CROATIA FIRM ON CEFTA POSITION

C O N F I D E N T I A L ZAGREB 001400

SIPDIS

SIPDIS

STATE FOR EUR/SCE RIEHL
USEU BRUSSELS FOR MOZUR

E.O. 12958: DECL: 11/20/2016
TAGS: ETRD ECON PREL BK SR HR
SUBJECT: CROATIA FIRM ON CEFTA POSITION

Classified By: Econ Officer Nicholas Berliner for reasons 1.4 b/d.


1. (C) Summary: Croatian officials have expressed regret at
the inability to reach agreement with Serbia and BiH over
CEFTA, but are firm in their view that any departure from the
terms of existing bilateral agreements in the CEFTA context
that does not result in greater trade liberalization is
unacceptable. Croatia cites the Joint Declaration signed by
the regional prime ministers in Bucharest in April 2006 in
which the parties agreed to "build on the bilateral trade
concessions provided for in the existing bilateral free trade
agreements..." as the basis for this position, maintaining
that acquiescence to Serbian and Bosnian demands for what
Croatia considers protectionist measures runs counter to the
objectives of the CEFTA process and the spirit of the WTO.
According to the Croatian Ministry of Economy, Croatian
exports to both Serbia and Bosnia have fallen as a result of
non-compliance with existing bilateral agreements, while
imports from both countries have risen. In the Croatian
view, pressure to accept trade barriers in CEFTA is motivated
not by free trade principles, but by larger political
objectives to support Serbia and BiH. While supportive of
both neighbors, the GOC does not believe that it should be
asked to pay economically, as its own economic growth is
still fragile fifteen years after the war and threatened by
chronically large trade deficits. End Summary.


2. (C) Croatian Assistant Minister of Economy Igor Lucic told
econ off recently that Croatia was firm in its position of
rejecting protectionist measures sought by Serbia and BiH to
reach agreement on CEFTA. Despite wanting to reach a deal by
the December deadline, Croatia believes that a bad deal with
Serbia and BiH on CEFTA is worse than no deal at all. He
said the deal proposed by Serbia to drop excise taxes on
cigarettes in favor of higher customs duties was not
acceptable, as it would triple existing duties. Likewise,
Lucic noted that Croatia has reluctantly tolerated BiH's
non-compliance with its bilateral agreement, but could not
countenance BiH's formalizing tariffs on a range of
agricultural products within the context of CEFTA.


3. (C) According to Lucic, Croatian industry and agriculture
has already suffered as a result of Serbian and Bosnian
non-compliance with existing agreements. In the case of BiH,
he said that Croatia has lost about USD 150 million in
exports, while imports from BiH have risen sharply. In the
case of Serbia, Lucic estimated the damage to the Croatian
economy at USD 26 million. He pointed out that neither the
Government of Croatia nor any Croatian business has filed
suit against either BiH or Serbia over their failure to abide
by the terms of the bilateral trade agreements, which they
could legally do.


4. (C) Although the Croatian economy is strong by regional
standards, growth and income levels still lag behind European
levels. In large part, economic growth has been underpinned
by increased consumer demand, fueling an ever widening trade
imbalance - Croatia's 2005 exports amounted to only 47
percent of imports. Coupled with high levels of debt,
Croatia's trade imbalance could endanger economic stability,
which has led the GOC to seek ways of boosting Croatia's
exports. As Lucic underscored, agreeing to a trade agreement
that would potentially reduce Croatian exports to two markets
where the country has been relatively successful would be
against national economic interests and a very difficult sell
politically. The feeling in Zagreb is that the political
objectives of assuaging Serbia before the impending loss of
Kosovo and propping up BiH are being given greater
consideration than principles of free trade in some quarters
of Brussels. While Croatia sees its interest in the
long-term stability of its neighbors, it does not believe
that it should be asked to pay an economic price for this
when it suffers from high unemployment and its own economy is
yet to recover from the effects of the 1991-1995 war.
BRADTKE