Show Summary Details

Page of

PRINTED FROM OXFORD HANDBOOKS ONLINE (www.oxfordhandbooks.com). © Oxford University Press, 2018. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a title in Oxford Handbooks Online for personal use (for details see Privacy Policy and Legal Notice).

Subscriber: null; date: 18 December 2018

The European Transition Economies

Abstract and Keywords

This article discusses trade policy in the European Transition Economies. The countries covered are the Eastern European countries that became independent in 1989, the new nations formed by the breakup of former Yugoslavia, the countries west of the Ural that formerly were part of the Soviet Union, and Russia. It adds up to twenty-one countries covered over a time period that involves a fundamental transition from planned to market economies. Trade policies have certainly been one of the key reform areas in the transition process. But for many of the countries discussed, it has to be viewed in a broader light of integration with the EU. The article covers historical developments in the region over the past two decades, tariffs, and trade in the region.

Keywords: trade policy, commercial policy, transition economy, Eastern Europe, former Yugoslavia, tariffs

This chapter discusses trade policy in the European Transition Economies. The countries covered are the Eastern European countries that became independent in 1989, the new nations formed by the breakup of former Yugoslavia, the countries west of the Ural that formerly were part of the Soviet Union, and Russia. It adds up to 21 countries covered over a time period that involves a fundamental transition from planned to market economies. Trade policies have certainly been one of the key reform areas in the transition process. But for many of the countries discussed, it has to be viewed in a broader light of integration with the EU.

The chapter consists of an introduction, a section on the historical developments in the region over the past two decades, a section on tariffs, and a section on trade in the region.

In the account of developments over the past two decades in section 1, the countries of the region are classified into four groups: Central Eastern Europe and Eastern Balkans, the Baltics, South Eastern Europe (SEE) and finally, the Commonwealth of Independent States (CIS) countries. This is largely based on geography, independence status in 1989, and progress in economic integration efforts over the last 20 years. While this classification makes sense along some dimensions, each group still includes countries with different economic policies. But since the scope of this chapter is to provide an overview of each group of countries as a whole, it will necessarily make certain oversimplifications. A separate subsection deals with each group.

(p. 309) The first group, Central Eastern Europe and Eastern Balkans, consists of Poland, the Czech Republic, the Slovak Republic, Hungary, Slovenia, Romania, and Bulgaria. The Czech Republic and the Slovak Republic were not independent nations but part of one country, Czechoslovakia, until January 1, 1993.1 Slovenia, independent since 1991, was part of Yugoslavia at the time of the breakup of the Eastern Bloc but has followed an economic integration path similar to that of the first group of countries.

The second group is the Baltics: Estonia, Latvia, and Lithuania. The process of economic integration with Western Europe has come since independence from the Soviet Union in 1991, setting these countries apart from the first group. But there are many similarities between the two groups: countries in both the Baltics and in Central Eastern Europe and the Eastern Balkans are members of the EU, and prior to EU accession, they all joined the WTO.

Until the end of the 1980s, Poland, Czechoslovakia, Hungary, Romania, and Bulgaria were state-controlled and centrally planned economies belonging to the Council for Mutual Economic Assistance (CMEA), the organization through which economic activities were organized in the Eastern Bloc. Discussing the development of trade policy for Poland, the Czech Republic, the Slovak Republic, Hungary, Romania, and Bulgaria therefore consists largely of the account of their transformation to become members of the EU.2 Slovenia has followed a similar path after independence.3 Discussion of trade policy in terms of approaching the EU also holds for Estonia, Latvia, and Lithuania, countries that followed a European integration and trade policy path similar to that of the Central Eastern European countries. Becoming members of the EU has meant adoption of the EU “acquis communautaire”—in particular the rules of the internal market; moving to free trade with all EU 27 members and adopting the EU trade policy in relations with non-EU members.4

The third group, SEE, is made up of the countries—except Slovenia—that formerly belonged to Yugoslavia: Croatia, Bosnia and Herzegovina, Serbia, Montenegro, UNMIK5-Kosovo, and the Former Yugoslav Republic (FYR) of Macedonia. Albania has been placed in this group as well. For these countries, further integration with the EU is a likely outcome, although the progress in this process differs markedly between countries.6

Moldova, Belarus, Ukraine, and Russia constitute the fourth group of countries. They were all part of the Soviet Union and are now part of the CIS. This is probably the most diverse group of countries, despite their close historical and economic ties. For example, Moldova is a small low-income nation with European integration as a possible goal, whereas Russia is a high-powered economic force due to its energy exports. It also carries significant weight as a military force beyond its borders and has no intention to join the EU. This diversity is also reflected in the speed and direction of trade policy reforms.

Table 13.1 provides basic information about the different countries, including dates of independence, EU accession, and regional and multilateral trade agreements.

Table 13.1. Country facts on independence and key trade arrangements

Region

Country

Independent

European integration:

Trade-related preaccession agreements relevant for Central Eastern Europe, Eastern Balkans, Baltics

Preaccession agreements relevant for SEE

Agreements with CIS countries

EU member

Euro

OECD

Regional integration CEFTA/BFTA

CIS

CEZ

EAEC

WTO WTO

Trade and cooperation

Interim trade agreement

Free trade agreement

Europe agreement in force

Agreement w. EFTA

Interim agreement in force

SAA signed

PCA

Central Eastern Europe

Poland

1989

1992

1994

1992

2004

1996

CEFTA 92–04

1995

Central Eastern Europe

Czech Republic

1993

19901

19921

1995

19921

2004

1995

CEFTA 92–04

1995

Central Eastern Europe

Slovak Republic

1993

19901

19921

1995

19921

2004

2009

2000

CEFTA 92–04

1995

Central Eastern Europe

Hungary

1988

1992

1994

1993

2004

1996

CEFTA 92–04

1995

Central Eastern Europe

Slovenia

1991

1993

1997

1999

1995

2004

2007

CEFTA 96–04

1995

Eastern Balkans

Romania

1991

1993

1995

1992

2007

CEFTA 97–07

1995

Eastern Balkans

Bulgaria

1990

1993

1995

1993

2007

CEFTA 99–07

1996

Baltics

Estonia

1991

1992

1994

1998

1995

2004

BFTA 94–04

1999

Baltics

Latvia

1991

1992

1994

1998

1995

2004

BFTA 94–04

1999

Baltics

Lithuania

1991

1992

1994

1998

1995

2004

BFTA 94–04

2001

South Eastern Europe (SEE)

Croatia

1991

2001

2002

2001

Cand.

CEFTA 03-

2000

South Eastern Europe (SEE)

Bosnia and Herzegovina

1992

2008

2008

CEFTA 07-

OG

South Eastern Europe (SEE)

Serbia

2010

2008

CEFTA 07-

OG

South Eastern Europe (SEE)

Montenegro

2006

2008

2007

CEFTA 07-

OG

South Eastern Europe (SEE)

UNMIK/Kosovo

2008

CEFTA 07-

South Eastern Europe (SEE)

FYR Macedonia

1991

2000

2001

2001

Cand.

CEFTA 06-

2003

South Eastern Europe (SEE)

Albania

1992

2006

2006

CEFTA 07-

2000

CIS member

Moldova

1991

1998

CEFTA 07-

CIS

2001

CIS member

Ukraine2

1991

1998

CIS

CEZ

2008

CIS member

Belarus

1991

CIS

CEZ

EAEC

OG

CIS member

Russia

1997

CIS

CEZ

EAEC

OG

Sources: European Commission documents from the Enlargement webpage, EFTA webpage, CEFTA webpage, WTO Regional Trade Agreements gateway, OECD webpage.

OG—Observer Government at WTO.

Cand—Candidate for EU membership.

EA—Europe Agreement.

