an integral part of the built-in agenda of the TRIPS

Agreement (WTO documents WT/GC/W/206, 14 June 1999, and IP/C/W/204/Rev.1, 2 October 2000).


have lagged. A newly enacted law provides for tough criminal sanctions for infringement, but the Czech courts have not yet imposed such sanctions in practice.

Table IV.6Summary of intellectual property protection in the Czech Republic, June 2001

Form Main legislation Coverage Selected exclusions Duration Sanctions

Copyrights and related rights

Act No. 121/2000 Coll., on Copyright, Rights Related to Copyright and on the Amendment of Certain Acts

Literary, scientific and artistic works (including computer programs and makers of databases)

Related rights include performers', phonograms', audiovisual fixations', broadcasters' and publishers' rights

Life of author plus 70 years (50 years from the creation for performers, phonograms, audiovisual fixations, broadcasters and publishers; and 15 years from the making for databases)

Fines unlimited; imprisonment of up to five years; and seizure and destruction under Civil and Penal Code

Patents Act No. 527/1990 Coll., on Inventions and Rationalizations Proposals as amended by Act No. 116/2000 Coll.

Any invention that is new, involves an inventive step and susceptible of industrial application. Compulsory licences may be decided by the IPO

Public interest; plant or animal varieties; biological processes

20 years from filing date

Supplementary protection certificate up to five years

Fines up to CZK 5 million; imprisonment of up to two years; and seizure and destruction under Civil and Penal Code

Topographies of integrated circuits

Act No. 529/1991 Coll., as amended by Act No.116/2000 Coll.

Compulsory licences may be decided by the IPO

10 years from filing date (or, if earlier, from first use)

As above

Trade marks Act No. 137/1995 Coll., as amended by Act No.116/2000 Coll.

Trade marks, service marks, collective marks and well-known marks. Use requirement of five years

10 years from filing date, with possibility to be renewed indefinitely for 10-year periods

As above

Industrial designs

Act No.207/2000 Coll., on the Protection of Industrial Designs

An industrial design shall be protected, if it is new and has individual character

Public interest; principles of morality

5 years from the filing date, this period can be repeatedly renewed up to 25 years

As above

Geographical indications (including appellations of origin)

Act No. 159/1973 on Protection of Appellations of Origin

Protection for appellations of origin of agriculture, industrial and handicraft products

Unlimited As above

New plant varieties

Act No. 408/2000 Coll., on New Plant Variety Protection

New, distinct, homogenous and stable. Compulsory licences may be decided by the Ministry of Agriculture

Generally 25 years from the date of the filing (30 years for varieties of hop, grapevine, potatoes, ornamental and forest wood species)

Fine up to CZK 5 million

Biological inventions

Act No. 206/2000 Coll., on the Protection of Biotechnological Inventions

Any biological material derived through propagation or multiplication in an identical or divergent form and possessing those same characteristics. Compulsory licences may be decided by the IPO

Invention whose commercial exploitation could be contrary to public policy or to moral

20 years from filing Fines up to CZK 5 million; imprisonment of up to two years; seizure and destruction under Civil and Penal Code

Table IV.6 (cont'd)


Form Main legislation Coverage Selected exclusions Duration Sanctions

Utility models Act No. 478/1992 Coll., on Utility Models as amended by Act No. 116/2000 Coll.

Any technical solution that is new, exceeds the framework of mere professional skill, and is industrially applicable

Plant varieties, animal breeds, biological reproduction materials; production processes or work activities

4 years from filing date, with possibility of two three-year extensions

As above

Border measures

Act No. 191/1999 Coll., on measures concerning entry, export and re-export of goods infringing certain IPRs and amending some other Acts

Measures to enforce IPRs on the border of the Czech Republic

Seizure and destruction of goods; and fine up to CZK 20 million

Source: WTO Secretariat, based on information provided by the Czech authorities; and WTO (1996), Trade Policy Review – Czech Republic.

As in 1996, foreign right holders receive the same legal protection as Czech legal or natural persons. Reflecting the active participation by foreigners in the Czech economy, foreigners constitute an increasing share of industrial property rights applications. In the area of inventions, the share of applications filed to the Industrial Property Office (IPO) by foreign applicants increased to 89% in 2000.13 Foreigners also constitute a high share of granted patents on inventions.

Recent efforts to harmonize with the European Union

According to the European Commission, the Czech Republic has achieved a high degree of compatability of its legislation on intellectual property rights with the EU acquis communautaire. In the area of copyright, a law passed in 2000 brought the Czech copyright legislation into line with the acquis communautaire.14 Towards this end, a number of EC Directives and Regulations have been implemented during the review period, covering issues such as border measures; trade marks; the legal protection of topographies of semiconductor products; and the protection of computer programs, patents, biological inventions, and industrial designs.

Compulsory licensing

When no agreement can be reached on a licence contract between the right holder and potential licencees for patents, topographies of integrated circuits, new plant varieties and biotechnological inventions, compulsory licences may be granted by the IPO. The IPO can only grant a compulsory licence for a patent if the owner of the patent does not work the patent sufficiently or when an important public interest is endangered. The compulsory licence may not be granted within the period specified in the Paris Conventions (i.e. four

13 The IPO is in charge of the administration of industrial property (as governed by Act No. 14/1993 Coll.). The IPO decides on applications and maintains registers of legal right holders. Foreign right holders must normally act through patent agents licensed by the IPO. The IPO will not register protection for intellectual property that is deemed to be contrary to the public interest (notably the principles of humanity and morality) (IPO online information. Available at: http://www.upv.cz/english/index.html [23 November 2000]; and WTO, 1996).

14 European Commission (2000).


years from the date of filing or three years from the date when the patent was granted, whichever period expires last). Compulsory licences for topographies of integrated circuits may only be granted provided an important public interest is in jeopardy. Regarding new plant varieties, compulsory licences may be granted by the Ministry of Agriculture if the owner of the breeder's certificate refuses to authorize the commercial exploitation of the variety or the breed, or refuses to do so to the extent necessary. For biotechnological inventions, the IPO may grant a compulsory cross-licence if the plant or animal variety constitutes significant technical progress of considerable economic interest compared with the invention. To date, the IPO or the Ministry of Agriculture has not granted any such compulsory licences.

Parallel imports

No provision in the existing legislation refers expressly to parallel imports. Regarding patents, the patentee is granted the right to exclude others importing the patented invention during the term of the patent protection. The patentee is not entitled to prohibit the use of the patented product by third persons, if the product has been put on the market in the Czech Republic by the patentee or with his consent unless allowed by law.

No one is allowed to use a trade mark without the consent of its owner. The trade mark does not entitle the owner to prohibit its use in relation to goods that have been put on the market under that trade mark by the owner or with his consent unless, after the goods have been put on the market, there has been a substantial change or deterioration in the quality or properties of the goods (the national exhaustion of trade mark rights).

A copyright holder enjoys exclusive right of reproduction, distribution, broadcast and communication to the public. The law also provides for a principle of national exhaustion of this right. The first sale or other transfer of the original property right or a copy of the work, by which the work is distributed lawfully in the Czech Republic, exhausts the author's right to distribute such original or a copy of the work in the Czech Republic.

Enforcement

The authorities have recently taken several measures to improve the enforcement of existing legislation. Measures include:

Act No. 191/1999 Coll. (on Measures Concerning Entry, Export and Re-Export of Goods Infringing Certain Intellectual Property Rights and Amending some Other Acts), which became effective on 1 December 1999. The law establishes the conditions under which customs authorities can take measures against alleged infringing and counterfeit goods. Under the law, customs authorities may withhold goods violating intellectual property rights upon the request of the owner of the trade mark or patent, or based on their own suspicion based on the customs check. If the court rules that the goods retained are fake or counterfeit, customs authorities may prevent their release and, under specified conditions, are entitled to destroy the goods15;

Government Resolution No. 330/1999 (Relating to the Conception of the Fight Against Crime in the Area of Intellectual Property). Fulfilment of the resolution included, inter alia, a

15 Bureau of National Affairs (2000b).


seminar dedicated to combating product piracy, where experts on industrial property, police, customs administration, and trade inspection exchanged their experiences16;

a special Inter-ministerial Commission to co-ordinate all state administration activities concerning intellectual property rights. The Commission includes representatives of the Ministry of Culture, the Ministry of Finance (the General Customs Directorate), the Ministry of Interior, the Ministry of Justice, the Ministry of Industry and Trade, the Czech Police, the Czech Trade Inspection Authority, the Patent Office, and representatives of the Supreme and High Courts. The Commission's task is to initiate legislative changes and practical measures to protect intellectual property rights, and secure compliance with international obligations in this area;

regular preventive security operations to fight crime involving intellectual property rights;

establishing a uniform information system interconnecting all individuals and organizations involved in the issue;

Government Resolution No. 190/2001 on conditions and rules for the regular control of use of legal software within all ministries and government agencies; and

seminars and lectures for the staff of the Czech Police, Czech Trade Inspectors, and for other experts.17

Along with stronger enforcement regulations, the number of apprehensions leapt by more than 80% in 2000 while an even higher increase was recorded in the number of confiscated items (Table IV.7).

Table IV.7Enforcement of Intellectual Property Rights, 1997-2000

1997 1998 1999 2000

Czech Trade Inspection, General Inspectorate

Number of apprehensions 160 230 522 952

Number of confiscated/seized items 1,000 1,100 8,565 96 ,996

Estimated value of confiscated goods (CZK million) 1.16 1.48 5.01 127.95

Income from penalties imposed (CZK million) 0.40 0.30 1.30 4.20

Czech police (IPR crimes)

Number of apprehensions 1,202 2,629 4,678 2,080

Estimated value of confiscated goods (CZK million) 1,447 2,035 7,014 1,344

Directorate General of Customs (cases of goods infringing copyright and trade marks)

Cases 42 45 56 67Customs value (CZK million) 9,313 21,715 35,324 52,738

Source: Information provided by the Czech authorities.

16 Industrial Property Office (2000).17 Government of the Czech Republic (undated (a)).


III. DEVELOPMENTS IN SELECTED SECTORS

(1) FINANCIAL SERVICES

(i) Banking services

The structure

88. Competition in the Czech banking sector has increased in recent years. The number of foreign banks and branches has expanded progressively since the first foreign bank was established in 1992, with foreign banks and branches accounting for one quarter of total assets at the end of 1998 (Chart V.1). According to the authorities, foreign-controlled banks account for around 70% of total assets of the banking sector following the privatization of three large Czech banks in 1998-00. 1 As of 31 December 2000, there were 40 banks and foreign bank branches. The group of small banks is characterized by a high share of Czech private capital and relatively small amounts of assets. The marked rise, and subsequent fall, in the number of small banks reflects the initial relatively soft rules on bank licensing during the early transition years, followed by a significant tightening of the supervisory framework.2

89. The banking sector has increased over the past years. Total bank assets in 1999 amounted to the equivalent of about 140% of GDP, and bank credits to the private sector accounted for the equivalent of around 60% of GDP. This reflects the already high level of financial intermediation at

1 The privatized banks are: Investicni A Postovni Banka (IPB), which focused on larger companies, Ceskoslovenska Obchodni Banka (CSOB), which focused on services related to foreign operations, and the savings bank Česká Spořitelna (CS).

2 IMF (1999).


the outset of the transition, relative monetary stability since then, and absence of significant alternative financial institutions. 3 Nevertheless, it has been noted that the banking sector suffers from major weaknesses in the areas of asset quality (high share of classified credits) and profitability. Sources of weaknesses are said to include poor corporate governance, poor ability to assess risk, and the belief that the Czech authorities would not let the banks fail, creating an environment of moral hazard.4

Recent efforts to strengthen the regulatory framework

90. Bank activities in the Czech Republic are governed by Act No. 21/1992 Coll. on Banks, which contains, inter alia, the basic principles for granting a banking licence and provides for the structure of the bank's governing bodies, the procedure for acquiring holdings in banks, the operational requirements for banks, the basic procedures of banking supervision (including conservatorship and banking licence revocation) and the system of insurance deposits. 5 The Czech National Bank is in charge of banking supervision.

91. The regulatory framework for the banking sector has improved considerably during the period under review. According to the authorities, the basic direction of the reforms has been to harmonize Czech laws and regulations with those of the EU. Considerable progress has been made in the harmonization efforts. The Czech National Bank provisions are based on the international regulatory standards included in EU Directives and on the recommendations of the Basle Committee on Banking Supervision. Reforms in the period under review include, inter alia6:

establishment of a framework for closer co-operation between financial-sector supervisors (Czech National Bank for banks, Ministry of Finance for insurance companies and pension funds, and the Securities Commission for the Stock Exchange and for investment funds);

abolition of economic need test under the licensing procedure and introduction of national treatment for investors buying the shares of existing banks;

introduction of limits on bank's ownership of investment funds and industrial companies;

introduction of new provisioning requirements for loan losses (no longer allowed to net out the value of real estate collateral in calculating the loan loss provisions for loans that were overdue by more than 360 days). The measures were phased in over a three-year period, beginning at the end of 1998;

as from January 2000, the Central Bank performs banking supervision on a consolidated basis (applies only to groups headed by a bank and comprising their subsidiaries and companies in which they have participating interest). The prudential rules in force until then applied only to banks and did not regulate the overall position of a bank within the framework of its group; and

enactment of legislation bringing anti-money-laundering policy more into line with EU requirements.

Foreign investment – granting of licences

3 IMF (1999).4 World Bank (1999a), Vol. 1.5 Czech National Bank (undated).6 This paragraph is based on EBRD (1999); and IMF (1999).


