Customs wars in the Balkans

A “Disney Store” in Pristina Kosovo. Photo: Andy Mabbett (CC) commons.wikimedia.org

Chicken or egg

At the beginning of last November, Kosovo authorities imposed tariffs on goods imported from Serbia and Bosnia and Herzegovina, breaching the very principles of the Central European Free Trade Agreement (CEFTA). On November 6th, ten per cent tariffs were introduced as “protective measures on the import of all products produced in the Republic of Serbia and in Bosnia and Herzegovina”. The tariffs were further increased two weeks later to 100 per cent, after Serbia blocked its former province from joining Interpol.

“We are a witness that, for a long time, Kosovo has been blocked, was not allowed to exercise the rights of the CEFTA, has been hampered through the origin of the goods by not recognising the origin of goods, hampered in transport, analysis and in every other instrument. CEFTA has not worked between Kosovo and Serbia, and this is proof. Serbia is also violating national security so this is the approach that has come from Serbia in continuity in recent periods,” said Ramush Haradinaj, Kosovo’s prime minister.

Serbian exports to Kosovo in 2017 (mostly food, livestock, manufactured goods and chemical products) amounted to 439.5 million euros. Serbia notes a significant surplus in trade with Kosovo – only 21.8 million euros’ worth of imports. In 2017 Bosnia and Herzegovina (BiH) exports to Kosovo amounted to 78 million euros, and 80 million for last year; and it brought a surplus in foreign trade to the country (in 2017 imports amounted to 7.9 million euros). Most exported products are milk, oil and paper. According to local analysts, Pristina’s decision had a devastating effect on the BiH economy. Up to 10,000 jobs in BiH could be endangered as a result. And indeed, according to Kosovo authorities, within two months imports fell by 99 per cent. Needless to say, Serbia is the archenemy of Kosovo, while Republika Srpska of BiH remains a lesser evil. The question of trade balance overlapped with the question of name recognition. Just as in other cases in the region, the governments end up mixing purely economic issues with highly political ones.

CEFTA and its shortcomings

Kosovo’s actions were immediately criticised by the European Union and triggered repercussions from Belgrade and Sarajevo/Banja Luka. This silent war, however, has been going on for quite some time. Instead of tariffs, individual countries use non-tariff measures. By principle CEFTA was seen as a hope for economic growth in the region, and a path for more efficient integration with the EU. However, differences in trade balance and international political disputes hindered the region’s economic integration. Yet, how did the Balkan states end up as signatories of CEFTA in the first place? Much earlier, in the 1990s, CEFTA become an important steppingstone for Poland, the Czech Republic, Hungary and Slovakia and later on Bulgaria, Romania and Slovenia on their road towards the EU. For countries in transition, CEFTA became a training ground for developing a market economy and free trade.

Michael Davenport, the head of the EU delegation to Serbia, explained during the conference titled “Ten years of the CEFTA agreement implementation” in 2016 that the agenda of regional economic integration is in accordance with the integration agenda in the context of the Berlin process – an initiative which aims to revitalise the integration of the Western Balkans with the EU by strengthening ties between the Balkan states and Western European core participating members (i.e. France, Italy, Austria and, of course, Germany). However CEFTA should stimulate and encourage co-operation between the Balkan states themselves. Extra- and intra-regional co-operation could constitute another stabilising factor in this politically shaky part of Europe and be another anchor holding the Balkan ark in EU waters. Indeed, tracing the seat of the general secretary of CEFTA we shall not find it in Belgrade or any other Balkan city, but in Brussels.

Why, then, not focus directly on the integration of the Albanian and post-Yugoslav economies with the joint European market? Practice shows that only gradual economic integration allows the weaker economy to develop, allowing it to become a partner rather than subcontractor in the European equation. In other words, if Macedonia jumped into the EU swimming pool, for example, it would almost certainly drown. CEFTA plays an important role in this process. The member states of the agreement have a similar level of development, and it therefore enables competition of equals that would not be possible with or within the EU.