SAA—Stabilization and Association agreement with EU.

PCA—Partnership and Cooperation Agreement with EU.

CIS—Commonwealth of Independent States (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, Ukraine, Uzbekistan) (note that Georgia left the CIS after the armed conflict with Russia in 2008).

EFTA—European Free Trade Association.

CEFTA—Central European Free Trade Agreement (currently Albania, Bosnia and Herzegovina, Croatia, Macedonia, Moldova, Montenegro, Serbia and Kosovo).

BFTA—Baltic Free Trade Area.

CEZ—Common Economic Zone (Belarus, Ukraine, Russia, Kazakhstan).

EAEC (or EVRAZES)—Eurasian Economic Community (Belarus, Kazakhstan, Kyrgyz Republic, Russian Federation, Tajikistan), a customs union.

(1) Signed by Czechoslovakia.

(2) De facto member but not signatory.

(p. 310) (p. 311) (p. 312) (p. 313) 1. Development since 1989

The move from plan to market in the European Transition Economies that started in earnest in most countries at the end of the 1980s has been the driving force of the vast majority of economic reforms over the last two decades. This section describes trade policies, together with key elements of this broader transition process. Two central themes in this transition are, first, the breakup of the Soviet Union and its extended economic and political sphere, and second, the EU accession process.

Poland, the Czech Republic, the Slovak Republic, Hungary, Slovenia, Romania, and Bulgaria: The Path toward EU Membership

At the time of the breakdown of communism and the Eastern Bloc in 1989, a reorientation toward Western Europe started or was already under way in Czechoslovakia, Poland, and Hungary. Hungary and Poland had implemented some market reforms prior to 1989. One example of such a reform was allowing for small private businesses in Hungary during the 1980s. In Czechoslovakia, on the other hand, the economy was largely centrally planned and state controlled. Czechoslovakia split into the Czech Republic and the Slovak Republic in 1993, but the period of reorientation toward the west began when Czechoslovakia still existed.

One of the first steps toward closer economic cooperation with Western Europe had started in 1988 with Hungary signing a Trade and Cooperation agreement with the European Community.7 Poland and Czechoslovakia followed suit and signed such agreements in 1989 and 1990, respectively. These trade agreements aimed at normalizing trade relations, applying the most-favored-nation (MFN) principle and eliminating quantitative import restrictions (except in “sensitive sectors” such as coal, steel, textiles, and agriculture).

When the leaders of Poland, Czechoslovakia, and Hungary met in the Hungarian city of Visegrad in 1991, one of the aims was to increase integration among themselves and to work together toward EU membership. The Visegrad countries made a joint effort to get a clear roadmap from the European Community, including criteria that would need to be fulfilled and a timetable that would lead to full membership. During the first years of transition, the European Community did not commit to such a schedule, and the discussion within the EU was one of “deepening” cooperation between present members versus “widening” (to allow the EU to expand to include the former Eastern Bloc countries). At the Copenhagen summit in 1993, the EU did commit to admitting its eastern neighbors at some future date, if a number of criteria were met.8

Prior to Copenhagen, however, in December 1991, the Visegrad countries all signed a “Europe Agreement” (EA) with the European Community. Although these agreements did not come into full force until 1994–1995, the parts relating to trade, the Interim Trade Agreements (ITAs), applied from early 1992.

(p. 314) The Europe Agreements formed the legal ground between the EU and the countries aiming at membership. The implementation of the ITAs, and the move toward closer integration with the EU in general, meant both establishing free trade with the EU countries and adopting the EU trade policy in relations with non-EU members.

In the area of trade with the EU, the ITA stated that free trade in industrial goods between the country and the EU should be established within 10 years. Economic legislation within the country should be harmonized with EU legislation. The ITAs recognized that the restructuring of the Eastern Bloc economies would take time and therefore allowed some protection on the part of the Visegrad countries, while the EU was required to reduce import tariffs at a faster pace (“asymmetry”). At the Copenhagen summit in 1993, a more accelerated schedule for the reduction of tariffs was established (Berend, 2009; Kaminski, 1994).9

In addition to the integration process with the EU, the Visegrad countries established in 1992 the Central European Free Trade Agreement (CEFTA), which was encouraged by the EU. Apart from goals of increased integration, increased regional trade would also protect the Visegrad countries, with trade flows ever more linked toward Western Europe, from shocks originated within the EU. In addition, if trade were liberalized with the EU but not with regional partners, it could lead to trade diversion.10 The CEFTA agreement consisted of bilateral agreements between the countries involved and was similar to the EAs, in that it aimed at establishing free trade in industrial goods between Poland, the Czech Republic, the Slovak Republic, and Hungary within 10 years.11 A series of adjustments of the initial agreement in practice made trade in most industrial goods tariff-free within five years (Richter, 1998).

In 1992/93, the Visegrad countries had first gone through a phase of rapid trade liberalization, which was then followed by some measures of increased protection. These early developments are discussed in Koteva (1993), Rodrik (1992), and Winiecki (2002) and are briefly summarized here.

At the onset of transition, all three countries largely abandoned trade licenses and quotas, although their removal was more gradual in Hungary than in Poland and Czechoslovakia. In particular, Hungary used a “global quota” to protect agricultural products and foodstuffs. Being the most gradual reformer of the three, Hungary had average tariff levels of 13–16% in the early 1990s (Koteva, 1993). In the face of a balance-of-payments crisis in the mid-1990s, a temporary import surcharge of 8% was imposed (Winiecki, 2002; WTO, 1998). This measure was then removed in 1997.

Poland adopted a very liberal import tariff schedule, with rates averaging 5% at the end of 1990. However, calls for protection of industry and agriculture and for raising government revenue resulted in increasing import tariff rates. With these increases, particularly prevalent for agricultural goods, import tariffs stood at 11.5–18% in 1992/93 (Koteva, 1993)12. An import surcharge of 6% was also introduced in 1992 but then gradually phased out until 1997 (European Commission, 1997g).

(p. 315) Czechoslovakia adopted a liberal tariff schedule at the onset of transition, with rates averaging 5%. Although tariff levels were only marginally increased to an average level of 6% in 1992, a temporary import surcharge on foodstuffs and consumer goods of 20% was introduced at the end of 1990 and hence increased protection. By 1993, the import surcharge had been reduced to 12%. From its formation, the Slovak Republic used an import surcharge of 10% that was dismantled in 1996/97 (European Commission, 1997i).

After the initial period of liberalization, some of the protectionist measures, for example, increased levels of agricultural protection, made the Visegrad countries look more like their western neighbors.

The ITAs required that quantitative import restrictions in the EU should be eliminated immediately, except for the “sensitive sectors” of steel, coal, textiles, and clothing. The ITAs, furthermore, classified industrial goods into six categories for which tariffs should be reduced: products of immediate trade liberalization; liberalization within one, four, and five years; plus the two groups containing steel/coal and textiles/clothing. Kaminski (1994) reports that, depending on the country, the group of products to be liberalized immediately accounted for 30–50% of the preagreement export value to the EU, that is, a substantial fraction. The sectors for which the EU imposed more restrictions, that is, steel/coal and textiles/clothing, accounted for 4–14% and 14–28% of the preagreement export value to the EU, respectively.

Romania and Bulgaria also signed EAs. The ITA for these two countries came into force in 1993.13 For Slovenia, the only country from the former Yugoslavia that was included in the same enlargement process as Central Eastern Europe, the ITA of the EA came into force in 1997. Slovenia (1996), Romania (1997), and Bulgaria (1999) also joined CEFTA.