92. The Czech banking system is generally open to foreign investment. The Central Bank began issuing licences in 1990, but it took another two years until licences for branches of foreign banks were issued. Under Act No. 21/1992 Coll. on Banks, the entry of foreign capital is allowed in the form of wholly or majority foreign owned banks and foreign bank branches. Domestic and foreign banks need an authorization from the Central Bank to establish a commercial presence in the Czech Republic. Prior approval of the Central Bank is required for foreign persons to purchase shares of existing banks in the Czech Republic.

93. The Czech Republic applies a universal banking model where banks and branches of foreign banks may carry on both commercial and investment banking activities. Banks are allowed to internalize, through their subsidiaries, the businesses in the area of insurance, investment funds, and pension funds. On the other hand, a bank may not perform control (defined in accordance with EU Directive 89/646/EEC) over a legal entity other than banks, financial institutions or enterprises of auxiliary services. Banks are also allowed to invest in non-financial companies as long as a bank's qualifying holding (defined in accordance with EU Directive 89/646/EEC) in such a legal entity does not exceed 15% of the bank's capital in a single legal entity, or a total of 60% of the bank's capital in the sum of all legal entities.7 In the WTO negotiations on financial services the Czech Republic committed to relax foreign exchange licensing requirements, and to remove restrictions on deposit of foreign exchange assets. As of 1 January 2001, all foreign exchange operations are free, except those concerning the acquisition of real estate by foreigners.

Bank restructuring - recent reforms and challenges ahead

94. Progress has been made in improving the health of the small banks as well as privatizing some large state-owned banks, but the cost of bank assistance has been substantial. In response to poor asset quality in the small banking sector, the central bank implemented in 1996-97 a programme of supervisory actions designed to encourage the banks to improve their situation (Consolidation Program II).8 As a result, several small banks were liquidated, merged or went into bankruptcy.9 To further address weaknesses in small banks, the Government approved in October 1996 a large-scale restructuring programme (Stabilization Program). As part of the programme, a government institution bought poor quality assets of the banks at book value. Liquidity crisis in the banks were also solved through loans as well as an increased coverage of the deposit insurance scheme. The cost of bank assistance during the period 1991-98 was estimated at the equivalent of 10.5% of GDP.

95. Bank privatization has accelerated significantly in recent years. Three large state-owned banks (IPB in 1998, CSOB in 1999 and CS in 2000) have been successfully privatized to strategic foreign investors, increasing foreign share of total banking assets to 70%. The last remaining state-owned commercial bank, KB, is to be privatized in the second half of 2001.

96. A looming problem for the sector is the large share of non-performing loans in the total volume of credits, which has been fluctuating around 20% since 1997. The problem is concentrated in large banks. Since its establishment in 1991, the KOB (Konsolidační banka) has acted as an institution for the management of assumed and purchased assets. It has undertaken several restructuring operations and, more recently, facilitated the privatization of large state banks as it took over a major portion of their bad debts. The volume of KOB's bad assets represented some 15% of GDP by end-1999, a figure that could increase to about 20%.10 The situation may be aggravated by

7 World Bank (1999a), Vol. 2.8 Consolidation Program I, implemented in 1991-93, was aimed at cleaning up the portfolios of former

state-owned banks/organizations. 9 World Bank (1999a), Vol. 1.10 KOB (2000).


the fact that the KOB is also a development bank with commercial banking and deposit-taking functions. The authorities' efforts to dispose of the non-performing loans include sales, bankruptcy proceedings, court settlements, and claim capitalization.11

97. A related area of reform is the legal framework for bankruptcy. Weaknesses in the bankruptcy legal framework (such as delays in the bankruptcy process) have discouraged banks from implementing bankruptcy proceedings against many insolvent enterprises (Chapter IV(6)).

(ii) Insurance services

98. The insurance sector is characterized by increasing competition as a result of the continued reforms. In May 2001, 40 companies were active in the Czech insurance market (17 general insurance companies offering a wide range of products, four life insurance companies, and 19 companies offering one or more kinds of non-life insurance). Eighteen of the joint-stock companies were 100% owned by Czech capital, while 13 were owned exclusively by foreign capital. The Czech insurance company (Ceská pojišťovna a.s), in which the State has a 30.25% share, still retains a large, though declining, share (around 39%) of the insurance market. Insurance penetration – ratio of insurance premiums to GDP unadjusted for inflation – reached 3.7% in 2000. 12

99. The new Act on Insurance (No. 363/1999 Coll.) substantially harmonizes Czech law with EU directives and brings the sector under more effective supervision. The law, which took effect in April 2000, includes:

tighter restrictions on insurance company board members and their activities (including conflict of interest);

a requirement to split life and non-life business into separate companies within ten years13; and

measures to strengthen the Insurance Supervisory Authority, which was given considerable powers and new resources.14

100. The insurance market is open to national and foreign investors. Under current law, foreign financial suppliers may establish an insurance company in the form of a joint-stock company or provide services through branches. Establishment requires the authorization of the Insurance Supervisory Authority.15 The new Act on Insurance, contrary to the previous law, does not contain any restrictions for purchasing insurance services abroad.

101. However, certain business activities were reserved until recently, thereby limiting competition and development of the market. Competition remains limited only for compulsory health insurance, which is provided by nine licensed Czech-owned suppliers, and for mandatory liability insurance for employers against injury or occupational diseases, which is provided by two licensed companies. In January 2000, the Czech Insurance Company's monopoly right on the supply of compulsory third-party motor liability insurance was ended.16 Twelve insurance companies have received licences to provide this type of service. Moreover, as part of its commitments undertaken during the WTO

11 IMF (2000b).12 In comparison with EU countries and other advanced countries, the Czech Republic's penetration

figure is roughly half. Czech Insurance Association (1999).13 World Markets Research Centre online information. Available at: http://www.impactglobal.com/

subscribers/HOMETEST.CFM [24 November 2000].14 European Commission (2000).15 WTO (1996).


negotiation on financial services, the Czech Republic removed monopoly rights for compulsory air transport insurance in April 1997.

102. Premiums for compulsory health insurance and mandatory liability insurance for employers against injury or occupational diseases are set by the authorities; companies are free to set premium rates in all other areas.

103. A large amount of business – especially in large industrial and commercial risks – is reinsured with large international reinsurance companies.17 While there is no local re-insurance company, the largest three domestic companies are authorized to act as active re-insurers.

(iii) Other financial services

104. Capital market legislation is under the responsibility of the Ministry of Finance; the Securities Commission is responsible for the enforcement of laws.18 Certain activities are closed to foreign investors by law, including mortgage banking, some operations in securities on capital markets, operations in collective investment securities, and operations in foreign exchange activities (Table II.3). The establishment of securities dealers, stockbrokers (of the stock exchange or organizers of an over-the-counter market), investment companies, and investment funds are subject to authorization by the Securities Commission.

The Czech Securities Commission

105. Important measures have been taken to increase the transparency and regulation of capital markets by creating a Securities Commission (SEC), established in April 1998 under Act No. 15/1998 Coll. on the Czech Securities Commission. The objectives of the SEC are to improve investors' protection and transparency by attaining a higher level of information openness, to check compliance with legal standards, and to participate in the creation of legal provisions and laws to regulate the capital market.19 The activities of investment companies, banks (their investment services), and pension funds (investment instruments) are subject to supervision by the SEC. The SEC has undertaken a clean-up operation, withdrawing the licences of many brokerages and de-listing several firms for non-compliance with existing rules.20 The SEC must submit proposals for secondary legislation governing the capital markets through the Ministry of Finance.21 According to the authorities, from the beginning of 2000, the Czech legislation related to capital markets is largely harmonized with that of the EU.

16 Regulated by Act No. 168/1999 Coll. on Liability Insurance for Damage Caused by Operation of a Vehicle and on Amendment to Some Related Acts (Motor Third-Party Liability Insurance Act) (WTO document S/C/N/125, 3 August 2000).

17 World Bank (1999b).18 The legislation governing the capital market includes: the Securities Act, the Act on Bonds, the Stock

Exchange Act, the Act on Investment Companies and Investment Funds, and the Act on Securities Commission.19 EBRD (1999).20 OECD (2000a).21 Government of the Czech Republic and the European Commission (1999).


The Prague Stock Exchange

106. The operation of the Prague Stock Exchange (PSE) is governed by the laws relating to the Czech capital markets, and Stock Exchange Rules and Regulations. It is supervised by the Security Exchange Commission. The PSE is a joint-stock company authorized to organize trading in securities, i.e. shares, bonds, unit certificates, etc.22 The trading system on the PSE is both order-driven and price-driven. There is also another organizer of equities trade, the RM system. It appears that with the two systems operating in tandem, there is no mechanism to ensure a single price for shares.23

Investment funds

107. The majority of the investment funds in the Czech Republic were formed during the period of voucher privatization (Box IV.1). In the voucher system, individuals could either bid directly for company shares in the auctions or place the vouchers with an investment fund. The investment fund would then use the vouchers to bid for the company. The investment funds attracted most vouchers (70% and 65% of the vouchers issued in the first and second waves, respectively). The investment funds were all set up as closed-end funds in the first wave of the privatization, while in the second wave, open and unit trusts were also allowed.24

108. Several weaknesses with the investment funds became apparent. Corporate governance by the funds was considered to be weak. It is also thought that several of the funds were used as instruments of asset stripping by the managers. Causes for such performance include liberal licensing criteria, lax supervision, limited disclosure rules, and the weak incentives related to the closed-end structures of most funds.25

109. The poor performance of investment funds led the authorities to introduce important changes to the legal framework (Act No. 248/1992 on Investment Companies and Investment Funds) in 1998. The closed-end funds are now required to convert into open funds at the latest by the end of 2002, which will result in a substantial outflow of assets from those funds. Under the law, authorization for new closed-end mutual funds, formed as unit trusts, can only be issued for a period not exceeding ten years. Another important change is the reduction in the IPFs holdings in any company from 20% to not more than 11%. Other changes to the law designed to reduce portfolio risk include the prohibition to invest in silent partnerships. In addition, the law was also amended to include, inter alia, the following provisions: (i) acquisition of more than 10% of the shares of registered capital of an investment company or investment fund requires the prior approval by the SEC; (ii) the portfolio of investment funds or mutual funds may not consist of the shares of joint-stock companies whose share of registered capital of a management investment company or investment fund exceeds 10%; and (iii) the control functions of a depository were strengthened.26

(2) TELECOMMUNICATIONS SERVICES

110. The Czech Republic has brought competition into the telecommunications sector by gradually opening up its markets to national and foreign investors. The telecom monopoly company (Český Telecom) has been partly privatized; additional operators have been allowed in the provision of public fixed telephone services in "local telecom areas", local voice services, and the provision of

22 In June 2001, the PSE became an Associate Member of the Federation of European Securities Exchanges.

23 EIU (1999). 24 World Bank (1999b).25 World Bank (1999b).26 WTO document S/C/N/92, 15 January 1999.


cellular communications; and Internet services and cable television is now characterized by strong competition (Chart V.2). The authorities have attained their goal of fully liberalizing the telecommunications sector with no limitations for entry of foreign capital by 1 January 2001, a date set already in 1994, by allowing additional operators in the provision of international, long-distance services, and local telephone services via fixed networks.27 Following general global trends in telecommunications, the Czech Republic has, along with liberalization, experienced strong growth in both size and quality of services, and prices of some services have fallen. Nationwide transmission of TV and radio signal is ensured mainly by a single joint-stock company controlled by the State (České radiokomunikace, CR). Looking ahead, the authorities are planning to privatize the remaining 51% of shares in the Český Telecom and the CR during 2001.

Chart V.2Evolution of selected telecommunication services, 1994-2001

1994 1995 1996 2000 2001International and long-distance services

- SPT Telecom - Český Telecoma

- about 20 additional operators

Local services - SPT Telecom - SPT Telecom- eight additional operators

- Český Telecoma

- about 20 additional operators

Mobile communication

- one operator - two operators - three operators - three operators

Third-generation mobile phone services

- no operator - four licences expected

Internet services

- information not available (liberalized in 1998) - 18 major ISPs and 300 small ISPs

- 20 major ISPs and many hundreds of small ISPs

a Previously SPT Telecom.


Enhanced regulatory framework

111. The Czech Telecommunication Office (CTO) is the regulatory body for the telecommunications sector. Under Act No. 151/2000 (on Telecommunications and on Amendments to Other Acts) the CTO was re-established in July 2000, as a separate body with full independence from the Ministry of Transport and Communications. Areas of responsibility given to the CTO as a result of the new law include administration of interconnections and price regulation. Previous responsibilities retained by the CTO include, inter alia, to approve telecommunication equipment, administration of the frequency spectrum system; fines; granting licences and the withdrawal of

27 It appears that some problems remain in the area of interconnection agreements and freedom of choice of operator.


authorizations of licences. Under the law, the Ministry of Transport and Communications remains responsible for telecommunications policy and for establishing the principles and main regulations of the sector; it also approves the plan for assignment of frequency bands.

112. A licence is required for establishing and operating a public telecommunications network (except networks intended solely for one-way dissemination of television or radio signals down wires), and providing public telephone services via a fixed or mobile telecommunication network. The CTO will issue a licence as long as it does not jeopardize the security of the State or human life, health or safety, and given that the necessary frequencies are available. If sufficient frequencies are not available, the CTO is obliged to announce its selection proceedings for the licences. For all applications, the CTO decides on awarding licences within 40 days from the delivery of the application. To provide all other types of telecommunications services (such as internet services, operate radio transmitters via VSAT), providers must simply register with CTO.

113. One or more of the licence holders in the areas of public telephone services is required to provide universal service via a fixed telecommunication network, such that accessibility is secured throughout the whole country. Universal service providers have the right to compensation for "demonstrable" loss (expenditures which would not have arisen if the provider had not had this obligation).

