Croatia’s Accession to the EU and Changes in the Regional Trade

Croatia is well on its way to become the 28th member state of the European Union (EU). After seven years of extensive entry negotiations, this country of 4.3 million people has fully accepted the European acquis and, thus far, 12 member states have ratified the Treaty of Accession. Croatia’s accession to the EU in July 2013 will bring many political, institutional and economic changes to its internal structure, as well as to regional relations.

The Road to Accession

One of the challenges that entry negotiations had placed upon Croatia’s administration was a politically sensitive cooperation with the International Criminal Tribunal for the Former Yugoslavia (ICTY), which the country completed by capturing general Ante Gotovina, indicted for war crimes by the ICTY. The Croatian government also had to deal with a pervasive problem of political corruption, going as far as arresting and indicting its ex-prime minister Ivo Sanader. Many other demands were placed upon Croatia’s administrations and the negotiation process opened 33 chapters that needed to be implemented. These acquis chapters range from legal and institutional standardization for a free(er) movement of goods, workers and capital to changes in environmental, social and juridical systems. Deeper implementation of the acquis in the future will leave a profound impact on Croatia’s institutional arrangements. Nevertheless, the accession to the EU will also produce a number of important economic consequences that will most certainly reverberate throughout the Balkan region. Despite the war that had left Yugoslavia disintegrated politically, Croatia and its neighbors are deeply integrated in economic terms. Due to mutual preferential treatments within the Central European Free Trade Agreement (CEFTA), trade between Croatia and Bosnia and Herzegovina (BiH), for example, rose to €1.5 billion in 2010 making BiH the second largest importer of Croatian goods (11% of its exports). This tells us that Bosnia and Herzegovina and other countries in the region will certainly need to adjust their trade patterns and Croatia’s entry will affect their exporters and producers.

Structural Funds and Immediate Benefits

One of the most important immediate effects for the Croatian economy is the access to the European Structural and Cohesion Funds that will provide around €690 million in the first six months of Croatia’s membership, and during the first year the country will be a net receiver of the EU money. These funds will be used to co-finance various projects and the Croatian government’s participation in them should range from 15% to 25%. Fears that the government would not be able to co-finance the projects were brushed away – at least briefly – by the recent improvement in Croatia’s credit rating outlook. Fitch positively revised Croatia’s outlook from negative to stable due to fiscal progress, consequently lowering the country’s costs of borrowing.

Free Movement of Goods, Workers and Capital

Another argument used by the proponents of the EU accession is the fact that Croatia’s businesses will gain vital access to the EU’s internal market of over 500 million people. Croatia is already well integrated with the EU in economic terms and the share of European countries makes up around 61% of Croatia’s exports and 60% of its imports. Besides access to the market, free movement of workers will enable many people from Croatia to find better job opportunities on an equal footing with domestic workers of the EU. This, of course, could lead to a severe brain drain.

Agriculture in Problems

On the other hand, the EU membership will bring difficulties for some producers as they will face tougher competition from other EU countries and strict standardization measures for entering the market. There are already fears that Croatia’s steel industry and shipbuilding will suffer greatly, since direct subsidies by the state are against the EU competition law and ought to be cut. Another industry that might end up being in dire straits in the short term is agriculture. Besides protests against the loss of autonomy over agricultural policy-making, Croatian farmers have also complained that their products will face harsh discrimination and will not be able to compete with the flood of EU products. Although there will be around €670 million in European funds dedicated for direct subsidies and rural development in Croatia, previous low utilization of the so-called IPARD agricultural funds (only 7%) indicate potential problems with subsidizing farmers with the EU money. Over the next ten years, the share of EU funds in direct subsidies and rural development will rise from 25% to 100% and the Croatian government is hastily trying to increase awareness and knowledge about project proposal-writing and the EU funds in general.

Regional Changes in Trade

As I have already noted, CEFTA (signed by Albania, Bosnia and Herzegovina, Croatia, Macedonia, Moldova, Montenegro, Serbia and UNMIK on behalf of Kosovo) plays an immense role in the regional trade. Nevertheless, Croatia is bound to abolish this Agreement after July 1st 2013, since it has to introduce the so-called Common External Tariff towards the non-EU countries. This will greatly impact the regional trade patterns. Croatian export of industrial goods to BiH (which constitutes around 60% of the total) will remain unchanged. On the other hand, the price of Croatian meat, fruits, vegetables and milk products will rise sharply in BiH due to the change in tariff regime. Instead of CEFTA, Bosnia will apply higher tariffs which it holds for the entire EU. In the case of Bosnian exports to Croatia, an increase in tariffs is expected for four kinds of produce: beef, sugar, wine and fish. Nonetheless, Bosnia’s exports to the EU are heavily regulated and strict standardization rules apply, which effectively renders many of its products “un-exportable”. Moreover, recent negotiations between BiH and Croatia concluded that there will be only two official export border crossings and this is going to increase transportation costs for many Bosnian producers, lowering the competitiveness of their products in the Croatian market.

Serbia Takes Over?

This void in the remaining CEFTA domestic markets made by the higher prices of Croatian products could quite easily be filled with Serbia’s exports. This country will likely take the leading role in the CEFTA and it will be able to sell its products under preferential treatment not just to other CEFTA partners (though limited by quotas) but also to Croatia, since there are no quota limits for trade with the EU. A recent increase of Serbian investments in Bosnia and other countries of the region indicates that Serbian producers (especially in the milk and food industry) are positioning themselves to take over the market. Another instance of positive side effects for Serbia is the cigarette industry. The country has been importing around 32% of its cigarettes from Croatia and its domestic industry will likely receive a new impetus since the import tariff from the EU – currently at 57.6% – is very high. In addition, there are indications that certain producers from Croatia might move their factories to other CEFTA countries to preserve the preferential status within the trade zone.

Conclusion

There are many positive sides of Croatia’s accession to the EU. This has been the country’s strategic goal for the last 10 years and it will certainly build its future within the Union. On the other hand, the historical moment does not seem to be so pleasant. The eurozone is in crisis and the faltering global economy will certainly make it harder for Croatia to cope with all the demands. Moreover, its entry will change regional trade patterns and might induce problems for certain industries in neighboring countries. Nevertheless, Croatia will most probably remain deeply integrated with the region and provide immensely useful guidance, advice and support for other Balkan countries on their way to the European Union.

Marko Radovanović

2012