International Relations and Security Network (ISN)
By Ekrem Krasniqi and Anes Alic
June 29, 2009

http://www.isn.ethz.ch/isn/

Balkan nations, despite their commitments to the Central European Free Trade Agreement, are engaged in a tit-for-tat protectionist trade war, much of which has political motives,

Free trade in the Western Balkans has recently been characterized by dispute, marred by blockades of goods triggered by protectionism, and of course, politics.

Brussels warns that the countries involved should stick to their commitments and overcome “historical ethnic disputes” if they hope to progress along the path toward EU accession.

The Central European Free Trade Agreement (CEFTA) was established almost three decades ago in order to facilitate free trade among Southeastern European countries and prepare them for EU membership. In 2007, bilateral agreements in the region were brought together under the CEFTA umbrella, making it the first agreement of its kind in the region following the years of war the over the break-up of Yugoslavia.

But some of these agreements have proven problematic, for both political and protectionist reasons, during this time of global financial crisis.

Kosovo hard hit

The blockades are hitting Kosovo, the most underdeveloped country in the region, hardest. Serbia, Bosnia and Herzegovina are blocking export from Kosovo, arguing that that to do otherwise would be to give their official stamp of approval to Kosovo’s February 2008 unilateral declaration of independence.

Albania has imposed customs taxes and increased value-added tax (VAT) on agriculture imports from the region, causing Kosovo potato producers to halt exports.

The latest round of problems also has seen, despite warnings from the EU, the Bosnian Parliament adopt a law in mid-June calling for greater protection of local farmers against imported goods from neighboring countries.

In December last year, 10 months after Kosovo’s independence declaration, Serbia and Bosnia moved to block Kosovo exports. Serbia is holding firm against ever recognizing Kosovo’s independence and has recently stated that it will not sacrifice Kosovo for EU membership. Bosnia, for its part, with Bosnian Serbs backing Serbia, has also not recognized Kosovo’s independence.

‘Made in Kosovo’

Kosovo exports, for now, are not even allowed to transit through Serbia or Bosnia, despite the fact that Kosovo is a CEFTA signatory. Before Kosovo declared independence, goods produced in Kosovo were stamped with UNMIK where the name of the country would be. Since the independence declaration, goods have been stamped with “Republic of Kosovo,” which is unacceptable to both Serbia and Bosnia.

Under pressure from the public and local producers, Kosovo officials were prepared to retaliate with a tit-for-tat measure against Serbia and Bosnia, but forces in the West prompted a change of strategy.

Kosovo trade and industry minister Lutfi Zharku told local media that after “discussions held with international representatives it was agreed” that the problems “should be resolved by political means, without resorting to blockade measures.”

Though Montenegro in fact recognized Kosovo’s independence in October last year, it too is jumping on the protectionist bandwagon, blocking the export of Kosovo products and the transit of Kosovo goods through its territory since April.

Authorities in Kosovo accuse Serbia of using its influence over Montenegro to block exports and transit.

In the meantime, local producers are seeking out alternative transit routes to the EU for their goods, through Albania, but transport costs through the Adriatic Sea to Italy have increased by some 30 percent, hitting producers hard at a time of global economic downturn.

“The Commission drew the attention of Belgrade to the fact that the customs stamps are status neutral. We expect that parties will keep this matter at a technical level and soon reach a solution,” EC spokesperson Krisztina Nagy told ISN Security Watch.

Endorsing protectionism

Earlier this month, the Bosnian Parliament passed a law after the first reading imposing taxes on imported goods from Serbia and Croatia, despite existing free trade agreements. Croatia tried to scare Bosnia on the pending legislation by blocking some Bosnian products, but that dispute ended few days after Sarajevo retaliated.

The Parliament endorsed the bill, which imposes higher duties on nearly 1,000 items, in a bid to protect domestic production. According to the bill, customs are to be imposed on agriculture imports such as meat, milk, dairy products, fruits, vegetables, alcohol and several other products imported from Croatia and Serbia.

