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ART III

FUTURE TRENDS FOLLOWING THE IMPLEMENTATION
OF A FREE TRADE AREA
(by Savino Onelli)

14 - Overall perspectives

In the case in point it is extremely difficult and complex to make forecast, since the multiple interacting variables often go in diverging directions.

However, we may affirm that the overall picture, by now sufficiently stable, the economic recovery and GDP growth will result in increased trade within the area. This will be the case even if its economic poles (Italy and Germany and, in the second place, Greece and Turkey) are situated outside the area. This aspect, as evidenced in analogous situations (e.g. CEFTA) is one that may hinder the development of intra-regional trade.

The main factor underlying Balkan development is, and will continue to be, the level and kind of the interchange with the EU, even in consideration of the typology of goods exchanged (assets, capital goods, consumer goods from the EU to the Balkan region – labour-intensive goods or raw material-intensive goods, in the opposite direction). The high level of complementarity emerging from this picture has been decisive for the striking success of other areas, among which NAFTA.

The shift to an effective free trade area will entail greater opportunities for economic cooperation. The more efficient component of the relationship between both vertical producers in the same sector (production pipeline) and companies (network), that already existed within the countries forming the Federal Republic of Yugoslavia, will presumably be re-established.

Within the framework of the future free trade area, a further growth factor should be the greater importance – compared to the current one – attached to bilateral relations between neighbouring countries or nearby countries, such as between Croatia and Serbia and Montenegro, or between Romania and Bulgaria.

Furthermore, it should be pointed out that, besides economies at nations level, peculiar economic systems exist in the area (Kosovo and Republika Srbska), the inclusion of which in the Country of origin (Serbia and Montenegro and Bosnia-Herzegovina, respectively), within the framework of the free trade area that is being formed , will surely result in advantages. Indeed, possible partners will be greatly differentiated (as in the case of the Republika Srbska) and separation lines will be eliminated or weakened (as in the case of Kosovo in relation to all neighbouring countries). This should favour the economic revival of the most disadvantaged areas (current per capita income in Kosovo is 1/5 of that recorded in the period prior to the breaking up of the Federal Republic of Yugoslavia).

On the contrary, future greater chances for a wider choice of partners other than the current ones could lead to lesser propensity to intra-regional trade. However, this negative outcome is offset by the different stage of development in the various countries which should favour production specialization. The fact that the two entities of Bosnia-Herzegovina (the Croat-Muslim Confederation and the Republika Srbska) may loosen their ties with Zagreb and Belgrade, respectively, may represent a further stimulus for trade within the area.

According to widespread opinion, the area should lose its importance in 2007, due to the accession of Bulgaria and Romania to the EU. Indeed, it is often upheld that some Balkan countries consider the Free Trade Area creation only as an instrument to draw closer to the EU. In other words, the integration process in the area would only be supported in order for Bulgaria and Romania to please the EU. The latter countries would gain credits by enabling the ruling classes of the remaining Balkan countries to be viewed by their public opinion as guarantors of a redeeming process of getting closer to the EU.

Such a view cannot be shared since it does not take into account the fact that, in the current acceleration of the transition process, even the period 2003-2007 is a lapse of time that may be considered reasonably long for relations to be strengthened and intensified. In fact, given the preferential agreements with EU, such relations will exert a positive influence even after 2007.

Furthermore, it should be pointed out that the future free trade area will cover all former Yugoslav republics that show the greatest interchange within the area, including the regional poles of development (Zagreb and Belgrade). As a consequence, the strongest opportunities exist in terms of re-establishing production pipeline and network relations and benefiting from economies complementarity. These are perhaps the most significant remarks that may be made concerning the post-2007 evolution of the free trade area.

In addition, a free trade area made up of 5 countries (Croatia, Serbia and Montenegro, Albania, Macedonia, Bosnia-Herzegovina), would make it possible to maintain a link between Croatia and the Croat-Muslim Confederation.. The expected inclusion of Croatia in the group of candidates countries for EU Membership as of 2007 would result in the breaking up of such a link, with unexpected consequences arising from the political and economic drift of the Confederation.

The idea of a free trade area continues to be cherished even if the two countries with the highest level of interchange are likely to withdraw from it; in fact, another advantage could be the possibility of merging the potentials of the three other sub-governmental entities (Montenegro, Kosovo, Republika Srbska) in a free-trade entity where economies of scale could easily be obtained.