114. Interconnection policy is regulated by the CTO. According to the law, operators of public telecommunications networks and providers of public telecommunications services, who are in control of at least one terminal point of a network, are obliged to provide interconnection to the networks they operate. The operators of public telecommunications networks and providers of public telecommunications services can reject a proposal for an agreement on interconnection of networks when the requested interconnection does not comply with the technical specifications at their disposal. In such a case, they are obliged to request the CTO's approval for the rejection of the proposal. The prices for interconnection are negotiated by the parties. If the parties do not reach an agreement on price for interconnection, they have to use a price-calculation method set by the CTO.

115. Until 1 July 2000, when the new telecommunications law came into force, the Ministry of Finance regulated the tariffs of the main public telephone services over the fixed networks (including public telex and telegraph services) using the price-cap method.28 Under the new telecommunications law, the CTO became the responsible regulatory body for tariffs and prices. The CTO uses a similar price-cap methodology for setting prices for the main services (public telex and telegraph services). Other tariffs and prices for telecommunications services remain unregulated.

Progressive opening of markets to competition

116. In line with the Czech Republic's commitments under the GATS, the state-owned Český Telecom's (former SPT Telecom) monopoly on the provision of long-distance and international telephony has been abolished as of 1 January 2001, as a result of the enactment of Act No. 151/2000.29 Český Telecom is obliged to ensure the implementation of call-by-call selection of operator by a dialled prefix until July 2002, and pre-selection of operator as well as number portability until January 2003. The Český Telecom has been the exclusive operator in 144 out of 160 local areas, covering about 93% of the population. Under the new law, potential competitors in the fixed line telephone market could apply for licences and begin building networks in preparation for 1 January 2001 when they were allowed to start operation. There are no limitations on the number of

28 Hruby, Zdenek (1999). 29 See WTO (1996), Annex V.1 on the Czech Republic's Specific Commitments under the GATS.


companies that will be awarded a licence.30 Nor are there any limitations on the areas of operation. Foreign participation in the provision of long-distance and international telephony services is not limited. So far, Contactel (a Czech joint-venture between Ceske Radiokomunikace and TeleDanmark) and Aliatel and more than 20 other companies have been granted licences for public voice services.31

117. Prior to the date of the full liberalization of the telecommunications market, competition in local public fixed telephone services had been experimentally allowed in 16 of the country's 160 "local telecom areas". It has been noted that only limited success was achieved due to some strict conditions that operators had to fulfil.32 By June 2000 only four companies were offering local services in competition with Český Telecom.

118. In most other areas of telecom services, the market structure is competitive. Cellular communications along with the provision of internet services and cable television are perhaps the most competitive markets; and there is competition in leased lines, data, fixed satellite, and digital cellular services. In the area of telex, telegraphs and facsimile, competition is allowed, but, according to the authorities, there is no interest from companies (other than Český Telecom) to provide such services. According to the new law, Český Telecom has to provide these services under the framework of universal services until 2005. There are no limitations for market entry in packet-switched data transmission services, circuit-switched data services, and leased lines services.

(3) TRANSPORT SERVICES

119. Progress has been made in liberalizing the transport services sector during the period under review. 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. Full harmonization of the Czech Republic's transport laws and legislation with the EU's acquis communautaire is planned for the end of 2002. Road transportation remained by far the most important mode of freight traffic transportation throughout the 1990s, accounting for at least 80% of the total in recent years. In 1999, 42% of imports were transported by road while 56% were transported by rail.

Rail transport

120. Within the framework of Act No. 9/1993 Coll. on Czech Railways, freight and passenger railways are owned and operated by the State through Czech Railways (ČD). Large amounts of funds (grants and subsidies) are transferred to ČD to cover losses from passenger transport. In early 2001, ČD's accumulated losses amounted to CZK 40 billion. The losses originate from passenger services. Passenger fares are regulated by the Government and subsidized in accordance with social obligations to provide mobility for the public. Subsidies on railway freights were abolished in January 1995. Fares for freight are now determined through negotiations with shippers.33 The Government allows in some instances access to tracks for companies wishing to provide their own rail transportation. Prices for access to tracks are set by the Ministry of Finance based on cost information supplied by ČD.

30 Telecoms-Data.com (2000).31 Total Telecom (2000) [Online], 11 September, and 4 October. Available at: http://totaltel.com.

[8 November 2000].32 European Commission (1999b); and Telecoms-Data.com (2000).33 World Bank (1999b), Vol. 2.


Road transport

121. The main laws related to road transport are Act No. 111/1994 Coll. on Road Transport and Act No. 304/1997 Coll. on Roads. Foreign investment is prohibited in road transport (passenger and freight).34 Nevertheless, the Czech Republic's trucking industry is relatively competitive. Truck transportation is undertaken by private carriers, with less than 1% of truck transportation undertaken by state-owned companies.35 Bus transportation is provided by private national companies, but, in contrast to truck transportation, the State compensates the carrier (in case of public interest) for demonstrable loss incurred. Bus transport companies receive about CZK 2 billion annually. Transportation on international and long-distance routes is not subsidized. Fuel taxes on cars, trucks and buses contribute towards the cost of highway maintenance and construction.

Internal waterway transport

122. The main laws related to inland waterway transport and maritime transport are Act No. 144/1995 Coll. on Inland Navigation and Act No. 61/2000 Coll. on Maritime Navigation. The Ministry of Transport and Communications and the State Shipping Administration are the competent authorities for matters related to inland navigation. The Maritime Authority is responsible for matters related to maritime navigation. An amendment to the Act on Inland Navigation was adopted in January 2000, aiming at transposing the EU acquis communautaire on access to the occupation of carrier of goods by inland waterways.36 The legislation on maritime navigation, which entered into force in July 2000, provides for further harmonization with the acquis communautaire in areas such as cabotage, the investigation of maritime accidents, and the professional competence of the crews of sea-going ships. As there is no maritime port, the Czech Republic does not have any special regulations on multimodal transport. Nor does it have any national regulation on bulk shipping or liner shipping.

123. Foreign investors are allowed to operate in inland waterway freights, including chartering activities. Licensing criteria include, inter alia, the approval by the investor's national authority to operate in its home country. In order to fly the Czech flag, vessels must be owned by a Czech party who must reside in the Czech Republic. Currently, no merchant ship is registered in the Maritme Register of the Czech Republic. There is only one national shipping company in operation (Czech Ocean Shipping). Although Act No. 61/2000 Coll. provides for the possibility of state aid, no such aid has so far been granted.

Air transport

124. Air transportation is regulated by Act No. 49/1997 Coll. on Civil Aviation. Under the law, the Civil Aviation Authority (subordinated to the Ministry of Transport and Communications) is the executive arm of the State in civil aviation matters. Negotiations have started between the EU and the Czech Republic on an agreement to establish a European Common Aviation Area (ECAA), which are resulting in progressive alignment with the acquis communautaire. An amendment to the law, which

34 The regulation applies to the following for passengers: transit, "closed door" tours, picking up or setting down on an international journey, and transport within the country. It applies to the following for freights: transit, delivery on an international journey, collection on an international journey, return cargo where collection is authorised, return cargo where delivery is authorised, and transport within the country (OECD, 2000b).

35 World Bank (1999b), Vol. 2.36 European Commission (2000).


entered into force in June 2000, is expected to implement both the Joint Aviation Requirements (JARs) and the Eurocontrol standards.37

125. Commercial air transport (carriage by aircraft of persons, animals, luggage, goods and mail) can be operated on the basis of an air transport licence or on the basis of an authorization for air taxi operators. The licence is issued by the Civil Aviation Department of the Ministry of Transport and Communications; the taxi authorization is given by the Civil Aviation Authority. The criteria for approving Czech carriers include, inter alia, national ownership (maximum 49% foreign equity). By February 2001, eight such licences had been issued and no applications had been rejected. Domestic scheduled air transport is limited due to the size of the country. The State still owns shares in the Czech Airlines (ČSA). ČSA does not receive subsidies from the Government. A domestic airline operator who intends to operate international commercial air transport must have an authorization from the foreign State that will be the destination of the transport. A foreign airline operator is permitted to run commercial air transport to and from the Czech Republic pursuant to the bilateral air transport agreement or to a permission issued by the Ministry of Transport and Communications. Domestic fares and services are regulated by the Ministry of Transport and Communications.38

126. The Czech Republic currently applies slot restrictions allocated by Eurocontrol.39 An open skies agreement entered into force between the Czech Republic and the United States in September 1996. The agreement provided for a phased liberalization from September 1996 until 31 October 1999: an open skies agreement for scheduled and charter operations between the Czech Republic and the United States has been applicable since 1 November 1999.

127. The Czech Republic has adopted ad referendum Protocol VI (Transitional arrangements between the European Community and the Czech Republic) to the draft Multilateral Agreement on the Establishment of a European Common Aviation Area (ECAA Agreement) in November 1999. The Czech Republic is also a member of the International Civil Aviation Organization (ICAO), Eurocontrol and Joint Aviation Authorities.

128. Cabotage rights for passengers or cargo are generally not granted to foreign carriers. However, on the basis of reciprocity, they can be obtained from the Civil Aviation Authority. Traffic rights are regulated by bilateral agreements signed by the Czech Republic or through permissions issued by the Civil Aviation Department. Requirements for non-scheduled flights of foreign civil aircraft landing in the Czech Republic for commercial purposes are contained in the Aeronautical Information Publication of the Czech Republic.

129. The state-owned company (Czech Airport Authority) operates four international airports. Air traffic is managed by the state-owned company Air Navigation Services. Other airport services (e.g. ground handling, catering and maintenance) are open to competition.

(4) TOURISM SERVICES

130. The tourism industry recorded rapid growth during the past decade, except in 1995 and 1997. Tourist arrivals increased from 37 million in 1990 to 104 million in 2000, and receipts increased from US$0.4 billion (equivalent to 5.6% of GDP) to US$2.9 billion over the same period. In addition to contributing a significant amount of foreign currency revenues to the balance of payments, the tourism industry represents a major source of income for the national budget. The value-added tax is the most important item in this regard. Its importance is also noted because of the sector's positive

37 European Commission (2000).38 World Bank (1999b), Vol. 2.39 World Bank (1999b), Vol. 2.


influence on a number of other industries and services (such as transport, retail, construction, banking, telecommunications, culture and sports).

131. The Ministry for Regional Development is responsible for the supervision of tourism activities. In September 1999, an inter-ministerial tourism commission was established to function as an advisory body to the Ministry.40 The Czech Tourist Authority, created in 1993, is responsible for coordinating the state-run promotion activities and the operations of the businesses operating in the tourism sector, and for formulating marketing strategies for domestic and international tourist markets. It boosts general awareness about the Czech Republic through participation in fairs and exhibitions, and organizing workshops. It also boosts awareness through a network of 12 representative offices in 11 countries, as well as through publishing activities and cooperation with media outside the Czech Republic.

132. There is no limitation on foreign investment in the tourism sector. The Ministry for Regional Development is responsible for granting licences to tour operators. As set out in Act No. 159/1999 Coll. on Some Conditions of Business Operation in the Tourism Industry, a tour organizer is obliged to conclude an insurance policy for a premium of at least 30% of planned annual sales of packages. Foreign investors have increased their role in the tourism sector since the mid 1990s, and in 1999 trade, hotels and restaurants attracted as much as one quarter of total foreign direct investment inflows (Table I.3).

133. One state-aid programme specifically targets the tourism sector. Under the State Programme for Tourist Support, investors may receive grants up to 50% of investment costs for the development of spa-related activities. In addition, as in all sectors, investors in the tourism sector have access to the incentives offered under the Government's state aid programmes (Chapter IV(3)).

40 Government of the Czech Republic (undated (b)).

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WTO (1996), Trade Policy Review – Czech Republic, Geneva.APPENDIX TABLES


Table AI.1Balance of payments, 1993-2000(US$ million)

1993 1994 1995 1996 1997 1998 1999 2000

A. Current Account 456 -787 -1,369 -4,292 -3,211 -1,336 -1,567 -2,369

Trade balancea -525 -1,381 -3,678 -5,877 -4,540 -2,554 -1,903 -3,285

- Exports 14,229 15,929 21,463 21,691 22,777 26,351 26,265 29,034

- Imports 14,754 17,310 25,140 27,568 27,317 28,905 28,167 32,320

Balance of services 1,011 488 1,842 1,923 1,763 1,793 1,102 1,396

Credit 4,723 5,157 6,718 8,179 7,162 7,494 6,928 7,245

- Transportation 1,241 1,243 1,461 1,334 1,313 1,389 1,547 1,392

- Travel 1,559 2,230 2,875 4,075 3,647 3,719 3,035 2,869

- Other services 1,923 1,684 2,382 2,770 2,201 2,385 2,347 2,984

Debit 3,712 4,668 4,876 6,256 5,399 5,701 5,826 5,849

- Transportation 734 853 799 699 630 706 782 720

- Travel 527 1,585 1,633 2,953 2,380 1,869 1,474 1,257

- Other services 2,451 2,231 2,444 2,604 2,389 3,126 3,570 3,872

Income balance -118 -20 -106 -723 -791 -983 -1,277 -764

Credit 547 789 1,195 1,170 1,409 1,424 1,644 1,831

Debit 665 809 1,300 1,893 2,200 2,407 2,921 2,595

Current transfers 88 126 572 385 357 408 511 285

Credit 241 296 664 617 864 787 1,075 715

Debit 153 170 92 233 507 379 564 431

B. Capital Account -555 0 7 1 10 2 -2 -5

Credit 205 0 12 1 16 14 18 6

Debit 760 0 5 0 6 12 21 11

C. Financial Account 3,025 3,371 8,226 4,184 1,082 2,923 3,080 3,359

Direct investment 563 749 2,526 1,276 1,275 2,641 6,234 4,477

- Abroad -90 -120 -37 -153 -25 -79 -90 -118

- In the Czech Republic 654 869 2,562 1,428 1,300 2,720 6,324 4,595

Portfolio investment 1,601 855 1,362 726 1,086 1,069 -1,395 -1,767

Assets -229 -46 -323 -48 -189 -23 -1,896 -2,245

- Equity securities -229 -46 -323 -48 1 119 -1,415 -1,145

- Debt securities 0 0 0 0 -190 -143 -481 -1,100

Liabilities 1,830 901 1,685 773 1,275 1,093 501 478

- Equity securities 1,117 499 1,235 602 435 1,080 127 617

- Debt securities 713 401 450 171 841 13 374 -139

Financial derivatives 0 0 0 0 0 0 0 -47

Other investment 861 1,768 4,338 2,183 -1,279 -787 -1,759 696

Assets -2,878 -2,418 -2,489 -2,382 -4,499 -1,494 -2,638 929

Long-term 458 419 52 -397 -351 -770 -690 553

- Commercial banks -49 -1 -126 -522 -375 -835 -747 372

- Government 286 284 126 47 16 20 28 76

Short-term -3,336 -2,836 -2,541 -1,985 -4,149 -723 -1,948 376

- Commercial banks 74 -149 -92 -1,804 -3,847 -671 -1,844 570

- Governmentb -3,341 -2,642 -2,268 .. .. .. .. ..