Vachudova (2005) discusses the political developments in Romania and Bulgaria during the 1990s and the lack of reform actually taking place in order to meet the criteria for EU accession. When the EU evaluated progress in the Eastern European candidates in 1997, the lack of progress in adoption of the acquis communautaire in both countries led to the conclusion that they were not ready to cope with competitive pressures and market forces within the EU (European Commission 1997a, 1997h). These and other considerations delayed the process of EU accession and economic integration in the Eastern Balkans.

Slovenia experienced a gradual transformation of its economy during the early 1990s and, building on links established when it was still part of Yugoslavia, had Western Europe as its main trading partner throughout the transition period.14 Similar to the other ITAs, trade between Slovenia and the EU was to be liberalized gradually. However, since Slovenia had signed its agreement later than the other countries, it had to liberalize trade at a faster pace. Signing the ITA with the EU, joining CEFTA, and signing a free trade agreement with Croatia, all in 1996–1998, contributed to speeding up trade liberalization. After entering into these agreements, approximately 80% of Slovenian imports were subject to preferential treatment, and the effective level of import protection was low (World Bank, 1999). As in other countries, agriculture was an exception.15

(p. 316) The Baltic Countries

Estonia, Latvia, and Lithuania gained independence when the Soviet Union broke up in 1991.16 The path of reorientation toward, and integration with, Western Europe and the EU looks similar to that of the previous group of countries. However, at the time of independence from the Soviet Union in 1991, it was not at all obvious that a close integration with Western Europe would follow. The EU’s relationship with Russia and the CIS, the issue of citizenship for ethnic Russians in Estonia and Latvia, and desire by the EU to have the Baltic states focus primarily on increased economic integration among themselves were some of the factors affecting the extent of EU-Baltic integration in the first half of the 1990s.17 Western integration was desired by the Baltic states, but it was not a priority of most EU members at the time. However, the political breakthrough regarding enlargement in Copenhagen in 1993 and the accession of Sweden and Finland—“Baltic neighbors”—into the EU in 1995 acted to strengthen the EU-Baltic integration process.

Similar to the countries discussed earlier, the Soviet Union had signed a Trade and Cooperation agreement with the EU in 1990. In principle, this covered also the Baltics. After independence, however, the EU negotiated separate agreements with each of the Baltic states in 1992. In 1994/95, the next level of formal trade integration followed—after a discussion of the citizenship issue—with the signing and ratification of free trade agreements between the EU and each of the Baltic countries. Several factors contributed to the EU taking the step toward deeper economic integration: the breakthrough in Copenhagen; the signing of free trade agreements by Finland, Sweden, and Norway—at the time potential EU members—with the Baltic states; and the establishment of the Baltic Free Trade Agreement (BFTA). In contrast with the Central European case, the free trade agreements were not part of EAs, perhaps reflecting a lack of full commitment from the EU at the time to open the road toward membership. However, EAs with the Baltic countries were signed in 1995.

The Baltic countries were keen to adapt to EU institutions and trade policies from the outset, and the free trade agreements with the Baltic countries were more “liberal” than the corresponding trade agreements discussed for the first group of countries. From the date of the agreement in 1995, trade with Lithuania was to be liberalized within a period of six years, with Latvia within four years, and for Estonia trade was liberalized immediately. The EU was to abolish all quantitative restrictions and tariffs over this period of trade liberalization. Some products such as textiles, fishing, and agriculture were treated separately. In line with the ITAs with Central Eastern Europe, the Baltic countries were allowed to temporarily impose protectionist measures.18 Lithuania and Latvia protected agriculture and textiles, although signaling that they intended to comply with the criteria of EU accession (Čičinskas, Cornelius, and Treigiene, 1996). Estonia on the other hand was reluctant to impose any restrictions on trade and was largely at free trade with the EU after 1995.

(p. 317) SEE: Croatia, Bosnia and Herzegovina, Serbia, Montenegro, UNMIK-Kosovo, FYR of Macedonia, Albania

Yugoslavia followed a different socialist development path from the other Eastern European countries. With respect to trade, it was not a CMEA member, it maintained closer links with Western Europe, and it signed trade agreements with the EU in the 1970s and in 1980. Compared to that of other Eastern European countries, Yugoslav trade was more oriented toward Western Europe, although it also contained a substantial CMEA component. Yugoslavia also traded with the United States and, as did some other Eastern European countries, with developing countries.19 Albania on the other hand followed an “autarchic” development policy and was largely isolated from world trade up until the late 1980s. But by 1992, it signed a Trade and Cooperation Agreement with the EU.

At the onset of the Yugoslav wars, the EU suspended its trade agreements with Yugoslavia. As Slovenia (1991), Croatia (1991), FYR Macedonia (1991), and Bosnia and Herzegovina (1992) became independent nations, new national borders were drawn between them and the remaining parts of the federation (consisting of Serbia and Montenegro). From 1992 until the end of the Yugoslav wars in 1995, Serbia and Montenegro was subject to sanctions by the UN.20

In the late 1990s, the newly formed nations of the SEE region had their own trade policies, tariff structures, and nontariff barriers. Serbia and Montenegro, in addition, conducted somewhat independent trade policies even prior to the independence of Montenegro in 2006.

Trade Policy Developments in SEE since the Late 1990s: Approaching Europe

The international community launched the Stability Pact for SEE in 1999, after the NATO intervention against the Federal Republic of Yugoslavia over Kosovo. One of the goals of this process was economic reconstruction, cooperation, and development. The EU, in turn, launched the Stabilization and Association Process, which is the framework for integration between the SEE countries and the EU. For the SEE countries, this process plays a role similar to that of the EAs, which the EU signed with the countries discussed previously.

Following the Stability Pact and after initial discussions and preparations in 2001, 28 bilateral free trade agreements were signed during 2002–2003. These agreements established free trade in all the bilateral relations between Croatia, FYR Macedonia, Bosnia and Herzegovina, Serbia and Montenegro, Albania and, in addition, Romania, Bulgaria, and Moldova. This was generally considered a great success, given the recent history of the region and the amount of negotiation that had taken place (Sida, 2004; World Bank, 2005a). The treaties covered industrial products. Trade in agricultural goods on the other hand continued to be characterized by protection (Sida, 2004). Another major step toward regional integration was (p. 318) taken in 2006, when an expanded CEFTA further liberalized trade in the region and replaced the web of bilateral agreements.21

Similar to the position that the EU had taken on regional integration in Central Eastern Europe and in the Baltics, increased SEE regional integration was highly desired by the EU. Given the Yugoslav wars, political reasons for the EU to encourage regional integration may have been even stronger for the SEE. The EU also explicitly emphasized that benefits from the EU would depend on deepened regional economic integration taking place (World Bank, 2005a). The free trade agreements signed were thus much welcomed by the EU.22

For its part, the EU took several steps to increase trade with the SEE countries. Although some previous agreements existed, the granting of Autonomous Trade Measures (ATMs) to the SEE countries in 2000 virtually eliminated tariffs and quotas on most products imported from them. Some agricultural products were exceptions. This asymmetric trade liberalization measure was followed by the start of negotiations of a Stabilization and Association Agreement (SAA) between the EU and each SEE country. Similar to the trade part of the EAs, the SAA contains measures that will gradually liberalize trade, asymmetrically, over a 10-year period.

The ATMs and the SAAs together imply a faster liberalization of restrictions to EU imports from the SEE region than was the case for the EAs signed with previous accession candidates. However, the region faced some obstacles that limited reforms and EU integration in the early years of the decade 2000–2010. First, the region started the process at a lower level of economic development than previous accession countries and lacked administrative capacity to undertake reforms; this lack was especially the case in FYR Macedonia, Bosnia and Herzegovina, and Albania (SIGMA, 2002; Vachudova, 2005). Second, public sector corruption—as measured for example by Transparency International—was and remains a greater problem in the region than was the case in the Visegrad countries.23 Finally, complying with the International Criminal Tribunal for Former Yugoslavia (ICTY) was an additional criterion affecting the integration prospects for Serbia and Montenegro, and initially also for Croatia (European Commission, 2005a; Vachudova, 2005).

