CROATIAN TRADE SPAT WITH HUNGARY

UNCLAS ZAGREB 002654

SIPDIS


SENSITIVE

VIENNA FOR FAS

E.O. 12958: N/A
TAGS: EAGR ETRD HR
SUBJECT: CROATIAN TRADE SPAT WITH HUNGARY


Sensitive but Unclassified -- please handle accordingly.

Summary
--------------


1. (U) Recent headlines announcing the death of the
Hungarian-Croatian Free Trade Agreement are premature, but
not by much. Hungary's decision to raise tariffs on
selected Croatian products may be a last gasp of
exasperation before Hungary apparently loses its ability to
single out countries for special treatment upon its entry
into the EU. While trade negotiators and veterinarians
will hopefully find a compromise over the meat
certification issue that has provoked this mini-trade war,
the Minister of Agriculture has warned that Hungary has
more to lose than Croatia should Croatia decide to
reciprocate. End Summary.

Another case of BSE-fallout?
--------------


2. (U) The trade tensions that ultimately resulted in
Hungary raising its tariffs on December 9 on 15 items --
mainly processed food -- arose out of a Croatian decision
in May to ban all meat products from livestock fed with
bone meal, whether they be ruminants (such as cows) or non-
ruminants (such as chickens and pigs). The U.S. and other
countries argue that there is little risk in using bone
meal to feed animals that do not contract BSE-like
diseases. Croatia itself banned the practice of using bone
meal feed for all livestock three years ago, whereas
Hungary (like the U.S.) at first only banned the use of
bone meal for ruminants when BSE first broke out in Europe.


3. (SBU) According to our contacts at the Ministry of
Agriculture, after originally protesting the Croatian ban,
Hungary adopted a similar measure this past summer.
However, it gave its agricultural producers 60 days to
implement the measure, presumably in order to give them
time to use up existing bone meal stocks and to find
substitutes. Croatia duly lifted the ban on products from
Hungary, as long as they were "bone meal free."


4. (SBU) While Hungary wanted Croatia to accept meat
products from a list of about 200 Hungarian companies that
Hungarian veterinarians were willing to certify as bone-
meal-free (companies which had adopted a "voluntary ban"),
Croatia demanded testing and traceability. The Croatians
wanted to do random checks of a number of these "bone meal
free" meat plants. This apparently was the final straw for
the Hungarians


5. (U) On December 9, Hungary suspended FTA rates for 15
Croatian products. In effect, the low FTA-rates reverted
back to MFN rates. This can be a high barrier -- in one
example, the tariff on dried soups jumped from four percent
to 32 percent. The Croatians claim this was done without
prenotification and in violation of the provisions of the
FTA, which calls for consultations if "interests" are
damaged and before any privileges are withdrawn, though
they admit the Hungarians had indicated there would be
consequences if Croatia continued to block pork imports
once Hungary had a comprehensive ban in place. The
Croatians claim they learned of the tariff changes the day
they were implemented. While exports to Hungary only make
up less than three percent of Croatian exports, the tariffs
hit a few companies, most significantly Podravka, hard.
While Prime Minister Racan has spoken of how a trade war
would hurt everyone, Minister of Agriculture Pankretic has
pointedly reminded the Hungarians that they have more to
lose than Croatia. In the first 10 months of 2003, Croatia
exported only $67 million of goods to Hungary, but imported
$350 million from that country.

Or Croatian Protectionism?
--------------


6. (SBU) While Croatia is probably motivated partly by
protectionism, the picture is a bit more complicated than
that. While Hungary is reportedly facing a surplus of pork
and depressed prices, Croatia is actually in a shortage
situation, especially for higher quality pork, and has been
importing pork for a number of years. Shortages have been
exacerbated by foot-and-mouth disease in some of its source

countries. Nevertheless, Croatian pork producers have
tried to urge the government to "encourage" meat processors
to use lower quality, higher priced Croatian pork. They
can argue that with the total bone meal ban they have lived
with for three years, they face higher costs and need a
level playing field. This justification will be eliminated
in a few months time, when the generation of Hungarian pigs
old enough for slaughter will all be from the post-ban era.


7. (SBU) Additionally, Croatian officials are extremely
cautious -- even over-cautious -- in the face of public
concern about BSE. Bureaucratic pride may have played a
role as well -- the Hungarian veterinarians did not like
having their certificates questioned, while the Croatians
did not like being told they did not have the right to
verify these certificates.


8. (SBU) While the FTA will lapse upon Hungary's entry
into the EU in May 2004, Croatia will then face in the
Hungarian market the generally low preferential tariffs it
enjoys with the EU. Our contacts tell us that Hungary
should lose its ability to single out countries for
punishment (the possibility of misusing sanitary measures
will remain, no doubt). However, May is a long way off for
the companies that are negatively affected, and the GOC
hopes to negotiate a solution. If not, Croatia may well
retaliate.

FRANK


NNNN