Table AI.1 (cont'd)


1993 1994 1995 1996 1997 1998 1999 2000

Liabilities 3,739 4,185 6,827 4,565 3,220 706 879 -233

Long-term 348 690 3,315 3,507 758 -139 -37 -679

- Commercial banks -73 389 2,275 1,722 -469 -446 -206 -817

- Government -117 -182 -454 -263 -365 -365 -185 -48

Short-term 3,392 3,495 3,512 1,058 2,462 845 916 447

- Czech National Bank 57 -57 3 -2 0 0 3 0

- Commercial banks 85 487 1,041 1,126 2,124 758 1,058 -99

- Governmentb 3,152 3,008 2,120 -33 -2 -7 -3 ..

D. Net errors and omissions, valuation changes 104 -213 595 -721 353 351 141 -166

E. Change in reserves (-increase) -3,029 -2,372 -7,458 828 1,767 -1,941 -1,651 -819

.. Not available.

a Data for 1993-98 according to methodology for customs statistics in effect from 1 January 1996. Data for 1999-2000 according to revised methodology for customs statistics in effect from 1 July 2000.

b Absence of data represents the clearing settlement with the Slovak Republic, which ended in 1995 as regards assets, and in 1999 as regards liabilities.

Source: Czech National Bank online information. Available at: http://193.85.4.105/en/_statistika/statistika/pb_index.htm [20 March 2001].

Table AI.2 Exports by destination, 1993-2000(US$ million and per cent)

Description 1993 1994 1995 1996 1997 1998 1999 2000

Total exports (US$ million) 12,892 14,081 21,686 21,907 22,746 28,306 26,843 29,053

(Per cent of total)America 3.1 3.4 2.9 3.2 3.5 3.1 3.2 3.6

United States 1.8 2.1 1.9 2.1 2.6 2.2 2.4 2.5 Europe 86.7 88.4 90.8 90.3 91.3 92.7 92.8 91.8

EU(15) 49.7 54.2 61.0 58.3 59.9 65.9 69.2 68.6 Germany 26.0 29.5 37.6 36.0 35.7 40.6 42.1 40.5

Austria 6.0 7.2 6.6 6.4 6.4 6.3 6.4 6.0 France 1.9 2.6 2.6 2.9 3.2 3.3 3.9 4.0

Italy 5.2 4.5 3.7 3.3 3.7 3.6 3.6 3.8 United Kingdom 3.0 2.8 3.2 2.5 3.0 3.3 3.4 4.3

EFTA 1.4 1.7 1.7 1.6 1.7 1.7 1.9 1.8 Eastern Europe 33.0 29.9 25.8 27.7 27.0 22.7 19.5 19.1

Slovak Republic 21.0 16.5 13.9 14.2 12.9 10.0 8.2 7.7 Poland 2.7 3.9 4.5 5.5 5.7 5.4 5.5 5.4 Hungary 2.3 2.6 1.7 1.8 1.9 1.8 1.8 1.9 Former USSR 6.3 6.2 5.0 5.5 5.8 4.5 3.1 3.1

Russian Federation 4.5 3.9 2.9 3.2 3.4 2.4 1.4 1.3 Other Europe 2.6 2.6 2.4 2.8 2.7 2.3 2.2 2.4

Asia 7.9 6.2 4.7 4.4 4.0 3.1 3.1 3.7

Africa 2.0 1.6 1.1 1.6 0.8 0.7 0.6 0.5

Other 0.3 0.4 0.4 0.5 0.4 0.4 0.3 0.3

Memorandum:

CEFTA 27.5 24.9 21.8 23.2 22.1 19.0 17.4 16.7

Source: UNSD, Comtrade database (SITC Rev.3).


Table AI.3Imports by origin, 1993-2000(US$ million and per cent)

Description 1993 1994 1995 1996 1997 1998 1999 2000

Total imports (US$ million) 12,704 14,951 25,303 27,717 27,184 30,524 28,837 32,243

(Per cent of total)America 4.6 5.1 4.6 4.7 5.0 4.8 5.2 5.6

United States 3.0 3.4 3.4 3.4 3.8 3.7 4.1 4.4 Europe 88.6 87.5 88.6 87.6 85.8 85.6 84.9 84.9

EU(15) 52.9 55.6 61.1 62.4 61.5 64.5 64.0 61.9 Germany 25.7 25.4 31.7 29.8 31.9 35.9 33.9 32.2 Italy 4.8 5.1 5.3 5.9 5.5 5.1 5.3 5.2 France 3.1 3.7 4.0 4.2 4.1 4.4 5.3 5.0 Austria 7.9 8.1 6.9 5.8 6.1 6.0 5.6 4.9 United Kingdom 2.7 3.0 3.8 3.8 3.9 3.8 3.8 4.1

EFTA 2.6 2.6 2.2 2.0 2.2 2.2 2.4 2.5 Eastern Europe 32.2 28.3 24.3 22.1 21.1 17.9 17.4 19.4

Slovak Republic 16.7 14.3 11.8 9.6 8.4 6.9 6.1 6.0 Poland 2.5 2.9 2.7 2.9 3.2 3.2 3.5 3.6 Hungary 1.4 1.1 0.9 1.0 1.3 1.3 1.6 1.6 Former USSR 11.4 9.9 8.8 8.5 8.1 6.4 6.0 8.1

Russian Federation 10.0 8.4 7.4 7.4 6.8 5.2 4.8 6.4 Other Europe 0.9 1.1 1.0 1.1 1.1 1.0 1.1 1.1

Asia 5.8 6.4 5.7 6.4 6.7 7.2 7.4 7.6 East Asia 5.2 5.7 5.1 5.5 6.0 6.6 6.8 6.9 China 0.6 0.7 0.8 1.1 1.4 1.7 2.0 2.2 Japan 1.8 2.0 1.7 1.7 1.9 1.9 2.0 1.9

Africa 0.4 0.5 0.4 0.5 0.7 0.6 0.7 0.7

Other 0.5 0.5 0.6 0.8 1.7 1.7 1.8 1.2

Memorandum:

CEFTA 21.2 18.9 16.0 14.2 13.6 12.1 12.0 11.9



Table AI.4Exports by group of products, 1993-2000(US$ million and per cent)

Description 1993 1994 1995 1996 1997 1998 1999 2000

Total exports (US$ million) 12,892 14,081 21,686 21,907 22,746 28,306 26,843 29,053

(Per cent of total)

Total primary products 20.8 20.4 16.8 15.7 14.1 11.7 11.5 11.5 Agriculture 11.4 12.0 9.7 8.7 8.1 6.9 6.7 6.6

Food 8.1 7.1 6.0 5.5 5.3 4.6 4.2 4.1 Agricultural raw material 3.3 4.9 3.7 3.2 2.8 2.3 2.6 2.4

Mining 9.3 8.5 7.0 7.0 6.0 4.8 4.7 4.9 Fuels 6.1 5.6 4.3 4.5 3.8 3.0 2.8 3.1

Manufactures 77.4 77.6 81.6 83.9 85.5 88.0 88.1 88.1 Iron and steel 10.2 9.2 8.7 7.0 6.2 5.4 4.3 4.2 Chemicals 9.3 10.0 9.2 9.0 8.8 7.4 7.2 7.1 Other semi-manufactures 14.5 15.4 15.8 16.3 15.0 15.1 16.0 15.9 Machinery and transport equipment 26.2 24.5 29.3 32.7 37.7 42.6 43.2 44.5

Power generating machines 1.8 1.4 1.6 2.0 1.8 1.9 1.9 2.2 Other non-electrical machinery 9.0 8.6 9.8 10.7 11.1 11.4 10.6 10.3 Office machines & telecommunication equipment

1.3 1.8 2.2 2.3 2.2 3.2 2.6 4.4

Other electrical machines 3.6 3.0 6.2 6.1 7.2 8.8 8.5 9.3 Automotive products 8.4 7.4 7.1 9.1 12.1 13.7 15.4 16.1 Other transport equipment 2.1 2.3 2.4 2.5 3.2 3.6 4.2 2.2

Textiles 4.8 4.7 6.2 4.5 4.3 4.1 4.1 4.2 Clothing 2.4 2.6 2.4 2.8 2.7 2.6 2.5 2.2 Other consumer goods 10.0 11.3 9.9 11.5 10.7 10.9 10.9 10.0

Other 1.8 1.9 1.7 0.5 0.4 0.4 0.4 0.4



Table AI.5Imports by group of products, 1993-2000(US$ million and per cent)

Description 1993 1994 1995 1996 1997 1998 1999 2000

Total imports (US$ million) 12,704 14,951 25,303 27,717 27,184 30,524 28,837 32,243

(Per cent of total)

Total primary products 25.7 25.7 21.4 21.5 21.2 18.0 17.6 20.3 Agriculture 10.6 11.6 9.4 9.3 8.8 8.2 7.8 7.0

Food 7.9 8.7 6.7 7.0 6.6 6.0 5.7 4.9 Mining 15.1 14.2 12.0 12.2 12.4 9.8 9.9 13.3

Ores and other minerals 2.2 1.9 1.7 1.3 1.4 1.4 1.0 1.0 Non-ferrous metals 2.1 2.2 2.5 2.2 2.4 2.3 2.3 2.6 Fuels 10.9 10.0 7.8 8.7 8.6 6.1 6.5 9.6

Manufactures 73.5 73.7 77.4 78.4 78.7 81.9 82.3 79.7 Iron and steel 3.5 3.8 4.9 4.0 4.1 4.8 4.0 4.2 Chemicals 12.2 13.2 11.8 11.8 12.2 11.7 12.0 11.2 Other semi-manufactures 8.0 8.5 9.2 9.4 9.3 10.2 10.4 10.1 Machinery and transport equipment 35.9 34.6 36.1 38.1 38.0 40.2 40.4 40.1

Power generating machines 0.9 0.4 1.0 1.2 1.2 1.7 1.7 1.7 Other non-electrical machinery 15.4 14.3 13.1 12.4 11.4 10.8 10.8 10.2 Office machines & telecommunication equipment

8.6 8.7 7.8 8.1 7.3 7.4 7.6 9.6

Other electrical machines 5.0 5.0 7.0 7.9 8.3 10.0 8.5 8.6 Automotive products 4.9 5.3 5.8 6.9 8.0 7.4 8.3 8.0 Other transport equipment 1.2 0.9 1.4 1.6 1.8 2.9 3.4 2.0

Textiles 2.2 2.1 3.7 3.6 3.6 4.0 3.9 3.7 Clothing 1.5 1.5 1.8 1.8 1.6 1.5 1.5 1.3 Other consumer goods 10.1 10.2 9.8 9.6 9.9 9.5 10.2 8.9

Other 0.8 0.5 1.2 0.1 0.1 0.1 0.1 0.1



Table AII.1Selected Czech notifications to the WTO, June 2001

WTO Agreement Description of requirement Periodicity Document No. of most

recent notification Comment

Agreement on Agriculture

(Articles 10 and 18.2; ES:1+)

Export subsidies Annual, 90 days after end of calendar year

G/AG/N/CZE/31, 25.06.01

In 2000, applied to milk powder, butter, cheeses, other dairy products potato starch, pork, and malt

(Article 18.2; DS:1+) Domestic support Annual, 90 days after end of calendar year

G/AG/N/CZE/25, 21.08.00

Total 1999 AMS of CZK 4,351 million

(Article 12) Export restrictions and prohibitions

Ad hoc G/AG/N/CZE/11, 13.03.97

Temporary quantitative restrictions on oats, cereals grains otherwise worked, bran, sharps and other residues, oilcake and other solid residues of rape or colza seeds

(Article 5.7 or 18.2) Special safeguard measures

Annual, 90 days after end of calendar year

G/AG/N/CZE/30, 25.06.01

No special safeguard provision in 2000

(Article 5.7 or 18.2) Tariff quotas Annual, 90 days after end of calendar year

G/AG/N/CZE/29, 25.06.01

Administration of tariff quotas for 2000

Anti-dumping (Agreement on Implementation of Article VI of the GATT 1994)

(Article 16.4) Anti-dumpling measures Twice annually G/ADP/N/72/CZE, 02.03.01

(Article 16.5) Competent authorities Once, then changes G/ADP/N/14/Add.10, 19.04.00

(Article 18.5) Laws and regulations Mar. 1995, then changes G/ADP/N/1/CZE/2/Corr.1, 26.10.99

No specific legislation notified on countervailing measures

Customs Valuation (Agreement on Implementation of Article VII of the GATT 1994)

(Article 22.2) Laws and regulations Once, then changes G/VAL/N/1/CZE/3, 03.09.99

General Agreement on Trade in Services (GATS)