Croatia and FYR Macedonia signed SAA agreements in 2001 and are currently candidates for accession to the EU.24 Both countries, together with Albania, are members of the WTO. Albania made significant progress toward trade liberalization in the 1990s, with reduction in tariff rates and the removal of nontariff barriers, but the institutional capacity lagged behind (SIGMA, 2002). Albania, as well as Montenegro, Bosnia and Herzegovina, and Serbia signed SAAs in 2006–2008, but as of March 2010 the latter three agreements still await EU ratification.25 Furthermore, these three countries have yet to become members of the WTO, although some progress has been made in the membership negotiations.

In terms of progress of European integration as of October 2009, the European Commission (2009) reports that accession negotiations with Croatia “are nearing the final phase” (p. 2); FYR Macedonia “has made significant progress in meeting key challenges” (p. 2); Montenegro and Albania in general show progress in implementing agreements but need to show concrete results on rule of law and corruption (p. 14); (p. 319) reforms are lacking in Bosnia and Herzegovina (p. 14); the Interim Agreement (prior to the SAA) should now be implemented in Serbia, but there is still progress to be made in terms of cooperating with the ICTY (p. 15); and the Commission is concerned (p. 7) about CEFTA being paralyzed due to disagreements over the Kosovo status issue.26

The CIS States: Moldova, Ukraine, Belarus, Russia

The CIS was formed in 1991 by 12 out of the 15 former republics of the Soviet Union. The three Baltic countries were the only former republics that did not join the CIS in 1991, although Georgia left the CIS after the armed conflict with Russia in 2008. A free trade area was, in principle, established between the 12 CIS countries in 1994, but progress toward the realization of free trade was slow, and the agreement was never ratified by the Russian parliament.27 Instead, starting in 1994/95, Belarus and Russia, later joined by Kazakhstan, the Kyrgyz Republic, and Tajikistan, formed a customs union, the Eurasian Economic Community (EAEC). In addition, a free trade agreement, the Common Economic Zone (CEZ), was also established by Belarus, Russia, Kazakhstan, and Ukraine in 2004.

Yet the degree of implementation of the agreements has been questioned. For example, exceptions to common external tariffs were common in the EAEC; the extent to which Ukraine has desired further eastern integration has varied over the years; and the agreements have been incompatible with both a closer relationship with the EU and with WTO membership for the CIS countries (Fantini, 2007; Olcott et al., 1999; World Bank, 2005a). In addition to the multilateral agreements, a large number of bilateral free trade agreements have been signed between the CIS members. As an example, Ukraine has a total of 12 bilateral free trade agreements, covering all original CIS members as well as FYR Macedonia.28

Parallel to the efforts for CIS integration, Moldova, Ukraine, and Russia signed Partnership and Cooperation Agreements (PCAs) with the EU. These agreements, now part of the EU’s broader “European Neighborhood Policy” (ENP), have been in effect since 1997–1998 and cover different aspects of the relations with the EU. Trade between the three countries and the EU should adhere to WTO principles such as MFN treatment. Compared to the original EAs and the SAAs, however, the PCA regulates, rather than liberalizes, trade with the EU. In the cases of Moldova and Ukraine, the EU granted them Generalized System of Preferences (GSP), meaning lower tariffs on some imports, although coverage is limited. Trade between Belarus and the EU is covered by the Trade and Cooperation agreement that was originally signed with the Soviet Union in 1990. Relations between the CIS countries and the EU have also been characterized by the EU classification of the countries as nonmarket or transition economies, which has opened up a large number of antidumping actions (World Bank, 2005a).

The following subsections discuss briefly some specific aspects of trade and trade policy developments in the four countries.

(p. 320) Moldova

Moldova suffered a large decline in GDP and in exports in the 1990s as a result of the collapse of the Soviet Union and the Russian financial crisis in 1998 and is today very poor by European standards.29 With respect to proximity to the EU and access to EU markets, the country falls somewhere between the SEE region and the other CIS countries. From an EU perspective, the country is included in the ENP.

Moldova is part of CEFTA and thus has free trade with the SEE region. When Romania joined the EU, however, it had to abandon its 1994 free trade agreement with Moldova, and it also left CEFTA. Thus, Moldova no longer borders the region with which it has a free trade agreement. In 2005, in the “EU/Moldova Action Plan,” the possible extension of Autonomous Trade Preferences to Moldova was considered (European Commission, 2005b) and then granted in 2008. This meant a removal of tariffs on industrial goods and improved access for agricultural products. However, trade in some important products, including wine, is still restricted. More generally, EU barriers to import of agricultural products—Moldova’s main exportable output—are likely to have slowed down a reorientation of Moldovan exports toward the EU (Ronnås and Orlova, 2000).

One of the issues that restrict Moldova’s market access to the EU is the problem of controlling the origin of goods in Moldova (European Commission, 2008). This is a nontrivial issue, since Moldova does not control its eastern province Transnistria, and the semiindependent Transnistria customs authority complicates the fulfillment of “control of origin.” Illegitimate trade in this region is an issue that goes far beyond trade policies and will require a broader resolution of the underlying conflicts.

With respect to tariffs, Moldova has kept a low level of protection since the mid-1990s, with average MFN import tariffs of approximately 5%. The country also became a member of the WTO in 2001.

Belarus, Ukraine, and Russia

A discussion of trade policy developments for Belarus and Ukraine is by necessity characterized by the geographical location of the two countries between the EU and Russia and the legacy of Soviet economic structures. Both countries are heavily dependent on imports of Russian energy and are transit countries for Russian gas exports to the EU. Although the Ukrainian share of imports coming from Russia decreased from around 60% in 1990 to around 40% in 2003 (World Bank, 2005b) and has continued to decline, the country continues to depend heavily on gas and oil imports from Russia. With respect to Belarus, 60% of its imports came from Russia in 2008.30

During the Soviet period, the different republics received heavily subsidized gas from Russia, in exchange for manufactured goods, agricultural products, and other goods. Although Russian exports are not as heavily subsidized as previously, Ukraine and Belarus still benefit from gas imports below the prices that other countries in Europe pay. Subsidized prices, lock-in effects, and transit routes have made gas a contentious issue for these two countries. On several occasions since transition, arguments over gas supplies have become international disputes that have spilled (p. 321) over to the rest of Europe. The issues have included accusations that Ukraine was reselling gas bought at subsidized prices to its Western neighbors; Belarus and Ukraine not paying gas bills and therefore having supplies shut off; quadrupling of the gas price for Ukraine (and Moldova); and accusations that Russia was using its monopoly pricing power to affect internal politics in the recipient countries and trying to gain control of the distribution network inside Belarus and Ukraine themselves (Fantini, 2007; Nygren, 2009; Olcott et al., 1999).

For Russia, the EU 27 is by far the most important trade partner (see section III for further details). Mineral fuels and related products constitute the largest share of Russia’s exports to the EU. These raw materials are not subject to any tariff barriers in the EU. However, it has been argued that Russia’s exports suffer from EU protection of “sensitive areas” such as coal, steel, textiles, and agriculture, areas in which the CIS countries often have a comparative advantage (Machold, 1998).

Ukraine’s reorientation of trade toward the EU has been slow compared to Russia and the former CMEA members that are now EU members. Most Ukrainian exports are in sensitive areas and therefore heavily protected by the EU. The GSP status Ukraine enjoys most likely produced moderate results in terms of improved access to the European market. Half of the 30% of Ukrainian eligible exports actually received GSP benefits, according to a World Bank 2005 study, while the European Commission places this ratio at 72% in 2010.31 The GSP status means reduction in, not elimination of, tariffs in the subset of areas where it applies.

