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EU hails Balkan free trade deal as milestone

Institute for War and Peace Reporting | 31 October 2006

EU Hails Balkan Free Trade Deal as Milestone

New regional agreement sweeps away web of bilateral deals and - hopefully - boosts trade and investment.

By Anna McTaggart in Zagreb (Balkan Insight, 26 Oct 06)

The drive to create a free trade area in the Western Balkans ended more or less successfully on October 20, after the fourth round of negotiations closed on extending the Central European Free Trade Area, CEFTA.

Economists heralded a significant step in regional trade relations, while warning more needs to be done to turn around the most troubled economies.

Forged under the auspices of the Stability Pact for Southeast Europe, the deal is due to be initialled on November 9 with signature planned for December 2006.

It had been hoped that the deal would be closed on October 20. But the Stability Pact spokesman, Dragan Barbutovski, told Balkan Insight the text had nevertheless been agreed in principle. It only remains for Belgrade, Sarajevo and Zagreb to hammer out the remaining details on trade in agriculture, tobacco and oil products.

The extension of CEFTA will cover more than just the Western Balkans. Moldova will also join, while Croatia and Macedonia are already members, along with Bulgaria and Romania. These two countries will resign, however, when they join the European Union next year.

Moves to create a free trade area in Southeast Europe initially aroused hostility from some countries that feared the arrangement recalled the former Yugoslavia.

Croatia was especially anxious lest the EU was abandoning its “individual approach” to countries in the region for a regional “package”.

Therefore, observers have greeted the CEFTA expansion as a significant achievement, ushering in a new era of regional trade cooperation, increased investment opportunities and harmonisation with international standards.


Trade integration is nothing new for the Western Balkans, where countries have signed at least 32 bilateral agreements freeing the movement of goods and services.

But the results have been disappointing. Overall trade between the states remains at a low level. Small and fragmented markets have been generally slow in achieving competitiveness and growth.

For some countries, neighbours have become the most important trading partners. For others, regional trade is almost insignificant. Joint exports from the region are insignificant.

The barriers between trade in the region are widely thought to discourage foreign investors, as small individual country markets are not seen as attractive to outsiders.

The complex web of bilateral arrangements - often compared to a “bowl of spaghetti” - is seen as confusing and is judged partly responsible for failures to capitalise on trading opportunities.

The various bilateral deals are also difficult to administer. Where disputes have arisen, enforcement mechanisms have proved easy to ignore. The infrastructure needed to support free trade is lacking.

Existing trade agreements on agriculture between Bosnia and Herzegovina, Croatia and Serbia, serve as a good example of the problem.

In theory, their bilateral treaties completely liberalised this trade. But after the transitional period expired, when Bosnian farmers were unable to cope with competition from their stronger neighbours, Sarajevo unilaterally re-imposed protectionist tariffs.

The European Commission’s trade directorate, which assisted the recent CEFTA talks, says the new multilateral treaty ought to iron out these glitches.

“CEFTA will turn the spaghetti bowl into a flat lasagne,” said Moumen Hamdouch, an EC official.

“This agreement simultaneously enlarges and modernises the free trade area, opening up a larger market for trade and investment and creating the institutions to manage it.”

CEFTA was established in 1991 by Poland, Hungary and the Czechoslovakia with an agenda to liberalise trade, attract investment and align members’ economies with EU standards.

The free-trade area took in the remaining EU candidate states in Central and Eastern Europe. Croatia and then Macedonia joined later, while the original members resigned on joining the EU.

Barbutovski said the latest agreement contains several innovations, broadening its remit and strengthening impact.

“The new treaty builds on the existing CEFTA agreement but takes in new areas such as trade in services, intellectual property and public procurement,” he told Balkan Insight.

Barbutovski said new mechanisms would monitor enforcement. Citing the previous lack of administrative supports in the region to monitor and enforce deals, he said changes had been made with this in mind.

“An agreement has been reached to set up an independent body to manage the deal and resolve any disputes,” he said.

Barbutovski dismissed speculation in Croatia that this body might be seated in Belgrade - a sensitive issue for Zagreb. “This was never been on the cards,” he said.

Visnja Samardzija, of the Zagreb-based think-tank the Institute for International Relations, said the new extended CEFTA agreement should boost regional trade and investment.

“The added value of this multi-lateral agreement, as opposed to the collection of bilateral agreements we have now, is it harmonises trade rules and brings them closer to EU standards,” she said.

“It is also bringing in new areas such as intellectual property, consumer protection, competition rules, public procurement and industrial property rights.

“No investor is willing to invest in just one country of the region, as the market is too small. This agreement will make it easier for an investor to reach a larger regional market.”

Serbia’s finance minister, Mladjan Dinkic, speaking at a regional investment conference on October 24, made many of the same points.

Dinkic predicted that a “free market of 55 million people” would significantly boost the region’s economies and especially foreign investment.

Provisions governing the “rules of origin” for products also promise to make manufacturing and trading in the region more attractive to foreigners and local businessmen alike, easing the placement of regional products in EU markets, for example.


Not everyone is enthusiastic about the new agreement. A number of EU-based researchers point out that significant barriers to trade and investment remain.

They urge a more ambitious approach to make up for lost time and kick-start the weaker Balkan economies.

A paper in August by the Brussels-based Centre for European Policy Studies, CEPS, calls for a more muscular approach in the form of a customs union.

The author, David Kernohan, told Balkan Insight that CEFTA does not go far enough in responding to the specific situation of states in Southeast Europe.

Kernohan said the former Yugoslav republics were in a far worse shape than the states of Central Europe at the equivalent stage in their transition to EU integration, pointing to their low trade levels, poor transport links and general unwillingness to integrate.