(Article III:3) Notification of significant changes over the past year in the rules governing scheduled sectors

Annual S/C/N/126, 03.08.00

(Article III:4 or IV:2) Contact/enquiry points Once, then changes S/ENQ/33/Corr.1, 14.05.97

Contact points

(Article V:7) Agreements Once, then changes S/C/N/26, 09.10.96 European Communities

(Article VII:4) Recognition measures Within 12 months of WTO Agreement

Not received

General Agreement on Tariffs and Trade 1994

(Article XXIV:7 (a)) Regional trade agreements

Ad hoc WT/REG67/N/1, 24.03.99

Free-trade agreement with Turkey

(Article XXVIII:5) Reservation of right to modify schedule and concessions

Ad hoc G/MA/30, 16.01.97 Right reserved until 1 January 2000

(Table AII.1 cont'd)

(Article XII) Balance-of-payments Ad hoc WT/BOP/N/29, 15.09.97 Import surcharge between




provisions 21 April and 21 August 1997

Agreement on Import Licensing Procedures

(Articles 1.4(a) and 8.2(b))

Laws and regulations Once, then changes G/LIC/N/1/CZE/2, 19.03.01

(Article 7.3) Replies to questionnaire on procedures

Annual G/LIC/N/3/CZE/1 27.04.01

Agreement on Preshipment Inspection

(Article 5) Laws and regulations Once, then changes G/PSI/N/1/Add.3, 12.07.96

No PSI regulation

Quantitative Restrictions (Decision on Notification Procedures for Quantitative Restrictions)

(Decision of the Council for Trade in Goods (G/L/59))

Non-tariff measures Every two years, beginning Jan. 1996

Not received

Agreement on Rules of Origin

(Article 5.1 and Annex II(4))

Preferential rules of origin

Within 90 days of WTO Agreement

G/RO/N/2, 22.06.95

(Article 5.1 and Annex II (4))

Preferential rules of origin


G/RO/N/22, 16.09.98 System of European cumulation of rules of origin

Agreement on Safeguards

(Article 12.6) Laws and regulations Once, then changes G/SG/N/1/CZE/3, 03.01.01

(Article 12.1(a), (b),(c))

Measures Ad hoc G/SG/N/6/CZE/1/Suppl.1, 18.03.99

(Article 12.4) Provisional Ad hoc G/SG/N/7/CZE/2, 10.01.01

(Article 9.1, footnote 2)

Developing country measure

Ad hoc G/SG/N/11/CZE/1/Suppl.1, 02.11.99

Agreement on the Application of Sanitary and Phytosanitary Measures

(Article 3, Annex B) Enquiry point Once, then changes G/SPS/ENQ/11/Add.1, 07.03.01

(Article 7, Annex B) SPS measure Ad hoc G/SPS/N/CZE/23/Rev.1, 08.01.01G/SPS/N/CZE/24, 20.04.01

23 measures notified

State Trading (Understanding on the Interpretation of Article XVII of the GATT 1994)

(Article XVII:4(a)) State-trading activities Annual G/STR/N/7/CZE, 19.03.01

No state-trading enterprises

Agreement on Subsidies and Countervailing Measures

(Article 25.1 - GATT 1994 Article XVI:1)

Specific subsidies Annual G/SCM/N/25/CZE, 04.05.00

(Article 25.11) Countervailing measures Twice annually G/SCM/N/62/Add.1, 25.10.00

No countervailing duty action notified up to end-2000

(Article 25.12) Competent authority Once, then changes G/SCM/N/18/Add.10, 19.05.00


(Article 29.3) Export-related subsidy Earliest possible date of G/SCM/N/9/CZE, "Nil return"




programmes WTO Agreement 24.07.95

(Article 32.6) Laws and regulations By 15 March 1995, then changes

G/SCM/N/1/Add.1 02.03.95

No law or legislation in force

Agreement on Technical Barriers to Trade(Articles 10.1 and 10.3)

Enquiry point Once, then changes G/TBT/ENQ/14, 22.03.99

(Article 10.7) Agreement with other country

Ad hoc G/TBT/10.7/N/1, 12.02.97

Ukraine

(Article 15.2) Laws and regulations Once, then changes G/TBT/2/Add.31, 18.02.97G/TBT/2/Suppl.1, 21.06.01

(Article 2.9) Measures Ad hoc G/TBT/N/CZE/3, 26.02.01G/TBT/N/CZE/6, 20.06.01

111 measures notified between 01.01.95-08.03.01

(Annex 3(c)) Acceptance of Code Once, then changes G/TBT/CS/N/8/Corr.2, 22.05.01

Agreement on Textile and Clothing(Article 2.7) First integration Once G/TMB/N/74/Add.2,

23.11.97

(Article 2.11) Second integration Once G/TMB/N/208, Add.2, & G/TMT/N/74/Add.2, 23.09.97

(Article 2.11) Third integration Once G/TMB/N/374, 18.01.01G/TMB/N/374/Add.1, 06.04.01

(Article 6.1) Transitional safeguards By 1 March 1995 G/TMB/N/38, 07.03.95 Retains right to use the safeguard provisions of Article 6

Agreement on Trade-Related Aspect of Intellectual Property Rights (TRIPS)(Article 63.2 and decision of the TRIPS Council of 21 Nov. 1995)

Laws and regulations Not specified IP/N/1/CZE/E/1, 14.01.00

Legislation related to audio-visual works; radio and television broadcasting; copyright and related rights; trademarks; geographical indications; industrial property; layout-design (topographies) of integrated circuits; literary, scientific and artistic work; inventions and industrial designs; patents; appellations of origin; utility models; plant and animal variety; and border measures

(Article 69) Contact points By 1 Jan. 1996 IP/N/3/Rev.2/Add.3, 27.06.97





Agreement on Trade-Related Investment Measures (TRIMs)

(Article 5.1) TRIMs inconsistent with the Agreement


Not received

(Article 6.2) Publications in which TRIMs may be found

Once, then changes G/TRIMS/N/2/Rev.8, 19.07.00

Investment measures are published in the Collection of Laws

Source: WTO documents.


Table AII.2The Czech Republic's preferential trade agreements, April 2001

CountryDate of signing agreement(entry into force)

Major Czech exports and imports covered Other major areas of cooperation

Slovak Republic 29 October 1992(1 January 1993)

Duty free on all products Customs Union Agreement, competition, monopolies, procurement, services, agricultural policies

European Union (EU)

16 December 1991 (provisionally 1 March 1992; entry into force 1 February 1995)a

Phased reduction of duties on industrial products; duty free on industrial products since 1 January 2001Gradual liberalization of trade in agricultural and processed agricultural products

Approximation of Czech legislation with that of the EU in areas of customs, competition, intellectual property, consumer protection, indirect taxation, services, standards and technical regulations, transport and environment

European Free Trade Agreement (EFTA)b

20 March 1992(1 July 1992)c

Phased reduction of duties on industrial products; duty free on industrial products since 1 January 2001Duty free on some fish, marine and processed agricultural products. Other agricultural products are covered by bilateral agreements between EFTA States and the Czech Republic

Competition, intellectual property, monopolies, public procurement, state aid

Central European Free Trade Agreement (CEFTA)d

21 December 1992(provisionally 1 March 1993; entry into force 1 July 1994)

Phased reduction of duties on industrial products; duty free on industrial products since 1 January 1999 (except cars by 1 January 2002)Tariff concessions, also in the form of tarifff quotas, on some agricultural products

As above

Latvia 15 April 1996 (provisionally 1 July 1996; entry into force 1 September 1997)

Phased reduction of duties on industrial products; duty free since 1 July 1997Tariff concessions, also in the form of tariff quotas, on some agricultural product

As above

Estonia 19 April 1996 (provisionally 1 July 1996; entry into force 12 February 1998)

Phased reduction of duties on industrial products; duty free since 1 January 2001Tariff concessions, also in the form of tariff quotas, on some agricultural products

As above

Israel 20 May 1996 (provisionally 1 January 1997; entry into force 1 December 1997)

Phased reduction of duties on industrial products; duty free since 1 September 2000Tariff concessions, also in the form of tariff quotas, on some agricultural products

As above

Turkey 3 October 1997(1 September 1998)


As above

Lithuania 14 October 1996(1 July 1997)


As above

a The first Europe Agreement establishing an association between the Czech and Slovak Federal Republic (CSFR) and the European Communities was signed on 16 December 1991. Pending ratification of the Agreement, its provisions concerning trade entered into force on 1 March 1992 under an Interim Agreement. The dissolution of the former CSFR made it necessary to negotiate a new Europe Agreement. This Agreement, which did not alter the content of the Interim Agreement, was signed on 4 October 1993 and entered into force on 1 February 1995.

b Member countries are Iceland, Liechtenstein, Norway, and Switzerland.c The Agreement was originally signed between the EFTA States and the CSFR. Following the dissolution of the CSFR, a Protocol on the

succession by the Czech Republic to the Agreement was signed on 19 April 1993.d Member countries are Czech Republic, Hungary, Poland, and Slovak Republic (in 1994 as the founding members), Slovenia (since

1 January 1996), Romania (since 1 July 1997) and Bulgaria (since 1 July 1998). The Czech Republic's bilateral free-trade agreements with Slovenia (since 1 January 1994), Romania (since 1 January 1995) and Bulgaria (since 1 January 1996) ceased to be applied upon accession of these countries to CEFTA.



Table AIII.1Average tariffs and bindings, by HS chapter(Per cent)

HSCode Description No. of

lines

1999 Imports

(% of total)

Simple MFN rate 2001 Bound rate (by 2005)

Simple average Range Standard

deviationSimple average Range Standard

deviation

Total 11,433 100.0 6.1 0 - 148 10.0 6.0 0 - 125 9.6

01-24 Agriculture 2,431 6.1 12.0 0 - 148 19.5 11.8 0 - 125 18.6

25-97 Industry 9,002 93.9 4.5 0 - 89 3.6 4.4 0 - 89 3.6

01 Live animals 47 0.0 30.1 0 - 100 38.0 30.1 0 - 100 38.002 Meat and edible meat offal 229 0.2 26.4 0 - 125 28.5 26.9 0 - 125 28.903 Fish and crustaceans, molluscs and other aquatic

invertebrates309 0.1 0.1 0 - 10 0.7 0.1 0 - 10 0.7

04 Dairy produce; birds' eggs; natural honey; edible products of animal origin, not elsewhere specified or included

178 0.2 21.1 2.8 - 68 14.1 21.1 2.8 - 68 14.1

05 Products of animal origin, not elsewhere specified or included

24 0.1 0.0 0 - 0 0.0 0.0 0 - 0 0.0

06 Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage

52 0.2 3.1 0 - 17 4.8 3.1 0 - 17 4.8

07 Edible vegetables and certain roots and tubers 125 0.4 5.9 0 - 100 13.1 5.9 0 - 100 13.108 Edible fruit and nuts; peel of citrus fruit or melons 156 0.7 3.5 0 - 85 7.7 3.5 0 - 85 7.709 Coffee, tea, maté and spices 42 0.3 1.1 0 - 8.5 2.5 1.1 0 - 8.5 2.510 Cereals 59 0.1 4.5 0 - 25.5 8.6 4.5 0 - 25.5 8.611 Products of the milling industry; malt; starches;

inulin; wheat gluten83 0.0 16.1 0 - 80 11.6 16.1 0 - 80 11.6

12 Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal plants; straw and fodder

81 0.2 3.4 0 - 60 9.7 3.4 0 - 60 9.7

13 Lac; gums, resins and other vegetable saps and extracts

20 0.0 0.7 0 - 7.6 1.8 0.7 0 - 7.6 1.8

14 Vegetable plaiting materials; vegetable products not elsewhere specified or included

10 0.0 0.0 0 0.0 0.0 0 - 0 0.0

15 Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes

125 0.3 5.8 0 - 30 8.6 5.8 0 - 30 8.6

16 Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates

92 0.2 8.6 0 - 25.5 9.1 8.6 0 - 25.5 9.1

17 Sugars and sugar confectionery 47 0.2 44.9 0 - 148 44.4 33.0 0 - 68 21.618 Cocoa and cocoa preparations 27 0.3 10.6 0 - 12.7 4.3 10.6 0 - 12.7 4.319 Preparations of cereals, flour, starch or milk;

pastrycooks' products48 0.3 8.0 0 - 25 6.3 8.0 0 - 25 6.3

20 Preparations of vegetables, fruit, nuts or other parts of plants

307 0.3 6.6 0 - 20 6.0 6.6 0 - 20 6.0

21 Miscellaneous edible preparations 42 0.6 7.9 0 - 29 7.2 7.9 0 - 29 7.222 Beverages, spirits and vinegar 219 0.3 32.2 0 - 77 23.5 32.2 0 - 77 23.523 Residues and waste from the food industries;

prepared animal fodder67 0.5 0.9 0 - 2 1.0 0.9 0 - 2 1.0

24 Tobacco and manufactured tobacco substitutes 42 0.5 18.8 3.4 - 55 16.5 18.8 3.4 - 55 16.525 Salt; sulphur; earths and stone; plastering materials,

lime and cement109 0.4 0.7 0 - 4.3 1.5 0.7 0 - 4.3 1.5

26 Ores, slag and ash 51 0.5 0.1 0 - 3.4 0.5 0.1 0 - 3.4 0.527 Mineral fuels, mineral oils and products of their

distillation; bituminous substances; mineral waxes191 6.5 3.0 0 - 6.4 2.0 3.1 0 - 6.4 2.0

28 Inorganic chemicals; organic or inorganic compounds of precious metals, of rare-earth metals, of radioactive elements or of isotopes