Another reason for Ukraine’s relatively slow trade growth with the EU is that it did not become a member of the WTO until 2008. This made the country more susceptible to antidumping actions by developed countries (World Bank, 2005a). Furthermore, before joining the WTO Ukraine did not have access to the dispute settlement mechanisms the WTO offers. After joining the WTO, Ukraine has started negotiations over a free trade agreement with the EU and EFTA.

The relationship between the EU and Russia is perhaps less developed than in 2002–2003. Initiatives to create a Common European Economic Space have yet to materialize and negotiations over an agreement to replace the PCA are ongoing. Russia also pushed an eventual WTO entry further into the future by stating that it would join only as part of a customs union with Belarus and Kazakhstan. As of 2007, Russia and Belarus have similar average MFN applied import tariffs of 11%, double the protection level of Ukraine. In addition to tariffs, domestic regulations have typically been substantial barriers to trade in CIS countries.

2. Tariff Protection

Table 13.2 reports average MFN applied tariff rates in the SEE and CIS countries that are part of this study. It also reports the trade-weighted average of applied tariff rates. The most recent tariff data from the WTO, averaged for all, industrial, and (p. 322) (p. 323) agricultural goods, respectively, is presented (columns 3–6, 9–12). The table also presents 2001–2003 average tariff levels from a 2005 World Bank study (columns 1–2, 7–8). No breakdown in industrial and agricultural goods is made for this earlier point in time.32 The 10 countries that have become EU members had to adopt the EU common external tariffs and are not included separately in the table.

Table 13.2. Tariffs

Region

Country

Average MFN applied tariff rates Simple average

Average applied tariff rates Weighted average

Year

All goods

Year

All goods

Agricultural goods

Industrial goods

Year

All goods

Year

All goods

Agricultural goods

Industrial goods

SEE

Croatia

2002

6.0

2008

4,8

10,3

4

2002

4.7

2006

4,5

14,2

3,8

SEE

Bosnia and Herzegovina

2001

5,4

2008

6,8

12,4

6

2001

5.1

2007

8,5

19,2

6,4

SEE

Serbia

2001

9.01

2008

7,4

14,2

6,3

2001

5.81

2006

6,1

15,9

5,3

SEE

Montenegro

n/a

n/a

2008

4,9

11,1

4

n/a

n/a

n/a

n/a

n/a

n/a

SEE

FYR Macedonia

2001

14,3

2008

7,7

13,7

6,8

2001

11.1

2007

6

18,4

4,4

SEE

Albania

2001

8,5

2008

5,2

7,8

4,8

2001

8.5

2007

5,2

7

4,9

Average SEE

8,6

6,1

11,6

5,3

7,0

6,1

14,9

5,0

CIS

Moldova

2001

5,1

2008

4,7

11,2

3,7

2001

2.8

2007

2,7

8,5

2,1

CIS

Ukraine

2002

7,9

2008

5,5

13

4,4

2002

3.9

2007

5,1

19,1

4,2

CIS

Belarus

2001

10,6

2008

10,8

13,3

10,5

2001

8.1

2007

7,7

16

7

CIS

Russia

2001

10,8

2008

10,8

14,2

10,2

2001

8.9

2006

11,4

22,8

9,3

EU

2003

4.42

2008

5.63

16.03

4.03

2003

3.12

2007

2.73

4.63

2.73

Column

1

2

3

4

5

6

7

8

9

10

11

12

(1) Number refers to Serbia and Montenegro.

(2) Number refers to EU15.

(3) Number refers to EU27.

Sources: Columns 1, 2, 7, 8: World Bank (2005A), Annex table 3.1. Columns 3–6, 9–12: WTO, Tariff Profiles.

The 2008 tariff rates in column 4 are not very high. The average SEE tariff rate of 6.1% is close to the EU level and compares favorably with other regions such as Latin America (10%) and Africa (13.8%)33. As discussed, Moldova has had a liberal tariff regime since the mid-1990s, whereas Russia and Belarus have a higher level of protection. All countries except Bosnia and Herzegovina, Belarus, and Russia have reduced average applied MFN tariff levels (comparing columns 2 and 4), with the FYR Macedonia showing the largest tariff reduction. The pattern of tariff reduction also shows up when comparing trade-weighted tariffs over time (columns 8 and 10). However, while Serbia and Ukraine have reduced MFN applied tariffs, the trade-weighted tariffs have actually increased. It is also noteworthy that the EU has substantial agricultural tariff protection (column 5) but the trade-weighted tariff protection is low (column 11). That might be the result of a downward bias imparted when using trade weights to estimate average tariffs.

The speed of implementation varied between the countries. For Romania, a 2007 EU member, tariffs remained high throughout the first part of the decade 2000–2010. Average applied MFN tariffs stood at 15% for industrial and 30% for agricultural products at least until 2004, well above EU levels of 3.6% and 16.2%, respectively (information from the European Commission’s yearly evaluation reports of Romania as a candidate country). Tariffs have since dropped down to EU levels. In the case of Estonia, trade was completely liberalized, including in agricultural goods. On accession to the EU, Estonia would have to apply the Community’s Common Customs Tariff, and from 2000 it has been raising rates to align its tariffs with those of the EU.

3. Trade in the European Transition Economies

This section provides a brief analysis of the extent of trade and of trade flows in the European Transition countries since 1993. The breakdown of the Communist Bloc and the following period of transition to market economies implied abrupt changes in economic conditions throughout the bloc. Former centrally planned and state-organized trade relations between CMEA members broke down. Quotas, licenses, trade in inconvertible currencies, or even barter trade relations were largely abandoned. Instead, countries were exposed to world market prices on imports and exports. Not only trade with Western Europe but also trade between former CMEA members underwent price liberalization. The CMEA countries were exposed to (p. 324) competition from Western products and Western quality, meaning that low-quality Eastern European products could not compete. These factors all contributed to a sharp decline of trade in most countries.34

Table 13.3 below shows total exports of goods and services, total trade in goods and services, the trade balance, and the openness data for the region for the years 1993, 2000, and 2007. Openness is defined as the sum of exports and imports divided by GDP. Table 13.3 also shows basic GDP data and the trade balance to GDP ratio for 2007. Table 13.3 presents the countries in three subgroups: the 10 current EU members, the SEE countries, and the CIS countries included in the study. Below each group of countries are shown its share in world exports, share in total trade, and average degree of openness.

The Level of Trade

Trade in the region has increased substantially over the period covered. Columns 4–6 of table 13.3 reveal that the share of the 10 countries that have joined the EU in world exports has more than doubled over the time period, and stood at 3.7% in 2007. For the SEE and CIS countries in the study, there is a substantial increase in shares of world exports as well.

The increase in trade over the last two decades is also reflected in the openness measures, reported in columns 14–16. Whereas the trade-to-GDP ratio has increased in the world as a whole, the increase in openness ratios is larger for both the present EU members and for the SEE countries over the periods for which data exist.

The most open economies in the study are the Slovak Republic, Hungary, Estonia, the Czech Republic, and Slovenia, whereas the larger countries—especially Russia, Romania, and Poland, trade less as a fraction of GDP.35 This is most likely due to a combination of factors, including country size and attractiveness to foreign investments into the trade-oriented manufacturing sector. From the group of most open economies, Hungary stands out as the country for which trade as a fraction of GDP shows the most dramatic increase; it was during the years 1994–2000 that trade increased at the fastest pace. The early openness measures of the Czech and Slovak republics may be exaggerated, due to the fact that to a large extent, early trade was bilateral between the two countries.36 This effect would exacerbate the “opening up” toward other countries in the data.

