Trade freedom is an important element of overall economic freedom. It allows for higher level of specialization than in a closed economy and international division of labor. This drives rise in productivity, allows for economies of scale and lowers overall costs of production of goods and services. Major savings can be made with imports from relatively cheaper countries. Companies facing fierce international competition must always better the quality, innovate and rise productivity to be able to present valuable products to international market. Highly protected, with tariffs and barriers, domestic industries are not instigated to innovate, lower the costs and introduce new products. This is bad for consumers who can buy products at higher purchasing prices.

Throughout the whole region of Western Balkans a high level of trade freedom is present. This is the result of at least two important processes that took place in the past two decades. Firstly, EU integration provided a framework of trade liberalization through Stabilization and Association Agreement. Sooner or later, all countries were either in the process of signing the document or already taking important regulatory steps to open their borders for European goods and services. This process also introduced framework for regional trade cooperation through CEFTA (Central European Free Trade Agreement) which was intended to implement free trade zone to transitional countries of Europe. Better in theory than in practice, this agreement still provided some additional push to free trade. After the big enlargement of EU in 2004 and 2007, Albania, Bosnia & Herzegovina, Croatia[1], Macedonia, Moldova, Montenegro and Serbia[2], stayed in CEFTA and were obligated to cut import taxes to zero among each other.

The second important process for transitional countries is their opening to global markets and foreign investment. This asked for rapid integration of banking and credit system to European networks. Also, foreign companies provided new trading lines for particular industries, all of which led the way of fast increasing volume of trade in the region.

Trading with neighbors 

Both mentioned processes induced strengthening of trade cooperation between EU and Balkan countries, as well as between neighboring states. However, CEFTA agreement presented much less benefits than expected. Main reasons for this are non-tariff barriers and underdeveloped structure of regional economies. Total volume of trade (sum of exports and imports) between Freedom Barometer Western Balkan (WB) countries amounted to 9.96 billion EUR in 2012[3] or 14.4% of total trade of these countries. At the same time, WB countries have 4 times greater total volume of trade with EU27 than among themselves, or 57.5% of total trade.

Regional countries have similar structure of production of goods. They are competing for the same export market to EU with similar goods. Still, these countries are dependent upon imports of industrial goods and services from EU27 and are not able to substitute this with own production. Additional obstacles for inter-regional trade are non-tariff barriers that significantly drive up time and money costs of trade – mainly complex and nontransparent custom procedures. Also, for example, there is deficiency of laboratories for testing the import goods.

The trade structure is not homogeneous. Albania still lags greatly in inter-regional trade with just over 5% of total volume. This is the result of still low level of openness of Albania to its neighbors and lack of integration. On the other hand, Montenegro does almost half of its trade with the region, with Serbia as the major partner (600 million EUR) while Bosnia is highly dependent on trade with Croatia (1.7 billion EUR).

EU as major trade partner

As expected, EU is the major trade partner in total for all regional countries. All CEFTA countries trade between 66% and 50% of total volume with EU27. More than ¾ of the volume in WB countries is traded with EU28 and candidate countries. And, along the track to EU accession and entering the customs union, we can expect that this number will increase further for every state in WB. In conclusion we can assert that EU is the major trade partner and its importance will increase further.

Therefore, the most important factor for future trade freedom in WB countries will be, on one side, ability of a country to join EU as soon as possible and, more importantly, the ability of EU to promote and ensure free trade internationally. EU does provide significant framework for relatively free trade within the customs union. However, with recent track of increasing inner-trade regulation, industry policy and ramping barriers of entry into particular industries, trade freedom prospects could be hampered. 

[1] Croatia left the CEFTA agreement on 1st July 2013 after EU accession.

[2] UNMIK Kosovo entered CEFTA Agreement. However, Kosovo membership is not clearly defined after the UNMIK mission ended. This hampered implementation of CEFTA agreement and disputes between Pristina and Belgrade resulted in trade “war” throughout 2011. Major improvements occurred in recent years and complete implementation could be introduced in the near future after the recent agreement between Belgrade and Pristina authorities.

[3] CEFTA trade statistics 2012