This idea has been transmitted, along with EU enlargement, from Central Europe – where it played a relatively successful role in the 1990s (although under somewhat different circumstances) – to the Balkan countries aiming at EU membership. Croatia joined CEFTA in 2003 (and left in 2011 after entering the EU). Macedonia joined in 2006, followed by the other Western Balkan countries the next year. An additional boost to economic exchange was added after the launch of the Berlin Process in 2014, which emphasises regional economic co-operation as the prerequisite of further integration with the EU. It seems that the EU member states wanted first to strengthen the Balkan countries economically, and only thereafter bind them institutionally with the EU. The idea, as good as it seemed, failed due to the reasons outlined above.

Real victor

Unfortunately for some countries, CEFTA does not spread its benefits equally. While Serbia notes a clear surplus in trade with other CEFTA countries, Kosovo is one of the losers. In fact, many indicators suggest it did not have the expected positive impact on the development of the economy in Kosovo at all. Since 2002, exports to CEFTA countries never crossed 20 per cent of Kosovo imports, which resulted in a high and growing trade balance deficit. All the other countries in the region also note significant trade deficit with Serbia. And Serbia remains the only country noting a surplus in trade with all the other CEFTA states, with exports doubling the amount of imports.

The data illustrates the domination of Serbia in regional trade. CEFTA signatory states are second, after the EU foreign trade partner of Serbia. Serbia notes a surplus in trade worth 2.1 billion euros, exporting more to the CEFTA economies than to Russia, China and America combined. Therefore, it became not only a matter of an exercise in free trade and closer regional co-operation before joining the EU, but a matter of survival for the weaker parts of this set up.

Serbian pushes

“All signatory countries to this agreement increased their exports to the EU by 75 per cent … ten years ago Serbia exported goods worth 1.8 billion euro to the countries of CEFTA, a decade later 2.8 billion. In trade with these countries, Serbia, before the agreement, had a surplus of 1.1 billion euro, while today it is 2.1 billion euro,” said Rasim Ljajić the trade minister of Serbia. This is not the end of the good news; according to the numbers presented by Ljajić, Albania exported 40 per cent less than their capability, Bosnia and Herzegovina 35 per cent, while Serbia and Kosovo exported 30 per cent less than they could send abroad. Experts calculate that, in order to achieve a good standard of living, it is necessary that the volume of exports for each of the individual countries CEFTA amounts to 50 per cent of gross domestic product. At the moment, however, it oscillates between 30 and 40 per cent. From Serbia’s perspective, CEFTA reflects a positive trend in regional and international trade.

The minister also indicated how to deepen integration and increase trade: “We should harmonise the Protocol 5 on trade facilitation, reduce waiting lines at the borders, do more work on the harmonisation of customs and the recognition of documents. We expected ratification of the protocol by March 2017, but due to the political situation in Macedonia this date is unlikely to be the case.” Unfortunately for exporters and Ljajić, CEFTA notes a deterioration of integration rather than an increase. And the current developments only confirm this negative trend.

The customs wars have as long and complicated a history as the region itself. Regardless of the political discourse and chauvinistic slogans, the economy and the economic goals almost always play an important role in the conflict. In the 19th century, demographics and access to trade routes pushed Serbian expansion towards the southern borderlands of Bosnia and Herzegovina, and through Macedonia and Kosovo towards important harbours in Durrës and Thessaloniki. Kosovo’s fertile lands and mineral rich mountains provided an incentive for Serbian rulers in the medieval ages and later Albanian settlers to claim this province.

During the latest stages of the Kosovo struggle for independence in the 2000s, the Serbian government had two options. First, they could block the external borders of Kosovo with Serbia (through which two-thirds of Kosovo’s trade was flowing) and hurt their southern neighbour economically. This move, however, had three disadvantages. Firstly, as practice shows today, it would be critically received by the West. Serbia, already with bad press, would face serious criticism and probably some sort of deterioration in relations with the EU. Secondly, it would force Kosovo importers to look for alternative sources and routes which would eventually have happened (as it did in 1905 during the “Pig War” when the Habsburg Empire imposed tariffs on the main Serbian export product, pork). Finally, a blockade would harm Serbian exporters more than Kosovo’s economy, since the imbalance in trade was clearly in favour of Serbian entrepreneurs.

