No. 62, 2000 - Role of Regional Integration Initiatives in Trade Liberalisation of Transition Economies

Various regional economic co-operation initiatives that have emerged since 1990 in Europe are part of a process of constructing the European economic area. Preferential trade arrangements established in this context intend, not to be inward-looking, but to facilitate the participation of their members in the world economy. The initiatives are part of a strategy to liberalise and open national economies and implement export- and foreign investment-led policies. For the participating transition economies, regional economic cooperation represents a useful support for their accession to the EU.
During the twentieth century, economic co-operation between Central and Eastern European countries (CEECs) has gone through several radical changes. These generally small-sized economies concluded economic partnership agreements in the shadow of big powers (Germany and later the Soviet Union), which had strong political and economic interests in the region. Mutual economic relations were established on a bilateral basis and regional trade developed within this framework. Despite geographical proximity, mutual historical experiences and potential economic benefits stemming from regional cooperation, intra-regional trade tended to decrease. Political considerations were given priority, and comparative advantages remained under-utilised. The declining and limited scope of intra-regional trade has strengthened the conviction that small economies could not become natural partners and their relations could only be guaranteed through the intermediation of major economies in the region.
The changes in the political systems of former socialist countries in 1989 resulted in an external opening and liberalisation of foreign trade and capital flows. At the beginning of 1990s, the Council for Mutual Economic Assistance (CMEA) was abolished and, following the emergence of custom tariffs and non-tariff barriers, trade among the CEECs, considerably decreased. The CEECs sought to promote economic connections primarily with the European Union. With the entry into force of the Europe Agreements (EA), trade barriers between East and West started to be dismantled and the pendulum has largely swung to the benefit of the relations with the West.
In order to influence these trends, the so-called Visegrad Agreement was concluded in February 1991 among former Czechoslovakia, Hungary and Poland. The Agreement emphasised the existence of mutual economic and political interests, underlined the necessity for co-ordinating integration policies with the West, and stressed the need to further develop regional economic relations. In Visegrad, signatory countries expressed their common interests in relations with the West and agreed that their efforts would be more efficient if pursued jointly. Subsequently, their interest in mutual intra-regional trade was also clearly confirmed.
The Central European Free Trade Agreement (CEFTA) was signed in 1992. In the beginning, the CEFTA was supported by two major factors. The EU promoted the idea that associated countries also needed to establish a free trade zone within the region. The EU thus provided external impetus in the creation of the CEFTA. The second major factor was the economically unjustified low level of eastern trade relations and the fact that their economic recovery would be enhanced by developing intra-regional trade. The CEFTA relied essentially on the trade part of the EA and set the goals of creating a free trade zone for industrial products in ten years and reducing trade barriers for trade in agriculture. The major difference between the two Agreements is that the EAs are based on the notion of asymmetry, while CEFTA seeks to exploit mutual benefits. The objective of the CEFTA was to create at least the same preferences as those provided by the EAs.
The present paper examines the Europe Agreements and the CEFTA and considers their impact on trade flows and trade policy of transition economies. It analyses in more detail the Hungarian experience, including the development of direct investment inflows from Hungary to neighbouring countries.

The paper is available here.