Foreign Policy: A strong tool in trade diplomacy

Hungarian Foreign Minister Peter Szijjarto

By Chathuri Dissanayake 

Foreign policy could be used to further a country’s economic and trade goals, when the country is a small actor in global politics, Hungarian Minister of Foreign Affairs and Trade, Péter Szijjártó emphasised relating to his country’s approach in attracting Foreign Direct Investments (FDI). 

Szijjártó took part in the World Economic Development Forum last week, representing Hungary, which won the rights to organise the Forum next year. 

“Hungary’s economy is a very open economy. Our National economy is pretty much determined by external factors like exports and investments. So it is very important for us to be visible on the global stage of export development,” he highlighted speaking of the intensive focus Hungary places on global trade.  In an interview with Daily FT Szijjártó spoke of the importance in establishing ties with the One Belt One World initiative of China, as well as intensified trade partnerships with global players. 

Following are excerpts from his interview:

Q; You spoke of how a foreign policy can be used for international trade. How has Hungary done that and what are the key elements which Sri Lanka can pick from your country’s experience?

A: We are a small country. Small countries cannot afford to have foreign policy just to have foreign policy. Big countries can afford that. If small countries express their opinion, basically it is not treated as important. It can be exciting and interesting but it is not important. We don’t look at foreign policy as a goal; we look at it as an instrument. That is why we merged External Economic relations, meaning trade investment and foreign affairs. So we have a ministry which covers external economic relationships and foreign affairs as well. We actually have the investment promotions, export promotion and export financing. We as a small country have to use our foreign policy as an instrument. 

If you ask what is the ultimate goal for Hungarian foreign policy, it is to create more jobs for Hungarian people through external aspects of people. That is why we have improved the effectiveness of our investment promotion network, that is why Exim bank finances the small and medium enterprises to be successful on the external market and that’s why we open trade representations all over the world to help our companies be successful in markets far away. When it comes to exports actually we concentrate on helping SMEs because the big companies don’t need state incentives because they have capacity.  

They cannot afford to have 180 days of payments, they cannot take the risk to travel to far away markets and not be successful, they don’t have the resources to cover travelling for negotiations. That is why we have to incentivise and help SMEs to be successful in the external market. 

Q: How has Hungary managed to play the government’s role to drive development of the SME sector?

A: We have two rates for cooperate tax; the big companies pay 19% and small and medium companies pay only 10 %. We have already lent €1.8 billion through the EXIM bank for SME for export transactions. Within the Digital Hungary program, by the end of next year, all Hungarian households and SMEs will have an internet access with 30MB per second and by then end of 2020 half of the households will have 100MB per second. Then we have decreased VAT on the internet service which ended up in a price reduction of 8 to 10% for internet services. We have also established a state owned organisation which has to provide assistance services for SMEs. So we opened up trade representations to facilitate SMES, we research market partnerships, we organise the meetings, we try to give over bridging for non financing periods. This is mainly the package put forward to support SMEs. 

Q: Hungary is one of the main FDI attracters in Central Europe. Sri Lanka has been trying to attract FDIs in the last two years without much success, what were the key elements that Hungary has used for its success that can be introduced to Sri Lanka as well? 

A: It is four key factors that we have used to attract FDIs. Number one is we have totally restructured our tax regime and we have taken away as much burden from labour as possible. So we have the lowest personal income tax rate in Europe –a  flat tax of 15%. The flat 15% helps not only those who want to work more, but helps those companies who want to hire more. 

Number two we have restructured the higher education system. We have radically increased the seats in state financed universities, for IT, Engineering, Mathematics and Economics, in order to be able to supply the demand of the modern manufacturing industry. 

Number three: We have introduced German type dual vocational system in high schools, which means companies are involved in school training programs. These results in the students who graduate high schools, having already taken part in training programs with the given company so that they have developed the skills and experience needed to be employed when they enter the labour market. This means that the labour supply is there and given. 

Number four: our infrastructural development. Now we have the most developed infrastructure in the region, our motorways, most of them already reach the country border, and by 2020 all our motor ways will reach the country border. We have a highly developed infrastructure in rail roads as well. 

So these four elements, the tax system, education, vocational training and infrastructure, these are the key drivers to attract FDIs and regarding FDI per GDP we are number one in Central Europe and on FDI per capita we are number two. All together we have € 85 billion FDIs in the country, which equals € 8500 per capita. 

Q: How can Transnational Free Trade Agreements benefit countries like Hungary? 

A: The future will be in global trade and will be determined by these multinational free trade agreements like the Trance Pacific Partnership or Euro Asian Economic Partnership, so I think for us the more important thing is not to be left out, if we are left out it means we will have a disadvantaged position in certain markets and we are not big enough to compensate for such disadvantages. So the main target for Hungary is having as many free trade agreements as possible. Of course as part of the European Union we are not allowed to carry out talks on our own. It is the EU that has the right to negotiate free trade agreements but that is why we usually pressure the EU to carry out free trade agreements.  

Q: in the global scenario, when there is an economic slowdown what needs to be focused on in countries such as Sri Lanka to improve economic growth? 