Albania is just another matter, since this country is currently the least inclined to intra-regional trade, and prefers to entirely commit itself to its relations with Italy and Greece, especially concerning export. In the case of Tirana, the current ratio of one to ten between export and import to and from the area could only but improve, since the situation would be ripe for favouring interchange. Better still, according to various estimates, Albania should be the country benefiting from the most significant advantages: in fact, in the medium term, its current export capacity should multiply by 5 through 9, based on the association patterns that would be definitely adopted in the free-trade area (EU model or CEFTA model). Similar considerations apply to Albania’s imports from the area.
 

15 - Specific advantages of the area

The main advantages originating from the implementation of a free-trade area in the Western Balkans may be summarized as follows11:

  • creation of a 55 million consumer market;

  • even the perspective of a merely 26 million consumer market (as soon as Bulgaria and Romania join the EU) is a valid one, considering that the recent EU accession of 10 countries – excluding Poland, the most populated country, from the calculation - has resulted in a new market of 30 million consumers, but with no less than 9 new Member States;

  • however the remaining 26 million consumer market has a strategic importance, since it would confer unity to the various entities of former Yugoslavia, re-establishing relations already existing in the recent past or opening up the possibilities typical of neighbouring countries with complementary economies;

  • in any case, the probable withdrawal of the two Black Sea countries would cause less damage than expected since these are the two partners that are less involved in intra-area trade;

  • for some Member State, the creation of a free-trade area would translate into having access to a market which is 10 to 15 times greater than the domestic one in terms of population and production. The political outcome should be particularly remarkable for "minor" countries and for the 4 sub-governmental entities mentioned above.

  • the economic aggregation process in the Western Balkans is presumably the most significant step in the area towards accustoming interested countries to adopting community measures that should mime, and somehow anticipate, the way of living of a community, such as EU, which is not only an economic one;

  • greater chances of interchange, due to rule homogenisation exist, for EU and, in Italy, for North-eastern regions and Puglia. Prospects look particularly good since all Balkan countries are recording a GDP growth, approaching again pre-‘89 levels. The case cited concerns two Italian areas close to or neighbouring South-eastern Europe, but other similar examples may be made for other Member States, such as Austria and Germany;

  • the creation of the free-trade area would accelerate and facilitate the development of the pan-European Corridor network.. Furthermore, the construction of the network in its final configuration would also involve greater and more efficient participation by relatively far-off countries, as both customers and suppliers. It is useless to say that the removal of trade barriers, even physical ones, will re-direct trade flows from, to and through the area; today, in fact, commercial traffic is obliged to choose longer by-pass, outside the area, to avoid or reduce payments and loss of time linked to transit and passage through customs;

  • the legal status of trade would evolve from the current "spaghetti bowl" configuration, as some analysts have named it, represented by a myriad of bilateral agreements, to an area agreement characterized, internally, by uniformity of rules and, externally, by uniformity of tariffs; this positive process would make Member States more trustworthy, influential and united. As a consequence, the consensus-building process taking place in the EU 25 countries as regards the accession of Balkan countries to the EU would be less traumatic;

  • Such a constructive waiting period would make it possible to have sufficient time to tackle and solve the issue of Turkey’s application for membership. Indeed, a reserve is fundamental for developing an access plan for Turkey, the pace of which should necessarily be slower than that adopted for the entry of 10 + 2 into the EU;

  • the association of Moldova to the free-trade area, in ways still to be examined and evaluated, is a positive element, since it could represent the "return to Europe" of the only country within the Commonwealth of Independent States boasting a Centre-Western European matrix. Such a return would reward the long and sometimes complex effort made by Kishnev to re-direct the country’s economy towards the Western world (for example, current interchange with the EU and the Balkans already exceeds trade with other members of the CIS) .

In addition, the ad hoc association of Moldova could mark the beginning of a process for bringing the CIS closer to the United Europe. This would somehow make the long-term association of Ukraine (and perhaps of Belarus) more realistic, as a preamble to a vision of the EU covering the whole of Europe (and maybe the entire Eurasiatic continent).

___________________
 11 See Campobasso, in «Est- Ovest», 6, 2002, Trieste
 

16 - Final Considerations

South East Europe is that particular European region defined by the need to complete the transformation process from a centrally-planned economy to free market.

Each individual country has followed a path of its own, which means that individual economies are now struggling at different stages along the hard road to globalisation and homologation with the big market institutions (WTO – UE).