Trade Balances in the Region

Since the start of the transition process, the countries in the region have tended to run significant trade deficits, leading in most cases also to large current account deficits. In the years prior to the 2008–2009 crisis, many countries in the region were running double-digit deficits as a percentage of GDP. Russia is an exception due to its substantial exports of oil, gas, and minerals. Indeed, its trade balance varies closely with international prices for energy and minerals.

(p. 325) (p. 326) (p. 327) Trade balances depend on many factors, including trade policies. In this region, the transition and EU integration process has been an extremely important factor affecting trade flows. The promise of economic growth and eventual access to the EU has made many of the countries in the region very attractive to foreign capital inflows, enabling them to run very large current account and trade deficits. The fact that Russia has not been running deficits can also be viewed as its failure to attract substantial foreign investments, despite its significant needs to invest and modernize.

Behind the raw numbers of trade deficits lie very different economic processes, which in turn affect future trade flows. For example, a trade deficit financed by foreign direct investment (FDI) flows tends to lead to investments that create or facilitate future output and exports. On the other hand, trade and current account deficits that are financed by households borrowing abroad to invest in real estate or buy foreign cars are less likely to have a positive impact on future exports.

The trade balances in this region are certainly a mix of these types of behaviors and other factors. For example, it seems that the Visegrad countries fit the picture of FDI-financed trade deficits, whereas the Baltic states have relied more heavily on foreign bank loans to finance their deficits. The important lesson is that trade data can both highlight and hide important economic processes and vulnerabilities.

Table 13.3. Trade data

GDP

Population

GDP/cap.

Total exports EX

Trade balance (EX-IM)

Trade balance (EX-IM)/GDP

Total trade (EX+IM)

Degree of openness (EX+IM)/GDP

2007

2007

2007

1993

2000

2007

1993

2000

2007

2007

1993

2000

2007

1993

2000

2007

BUSD

Millions

kUSD

BUSD

BUSD

BUSD

BUSD

BUSD

BUSD

BUSD

BUSD

BUSD

Country

Poland

425

38,1

11,1

19,7

46,5

173,3

0,8

-11,0

-12,2

-2,9%

38,6

103,9

358,8

0,45

0,61

0,84

Czech Republic

174

10,3

17,0

19,2

35,9

139,5

0,3

-1,7

8,7

5,0%

38,1

73,6

270,3

1,09

1,30

1,55

Slovak Republic

75

5,4

13,9

7,6

14,4

64,9

-0,6

-0,5

-0,8

-1,0%

15,7

29,3

130,5

1,18

1,43

1,74

Hungary

138

10,0

13,8

10,2

34,6

111,3

-3,2

-1,7

2,2

1,6%

23,6

70,8

220,5

0,61

1,50

1,59

Slovenia

47

2,0

23,5

7,4

10,7

32,9

0,1

-0,7

-0,8

-1,7%

14,8

22,2

66,6

1,16

1,11

1,41

Romania

166

21,5

7,7

6,1

12,2

50,5

-1,3

-2,1

-23,7

-14,3%

13,4

26,4

124,8

0,51

0,71

0,75

Bulgaria

40

7,6

5,2

4,1

7,0

25,1

-0,8

-0,7

-8,7

-22,1%

9,1

14,7

58,9

0,84

1,17

1,49

Estonia

21

1,3

15,9

1,1

4,8

15,6

-0,1

-0,2

-2,4

-11,3%

2,4

9,8

33,5

1,37

1,73

1,57

Latvia

29

2,3

12,7

1,6

3,3

12,1

0,4

-0,6

-5,8

-20,2%

2,8

7,1

30,1

1,18

0,90

1,05

Lithuania

39

3,4

11,6

n/a

5,1

21,1

n/a

-0,7

-5,2

-13,3%

n/a

11,0

47,5

n/a

0,96

1,22

Region average

0,93

1,14

1,32

Share in world trade

1,63%

2,20%

3,72%

1,66%

2,29%

3,86%

Croatia

59

4,4

13,2

n/a

9,0

25,1

n/a

-0,7

-4,4

-7,6%

n/a

18,6

54,6

n/a

0,87

0,93

Bosnia and Herzegovina

15

3,8

3,9

n/a

1,6

5,7

n/a

-2,6

-4,9

-33,1%

n/a

5,7

16,3

n/a

1,14

1,11

Serbia

40

7,4

5,5

n/a

0,7

12,4

n/a

-0,4

-9,6

-23,9%

n/a

1,7

34,4

n/a

0,28

0,85

Montenegro

3,8

0,6

6,2

n/a

n/a

1,7

n/a

n/a

-1,0

-27,2%

n/a

n/a

4,3

n/a

n/a

1,12

FYR Macedonia

7,9

2,0

3,9

n/a

1,7

4,2

n/a

-0,5

-1,5

-18,8%

n/a

4,0

10,0

n/a

1,12

1,26

Albania

11

3,1

3,4

n/a

0,7

3,0

n/a

-0,7

-2,9

-26,6%

n/a

2,0

8,9

n/a

0,56

0,83

Region average

n/a

0,79

1,02

Share in world trade

n/a

0,17%

0,30%

n/a

0,20%

0,37%

Moldova

4,4

3,7

1,2

n/a

0,6

2,0

n/a

-0,3

-2,3

-52,5%

n/a

1,6

6,3

n/a

1,25

1,43

Ukraine

143

46,3

3,1

8,5

19,5

64,0

-0,1

1,6

-8,2

-5,7%

17,0

37,5

136,2

0,52

1,20

0,95

Belarus

45

9,7

4,7

n/a

6,7

27,6

n/a

-0,4

-2,8

-6,3%

n/a

13,8

58,0

n/a

1,33

1,28

Russia

1277

141,9

9,0

66,1

114,4

392,2

13,3

52,0

111,3

8,7%

118,8

176,9

673,1

0,71

0,68

0,53

Region average

n/a

1,12

1,05

Share in world trade

n/a

1,78%

2,80%

n/a

1,43%

2,51%

World

4724

7937

17359

9558

16119

34746

0,38

0,50

0,63

Column

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

Sources: IMF International Financial Statistics (IFS), National accounts-section. For Montenegro, Moldova, Bosnia and Herzegovina: IFS, Balance of Payments-section. GDP figures for Montenegro and population figure for Serbia from IMF World Economic Outlook. World trade figures from WTO. World GDP figures (not shown) from IMF WEO database (sum of the 182 countries covered).

The Direction of Trade

Table 13.4 presents merchandise exports for the countries in the region, grouped by destination, for 1993, 2000, and 2007. Table 13.4 shows that the EU 15 is the most important export partner for most of the countries in the region. Although “EU 15” is no longer a political or economic entity in itself, it largely represents “Western Europe” at the onset of the transition process.37 The transition countries are, to a large extent, integrated into traditionally Western European trade flows and, for most countries, the reorientation toward Western Europe happened early in the transition period.

Yet trade with other regions has grown even faster, resulting in a declining EU 15 export share between 2000 and 2007. Seven out the ten present EU members show an export share to EU 15 that increased between 1993 and 2000, and then declined. Accounting for this decline is increased trade among the 10 countries themselves. All current EU members, except the Czech and Slovak republics, show increasing export shares to countries within this subregion.38 In the SEE region, Croatia and Bosnia and Herzegovina show increasing shares of exports destined to the region itself, whereas the opposite holds for Albania and FYR Macedonia. It is also noteworthy that Slovenia maintains its export share to the SEE countries, all being part of the former Yugoslavia (except Albania).