309 0.9 3.5 0 - 5.5 2.1 3.5 0 - 5.5 2.1

29 Organic chemicals 1,004 1.0 3.7 0 - 6.5 1.6 2.7 0 - 6.5 1.830 Pharmaceutical products 66 2.6 0.0 0 0.0 0.0 0 - 0 0.0

Table AIII.1 (cont'd)



lines

1999 Imports

(% of total)




deviation

31 Fertilisers 37 0.2 2.7 0 - 6.5 2.6 2.7 0 - 6.5 2.632 Tanning or dyeing extracts; tannins and their

derivatives; dyes, pigments and other colouring matter; paints and varnishes; putty and other mastics; inks

67 1.1 4.1 0 - 6.5 1.9 4.3 0 - 6.5 1.8

33 Essential oils and resinoids; perfumery, cosmetic or toilet preparations soap, organic surface-active agents, washing preparations, lubricating preparations, artificial waxes, prepared waxes, polishing or scouring preparations, candles and similar articles

62 0.8 4.2 0 - 21.2 3.5 4.2 0 - 21.2 3.5

34 Soap, organic surface-active agents, washing preparations, lubricating preparations, artificial waxes, prepared waxes, polishing or scouring preparations, candles and similar articles, modelling pastes, 'dental waxes and dental preparations with a basis

37 0.5 4.4 1.5 - 6.5 1.4 4.3 1.5 - 6.5 1.5

35 Albuminoidal substances; modified starches; glues; enzymes

35 0.2 11.8 1 - 89 23.3 11.7 1 - 89 23.3

36 Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations

10 0.0 4.4 2.5 - 6.5 1.2 4.4 2.5 - 6.5 1.2

37 Photographic or cinematographic goods 62 0.2 2.7 0 - 6.5 2.8 2.7 0 - 6.5 2.838 Miscellaneous chemical products 137 1.2 4.2 0 - 6.5 1.9 4.3 0 - 6.5 1.939 Plastics and articles thereof 307 5.4 4.9 0 - 6.5 1.6 4.8 0 - 6.5 1.740 Rubber and articles thereof 106 1.7 4.0 0 - 9.6 3.0 4.1 0 - 9.6 3.041 Raw hides and skins (other than furskins) and leather 57 0.4 0.8 0 - 5.1 1.0 0.8 0 - 5.1 1.042 Articles of leather; saddlery and harness; travel

goods, handbags and similar containers; articles of animal gut (other than silk-worm gut)

45 0.3 4.6 0 - 6 2.1 4.6 0 - 6 2.1

43 Furskins and artificial fur; manufactures thereof 47 0.0 0.9 0 - 5.8 1.8 0.9 0 - 5.8 1.844 Wood and articles of wood; wood charcoal 163 0.9 3.1 0 - 9.6 2.7 3.3 0 - 9.6 2.745 Cork and articles of cork 13 0.0 1.9 0 - 4.3 1.2 1.9 0 - 4.3 1.246 Manufactures of straw, of esparto or of other plaiting

materials; basketware and wickerwork12 0.0 3.7 1.6 - 4.3 1.0 3.7 1.6 - 4.3 1.0

47 Pulp of wood or of other fibrous cellulosic material; recovered (waste and scrap) paper and paperboard

28 0.3 0.0 0 0.0 4.3 0 - 20 8.4

48 Paper and paperboard; articles of paper pulp, of paper or of paperboard

365 2.3 7.6 0 - 20 4.1 7.8 0 - 20 4.0

49 Printed books, newspapers, pictures and other products of the printing industry; manuscripts, typescripts and plans

26 0.9 2.8 0 - 6.1 2.3 2.8 0 - 6.1 2.3

50 Silk 26 0.0 2.8 0 - 4.3 1.5 2.8 0 - 4.3 1.551 Wool, fine or coarse animal hair; horsehair yarn and

woven fabric78 0.5 3.4 0 - 6.5 2.9 3.1 0 - 5.8 2.5

52 Cotton 162 0.8 5.8 0 - 10.3 2.0 5.2 0 - 9.6 1.853 Other vegetable textile fibres; paper yarn and woven

fabrics of paper yarn44 0.1 2.7 0 - 10.3 3.6 2.4 0 - 10 3.3

54 Man-made filaments 88 0.8 4.1 0 - 7.9 2.7 4.9 2.9 - 7 1.955 Man-made staple fibres 183 0.6 4.5 0 - 17.2 2.6 4.6 0 - 16 2.156 Wadding, felt and nonwovens; special yarns; twine,

cordage, ropes and cables and articles thereof66 0.3 6.9 0 - 10.3 3.3 6.6 0 - 10.4 3.0

57 Carpets and other textile floor coverings 39 0.2 9.6 3.7 - 12.9

3.4 8.8 3.4 - 12 3.2

58 Special woven fabrics; tufted textile fabrics; lace; tapestries; trimmings; embroidery

56 0.2 6.2 0 - 10.3 2.2 5.6 0 - 9.6 2.1

59 Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use

44 0.5 5.8 0 - 9.5 2.3 5.3 0 - 8.8 2.2

60 Knitted or crocheted fabrics 55 0.3 6.2 4.9 - 7.9 0.9 5.5 4.4 - 7 0.7




lines

1999 Imports

(% of total)




deviation

61 Articles of apparel and clothing accessories, knitted or crocheted

179 0.6 8.2 2.1 - 9.9 2.5 7.6 1.9 - 9.4 2.5

62 Articles of apparel and clothing accessories, not knitted or crocheted

209 0.8 9.9 2.9 - 15.8

3.1 9.3 2.7 - 15 3.1

63 Other made up textile articles; sets; worn clothing and worn textile articles; rags

101 0.3 9.0 0 - 30.1 7.7 8.3 0 - 28 7.2

64 Footwear, gaiters and the like; parts of such articles 109 0.6 8.1 2 - 12 2.3 8.1 2 - 12 2.365 Headgear and parts thereof 15 0.0 3.8 1.2 - 7 1.5 3.8 1.2 - 7 1.566 Umbrellas, sun umbrellas, walking-sticks, seat-

sticks, whips, riding-crops and parts thereof

10 0.0 5.5 4 - 7 1.3 5.5 4 - 7 1.3

67 Prepared feathers and down and articles made of feathers or of down; artificial flowers; articles of human hair

8 0.0 3.3 1.4 - 7 2.5 3.3 1.4 - 7 2.5

68 Articles of stone, plaster, cement, asbestos, mica or similar materials

77 0.5 4.9 0 - 7 2.4 4.9 0 - 7 2.4

69 Ceramic products 53 0.6 6.5 0.2 - 15.6

4.4 6.5 0.2 - 15.6

4.4

70 Glass and glassware 137 0.7 8.4 0 - 25.6 5.3 8.5 0 - 25.6 5.271 Natural or cultured pearls, precious or semi-precious

stones, precious metals, metals clad with precious metal, and articles thereof; imitation jewellery; coin

62 0.3 1.9 0 - 12.8 3.2 1.9 0 - 12.8 3.2

72 Iron and steel 432 3.2 4.4 0 - 8.4 1.8 4.4 0 - 8.4 1.873 Articles of iron or steel 274 2.9 5.6 0 - 9 1.3 5.7 0.6 - 9 1.374 Copper and articles thereof 70 0.7 3.1 0 - 7.4 2.1 3.1 0 - 7.4 2.175 Nickel and articles thereof 18 0.0 1.6 0 - 5.2 1.5 1.6 0 - 5.2 1.576 Aluminium and articles thereof 64 1.7 4.3 0 - 7.8 2.1 4.3 0 - 7.8 2.178 Lead and articles thereof 13 0.1 2.6 0 - 8 2.7 2.6 0 - 8 2.779 Zinc and articles thereof 12 0.1 2.2 0 - 5.2 2.4 2.2 0 - 5.2 2.480 Tin and articles thereof 8 0.0 1.5 0 - 4 1.5 1.7 0 - 4 1.681 Other base metals; cermets; articles thereof 73 0.3 0.1 0 - 3 0.5 0.1 0 - 3 0.582 Tools, implements, cutlery, spoons and forks, of base

metal; parts thereof of base metal105 0.6 4.2 1.9 - 9.6 1.8 4.2 1.9 - 9.6 1.8

83 Miscellaneous articles of base metal 50 0.8 4.3 2.7 - 5.8 0.8 4.3 2.7 - 5.8 0.884 Nuclear reactors, boilers, machinery and mechanical

appliances; parts thereof1,040 16.3 3.6 0 - 10 1.7 3.6 0 - 10 1.8

85 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles

691 14.2 3.7 0 - 19.2 3.0 3.7 0 - 19.2 3.2

86 Railway or tramway locomotives, rolling-stock and parts thereof; railway or tramway track fixtures and fittings and parts thereof; mechanical (including electro-mechanical) traffic signalling equipment of all kinds

40 0.4 5.5 2.7 - 8 1.6 5.5 2.7 - 8 1.6

87 Vehicles other than railway or tramway rolling-stock, and parts and accessories thereof

198 7.8 8.1 0 - 17.1 5.7 8.1 0 - 17.1 5.7

88 Aircraft, spacecraft, and parts thereof 33 2.0 3.8 0 - 6.4 2.3 4.4 1.6 - 6.4 1.789 Ships, boats and floating structures 39 0.0 4.5 1.9 - 5.8 0.8 4.5 1.9 - 5.8 0.890 Optical, photographic, cinematographic, measuring,

checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof

314 2.7 2.7 0 – 21.6 2.7 2.6 0 - 21.6 2.8

91 Clocks and watches and parts thereof 74 0.1 2.5 0.8 - 5.1 1.0 2.5 0.8 - 5.1 1.092 Musical instruments; parts and accessories of such

articles33 0.1 3.8 0 - 15 3.7 5.2 0 - 29 7.7

93 Arms and ammunition; parts and accessories thereof 28 0.1 2.7 1.2 - 6.4 1.6 2.7 1.2 - 6.4 1.6




lines

1999 Imports

(% of total)




deviation

94 Furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; illuminated signs, illuminated name-plates and the like; prefabricated buildings

88 1.5 6.2 2.3 - 9.6 1.8 6.2 2.3 - 9.6 1.8

95 Toys, games and sports requisites; parts and accessories thereof

78 0.6 5.8 1.4 - 7 1.3 5.8 1.4 - 7 1.3

96 Miscellaneous manufactured articles 73 0.3 3.9 1.2 - 7 1.3 3.9 1.2 - 7 1.397 Works of art, collectors' pieces and antiques 7 0.4 1.0 0 - 7 2.6 1.0 0 - 7 2.6

Note: Tariff averages exclude the in-quota rates and are based on the out-of-quota rates.

Source: WTO Secretariat calculations based on data provided by the Czech authorities; and UNSD, Comtrade database.


Table AIII.2Tariff quotas, 2001

Products HS coverageTariff rates (per cent) Quota

(tonnes)

Country receiving preferenceOut-of-quota In-quota

A. Uruguay Round tariff quotasLive bovine animals, meat of bovine animals 0102 90; 0201; 0202 34 to 97.5 30 11,125Live swine, meat of swine 0103 92 28.6 25 24,720

0203 38.5 30Live sheep, meat of sheep ex 0104 10 100 5 370.2

ex 0204 109 to 125.1 20Meat of poultry ex 0207 43 24 3,471Meat offal, salted, in brine, dried 0210 20 25 to 30 30 410.1

ex 0210 90 55 to 125 24Milk and cream 0402 10; 0402 21 37 30 1,910

0402 29 37 35Yoghurt 0403 10 24 10 6,670.4Butter ex 0405 68 32 2,781Potatoes ex 0701 90 100 50 33,583.3Grapes, fresh ex 0806 10 85 28 3,929.7Wheat starch, maize starch, potato starch 1108 11 60 53.2 3,216.7

1108 12 60 55.61108 13 80 63.4

Rape or colza seeds ex 1205 60 20 16,200Sunflower seeds ex 1206 00 40 10 1,701.2Sunflower or safflower oil 1512 11 20 18 7,705.1

1512 19 20 19Rape, colza or mustard oil 1514 10; ex 1514 90 24.8 to 26 20 4,750Margarine and vegetable fats 1517 10 30 20 17,181.4

1517 90 23 to 30 10Glucose and glucose syrup 1702 30; 1702 40 60 50 1,421.9Pasta ex 1902 14.5 to 19.2 12 4,783.1

1902 30 19 10Ice cream 2105 00 29 11 2,075Waters containing added sweetening matters 2202 10 22 11 450,946 hlWine of grapes 2204 30 to 75 25 91,905 hlUn-denaturated ethyl alcohol (>= 80% vol) 2207 10 77 70 26,505 hlUn-denaturated ethyl alcohol (< 80% vol) ex 2208 56 56 126,203 hlDextrins and other modified starches 3505 10 53.5 to 89 52 3,211.8B. Temporary MFN tariff quotaCane molasse 1703 10 21.5 6 3,500Other molasse 1703 90 21.5 6 30,000Paper and paperboard, coated 4811 31 5.8 0 6,000Flax, raw or retted 5301 10 10 0 1,500Flax, broken or scutched 5301 21 10 0 3,000Synthetic filament ex 5402 10 7.5 0 4,500

5402 20 7.2 0 13,000ex 5402 7.8 to 7.9 0 3,000ex 5402 7.2 0 3,250

C. Tariff quota under preferential agreementLive turkey 0105 12 6 0 1.2 IsraelMeat of swine, pigmeat ex 0203, ex 0210 19 to 38.5 0 10,750 European UnionMeat of poultry ex 0207 3 to 43 0 4,300 European Union

43 28 50 Slovenia12 to 15 9 100 Bulgaria

Powdered milk 0402 10; 0402 21; 0402 29

37 24 1,000 European Union

Yoghurt 0403 10 24 15 400 Hungary24 10 100 Bulgaria24 15 200 Turkey

Buttermilk, curdled milk ex 0403 90 25 15 TurkeyButter ex 0405 68 15 3,450 European Union




