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The Road to Stability and Prosperity in South Eastern Europe
A Regional Strategy Paper

Chapter 3: Trade Integration for South Eastern Europe in the Context of the Stability Pact

3.1   Trade integration must be an important and, based on past experience in Europe and elsewhere, probably the leading component of the broader, longer term integration of the countries of South Eastern Europe (SEE) into EU structures as called for by the Stability Pact. These countries are so small that their development depends critically on international trade and access to the European market, which typically accounts for more than 50 percent of their exports.²⁰ Trade integration is also essential to reduce the dependence of these countries on aid from Europe and the international community.

3.2   This long-term vision of regional cooperation and eventual integration with the EU contrasts sharply with present reality. Trade relations in the countries of the region are characterized by a variety of restrictions and impediments to trade with each other and with the rest of the world. Moreover, relations with the EU are shaped by a variety of different bilateral trade arrangements which reflect the different state of play of bilateral relations of these countries with the EU. These range from "Europe" agreements with Bulgaria and Romania—which have recently been invited to initiate negotiations for full EU membership—to Cooperation Agreements with FYR Macedonia and Albania, to lack of contractual relations with Bosnia and Herzegovina, Croatia and FRY.

3.3   This Chapter outlines a strategy for moving towards fuller trade integration of the SEE countries with the EU. It addresses trade relations among these countries, between these countries and the rest of the world, and in particular between these countries and the EU. In the latter case, it explores various alternatives which take into account the situation in individual countries and the perspective of EU membership. The focus is on five SEE countries (SEE-5, Albania, Bosnia and Herzegovina, Croatia, FYR Macedonia and FRY) and on the economic aspects, although it is recognized that both the prime motivation and the end objective of trade integration may be political rather than economic.

3.4   In this light, it should be stressed that there are many institutional capacity and trade policy constraints in SEE countries which need to be urgently addressed, irrespective of the prospects of integration with the EU. For example, reforms which result in lower and more uniform protection, exclusively through tariffs, or increase their supply capacity to export would yield very significant benefits to the SEE countries. Because of their relatively small size and the low level of trade and investment links with the rest of the world, these economies would also greatly benefit from increased external demand for their products, and from the learning and innovation that are associated with higher levels of foreign investment. Integration in international trade with the rest of the world, including through membership in the WTO, should be actively pursued. Naturally, the EU would be the main source of increased external demand as well as foreign investment, as it already is, because of geographical proximity, size and openness.

3.5   There is also little doubt that intra-regional trade can expand and be a stimulus for growth, even though the economic structures of some of the countries are quite similar, leaving less room for obvious increased trade opportunities based on structural complementarities. The size of the economies and markets of South Eastern Europe suggest that the stimulus would be far smaller than the stimulus provided by closer integration with the EU and should not be seen as an alternative to EU integration; but progress in intra-regional integration is needed both for its direct economic benefits and the contribution it makes to the wider political integration of these countries. At the same time, increased intra-regional trade should not imply the re-establishment of some of the economic links that existed under the former Yugoslavia—which would be neither desirable nor feasible.

B.  Trade Patterns

3.6   Trade plays a varied role in the SEE economies, with trade/GDP ratios ranging from a high of 91 percent in FYR Macedonia and Bulgaria, to a low of 30 to 40 percent for Albania and FRY (see Table 3.1). In terms of aggregate size of the trade sector, there is a big divide between Bulgaria, Romania, Croatia and FRY on one hand, and the much smaller and poorer Albania, Bosnia and Herzegovina, and FYR Macedonia, on the other.

3.7   The EU is the biggest trading partner for all SEE economies, ranging from just under 90 percent of exports in the case of Albania to around 46 percent in the case of Croatia (Table 3.2). On the other hand, all of these economies together account for a very small fraction, 1.6 percent of EU imports from and 4.4 percent of exports to third countries. These countries are simply not major markets for EU exporters and are even less important as competitors to EU industry and agriculture. Excluding Bulgaria and Romania they account for less than 1 percent of extra EU imports—and of course much less of the EU market, if EU production and intra-EU trade are included.

3.8   But these indicators, as well as others involving trade performance, must be interpreted with considerable caution because of the following factors: (a) trade totals are distorted by conflicts and trade blockades against FRY, and strained relations between FRY and Croatia; (b) there is considerable evidence of unrecorded trade flows between some countries and regions; (c) some import categories (e.g., agricultural products) have been constrained by EU quantitative import restrictions.

3.9   Intra-regional trade is on average small, 12 to 14 percent of the total (Table 3.2). But this average conceals very wide variations: trade can be very substantial between two specific countries or regions, e.g., Croatia with parts of Bosnia and Herzegovina (over 30 percent); and FYR Macedonia with almost all countries in the region (Table 3.2). Some portions of this trade are unrecorded, for example between Republika Srpska (RS) and FRY. In contrast, there may be almost no trade between some countries for political or other reasons, for example between Croatia and FRY, or Albania and Croatia.

3.10   Detailed information on the commodity composition of trade is currently available only regarding SEE trade with the EU. Exports of SEE countries to the EU tend to be concentrated in five sectors: agricultural and related processed products, textiles and clothing, iron and steel, wood products and shoes (Table 3.3). Only in four of these categories—iron and steel, textiles, shoes and wood products—do these exports account for more than 1 percent of EU imports from all sources (See Tables 3.3 and 3.4).

3.11   Exports of textiles are important to all countries: the share in exports ranges from 18 percent in the case of FRY to 39 percent for FYR Macedonia. Around 65 percent of Albania’s exports to the EU are accounted for by textiles and shoes. But some of countries, e.g., Bulgaria and Croatia, have a more diversified export structure.