It appears that regional integration has taken place, at least in the case of the Visegrad countries and the Baltics. Russia has reemerged as an export partner for the Baltic countries and remains the most important export country for Ukraine and Belarus. Neither the United States nor China has emerged as important export partners for the countries in the region.

Table 13.4. Direction of Trade: share of total merchandise exports from a country (row) to a region or country (column)

Merchandise export share to

EU15

“EU10”

SEE

Russia

CIS (excl. Russia)

US

China

1993

2000

2007

1993

2000

2007

1993

2000

2007

1993

2000

2007

1993

2000

2007

1993

2000

2007

1993

2000

2007

Poland

0.69

0.70

0.63

0.05

0.11

0.16

0.00

0.00

0.01

0.05

0.03

0.05

0.03

0.04

0.05

0.03

0.03

0.01

0.01

0.00

0.01

Czech Republic

0.54

0.69

0.64

0.28

0.17

0.21

0.00

0.01

0.01

0.04

0.01

0.02

0.01

0.01

0.01

0.02

0.03

0.02

0.02

0.00

0.01

Slovak Republic

0.30

0.59

0.57

0.51

0.31

0.30

0.01

0.01

0.01

0.05

0.01

0.02

0.03

0.02

0.02

0.01

0.01

0.02

0.01

0.00

0.01

Hungary

0.58

0.75

0.60

0.04

0.08

0.19

0.00

0.02

0.03

0.00

0.02

0.03

0.00

0.01

0.03

0.04

0.05

0.02

0.01

0.00

0.01

Slovenia

0.62

0.64

0.54

0.05

0.08

0.15

0.15

0.15

0.16

0.04

0.02

0.04

0.01

0.01

0.02

0.03

0.03

0.02

0.00

0.00

0.00

Romania

0.41

0.64

0.58

0.06

0.08

0.14

0.01

0.02

0.02

0.05

0.01

0.01

0.05

0.03

0.04

0.01

0.04

0.02

0.09

0.01

0.01

Bulgaria

0.47

0.46

0.49

0.06

0.04

0.11

0.01

0.11

0.08

0.10

0.02

0.02

0.01

0.03

0.03

0.07

0.04

0.02

0.05

0.00

0.01

Estonia

0.48

0.68

0.50

0.15

0.12

0.20

0.00

0.00

0.00

0.23

0.07

0.09

0.08

0.03

0.03

0.02

0.02

0.04

0.00

0.00

0.01

Latvia

0.32

0.65

0.38

0.10

0.16

0.34

0.00

0.00

0.00

0.29

0.04

0.13

0.17

0.04

0.05

0.01

0.04

0.01

0.01

0.00

0.00

Lithuania

0.67

0.48

0.38

0.18

0.24

0.27

0.00

0.00

0.00

0.04

0.07

0.15

0.03

0.09

0.09

0.01

0.05

0.03

0.01

0.00

0.00

Croatia

0.57

0.52

0.43

0.21

0.13

0.14

0.06

0.15

0.22

0.00

0.01

0.01

0.00

0.01

0.01

0.02

0.02

0.03

0.00

0.00

0.00

Bosnia and Herzegovina

0.40

0.66

0.45

0.17

0.11

0.27

0.15

0.12

0.22

0.12

0.03

0.00

0.00

0.00

0.00

0.09

0.03

0.01

0.00

0.00

0.01

Serbia

0.39

0.21

0.21

0.05

0.02

0.01

0.00

Montenegro

0.65

0.33

0.01

0.00

0.00

0.01

0.00

FYR Macedonia

0.35

0.43

0.55

0.19

0.05

0.14

0.07

0.32

0.11

0.11

0.01

0.01

0.00

0.00

0.00

0.06

0.13

0.02

0.01

0.00

0.00

Albania

0.73

0.94

0.86

0.03

0.00

0.01

0.12

0.04

0.03

0.00

0.00

0.00

0.00

0.00

0.00

0.04

0.01

0.01

0.00

0.00

0.03

Moldova1

0.06

0.22

0.30

0.27

0.13

0.18

0.00

0.00

0.01

0.36

0.45

0.24

0.27

0.14

0.18

0.00

0.03

0.03

0.00

0.00

0.00

Ukraine

0.27

0.16

0.16

0.25

0.14

0.12

0.00

0.00

0.01

0.24

0.26

0.08

0.07

0.12

0.05

0.05

0.02

0.11

0.04

0.01

Belarus

0.13

0.09

0.29

0.10

0.19

0.14

0.01

0.00

0.00

0.41

0.51

0.37

0.20

0.09

0.10

0.02

0.01

0.01

0.01

0.02

0.02

Russia

0.45

0.36

0.41

0.18

0.17

0.13

0.00

0.00

0.01

0.00

0.13

0.15

0.05

0.08

0.02

0.07

0.05

0.05

Column

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

EU10—the 10 new member countries in EU from Eastern Europe.

SEE—the SEE countries of this study.

CIS—Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

(1) The latter data point for Moldova comes from 2006 data, not 2007.

Source: IMF Direction of Trade Statistics.

(p. 328) (p. 329) (p. 330) 4. Conclusion

The European transition countries discussed in this chapter were divided into four groups based on geography and time of independence. The EU has been a driving force for many of the economic policies and reforms these countries have undertaken, not least with regard to trade. An alternative grouping of countries that largely coincides with the classification used here could be based on the attractiveness and speed of EU integration: (1) the countries that were eager and ready to join the EU right after transition started; (2) those that became independent along the way and, while eager, were not ready to join the EU; and (3) those with less clear ambitions with regard to the EU. The first group would comprise the 10 new member states; the third group would include Russia and Belarus, and perhaps also Ukraine and Serbia; the bulk of the remaining countries would belong in the second group. This classification would also represent groups of countries that have followed similar trade policies, which signifies the importance of EU integration for trade policies and economic reforms more generally.

References

Adam, A., Kosma, T., and McHugh, J., 2003. Trade Liberalization Strategies: What Could Southeastern Europe Learn from the CEFTA and BFTA? IMF Working Paper 03/239. Washington, D.C.: IMF.Find this resource:

    Åslund, A., 2003. A Foreign Trade Policy Strategy for Ukraine. Washington, D.C.: Carnegie Endowment for International Peace.Find this resource:

      Baldwin, R., 1994. Towards an Integrated Europe. London: Centre for Economic Policy Research.Find this resource:

        Bartlett, W., 1991. Economic Change in Yugoslavia: From Crisis to Reform. In Ö. Sjöberg and M. Wyzan, eds., Economic Change in the Balkan States: Albania, Bulgaria, Romania and Yugoslavia. London: Pinter, pp. 32–46.Find this resource:

          Berend, I., 2009. From the Soviet Bloc to the European Union: The Economic and Social Transformation of Central and Eastern Europe since 1973. Cambridge: Cambridge University Press.Find this resource:

            Carter, B., and Singleton, F., 1982. The Economy of Yugoslavia. London: Croom Helm.Find this resource:

              Čičinskas, J., Cornelius, P., and Treigiene, D., 1996. Trade Policies and Lithuania´s Reintegration into the Global Economy. Stockholm Institute of East European Economies Working Paper 111. Stockholm: Institute of East European Economies.Find this resource:

                (p. 333) Ellman, Michael, 1989. Socialist Planning. Cambridge: Cambridge University Press.Find this resource:

                  European Commission, 1997a. Commission Opinion on Bulgaria’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                    European Commission, 1997b. Commission Opinion on the Czech Republic’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                      European Commission, 1997c. Commission Opinion on Estonia’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                        European Commission, 1997d. Commission Opinion on Hungary’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                          European Commission, 1997e. Commission Opinion on Latvia’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                            European Commission, 1997f. Commission Opinion on Lithuania’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                              European Commission, 1997g. Commission Opinion on Poland’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                                European Commission, 1997h. Commission Opinion on Romania’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                                  European Commission, 1997i. Commission Opinion on Slovak Republic’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                                    European Commission, 1997j. Commission Opinion on Slovenia’s Application for Membership of the European Union. Brussels: European Commission.Find this resource:

                                      European Commission, 2000a. Farm Trade with the CEECs: Preparing for accession. European Commission Directorate-General of Agriculture Newsletter, June 23.Find this resource:

                                        European Commission, 2005a. Croatia: 2005 Progress Report.Find this resource:

                                          European Commission, 2005b. EU/Moldova Action Plan.Find this resource:

                                            European Commission, 2008. Council Regulation (EC) No. 55/2008 of January 21, 2008, Introducing Autonomous Trade Preferences for the Republic of Moldova and Amending Regulation (EC) No. 980/2005 and Commission Decision 2005/924/EC.Find this resource:

                                              European Commission, 2009. Communication from the Commission to the European Parliament and the Council: Enlargement Strategy and Main Challenges 2009–2010. Brussels.Find this resource:

                                                European Commission, 2010. Countries, Ukraine. Available at http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/ukraine/, October 31, 2011.