The adoption of the protective measures is expected to affect neighboring Croatia, whose exports to Bosnia last year came to around €1.7 billion ($2.38 billion). Croatia tops the list of leading exporters to Bosnia, followed by Serbia.

Supporters of the law claim that free trade only harms Bosnia, and that each month the country increases its trade deficit. Since CEFTA was implemented, the Bosnian economy has experienced a monthly trade deficit of some €100 million.

Trade surpluses were reported only in exchange with Montenegro, Albania and Moldavia, but even in those cases it did not exceed several millions euros.

The law is controversial for others reasons, too. It was initiated by Jerko Ivankovic-Lijanovic, a deputy in Bosnia’s House of Representatives and the co-owner of the country’s biggest meat production company. Critics of the law accuse Ivankovic of using the law for his own personal benefit.

In an interview with ISN Security Watch, Ivankovic denied the accusations, saying that the law was proposed at the requests of local farmers and producers seeking greater government protection.

“With the high export benefits, our neighbors are destroying Bosnian production, which has been drastically decreasing in the past several months. We are aware that Croatia and Serbia are preparing counter measures but they will only benefit Bosnia and Herzegovina, since only then could trade exchange be equalized,” he said in a separate statement. The statement said that with the current regulations, Bosnia has a negative trade balance with Serbia and Croatia, which often exceeds a 1-7 ratio.

Ivankovic argues that CEFTA failed in meeting Bosnia’s expectations in the areas of investment, the general standard of living and employment. Also, he said that Serbia and Croatia previously limited Bosnian imports through other measures, but that Bosnian authorities failed to react due the influence of Croatian and Serbian lobbyists.

EU accession jeopardized

The adoption of the law has also been criticized by the international community and parts of the Bosnian government as well, who said it could jeopardize the country’s EU accession and that the country is now facing international sanctions.

Bosnian Foreign Trade Minister Mladen Zirojevic told local media that he regretted the decision of the parliament, saying there were better ways of improving the situation of local producers.

“I can’t even imagine what sanctions will be imposed. This law is putting us six steps behind in EU aspirations. The local producers should provide us with the documentation of the trade imbalances and we could react through legal channels,” Zirojevic said, stressing that international arbitration procedures are now expected and countermeasures from neighboring and CEFTA member countries.

Immediately after the law was adopted, an EC delegation issued a warning to Bosnia:

“This is a violation of Bosnia and Herzegovina’s obligations under the CEFTA Agreement and contradicts Bosnia and Herzegovina’s commitments under the Stabilization and Association Agreement. Since the Stabilization and Association Agreement is the gateway to EU candidate status, this is a very serious matter,” the statement said.

EC spokesperson Nagy told ISN Security Watch that the EC “is very concerned about the intention in Bosnia and Herzegovina to establish new trade barriers with other Western Balkan countries with the law on the protection of agricultural products. “

She said that the EC had strongly recommended that Bosnian authorities not adopt this protectionist law, calling the parties involved to discuss and to settle bilateral trade issues through the existing mechanisms of CEFTA and not through retaliatory measures.

EC officials warn that if CEFTA obligations are not met, SAA commitments will be violated.

“Respect of CEFTA obligations is also important as regards the commitments taken by the countries of the region in their Stabilisation and Association Agreements which underlines the importance of good regional cooperation and the trade liberalization under CEFTA in particular. The Commission is strongly encouraging the countries to abide by these commitments,” Nagy said.

Observers say the EU should apply pressure to end the trade disputes. “The EU can use its membership card to stop these countries adopting protectionist measures. This may not be done officially but publicly identifying protectionist measures at the media level may be discouraging,” Selen Guerin from the Centre for European Policy Studies (CEPS) told ISN Security Watch.

Ekrem Krasniqi is a Brussels-based journalist originally from Kosovo.

Anes Alic is a senior writer for ISN Security Watch, based in Sarajevo. He is also the co-founder and executive director of ISA Consulting, based in Sarajevo and Tel Aviv.

http://www.isn.ethz.ch/isn/Current-Affairs/Security-Watch/Detail/?lng=en&id=102549