“Instead of stopping Serbia’s exports to Kosovo, Belgrade blocked Kosovo’s exports to Serbia in December 2008. Along with Bosnia and Herzegovina, Serbia forbade the usage of its territory for the export of Kosovo goods to the EU market. Serbia justified its blockade based on the change in customs stamps… This, according to Serbia, was considered a violation of the CEFTA agreement,” notes Agron Demi, a policy analyst at the Pristina-based GAP Institute. “This blockade lasted until summer 2011, when Kosovo took reciprocal measures, stopping Serbian goods from entering Kosovo. After a 58-day blockade, Serbia was forced to accept stamps [issued] by Kosovo customs, and Kosovo also withdrew its blockade for Serbian goods. During this 58-day embargo, the Kosovo market reacted by increasing imports from Bulgaria and Macedonia. Furthermore, local producers reported that they had one of their best sales periods during that time. For example, paper producers reported that during those two months their sales tripled.”

Strikes and counter-strikes

The customs tensions followed, though limited to non-tariff barriers. “In addition,” writes Demi, “transit across Serbia faces very serious barriers especially when importing from EU member states through Serbian territory … however, Serbia is showing a very serious lack of sustainability because of the demands that Kosovo’s producers must meet … There have been several meetings within CEFTA as well as bilaterally with the Serbian authorities and despite all attempts by the Kosovar side, no permanent solution has been found.”

Without going deeper into the eternal question of “who started this war”, it is clear that there are strikes and counter-strikes in this fight. And not only within this one – Kosovo and Serbia are not the only trading adversaries in the region. Another fighting couple is Macedonia and Serbia. It thus nullifies the claim that any reason behind conflict in the Balkans is deeply rooted in history so therefore it is unsolvable.

“Serbia threatened a trade blockade unless Macedonia freed imports of Serbian flour,” read the headlines in the Macedonian media in 2015. Macedonia tried to protect its market from increasing imports of Serbian flour by issuing fewer “control marks” required for foreign products (in this case flour) entering the Macedonian market. Two years earlier, Macedonia preconditioned imports of Serbian flour and wheat by imposing obligations of re-importing Macedonian flour and wheat by a ratio of 4:1 and 2:1 respectively. In other words, Serbia was able to send one kilogram of flour to Macedonia if it bought four kilograms of Macedonian flour. For one kilogram of wheat exported from Serbia to Macedonia, Skopje demanded that two kilograms be exported back to Serbia. It clearly had little to do with free trade and more to do with the protection of local producers. In both cases Serbia introduced counter-measures that efficiently reduced Macedonian claims. In 2015, the Serbian government introduced a drastic increase in border control regarding the import of Macedonian food products, including wine.

At the same time, Bosnian authorities discussed a new rate of taxation for breweries. Large ones would pay a high rate of tax, while smaller enterprises would pay a lower rate, all depending on the quantity of production. The new taxation also concerned imported beers. It just so happened that Serbian breweries were the largest exporter of beer to Bosnia, and the new taxation rates would make imports less profitable. The conflict between Serbia and Kosovo will most likely end up in the arbitrary court provided by CEFTA. The proceedings will last for months and years, an amount of time that Serbian exporters simply do not have.

The stagnation of European integration in the Balkan states, and the relatively small rate (30 per cent) of CEFTA in the overall trade of the member states means that the customs war, although harmful, will not ruin the economy of Serbia or Kosovo; rather, it will force them to look for alternative markets. More importantly, it indicates that regional co-operation in politically “neutral” matters, like trade, can also fall victim to politicisation.

Do we face a Balkanisation of trade? Or perhaps peripheral countries will be forced to play according to different rules? The stagnation in which they are playing the European game is filled with deadly traps, like the status of Kosovo, the statehood of Bosnia and Herzegovina or, until recently, the name of the Macedonian republic. In addition to this, local economies are weak and citizens are often living below acceptable conditions. In circumstances like these, frustration of certain social groups can easily spill over into a major political challenge.

Jan Muś is a lecturer of East European, Balkan and Baltic studies at the University of Helsinki.

CEFTA, Kosovo, Serbia, trade agreement