(tonnes)Country receiving preference

Out-of-quota In-quota

Cheese 0406 4.9, 8.5 & 9 0 5,482 European Union4.9, 8.5 & 9 0 200 Hungary

8.5 & 9 8 150 Slovenia8.5 & 9 5 100 Bulgaria

4.9, 8.5 & 9 0 100 TurkeyNatural honey 0409 17 0 1,075 European UnionFlowers ex 0603 10 4 to 17 0 800 IsraelPotatoes ex 0701 90 100 6 15,000 European Union

100 10 10,000 Hungary100 30 6,000 Slovenia100 50 500 Bulgaria

Tomatoes 0702 00 12.7 8 2,000 European Union12.7 7.5 1,200 Romania12.7 5 1,000 Bulgaria12.7 7 250 Turkey

Onions and garlic ex 0703 10 10 6 100 BulgariaCucumbers 0707 00 14 to 15 9 1,000 Romania

14 to 15 9 1,000 BulgariaChampignons ex 0709 51 8 5 100 BulgariaCapsicums ex 0709 60 8.5 5 1,000 Bulgaria

8.5 6 400 IsraelDried vegetables 0712 90 1.5 to 8 0 200 IsraelGrapes 0806 10 12 to 85 0 to 11.5 500 Bulgaria

12 to 85 0 400 IsraelMelons 0807 11 8 5 500 TurkeyWatermelons 0807 19 8 5.5 500 IsraelApples ex 0808 10 15 5 3,000 SloveniaCherries ex 0809 20 2.5 & 8.5 2 &5 450 BulgariaPeaches ex 0809 30 8 4 500 TurkeyPlums ex 0809 40 7 5 800 Romania

7 0 450 BulgariaMaize 1005 90 17 4.2 74,300 European UnionMalt 1107 6.4 to 25 5 6,000 HungarySunflower ex 1206 00 40 10 3,000 BulgariaLinseed oil 1515 11 2 0 1,000 European UnionOther vegetable fats ex 1515 90 2 to 17 0 to 12.7 1,000 European UnionAnimal fats and oils 1516 10 15 10 400 European UnionVegetable fats and oils ex 1516 20 12 0 2,000 European UnionMargarine and vegetable fats 1517 23 to 30 15.0 200 Turkey

30 10 530 European UnionSmoked sausage 1601 00 18 15 200 Slovenia

18 10 100 Bulgaria18 0 600 Hungary

1601 00 18 0 2,645 European Union1602 41 18 01602 42 18 01602 49 18 0

Prepared or preserved meat of turkey 1602 31 18 0 1,075 European UnionPrepared or preserved meat of fowls of the species gallus domesticus

1602 32 18 0

Prepared or preserved meat, other 1602 39 18 0Prepared or preserved meat of liver of any animal

ex 1602 20 18 9 107 European Union

Prepared or preserved meat of bovine animals 1602 50 18 9 European UnionPreserved meat 1602 41, ex 1602 90 18 to 25.5 15 200 Slovenia

3 to 25.5 2.5 to 15 100 BulgariaSugar confectionery 1704 12.7 7 200 TurkeySugar confectionery 1704 90 12.7 7.5 200 Israel

Chocolate 1806 12.7 7.5 200 Israel12.7 10 50 Latvia12.7 7 100 Turkey12.7 7.5 200 Bulgaria




(tonnes)Country receiving preference

Out-of-quota In-quota

Preparations for infant use 1901 10 9.3 8 100 SloveniaPasta ex 1902 14.5 to 19 12 200 Bulgaria

14.5 to 19.2 5 100 LatviaProducts from cereal ex 1904 8 to 25 4 to 17 200 IsraelBakers´ wares ex1905 5 to 7 4.5 200 IsraelCucumbers 2001 10 18.7 0 1,075 European UnionVegetables preserved by vinegar ex 2001 90 4 to 9 2.5 to 6 100 BulgariaPreserved tomatoes 2002 15 8 100 TurkeyHomogenised vegetables ex 2005 90 18.7 10 100 BulgariaHomogenised preparations ex 2007 20 0 322 European UnionJam 4 to 20 2.5 to 12 150 Bulgaria

20 11 300 TurkeyTomato juice 2009 50 12 10 500 SloveniaApple juice containing added sugar ex 2009 70 20 0 6,450 European UnionApple juice not containing added sugar ex 2009 70 20 0 10,750 European UnionFruit juice ex 2009 3.2 to 4 2 700 TurkeySoups 2104 4 to 6.8 0 100 TurkeySoups 2104 10 4 3.5 100 IsraelIce cream 2105 29 15 1,500 Hungary

29 15 500 Slovenia29 10 50 Latvia

Beer 2203 20 10 9,000 hl Hungary20 12 4,000 hl Slovenia20 10 250 hl Latvia20 0 1,500 hl Turkey

Wine 2204 30 to 75 10 18,000 hl Hungary30 to 75 25 15,000 hl Romania30 to 75 25 4,000 hl Slovenia

Wine maximum 2 litre 2204 21 30 25 3,000 hl BulgariaWine 2 litre and more 2204 29 75 25 12,000 hl BulgariaVermouth 2205 14 10 5,000 hl SloveniaVodka ex 2208 60 25 15 80,000 hl European UnionFood preparations not elsewhere specified or included

ex 2106 90 21.2 12.5 2,000 hl Poland

Spirits 2208 20 21.2 12.52208 30 8.5 52208 40 12.7 7.52208 60; 2208 70; 2208 90

56 28

2208 60; 2208 70; 2208 90

56 30 2,500 hl Hungary

ex 2208 12.7 to 56 10 to 20 500 hl Sloveniaex 2208 8.5 to 21.2 5 to 12 500 hl Bulgaria2208.60; 2208 70; 2208 90

56 25 1,000 hl Israel

Vinegar 2209 5.3 5 250 SloveniaUn-manufactured tobacco ex 2401 3.4 to 6 2.4 2,000 European Union

3.4 to 6 2 to 4.5 200 Bulgaria6 3 200 Turkey

Tobacco 2402 40 to 55 26 to 32.5 50 PolandProducts of tobacco 2403 22.1 13

ex 2402 55 30 100 Slovenia



Table AIII.3Import and export licensing, 2001

Summary product description HS categorya Tonnes Reason for restriction

A. Imports subject to automatic licensing, without volume limits (Annex 1 to Government Regulation No. 185/2000 Coll.)

Agricultural and food products, tobacco and substitutes of tobacco products, raw materials, products of chemical industry and similar industry branches, used textile products, dangerous poisons, poisons, auxiliary chemical substances and precursors, pharmaceutical products, waste

ex1207, ex1211, 2207, 2208, ex2402, 2403, ex2523, 2702, ex2704, ex2709, ex2710, ex2711, ex2716, ex2801, ex2804, ex2806, ex2807, ex2811, ex2812, ex2813, ex2827, ex2833, ex2837, ex2841, ex2842, ex2843, ex2848, ex2850, ex2851, ex2902, ex2903, ex2904, ex2905, ex2907, ex2908, ex2909, ex2910, ex2912, ex2914, ex2915, ex2916, ex2919, ex2920, ex2921, ex2922, ex2924, ex2925, ex2926, ex2926, ex2927, ex2928, ex2929, ex2930, ex2931, ex2932, ex2933, ex2934, ex2938, ex2939, ex3002, ex3102, ex3505, ex3824, 4202, 4203, ex4707, ex6309, 6310, 7204, ex7404, ex7602, ex7802, ex8112

Statistical and monitoring purposes

B. Exports subject to automatic licensing, without volume limits (Annex 2 to Government Regulation No. 185/2000 Coll.)

Raw materials and products, raw leathers, wood and wooden products, precious metals, common metals, iron, steel and products from it, dangerous poisons, poisons, auxiliary chemical substances and precursors, pharmaceutical products, waste

ex1207, ex1211, 2701, 2702, ex2704, ex4101, ex4403, 7102, 7106, 7108, ex7109, 7110, ex7111, ex2801, ex2804, ex2806, ex2807, ex2811, ex2812, ex2813, ex2827, ex2833, ex2837, ex2841, ex2842, ex2843, ex2848, ex2850, ex2851, ex2902, ex2903, ex2904, ex2905, ex2907, ex2908, ex2909, ex2910, ex2912, ex2914, ex2915, ex2916, ex2919, ex2920, ex2921, ex2922, ex2924, ex2925, ex2926, ex2927, ex2928, ex2929, ex2930, ex2931, ex2932, ex2933, ex2934, ex2938, ex2939, ex3002, 7204, ex7404, ex7602, ex7802, ex8112

Statistical and monitoring purposes

C. Imports subject to non-automatic licensing, with volume limits (Annex 3 to Government Regulation No. 185/2000 Coll.)

Certain sugar from Slovakia 1701 3,500 Safeguard measureIsoglucose from Slovakia ex1702 5,000 As aboveCoal, briquettes and similar solid fuels from coal from Poland and Ukraine

2701 1,223,000 Protection of domestic industry

Common metals, iron and steel products from the European Union and the United States

ex7208, ex7209, ex7211, ex7216, 7304, 7305, 7306 Monitoring purposes

D. Exports subject to non-automatic licensing, with volume limits (Annex 4 to Government Regulation No 185/2000 Coll.)

Live bovine animals (up to 300 kg.) ex0102 7,000 Shortages on domestic market

Cows ex0102 1,000 As aboveLive swine up to 50 kg. ex0103 600 As aboveWheat and meslin ex1001 300,000 As aboveRye 1002 5,000 As aboveBarley ex1003 10,000 As aboveMaize ex1005 20,000 As aboveTextiles products and clothing exported to the United States or Canada

5112, 6203, 6202, 6203, 5515, ex6203, ex5111, ex5112, ex5515, ex6302

Varying Restriction under the WTO Agreement on Textiles and Clothing

E. Imports and exports subject to a security licence (Annex 5 to Government Regulation No. 185/2000 Coll.)

Propellant powders, prepared explosives, safety fuses, detonating fuses, percussion, other telescopic sights, revolver and pistols, other firearms, arms, parts and accessories – other than those covered by Act No. 21/1997 Coll, on Exports and Imports of Goods and Technologies subject to International Control Regime

ex3601, ex3602, ex3603, ex9013, ex9302, 9303, ex9304, 9305, 9306,

Security reasons

a The symbol ex in front of the HS code indicates that the restriction applies only to part of the HS-four digit level.

Source: WTO Secretariat, based on information provided by the authorities.


Table AIV.1Summary of the State aid system in the Czech Republic

Type of incentive Conditions Legislation

A. INVESTMENT INCENTIVE PACKAGE

1. Tax holiday: Corporate tax relief for ten years (newly established companies) or partial corporate tax discount for five years (existing companies).

Acquisition of a new manufacturing plant or the expansion or the modernization of an existing oneInvestment in manufacturing and a minimum of 50% of the cost consisting of machinery listed on a government-approved list of high-tech machinerya

Investment of at least CZK 350 million (CZK 175 million in an area with an unemployment rate of at least 25% above the average rate)Acquisition of machinery of at least 40% of the total value of acquired assetsEnvironmentally friendly production

Act No. 72/2000 Coll. on Investment Incentives, and Act No. 586/92 Coll. on Income Tax

2. Job-creation subsidy: Grant of CZK 200,000 or CZK 120,000 or CZK 80,000 per job created in a district with an unemployment rate of over 50% or 25-50% or 1-25% above the average unemployment rate, respectively. If 1,000 jobs are created, the maximum subsidy level is awarded, regardless of unemployment rate.

As above Act No. 72/2000 Coll. on Investment Incentives, Act No. 1/1991 Coll. on Employment and jurisdiction of Czech authorities in the area of employment, and Government Decree No. 134/2000 Coll.

3. Training and re-training subsidy: Subsidy of 35% of the aggregate costs for training and re-training in a district with an unemployment rate 50% higher than the average unemployment rate. The subsidy is 30% or 25% if the unemployment rate is 25-50% or 1-25% above the average unemployment rate.bc

As above As above

4. Property/infrastructure support: Subsidy covering up to 60% of the costs; and transfer of land at a discount rate.

No condition Act No. 72/2000 Coll. on Investment Incentives, Act No. 95/1999 Coll., Act No. 569/1991 Coll., Act No. 299/1991 Coll., and Act No. 183/1993 Coll.

5. Duty & VAT exemption: Remission of duties and VAT on machines, machinery equipment, instruments and tools (Chapters 84 and 85 of the Customs Tariff).

Total amount of investment of more than CZK 10 million A good with comparable characteristics may not be produced locallyLocated in a special customs-free zone for 100% exporting firms

Act No. 13/1993 Coll. on Tariff, Act No. 113/1997 Coll., and Decree No. 313/1998 Coll.

B. EXPORT PROMOTION

1. Export credit insurance: The Export Guarantee and Insurance Cooperation (EGAP) insures export credits against commercial and political risks at a premium rate of 1.5-7.5% of the insured amount.

Czech-based enterprise, regardless of ownershipMinimum of 50% of domestic supplies in total export value

Act No. 58/1995 Coll. on Insurance and Financing with State Support, Government Decision No. 747 of 18 November 1999, and Act No. 576 Coll. on Budgetary Regulations

1.1 International trade fairs: The Ministry of Industry and Trade organizes official Czech participation in international trade fairs and exhibitions.

In accordance with the promotion concept prepared by MIT and the General Principles for Organizing and Financing Official Presentations abroad

Act No. 576/1990 Coll. on Budgetary Regulations

Table AIV.1 (cont'd)



1.2 International trade fairs: CzechTrade organizes participation in fairs and exhibitions, and provides contribution to SME exhibitors for coverage of ground costs.

Only those fairs and exhibitions on the list of official events


2. Export finance: The Czech Export Bank (ČEB) compensates up to 70% of the excess of domestic interest rates over foreign rates.

