In 1995, the United States trade deficit with Hungary was $252 million, $91 million greater than that in 1994. U.S. merchandise exports to Hungary in 1995 were $295 million, 4.5 percent less than those in 1994. Hungary was the United States seventy-third largest export market in 1995. U.S. imports from Hungary totaled $547 million in 1994, an increase of $77 million from those in 1994.

The stock of U.S. foreign direct investment in Hungary totaled more than $5 billion in 1995.

Hungary, the first of the former Communist Central and Eastern European countries to experiment with economic reform, continues to push forward economic restructuring and the establishment of a market economy. In 1995, GDP rose by two percent, a slight drop from the 2.9 percent growth of 1994, but the second year of growth after having declined dramatically in 1990-1993. Industrial growth was up 5.8 percent, and unemployment near 10 percent in all four quarters of 1995. Since 1989, Hungary has attracted more than half of all foreign investment in the region, to a total stock of over $12 billion. An aggressive economic stabilization program was launched in March of 1995. Hungary's current account deficit declined from $3.9 billion in 1994 to about $2.5 billion in 1995. The consolidated budget deficit for 1995 equaled 6.5 percent of GDP, versus an original trend of over 10 percent of GDP. A four percent deficit/GDP ratio is projected for 1996.

Hungary's reserves at the end of 1995 swelled to over $12 billion, and 1995 privatization income of $3.5 billion was partly used to prepay debt principal, further reducing the debt service burden of the government. The macroeconomic picture began to show signs of improvement by late 1995, with the growth of exports proportionally higher than that of imports. The impact of privatization and direct foreign investment will have positive multiplier effects throughout the economy. Continued growth in foreign investment will depend on the government's ability to maintain current economic stability, reduce inflation and successfully pursue its goal of privatizing 80 percent of GDP by the end of 1997. Privatization boosted the private sector from about 60 percent to 70 percent of GDP at the end of 1995.

IMPORT POLICIES

Imports have been progressively liberalized in an effort to encourage competition and to allow imports of materials necessary for restructuring. Over 93 percent of products can be imported without an import license. (Exclusions include energy, fuels, precious metals, military goods, and certain pharmaceutical products.) Hungary's state monopoly on foreign trade has been eliminated.

Hungary's 1996 import quota on certain consumer and industrial goods will be around $500 million, versus $520 million in 1995, and $750 million in 1994. Hungary plans to eliminate quotas on cars, footwear and household detergent over the next two years. Under an agreement with the WTO, Hungary will eliminate quotas on textiles, clothing, and other industrial products by 2004. The quotas have been filled each year, and some U.S. companies have complained that the quotas restrict their access to the Hungarian market. Uncertainty about future quota levels also concerns importers.

Hungary's average import duties have been cut from 50 to 13 percent over the past three years. Under the terms of the Uruguay Round, Hungary will cut its tariffs even further, to an average of eight percent. In March 1995, Hungary introduced an eight percent surcharge for all imports, including agricultural imports. This surcharge will likely be terminated in 1997. The Hungarian government announced its new EU Harmonized Tariff Schedule for 1996 wherein tariffs for imports from the EU and CEFTA were lowered, effectively making exports from the U.S. less competitive.

The Hungarian government is expected to grant import licenses for 85,000 new cars and 56,000 used cars in 1996, up seven percent from 1995, but well below the 200,000 cars imported in 1991. Half of each category was reserved for imports from the EU. The customs duty law of 1995 forbids the importation of used cars over four years old. Specialized older vehicles may still be imported after passing a special technical test. However, these regulations, combined with standards for used cars which tend to exclude older U.S. models, will effectively curb most U.S. imports in this category.

Customs fees for 1996 have dropped from the 1995 level of five percent to two percent. This ad valorem fee now includes a one percent statistical fee and a one percent customs clearance fee. These fees are scheduled to be eliminated by January 1, 1997.

In January 1995, Hungary increased its border protection by raising many agricultural tariffs to Uruguay Round ceiling bindings, and introduced numerous tariff rate import quotas that are assigned to MFN or preferential suppliers. The quotas could impede imports given the complex nature of their management.

As part of its Association Agreement with the EU, Hungary will phase out import fees on EU products through 1997. In late 1994, the U.S. Trade Representative launched a review of Hungary's reverse tariff preferences to the EU. The review was part of a review of all GSP beneficiaries mandated by a Statement of Administrative Action attached to the Uruguay Round Act.

EXPORT SUBSIDIES

Hungary maintained agricultural export subsidies in excess of its WTO commitments during 1995 and is budgeted to exceed its commitments again in 1996. Hungary has sought agreement to have its WTO commitments modified. Most recently, Hungary proposed a revised schedule which would substantially increase its ability to subsidize exports above current expenditure levels. G-8 countries (New Zealand, Australia, Argentina, Japan, European Union, Canada, Thailand and the United States), as well as Uruguay, have been conducting informal consultations on the Hungarian export subsidies issue under the sponsorship of the Chairman of the WTO Committee on Agriculture since the fall of 1995. Despite encouragement from its trading partners to adjust policies, Hungary has insisted on modifying its obligations. Extensive bilateral and multilateral consultations have failed to resolve the problem.

