International trade is very important for both economic growth and prosperity. It enhances production specialization and economy of scale and raises productivity, thus lowering production costs. This leads to lower prices and higher quality of products and services. Companies competing in a closed economy are less prone to innovation due to protection of high barriers in trade and tariffs which results in lower quality products and higher prices for consumers. On the other hand, fierce competition from foreign companies in an open economy leads to more innovation, new product and overall higher quality and lower prices, all of which benefit consumers. Openness to trade is even more important to small economies due to the fact that few products can be produced in an efficient manner locally.
Freedom of trade in the Balkans
Freedom to trade internationally is present among all countries in the region – almost all countries mark 7.5 or an even higher grade. Albania and Serbia score somewhat lower marks than the rest of the region due to relatively higher control on movement of capital and people which impedes international trade. Furthermore, Serbia is the only country in the region which is not a member of World Trade Organization WTO.
Freedom to trade:
Economic integration boosting freedom to trade
The European Union and the Central Europe Free Trade Area (CEFTA) had a major impact on free trade in the Balkans. CEFTA was established in 1992. as a free trade area of transition countries prior to their EU accession – it continues to serve as a waiting room for EU accession to this day because all the transition countries that became full EU members were members of CEFTA. The EU integration process has strongly affected trade liberalization in the Balkans, via the SAA (Stabilization and Association Agreement) which stipulated lowering trade tariffs and other barriers to trade prior to EU membership. Greece, Bulgaria and Croatia joined the EU in 2007. and 2013, while Serbia, Montenegro, Albania, Macedonia and Bosnia and Herzegovina are members of CEFTA with EU candidate or potential candidate status. Croatia’s accession to EU membership has changed trade statistics, lowering the impact of CEFTA and increasing the importance of the EU. Another important issue is opening to foreign markets and foreign investments which brought European credit institutions and companies in the region which boosted economic growth and trade.
Importance of regional trade
Regional trade is of great importance for Balkans countries, but mostly for members of CEFTA whose 15% of trade is done with their partners from this integration, which is understandable bearing in mind the fact that these countries mostly share common history, language and culture but also under developed economies and similar production which means they more likely to compete with one another on foreign markets than cooperate through trade. Further development would boost regional trade most likely via intra-industry trade, especially if more liberalization takes place. There are no tariffs on industrial goods within CEFTA, but tariffs on agriculture products as well as non tariff barriers still remain. An interesting fact is the notion of intra-ethnic trade between some of the countries – some countries trade more between themselves than it would be expected by trade gravity models (this is the case of Bosnia and Herzegovina where Republika Srpska trades more with Serbia and Croatian cantons trade more with Croatia). Recent trade disputes in the region (regarding Croatian export of tobacco and Macedonian import of wheat flour) were successfully pacified via negotiation. Agriculture products remain the most traded good within CEFTA. Regional trade is less important for older members of the EU in the region – Greece and Bulgaria – which can be explained with their higher involvement in the world market.
EU as the major trade partner
European Union is the dominant trade partner with almost 50% or higher share in all Balkan countries’ trade with the world. The most important European countries for the region are Germany and Italy. Outside of the EU, the Russian Federation is the biggest exporter to the region, due its massive energy resources. The share of trade with the EU is expected to further rise in the future due to the EU enlargement. Freedom of trade in the future will be most likely influenced by the EU integration process, on one hand with the ability of Balkan countries to join the EU, and on the other with the ability of the European Union itself to promote freedom of trade. For the time being, the EU has been successful in promoting freedom of trade among its member countries, but the rising business regulation (such as barriers to entry, licenses and quality standards) could hamper the freedom of trade.