The CEFTA deal “doesn’t do enough to free up trade and prepare it for a genuine free market, since non-tariff restrictions and technical barriers at the borders remain”, said Kernohan.

Vladimir Gligorov, of the Vienna Institute for International Economic Studies, also supports the creation of a customs union.

“Had CEFTA been introduced in 2000, the Western Balkans would by now have had six years as part of a larger market,” he said. “Now there is little interest in the initiative,” he said.

Gligorov doubts some CEFTA members feel motivated to make the agreement succeeds, as they have other goals. “Croatia and Macedonia [are] not necessarily wholeheartedly interested in increasing regional trade, as they are directing themselves towards the EU,” he added.

Critics also say the value of CEFTA membership has been devalued by the decision to facilitate enlargement through lowering membership criteria.

Membership of the World Trade Organisation and the conclusion of a stabilisation and association agreement, SAA, with the EU are no longer mandatory requirements, for example.

Fredrik Erixon, of the European Centre for International Political Economy, ECIPE, a new think tank dealing with trade policy, underlined that several members, including Bosnia and Herzegovina, Serbia and Montenegro, as well as Kosovo, which is a “non-state” party, are not WTO members.

This means these states will retain different, higher, tariff regimes when trading with third countries.

“In that respect, such a free trade agreement can for some countries risk diverting their trade, locking it into the region,” said Erixon. And trade with third countries is seen as vital for overall economic progress.

The European sponsors of the CEFTA agreement play down these criticisms, saying all parties are working towards WTO membership.

“All the countries are fully engaged in the WTO accession process,” said Mary O’Mahony. a senior economist with the Stability Pact. She added that WTO principles on trade rules would be applied in the CEFTA agreement.

The EU has also already removed trade barriers for the member countries, while officials say SAAs have been completed, or are under negotiation.

But for countries like Bosnia and Herzegovina and Serbia, membership of the WTO and conclusion of an SAA still look a long way off.

This is not their only problem in trade development, as levels of infrastructure and product quality remain low.

Experts believe tackling poor transport links, frail administrative capacities and poor product quality is essential if Balkan countries are going to be able to take advantage of the CEFTA terms.

Kernohan doubts the current approach is adequate to tackle these issues, arguing for “stronger institutional intervention by the EU”.

More needs to be done to aid the region’s weak economies, which are “very backward in terms of infrastructure, with very severe barriers between countries”, he said.

“It is not enough to support soft projects like building the civil service - the region needs heavy duty cash investment projects,” he insisted.

Erixon agreed, “CEFTA can help the process move in the right direction, but in countries where so many things don’t work, it is difficult to see what CEFTA can lead to.”

As Gligorov asked rhetorically, “What is the advantage of investing in Bosnia if it has no roads?”


The Stability Pact and EU officials believe much of the criticism is misguided and that CEFTA remains is the best solution for the region.

“The mandate of the Stability Pact has changed from 1999 when it was set up,” explained Barbutovski. “It now fosters regional cooperation, while sitting on the steering board of the Joint Office of the World Bank and European Commission, which coordinates large donors.”

The EC’s Hamdouch said it was also misplaced to blame the EU for not doing enough. “We provide a lot of funding for projects,” he said.

“The EC’s annual progress reports make clear what needs to be strengthened, and it’s then up to the countries themselves to take responsibility and strengthen their capacity to design and implement projects,” he added. “They get support if they ask for it.”

Hamdouch disagrees that a customs union would have been a better solution. “A customs union would remove tariffs altogether, when countries in the region still rely on these as an instrument of their trade policy and as a source of budget revenue,” he said.

Reaction in the region to trade liberalisation shows just how controversial such a measure would be. Farmers are already fearful that cheaper imports from neighbours are undercutting domestic producers.

Samardzija believes more needs to be done to reassure those who feel threatened by trade liberalisation and resist deeper regional integration.

“There is a mental barrier to the likes of a customs’ union, as countries want to see their futures in the EU,” he said. “For that reason, a balance needs to be struck between EU and regional trade relations.”

The EU is also dubious about the value of a customs union in the region because officials fear the unchecked passage of goods across several states may be asking for trouble.

“We have seen cases of fraud in the region, where goods from outside have been passed off as original to enter the EU market,” said Hamdouch. “There is still work to be done to make sure customs function completely before the region is ready to do away with checks on rules of origin.”

Barbutovksi believes the situation does not need to be phrased in terms of “either ... or”.

“Creation of a customs union would have been a much longer process, requiring significantly more technical agreements and administration, while CEFTA has been concluded in six months,” he said.

Those who facilitated the negotiations are pleased with the way that countries, which not long ago were at war, have negotiated the agreement.

Even critics concede this is a positive development. Gligorov sees the creation of an independent body to manage the regional forum as an undoubted achievement of CEFTA enlargement.

“So far, quarrelling and jealousy have prevented the countries of the region from coming together to put a good case for Brussels to be more committed to their development and integration,” he said.

“In that sense, the fact that CEFTA creates some kind of political process with a body and regular meetings should encourage more understanding of their common interests.”

Who stands to benefit most from the arrangement remains to be seen. Croatia may gain most, as its more developed economy will help it take advantage of improved terms to invest in its neighbours.

But at the same time, Croatia’s advantageous position will help it to assist others in the region to adjust their legislation and prepare for closer EU integration.

As Hamdouch put it, “Parties will gain experience from others who enter the EU earlier in an apprenticeship that allows them to take on the rigours of free trade gradually.

“In the process, they will strengthen their trading practices and improve their credibility. This should at the end of the day expedite EU integration and create a better environment for investment.”

Anna McTaggart is BIRN’s Croatia project manager. Balkan Insight is BIRN’s online publication.

 source: IWPR