A: If I was the Sri Lankan Trade Minister, I would emphasise three things, I would emphasise the importance and I would strengthen the country’s presence in the One Belt One Road initiative by China. We were the first European country, and I the first European minister to sign the agreement on the One Belt One Road initiative with China last June. China is one of the leading powers in the world economy and we understand that currently the capital is not only moving from West to East not only looking for cheap labour but from East to West looking for European manufacturing facilities in order to decrease logistics and looking for skills. In this regard, Sri Lanka in the Indian Ocean is a very important logistical hub. If I was the minister in Sri Lanka I would put emphasis on benefiting from this initiative that is what Hungary has done as well. The Chinese have bought a Greek port in Piraeus where they ship their exported goods from the Eastern part of China, and from that given port, they deliver their goods by train to the Western part of Europe. So there we have now been in the modernisation part of the Budapest-Belgrade railway line in order to be the number one alternative for transition. 

Number two, I would also look to be intensely involved in regional free trade structures. Sri Lanka is an open economy like Hungary, and for relatively small countries with open economies, our vital interest  is to have global trade free of obstacles as far as possible, of course respecting national sensitivities, so Sri Lanka should work hard with China, India, Pakisthan, Bangladesh and Vietnam on free trade as Hungary has done. 

From a Sri Lankan perspective, strong cooperation with the European Union is beneficial as well. Hungary is a strong promoter of EU’s Free trade policy, and we are also strong supporters of providing Sri Lanka with GSP + status. We urge the EU to get deeper into bilateral dialogue on investment with Sri Lanka. Sri Lanka should foster the investment negotiation with EU because Sri Lanka has much to offer, intelligent workforce, excellent geographical location, very good outreach with the eastern front of the world, I would take advantage of that. These would be the key areas I would focus on if I was the Sri Lankan Trade Minister. 

Q: There have been a lot of changes in the European Union this year, with the refugee crisis and also Brexit. There is a lot of change in the global scenario as well. As a country which depends on external investments a lot how do you anticipate these changes affecting your country?

A: It is not an exaggeration to say that we have been living in a new world order and in this unfortunately Europe has been lagging behind a little bit because we are involved in our own problems. In the European Union a hypocritical and politically correct approach has been carried out, and this is very very disadvantageous. We are not able to name challenges as they are and if you speak honestly and are straight forward about things, then you are criticised. We have been facing historic challenges, migration,the threat of terror, war in the Ukraine, Brexit, and energy security issues. So these challenges are historic and one out of five would be enough at a time, Brexit is a huge economic and political loss for Europe. Brexit is not the reason, but the consequences, unfortunately the institutions in Brussels want more and more authority, which is totally against the interest of the European Union, our passion is that strong European integration can only be based on strong member states. There is a strong debate about this. There are two approaches to this, sovereignists and federalists. Federalists say that more and more authority should be taken to Brussels. What we as Sovereignists say that more and more authority should be taken to member states. The debate continues, and with the Britain leaving we will lose a strong voice in the Sovereignist camp, because they were always very pragmatic and was exercised common sense and rational in this regard. Economically Brexit is a huge loss, because it is the fifth largest economy in the world and our fear is that US will look at UK as the number one economy in Europe and they will look at EU only as second. UK leaving European Union means we will have one extra competitor when it comes to global trade as they will sign separate agreements with partners, it means that the EU will have to compete with UK on certain markets. 

Q: Does Hungary plan to enter into investment partnerships or trade agreements with Sri Lanka in the future?

A: We have very good references here; we contributed a lot to the reconstructions here after the Tsunami. We have built a kindergarten here, we have been training Sri Lankan experts regarding disaster management. There can be two flagships, number one, water management. This is already a flagship, Budapest Waterworks , have been building two of Sri Lanka’s water treatment stations – Labugama and Kalatuwawa at present spending of $51 million, which have been done by Hungarian companies. About 85% of the work has been finished and we 

anticipate completion soon. These have been financed by Exim Bank and through a tied aid credit framework. 

We have carried out discussions with the Prime Minister and Trade Minister of Sri Lanka it was emphasised that Hungary is ready to continue with the program. We would be ready to open new phrase of tied aid credit by the Hungarian Exim bank, we have opened a $68.8 million credit line, for a Hungarian – Sri Lankan cooperation, where we have actually looked at three major projects. One in Colombo to modernise your water  distribution system, one in Unawatuna to manage the sewage water system and one in Ahaliyagoda, to improve the drinking water network there. Water management can clearly be the flagship of economic cooperation with Sri Lanka. 

The other would be food industry and agriculture as we understand that Sri Lanka needs technological development and upgrading and Hungarian technologies are highly developed and we are ready to share that. It is going to be about food security, as Hungary is very developed in the area. We are in a unique situation because we have included in our constitution that Hungarian agriculture should be free of GMO. The technologies we used on how to preserve agriculture and food industry without GMO in animal husbandry, fruits and vegetables,and processing meat will be shared with Sri Lanka. We will now enter into negotiations on how this will be implemented. What I communicated to the Sri Lankan Minister of Trade was that we should start negotiations on the economic cooperation. Once the agreement is signed, a joint economic commission will be established and in the framework of the joint economic commission we can have a platform of cooperation not only on government to government but business to business as well. Until then we will facilitate business to business meetings. 

Pix by Shehan Gunasekara