Czech-based enterprise, regardless of ownership

Act No. 58/1995 Coll. on Insurance and Financing with State Support, Act No. 576 Coll. on Budgetary Regulations

3. Export promotion and marketing assistance: Ministry of Industry and Trade and CzechTrade contribute towards the cost for official participation in international fairs.

Contribution is set up on general rules Act No. 576/1990 Coll. on Budgetary Regulations

4. Export subsides: Export subsidies for milk powder, butter, cheeses, other dairy products, and potato starch.

In accordance with the Schedule XCII - Section II - export subsidies

As above

C. STATE GUARANTEES

1. State Loan Guarantees Programme: State guarantee paid to the bank, with varying duration of the guarantees according to the nature of individual projects and dependent on the maturity of the guaranteed credits.

Approved development programmes directed to the infrastructure and restructuring of some areas


D. SMALL AND MEDIUM-SIZED ENTERPRISES PROGRAMMES

1. Guarantee: Subsidy up to 9% per year for bank loan or leasing guarantee. For businesses in economically weak regions, guarantee for a bank loan in the amount of 75% of the principle and unpaid interest not exceeding 30% of the principle balance.

Company with less than 250 employees; less than 50 employees for regional guarantee

Government Decision No. 1352/1999 Coll. on Programme of Small and Medium-Sized Enterprises

2. Credit: Loan of up to CZK 10 million with six years maturity at an interest rate of 7% .

Company with less than 50 employeesMinimum increase of one in the number of employeesEmployment of at least one disabled personDocumented environmental benefitsIncreased exports

As above

3. Market: Loan of up to CZK 5 million at an interest rate of 7%; and grants to cover 50% of the costs needed in the process of certification under ISO 9000 or ISO 14000 up to CZK 200,000 (or for an integrated system up to CZK 300,000). Interest rate 3% if project is undertaken in a sub-programme Region or Village.

Company with less than 250 employeesExistence of a QA system certified under ISO 9000 or a certified environmental management system under ISO 14000 or the implementation of EMAS programme by certified bodies

As above

4. Capital: Bank guarantees for venture capital covering up to 70% of invested capital (up to a maximum of CZK 15 million) and subsidies for investment of up to 3% of the amount covered by the guarantee (maximum of CZK 250,000). The price of the guarantee shall not exceed 1.5% of the total amount of the guarantee (0.75% if maturity is one year or shorter).

Company with less than 250 employeesThe company must achieve at least 50% of its revenue from industrial, construction or handicraft manufacture, trade or services activities

As above

5. Mobile Shop: Subsidy of 50% of the cost for the acquisition of a mobile shop or, of part of the business, a car or trailer (up to a maximum of CZK 1.5 million).

Company with less than 250 employees As above

6. Co-operation: Subsidy of 50% of the cost (up to a maximum of CZK 1 million).

An entity with at least 20 members As above




7. Region: Loan of up to CZK 20 million at an interest rate of 12% in regions requiring economic restructuring or 7% in economically weak regions.

Company located in economically challenged regionsIncrease the number of employees by at least two (five) if the loan is less than CZK 10 (20) million

As above

8. Community: Loan of up to CZK 20 million at an interest rate of 6% for the financing of projects.

Company with less than 250 employees and located in communities with a population below 2,000Increase the number of employees by at least two (five) if the loan is less than CZK 10 (20) million

As above

9. Preference: Credit of up to CZK 5 million with six years maturity at an interest rate of 5%.

Company with less than 25 employees located in regions experiencing major economic dislocationIncrease the number of employees by at least two

As above

10. Operation: Loan up to CZK 1 million with two years maturity with an interest rate of 10%.

Company with less than 50 employees located in weak regions or regions experiencing major economic restructuringLoans for inventory procurement

As above

11. Border: Loan of up to CZK 7 million with six years maturity at an interest rate of 7%.

Company with less than 50 employees located in the border areasIncrease the number of employees by at least twoInvestment of 10-90% of the equity made by a partner from Germany or AustriaExport the equivalent of at least 10% of the total revenues during the loan periodAt least 10% of the loan must be used for acquisition of know-how, machinery, equipment or means of transport from suppliers located in Germany or Austria

As above

12. Regeneration: Loan of up to CZK 20 million at an interest rate of 3%.

Company with less than 50 employees located in national heritage areasIncrease the number of employees by at least two (five) if the loan is less than CZK 10 (20) million

As above

13. Special: Grant of up to CZK 4,000 per newly recruited employee (maximum CZK 3 million) from social groups requiring special attention.

Creation of jobs for people from problematic social groups

As above

E. RESEARCH AND DEVELOPMENT

1. Research & Development: Grant equivalent to the uncollected interest amounting to 10% of granted loans.

R&D, particularly in technology and engineering projects

Act No. 300/1992 Coll. on State Support for Research and Development Act No. 576/1990 Coll. on Budgetary Regulations

F. ENVIRONMENT

1. Environment support: Grant equivalent to the uncollected interest amounting to 10% of granted loans.

Companies involved in the State Environmental Fund schemes on air protection, air improvement, protection of waters, disposal of waste, etc.

Act No. 388/1991 Coll. on State Environmental Fund




G. MINING INDUSTRY

1. Mining: Grant to cover the costs stemming from structural adjustments in coal uranium and ore mining activities and progressive reduction of production. Allocation from State budget for remedy of damages caused to the environment by extraction of exclusive deposits

Companies engaged in coal, uranium and ore mining activities and covered by the government resolution and technical plan of liquidation of mining plants, compensation of dismissed employees, compensation of ecological damage and re-cultivation of environment

Act No. 576/1990 Coll. on Budgetary Regulations – Annual Budget Act, and Act No. 44/1988 Coll. on Protection and Use of Mineral Resources

H. TRANSPORT

1. Transport: Grant equivalent to the uncollected interest amounting to 10% of granted loans.

Railway (State Railway Company), air (national airline company), and bus transport companies (84 entities)

Annual Budget Act

I. AGRICULTURE (see above for export subsidies)

1. Support and Guarantee Fund for Farmers and Forestry (SGFFF):

1.1 Operation: Guarantees for commercial loans to the level of 30% and defrayal of 7.5 percentage points of interests on loans for seeds and seedlings, harvesting works including transportation of products, chemical protection, and purchase of industrial fertilizers.

50% of the revenues coming from agricultural or forestry production

Act No. 160/1997 Coll., Act No. 576/1990 Coll. on Budgetary Regulations, Decision 160/1997 Coll. by the Government Establishing the Farming and Forestry Support and Guarantee Fund (PGRLF), Principles of State Support in the Agriculture

1.2 Farmer: Guarantees for commercial credits to the level of 60% and defrayal of 7.5 percentage points of interests on loans of an investment character.

As above As above

1.3 Processor: Guarantees for commercial loans to the amount of 60% and defrayal of interests on loans for the purchase of machines, equipment and technology for the processing of agricultural products.

As above As above

1.4 Sales Organisation: Guarantees for commercial loans to the amount of 30% and defrayal of part of the interest on loans for the purchase of property serving the purposes of processing and sale of agricultural products.

As above As above

1.5 Young Farmers: Assistance for young entrepreneurs on family farms in the form of a subsidy of further 2.5 percentage points on loans provided within the framework of Operation and Farmer programmes.

As above As above

1.6 Exports: Defrayal of 10 percentage points of interest rates for export credits.

As above As above

3. Assistance Programmes:

3.1 Support of sale of diesel for farmers: a scheme promoting use of so-called "green diesel" by farmers

Tax reduction applied on fuel Act No. 252/1977 on Agriculture

3.2 Irrigation of arable land: support for optimal irrigation of agricultural areas (due to very high cost of water)

Partial repayment of real cost of water used for irrigation of crops and plantations

As above




3.3 Genetic sources: a scheme operating under the National Plan of the protection of biological diversity

Programme consists mainly of payments in connection with creation or maintenance of gene pools and payments of insemination doses or embryos of selected animal kinds included in the National Plan

Act No. 252/1997 on AgricultureCommunication by the Ministry of Foreign Affairs No. 134/1999 on conclusion of the Convention on Biological Diversity

4. Product-specific AMS support:

4.1 Old Kladruby horse breeding: maintaining genetic reserves of the herd (unique in the Czech Republic) and preservation of buildings of Kladruby stud, which was classified as a monument of national cultural heritage

Support involves repayments of daily feed consumption, primes for newly born foals selected for gene pool, repayments of costs of stud books, administration and publication of results, financing of necessary reconstruction and maintenance of historically classified buildings of the stud

Act No. 252/1997 Coll. on Agriculture

4.2 Production of potato starch: stabilization of cultivation of potatoes usable for starch production

Potato starch production from 75,000 t. potatoes of net weight; non-investment, direct, non-repayable subsidy

As above

4.3 Donation of milk to primary schools: promotion of drinking of milk by primary school pupils aiming to achieve an optimal weekly consumption of milk

Payments of pasteurized milk in boxes delivered to primary schools involved in the programme

As above

5. Government service programmes:

5.1 Vineyards, hop gardens and fruit orchards: the purpose is the necessary renewal of vineyards

The financial subsidies are based on support programmes

As above

5.2 Bee keeping: The main purpose of the programme is to provide for the pollination of agriculture crops

The principles setting conditions for granting financial subsidies based on support programmes

As above

5.3 Non-food production use of land fund:

- Support for dairy cows: restructuring of herds through upgrading of their genetic potential; not related to milk production

The financial subsidies are based on support programmes

As above

- Sheep: The aid is provided to sheep breeders in the less-favoured mountainous regions for environmental purposes (such as soil and landscape formation, reduction of eroded arable land)

Sheep breeding on agricultural land with an average value of up to CZK 3.1/m2

Government Regulation No. 24/1999 Coll. on assistance programmes to support the non-productive functions of agriculture

- Growing of flax: support for procedures of flax for technical use

Payments on one ha. of harvested area (uprooted flax)

Act No. 252/1997 on Agriculture

5.4 Maintenance of agricultural land: the programme supports less-favourable areas and for non-production functions of agriculture, promoting landscape maintenance

The financial contribution depends on the specific programmes and forms of promotion activities

Act No. 252/1997 Coll. on Agriculture and Government Regulation No. 24/1999 Coll. on assistance programmes to support the non-productive functions of agriculture

5.5 Beef-cattle farming: the aid is provided as structural adjustment assistance through investment

The principles set for granting financial As above



aids subsidies on support programmes

5.6 Support for ecological agriculture: covers losses, up to the amounts of the subsidies of individual programmes, incurred as a result of using ecological farming methods

Types of principal support programmes with direct positive environmental impact such as change in structure of agriculture production using grassing, maintenance of gramineous growths and organic farming

As above


5.7 Calcification with the help of limestone powder: the purpose is to reduce the acidity of the soil

Arable soil in land-register territories with a soil reaction of up to 5.5 pH

As above

5.8 Crop-production restructuring through afforestation: the programme provides for changes in the structure of agricultural production by afforestation of agricultural land

Change in the structure of agricultural production by afforestation of agricultural land

As above

5.9 Pest and disease control services: quarantine pest eradication in field and forest crops

100% of eradication expenses and 100% of average market value of destroyed crop

Act No. 147/1996 Coll. on Phytosanitary Care and Decree No. 83/1997 Coll.

5.10 Consultation: Information on System of Agriculture Counselling Organization and Function

Sources of funds to support extension is in the Budget of Ministry of Agriculture

Act No. 576/1990 Coll. on Budgetary Regulation -Annual Act on Budget

5.11 Support to the foundation and activity of producer marketing organization: support to legislation promoting the establishment and activity of marketing organizations of producers

Promotion of producers' sales, organizations of development and activity

Act No. 252/1997 Coll. on Agriculture

J. CINEMATOGRAPHY

1. Cinematography: Grant or loan for projects related to Czech cinematography

Creation or production of a work of Czech cinematography artDistribution of a valuable cinematography workPromotion or technical development and modernization of Czech cinematographyForeign participation equity lower than 50%

Act No. 241/1992 on State Fund of the Czech Republic to Assist and Promote Czech Cinematography

K. TOURISM

1. Fund for Support of Development of Tourism in the Czech Republic: Support for the development and reconstruction of the Czech spa for 2001

Promotion programmes of municipalities and owners of spa facilities to approved infrastructure and restructuring of spas, including education projects

Government Decision No. 1075/2000 Coll. on the State Programme of Development of Tourism in the Czech Republic

L. OTHER

1. Corporate tax discounts: deduction from the corporate tax base of 10-15% (investment credits) of the cost of new machinery and technologies. Aid in the form of partial or complete remittal of tax accessories or tax arrears.

The investor should be the first owner or leaseholder

Act No. 337/1992 Coll. on Administration of Taxes and Fees

2. Real estate tax relief: real estate tax relief for five years.

The investor should switch from coal or oil to gas, electricity or other alternative sources of energy for heating their premises

Act No. 582/1991 Coll. on Organization and Implementation of Social Security

3. Insurance: support in form of advantage in area of compulsory insurance, and complete or partial remittal of penalty for due premiums for social security and public health insurance.

.. Act No. 48/1997 Coll. on Public Health Insurance

4. Regional employment programmes: investment subsidies up to 50% of total investment cost (max CZK 200 million).

Investment in the North-West Bohemian and North Moravian regions

Act No. 1/1991 Coll. on Employment


.. Not available.a Examples of industries excluded are: the extraction of minerals, electric power generation and distribution, gas and water

treatment and distribution, construction industry, repair of motor vehicles, trade and other services.b Investors who do not meet eligibility criteria for investment incentives may apply for other job-creation, training, and re-training

grants directly at the local labour offices.c An additional 10% if the persons included in the programme are provided enhanced care in mediating employment (as defined in

Section 2(2) of Government Decree No. 134/2000 Coll.).Source: WTO Secretariat ,based on information provided by the Czech authorities.

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