Author: Jan Muś

Analyst in the Balkan Department at the Institute of Central Europe in Lublin, Poland

CEFTA gives the Balkans more than they think

MUS CEFTA daje Bałkanom więcej niż dostrzegają jamnik

The Central European Free Trade Agreement (CEFTA) signed in 1992, which has lost its importance with the expansion of the European Union, is now experiencing a revival.

Initially, the agreement only included the countries of the Visegrad Group, which were later gradually joined by other countries of the region: Slovenia, Romania, Bulgaria and Croatia. The trend changed after 2004. Countries joining the Single European Market had to leave organizations constituting separate economic areas.

Nobody was crying after CEFTA, however. The agreement was merely a free-market attempt before accession to the European Union. At first, the leaders of the Visegrad Group feared that CEFTA would constitute an alternative to the European Union, but that did not turn out to be true. At present, CEFTA members are countries bordering Central Europe – Macedonia (since 2006), Serbia, Bosnia and Herzegovina, Kosovo, Albania, Montenegro and Moldova.

In the case of the countries of Southeast Europe, the idea of this type of cooperation was supported by the European Union, which hoped for an increase in trade and economic integration of the region. The EU-Balkans summit held in Trieste in 2017 provided CEFTA with a new impetus. The leaders of the countries agreed to mobilize efforts to ensure an effective implementation of the additional CEFTA protocols on trade facilitation, quick conclusion of the additional protocol on trade in services and its immediate implementation (in particular as regards key services such as finance, insurance and transportation) and commencement of negotiations on a new protocol on dispute settlement and on electronic commerce and external tariffs.

The development of CEFTA is supposed to lay the foundation for the creation of a Regional Economic Area. This, in turn, is supposed to enable the faster economic development of the Western Balkans, and thus accelerate economic integration. This is because the weak economies of Serbia, Bosnia and Albania would not successfully cope with free competition within the Single European Market.

Why is CEFTA needed?

Apart from political significance, the implementation of CEFTA requirements, that is, the abolition of trade barriers between the countries of the region, provides chances for economic development. The Serbian Minister of Trade Rasim Ljajić said that last year 26 million hours were wasted at the national borders, and EUR800m was spent on border services, which amounts to 1 per cent of the region’s GDP. A truck transporting goods from Macedonia to Bosnia, i.e. across the entire CEFTA region, wastes between 7 to 24 hours on various border formalities. In his opinion, the problem is that “everyone wants to go further with economic integration, but nobody is doing that in practice”. The reduction or abolishment of tariffs and customs duties has not eliminated barriers to foreign trade.

For the CEFTA leaders trade is a tool for increasing the productivity and competitiveness of the Balkan economies. The Serbian authorities are willing to go further towards improving the functionality of the agreement. According to Ljajić, small countries have to generate at least 50 per cent of domestic income from foreign trade. Currently this rate is around 28 per cent for Serbia, below 15 per cent for Albania, 36 per cent for Macedonia, and 34 per cent for Bosnia and Herzegovina.

Given the current rate of economic growth, the Balkans will catch up with the European Union in around 70 years. Therefore increasing trade is one of the key challenges and the elimination of barriers to trade is a task for the coming years.

The creation of a more cohesive, if not entirely uniform, economic area, will also have other important macroeconomic consequences. First of all, it will attract foreign investments which currently do not fulfil an appropriate function. Investors are creating poorly paid jobs or are unable to find a suitably qualified workforce. This is why CEFTA parties are increasingly talking about the free movement of employees and the mutual recognition of diplomas and qualifications in the entire region as a necessary condition for encouraging new investors.

The development of foreign trade is also an opportunity for local producers to grow and to launch cooperation with partners from the European Union. Today foreign investors are often unable to use the services of local subcontractors due to technological differences and the instability of supplies from the local market.

CEFTA is therefore a chance for a faster development of more modern economies. The biggest supporter of the agreement is Serbia, the largest state with the largest economy and a huge surplus in trade with the region (reaching almost EUR2bn per year). Moreover, trade with the Balkan states is not as difficult as with France, the Netherlands or Denmark. Products that cannot be exported to the saturated and demanding western markets can be much more easily sold in their own region.