LACK OF INTELLECTUAL PROPERTY PROTECTION

Patent Protection

Protection of U.S. intellectual property in Hungary was strengthened following the conclusion of a comprehensive bilateral intellectual property agreement in July 1993. Under the IPR agreement, the Republic

of Hungary agreed to provide product patent protection; under prior law, patents were limited to industrial processes. Because of this change, Hungary was removed from the "Special 301" "priority watch list" in 1994. Legislation to provide the protection called for in the IPR Agreement was passed by the Hungarian Parliament and entered into force on July 1, 1994.

The IPR agreement also provides transitional protection for U.S. pharmaceutical products otherwise ineligible for new product patents in Hungary; provides that patents are available and patent rights are enjoyable regardless of whether products are imported or locally produced; and provides limitations on the use of compulsory licenses.

Copyright Protection

Hungary has copyright laws which largely conform to international standards. The 1993 U.S.-Hungary IPR Agreement should strengthen copyright protection in Hungary. The Agreement requires an exclusive right to authorize the public communication of work, including to perform, project, exhibit, broadcast, transmit, retransmit or display; it also requires that protected rights be freely and separately exploitable and conferrable (contract rights), and requires an exclusive right to authorize the first public distribution including importation for protected works.

In previous years, some U.S. companies complained about widespread video piracy in Hungary. In May 1993, Hungary added stiff penalties for copyright infringement to its Criminal Code. Despite numerous enforcement actions taken against film and video pirates since that time, limited law enforcement resources and a thriving underground economy ensure that piracy continues. U.S. firms estimate their losses at approximately $25 million annually. A media law passed in late 1995 links broadcast transmission licenses to respect for intellectual property rights.

The 1993 IPR Agreement also requires Hungary to protect all types of computer programs as literary works under the meaning of the Berne Convention; protect collections or compilations of data where the selection and arrangement of the contents constitute copyrightable authorship; and grant an exclusive right to authorize or prohibit the commercial rental of a computer program.

Protection is also provided for sound recordings, trademarks, semiconductor layout designs, and trade secrets. U.S. industry continues to report problems with sales of counterfeited U.S. trademarked products in Hungary, such as blue jeans imported from third countries. Counterfeited computer software is reported to be widely used in Hungary.

SERVICES BARRIERS

A liberalized currency convertibility law took effect on January 1, 1996. Hungary prohibits bank branching and maintains screening of investments in financial institutions and in insurance, although a large number of bank subsidiaries and insurance companies with foreign ownership operate in Hungary. Screening of most investments will be eliminated under Hungary's Uruguay Round services schedule. The Parliament is expected to pass in 1996 a revised law on financial institutions that should address some of these concerns. The Hungarian government has promised to allow bank branching by the end of 1997.

While there are currently no film quotas for private television, private national and regional television must fill 15 to 20 percent of their air time with Hungarian-made productions, excluding films, advertising, news, sports, and game and quiz shows.

Hungarian film quotas in the 15 to 20 percent range apply to public television. Excluding advertising, news, sports, game, and quiz shows, after 1997, public television will also be required to fill 70 percent of its air time with European production, 51 percent of which must be Hungarian. If one were to assume that 30 to 40 percent of all broadcast time is spent on the excluded categories, then the maximum amount of time available for non-European, non-film programming on public television is in the 20 percent range. Although these quotas are not currently seen as cutting actual U.S. market share, they could hamper future U.S. market share growth in the public sector. Nonetheless, further privatization of the television industry should boost the overall U.S. market share.

INVESTMENT BARRIERS

The Hungarian Government passed a new privatization law in May 1995, that reduces to 25 percent from 50 percent the average amount of permanent ownership the government would retain in the 163 companies it has identified as requiring permanent state participation. This opened a significant number of companies to foreign investment. Small portions of other privatized firms are being reserved for Hungarian citizens, for employee stock ownership programs (ESPOS) and/or management buyouts. Potential investors have complained that some regulations surrounding privatization are non-transparent subject to abrupt change. U.S. and U.K. companies involved in power station tenders in late 1995 complained of being allowed limited time to prepare their bids, although continental European firms did not complain about the same time limits. Privatization advanced substantially in late 1995, most notably in the energy, telecommunication and banking sectors. A law on simplified privatization facilitates the process for acquiring companies with less than 500 employees, and valued at less than $4 million.

Hungary terminated its blanket tax incentives on foreign investment as of January 1, 1994, and replaced them with incentives open to all large investors, based on export promotion, reinvestment of profits, and job creation in areas of high unemployment. The new customs law passed in late 1995 eliminates duty free importation of capital goods by foreign-owned companies, although companies were allowed to register previously planned investments and extend duty free status to these items. The new law was intended to level the playing field for domestic investors, but it eliminated an incentive to investment in Hungary.

GOVERNMENT PROCUREMENT

Foreign access to government-funded construction and service or supply contracts is regulated by the new Act on Public Procurement that took effect in November 1995. Tenders must be invited for the purchase of goods worth over HUF 10 million. However, bids with more than 50 percent Hungarian content will be considered equal to bids up to 10 percent lower in price. Purchases deemed to be of state secrecy, as well as purchases of gas, oil, and electricity, remain exempt from these new regulations.

STANDARDS

Import animal and plant health (APH) regulations of Hungary: Some import regulations limit or delay imports of breeding animals, semen, and planting seeds. Relevant authorities (Institute for Agricultural qualification and Ministry of Agriculture) set minimum breeding value limits to import sires and semen, and require repeated tests before distribution of the import shipment. These measures may restrict the import, increase costs, and expand the duration of the import process. The process of registration and testing of new plant varieties imported is time-consuming and costly as well.