In fact, besides the countries whose accession to the EU has been decided upon for the year 2007, there are other hopeful candidates who pretend to meet that deadline. Instead, the EU finish line has necessarily been shifted to the next five-year period for four other countries (Albania, Bosnia-Herzegovina, Macedonia, Serbia and Montenegro).

Moreover, hanging on the area is the still uncertain admission of Turkey. The country is the geo-economic extension (or outpost, or "bridge") of Balkan Europe to the South-East.

To deal more specifically with the Balkans potential, it must be taken into account that the post ’89 evolution has somewhat disappointed expectations. Put briefly, the causes can be tracked down to a variety of factors, such as the modest initial situation or the swaying reform policies or the involvement in armed conflicts. In some countries, the relatively small territorial area and a limited population, compounded by the present marginal geopolitical location (Bosnia-Herzegovina, Albania), has been (and still is) a further element of interference that prevents market scale and domestic production optimisation.

In the face of such a complex situation, the region’s countries should be given credit of their common effort to get out of this impasse. The attempt clearly demonstrates that all countries are deeply aware of being in front of a unique opportunity which will not come up again.

At present, the South East Europe free trade area can concretely be established on the basis of the 21 trade agreements signed among the seven countries, with the external association of Moldova.

The common commitment of the SEE countries to harmonise trade procedures according to WTO and EU standards as well as the clause that binds Members to widen and deepen the scope of their integration are a further guarantee of desirable medium-term development12.

The real significance of the twenty-one agreements has already been illustrated. They should result into a generalised downward convergence of customs tariffs, included those on agricultural products, which, thanks to the blanket decrease achieved of around 80-95%, will bring rates close to nihil.

As for the specific interests of some sectors, the six-year period of moratorium should ensure a progressive adjustment of the various domestic markets.

In particular, agricultural issues have to be tackled with a spirit of great reciprocal understanding and flexibility by the seven countries, the WTO and the EU. This is a field where current bilateral tariffs and quotas are still elevated (Romania has, for instance, rates of as much as 25%) and the Free Trade Area farmer population is, in percentage, ten to twenty times higher than that of the 15-member EU. The social, productive (and political) problems ensuing from a too rapid liberalisation of the primary sector recommend, as a consequence, the opportunity of adopting a model that ensures as smooth a passage as possible to the new trade regime.

The engagement to co-ordinate a tangle of twenty-one agreements should translate into actions aimed at progressively improving compliance with the WTO rules on protective quotas as well as harmonisation of customs regulations and procedures so as they become compatible with the EU’s. It is also fundamental that company, tax and bank rules, alongside those on corporate accounting and trade competition, are accommodated to the EU’s.

The evolution clause of the free trade area too is particularly conducive to advancements since it binds the countries to take further steps in the direction of the development of trade and of the increase in FDI that, in turn, should be encouraged by the adoption of the measures needed to extend liberalisation to services and to implement the guarantees for the protection of intellectual property rights.

On the subject of future potentials, various projections converge to indicate that trade may, at best, grow two or three times by the end of the medium period, with higher rates for Albania and Macedonia as well as for Croatia and the Republika Srbska. Further multiplying effects will be generated by the normalisation of trade relations within Bosnia-Herzegovina.

As for the sectors and countries that will throw open to export, it is expected that such a surge in trade flows will be more accentuated in the sectors that are currently more protected (agricultural produce and easier-to-manufacture products), and in the countries that currently impose higher general tariffs (Macedonia and Romania).

A strategic aspect that cannot be ignored is the adoption of a package of measures aimed at luring international specialised Institutions and businesses to mobilise financing and to provide support initiatives and know-how. It is a bulk of measures that range from the adoption of uniform rules of origin, to investment promotion, the regulation of competition and dispute settlement and to the standardisation of procedures relative to customs and the supply of services.

It must finally be recognised, with satisfaction, that a long road has already been walked but it must also be said, with frankness, that a way long as much still lays ahead.

The overtaking of the initial phase, which is usually the hardest, is however the best omen for the entire region of South-East Europe to consolidate, broaden and develop all that has already been achieved and to cast it into a phase of convergence of all efforts.

Even taking into account the future (and by now close to implementation) different configuration of the region encompassed by the agreements, the formation of the free trade area shall not be considered as an end in itself. On the contrary, it must be viewed as a step in the direction of the continental Unity that cannot be deemed complete until all the countries of South East Europe have entered the common European Home.

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12 See Key Findings at the Belgrade SEECP meeting, in Oct. 2003