Not everyone is happy

However, not everyone shares the enthusiasm of the Serbs. Albania exports a lot more processed goods (63 per cent of exports to CEFTA), and imports food (35 per cent), fuel (28 per cent) and processed materials (37per cent). Also in the case of Bosnia and Herzegovina, the commodity structure was relatively balanced – processed goods accounted for 52 per cent of exports, while imports consisted largely of processed goods (44 per cent) and food (42 per cent). Macedonia also exported 59 per cent of processed goods, while products from that category accounted “only” for 45 per cent of its imports. Serbian exports consisted of processed products (57 per cent), food (33 per cent) and fuel (10 per cent), and the imports consisted of processed products (47 per cent), fuel (22 per cent) and food (also 22 per cent). We could therefore say that the commodity structure of trade within CEFTA is relatively balanced.

The most drastic example is Kosovo. In 2016 Kosovo’s exports to CEFTA countries amounted to EUR144.2m, and its imports in the same period amounted to EUR753.1m. Bosnia and Herzegovina recorded a similarly marked trade balance deficit amounting to EUR419m, while Montenegro had a trade deficit of as much as EUR480m. Albania and Macedonia recorded a much lower deficit, amounting to EUR40.78 and EUR64m, respectively.

The only country that posted a surplus was Serbia. According to data from the Observatory of Economic Complexity, in 2016 Serbia had a trade balance surplus of over EUR1.9bn.

The European Union’s plans to support entrepreneurship in the Balkans could therefore fail on the grounds of the negative trade balances. Such a scenario is all the more likely, given the fact that political relations with Serbia are often presented as a threat to the security and sovereignty of the remaining countries. The deficit in trade with Serbia is often higher than the total trade deficit, i.e. it amounts to approx. EUR120m for Macedonia, EUR530m for Bosnia, and EUR155m for Albania.

If the structure of trade itself is not enough to discourage further integration, another argument against CEFTA could be the budgets. The Balkan states are rather poor, are struggling with serious budget problems, and public institutions are functioning at a very poor level. They cannot rely on additional tax revenues from developing entrepreneurship. Effective tax evasion by local companies has a tradition spanning centuries and is not necessarily the fault of the private sector. A further reduction of revenues to the state coffers could only worsen the situation, because there is no room for more cuts, unless we consider imposing higher burdens on entrepreneurs, but in this case there is no reason to talk about CEFTA.

CEFTA creates opportunities

Despite these facts, which may discourage further cooperation, the leaders of the individual countries should not lack motivation to implement CEFTA. This is because they have to learn to cope with growing competition. The inability to tackle rather weak regional competition clearly indicates that these states will not be able to compete in the European Union. If the Macedonian market is conquered, for example, by Serbian products, it will certainly not be able to “defend” itself against German or Dutch goods. Withdrawing from the agreement or obstructing its functioning will therefore mean exclusion from the European integration process.

CEFTA also gives these countries opportunities that wouldn’t be provided by an EU association agreement or membership in the EU. At the current stage of economic development, the immediate accession of Macedonia, Albania or Serbia to the European Union would lead to an economic collapse in the demanding Single European Market. For its part, CEFTA offers conditions of trade with partners who have rather equal economic potential. Such trade favors balanced development rather than the strengthening of divisions and inequalities.

CEFTA is a prelude to the establishment of a Regional Economic Area, i.e. to deeper economic integration, and hence to attracting further investment to the region. Blocking the implementation of CEFTA due to particular commercial or budget interests will have a negative impact on the entire region. Therefore, despite some negative consequences of trade, there is currently no alternative to CEFTA.

The market economy and free trade do not automatically bring economic prosperity. Practice shows that in reality rising macroeconomic indicators, such as trade turnover, GDP, and even the decline in unemployment, do not always lead to an equal increase in the quality of life and social development. And the more rapid the transformation, the greater the chances of exacerbated social inequality. Will the deepened CEFTA be able to mitigate these inequalities? We can easily imagine a negative scenario: the domination of markets by the largest entrepreneurs, the eradication of small and medium enterprises, a further deterioration of working conditions, etc.

The European Union seems to completely ignore these threats by focusing on positive macro-economic benefits. The implementation of CEFTA and the creation of a unified economic area is supposed to fulfil two external functions:

  1. the creation of a larger, more stable market with a greater purchasing power, and
  2. further gradual integration of this new structure with the European Union.

However, in the long term ignoring the risks of significant social costs may bring the opposite effects.

Jan Muś is a lecturer at the Vistula University.

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