Bosnia faces tough choices over free trade

Balkan Insight | 14 09 2007

Bosnia Faces Tough Choices over Free Trade

As Sarajevo moves towards reneging on its free trade commitments, the EU joins critics who warn this backsliding may damage Bosnia’s economy.

By Drazen Simic in Sarajevo

Bosnia and Herzegovina is coming under renewed pressure from the EU after its parliament ignored Sarajevo’s obligations under CEFTA — the Central European Free Trade Agreement — and imposed unilateral customs duties. The move, an EU official warned, could result in the loss of huge benefits and lead Bosnia to economic isolation.

“That would have a devastating effect on the country’s exports while it would remain heavily dependent on imports,” the EU spokesman in Bosnia, Frane Maroevic, told Balkan Insight.

The EU warning came only a few days after Bosnia began to go back on its commitments to CEFTA. After months of public debates, political deliberations and delays, Bosnia’s House of Representatives on September 6 finally ratified Bosnia’s membership in this regional free trade agreement.

Yet only one day later, in an apparent attempt to appease and protect local farmers, it passed a new law that would keep in place 40 per cent of the full customs duty on meat, milk and dairy products imported from Croatia and Serbia.

Neither the ratification of CEFTA nor the reimposition of some customs duties will come into force until endorsed by the Bosnian parliament’s second chamber, the House of the Peoples.

On December 19, 2006, Albania, Bosnia, Croatia, Kosovo, Macedonia, Moldova, Montenegro and Serbia signed CEFTA, which was intended to replace the existing 32 bilateral free-trade agreements.

The main goal of this agreement was to allow the western Balkans better access to EU markets, and attract much-need western investments.

Yet the agreement drew criticism, especially from farmers who feared for their livelihoods while trying to compete with heavily-subsidized EU producers.

Since December 2006 CEFTA has been ratified by all its signatories, except for Bosnia and Serbia. While Serbia is expected to ratify the agreement any day now, its fate in Bosnia remains uncertain.

Bosnia has a history of reneging on trade agreements as a result of its being caught between the interests of domestic producers on the one hand and regional or international commitments on the other.

After enjoying beneficial status for three years, Bosnia turned its back on its commitments arising from bilateral free-trade agreements with Croatia and Serbia — signed, respectively, in 2000 and 2002 — when they were due to establish fully duty-free trade.

Bosnian opponents of CEFTA — usually gathered around the biggest local food-producers — argue that the country’s agriculture and food industries are not yet ready to compete with their neighbors.

Their key argument is that Croatia and Serbia annually subsidize domestic producers with hundreds of millions of euros, around 10 times more than Bosnia.

Bosnian government officials say there are better ways to protect the local economy.

“We have to strive towards European integrations, the EU market, and that we can do only by opening up our own market and strengthening competition,” said Slobodan Puhalac, Bosnian Minister of Foreign Trade and Economic Relations, in his statement to Nezavisne Novine daily, after Bosnia’s House of Representatives passed the new trade law.

“This does not mean we should fail to take care of domestic production, but that is not to be done in this way,” Puhalac said. He stressed that Bosnian producers should be supported through measures that would encourage the local economy, and not by violating international treaties.

The new law envisages subsidizing 470 products rather than the original 92, and the Bosnian foreign trade ministry has warned that such a measure would be lacking legal foundations.

EU officials add that while CEFTA does have procedures and mechanisms to prevent destabilization of local markets, Bosnia and Herzegovina, BiH, has introduced legislation without even properly analyzing and verifying the treaty’s potentially negative effects.

“The EU will not punish BiH but other CEFTA countries are entitled to take action if Bosnia-Herzegovina fails to implement the international treaty. Should BiH impose customs duties unilaterally, its CEFTA partners are entitled to do the same,” Maroevic told Balkan Insight.

In addition to risking direct economic consequences, such unilateral decisions could damage Bosnia’s regional reputation and its relations with its neighbours.

Following the latest decision of the Bosnian House of Representatives, Croatia has already demanded an official explanation of Sarajevo’s attitude towards CEFTA.

As for Serbia, its Minister of Trade, Predrag Bubalo, said during a visit to Bosnia on September 11 that Sarajevo was reneging on its international commitments, while at the same time it was asking Belgrade for emergency supplies of grain and corn to compensate for the drought which had swept the Balkans this summer.

“You cannot ask for help because of the drought, and at the same time do things like this“, Bubalo complained.

Furthermore, the government’s argument that Bosnia is too poor to subsidize its own producers appears weak in light of the fact that the country’s annual budget revenue has exceeded expectations by 200 million euros for two consecutive years following the introduction of the Value Added Tax, VAT.

Yet observers say this money has so far been used mostly to increase public spending and buy social peace rather than to revitalize and encourage domestic industry.

Some analysts believe that it is not CEFTA but a lack of any plausible business-development strategies that has caused Bosnia’s economic falling behind. For example, the country’s ministers have not yet found the time to agree on establishing a state-wide agriculture ministry, in spite of all their apparent concern for the future of Bosnia’s food industry.

EU and government officials warn that protection of a few domestic meat producers from international competition would come at the cost of Bosnia being excluded from a regional market with 20 million consumers that would entice foreign investors.

The EU has long ago opened its market to duty-free products from the CEFTA region, provided they meet EU quality standards.

Reneging on CEFTA could also mean Bosnia misses out on the opportunity of the so-called diagonal accumulation of origin of goods. This mechanism allows all parts or ingredients made in CEFTA countries, when incorporated into a product, to be treated as a domestic product.

In other words, even if a mere 10 per cent of any product was made in Bosnia and as much as 50 percent in other CEFTA countries, the EU market would consider it a domestic, duty-free product.

Faced with investing in an isolated country of four million people or another country whose products have free access to a western Balkan market that is five times as big, foreign investors would choose the latter in the blink of an eye.

“CEFTA will go ahead with or without Bosnia and Herzegovina, and BiH will be far more affected than the other countries if it chooses not to abide by the treaty,” Maroevic said.

For all those reasons both the Bosnian Council of Ministers and the EU are hoping that the Bosnia parliament’s second chamber, the House of Peoples, will apply what they consider common sense, and reject the protectionist law.

The vote in House of Peoples will determine whether at the first meeting of CEFTA countries, which will take place on September 28 in the Macedonian city of Ohrid, Bosnia will appear as a full member or as an observer without the right to vote.

Drazen Simic is freelance journalist. Balkan Insight is BIRN’s online publication. This article was published as part of the project: "Bosnia and Herzegovina and Neighbours: Training and Reporting on Economic Dialogue" supported by the British Embassy in Sarajevo.

source: BIRN