                                                Fantini, M., 2007. The Economic Relationship between Russia and the EU: History and Prospects. In J. Gower and G. Timmins, eds., Russia and Europe in the Twenty-First Century—An Uneasy Partnership. London: Anthem Press, pp. 247–266.Find this resource:

                                                  Kaminski, B., 1994. The Significance of the “Europe Agreements” for Central European Industrial Exports. World Bank Policy Research Paper 1314. Washington, D.C.: World Bank.Find this resource:

                                                    Kaminski, B., and de la Rocha, M., 2003. Stabilization and Association Process in the Balkans: Integration Options and Their Assessment. World Bank Policy Research Working Paper 3108. Washington D.C.: World Bank.Find this resource:

                                                      Koteva, M., 1993. Trade Policy Reform: Lessons from the Experience of Developing Countries and Central and East European Economies in Transition (With Special Reference to Bulgaria). Oslo: Norwegian Institute of International Affairs.Find this resource:

                                                        Machold, S., 1998. Europe and Russia’s External Economic Relations, an Assessment. Economic and Political Weekly 33: 113–120.Find this resource:

                                                          Nygren, B., 2009. Rysslands relationer med OSS-länderna. In A. Jonsson and C. Vendil Pallin, eds., Ryssland, Politik, Samhälle och Ekonomi. Stockholm: SNS Förlag.Find this resource:

                                                            (p. 334) OECD, 2000a. Regulatory Reform in Hungary: Enhancing Market Openness through Regulatory Reform. Paris: OECD.Find this resource:

                                                              OECD, 2000b. Regulatory Reform in Poland: Enhancing Market Openness through Regulatory Reform. Paris: OECD.Find this resource:

                                                                OECD, 2002. Agricultural Policies in Transition Economies: Trends in Policies and Support. Paris: OECD.Find this resource:

                                                                  Olcott, M., Åslund, A., and Garnett, S., 1999. Getting It Wrong—Regional Cooperation and the Commonwealth of Independent States. Washington, D.C.: Carnegie Endowment for International Peace.Find this resource:

                                                                    Richter, S., 1998. The CEFTA and the Europe Agreements. MOCT-MOST 8: 91–119.Find this resource:

                                                                      Rodrik, D., 1992. Foreign Trade in Eastern Europe’s Transition: Early Results. NBER Working Paper 4064. Cambridge, Massachusetts: NBER.Find this resource:

                                                                        Ronnås, P., and Orlova, N., 2000. Moldova’s Transition to Destitution. Sida Studies no. 1. Stockholm: Sida Studies.Find this resource:

                                                                          Sida, 2004. An Overview of Trade and Trade Policy Developments in South Eastern Europe 2001–2003. Econ Analys AB. Stockholm: Sida.Find this resource:

                                                                            SIGMA, 2002. SIGMA Balkans Report 2002: Republic of Albania Trade Policy. Support for Improvement in Governance and Management in Central and Eastern European Countries.Find this resource:

                                                                              Vachudova, M. A., 2005. Europe Undivided: Democracy, Leverage, and Integration after Communism. Oxford: Oxford University Press.Find this resource:

                                                                                van Elsuwege, P., 2008. From Soviet Republics to EU Member States. A Legal and Political Assessment of the Baltic States’ Accession to the EU. Vol. 1. Leiden: Martinus Nijhoff.Find this resource:

                                                                                  Winiecki, J., 2002. Transition Economies and Foreign Trade. Routledge Studies of Societies in Transition. London: Routledge.Find this resource:

                                                                                    World Bank, 1999. Slovenia: Economic Transformation and EU accession. Vol. 2. Main Report., Washington, D.C.: World Bank.Find this resource:

                                                                                      World Bank, 2005a. From Disintegration to Reintegration. Eastern Europe and the Former Soviet Union in International Trade. Washington, D.C.: World Bank.Find this resource:

                                                                                        World Bank, 2005b. Ukraine’s Trade Policy: A Strategy for Integration into Global Trade. Washington, D.C.: World Bank.Find this resource:

                                                                                          World Bank, 2007. Trends in Average Applied Tariff Rates in Developing and Industrial Countries, 1981–2007 (Unweighted in %), Excel spreadsheet downloaded from www.siteresources.worldbank.org/INTRES/Resources/469232-1107449512766/tar2007.xls, available October 31, 2011.

                                                                                          Notes:

                                                                                          (1) . The official name until 1990 was the Czechoslovak Socialist Republic and, from April 1990, the Czech and Slovak Federal Republic.

                                                                                          (2) . For discussion of the pre-1989 trade policies and trade patterns of the CMEA region, see e.g. Ellman (1989). A substantial fraction of the trade of Czechoslovakia, Poland, Hungary, Romania, and Bulgaria consisted of the bilateral trade with the Soviet Union. The Soviet Union provided energy and raw materials, and the other CMEA members provided goods such as industrial (Czechoslovakia) and agricultural products (Hungary). For the five countries as a whole, 63% of trade was conducted with other CMEA members in both 1970 and 1983, although the share differed between countries and over time (Ellman 1989).

                                                                                          (3) . Yugoslavia was not a member of CMEA. Its trade policy history therefore looks somewhat different than that of the other countries in Central Eastern Europe.

                                                                                          (4) . The EU trade policy is described in a separate chapter.

                                                                                          (5) . United Nations Interim Administration in Kosovo.

                                                                                          (6) . As of March 2010, Croatia and FYR Macedonia were candidates for EU membership.

                                                                                          (7) . Throughout most of this chapter, we will use the term “EU” when we refer to the European Union and also when referring to the European Community (the relevant term until 1993).

                                                                                          (8) . These criteria became known as the “Copenhagen criteria.” Vachudova (2005) discusses early relations between EU and the Visegrad countries.

                                                                                          (9) . The countries also signed agreements with the European Free Trade Association, which at the beginning of the 1990s included the future EU members Austria, Finland, and Sweden.

                                                                                          (10) . See Adam et al. (2003) for a discussion of the EU´s attempts to increase regional trade within Central Eastern Europe, the Baltics, and SEE, respectively.

                                                                                          (11) . The Czech and Slovak Republics had signed a customs union at the breakup of Czechoslovakia. The CEFTA agreements consisted of one bilateral agreement between the Czech and Slovak republics and Hungary, one agreement between the Czech and Slovak republics and Poland, and one agreement between Poland and Hungary.

                                                                                          (12) . For Poland, Koteva cites several sources on the level of protection, with tariffs ranging from 11.5% to 18% in Poland in 1991–1993. The Rodrik (1992) figure for August 1991, 13.6%, and the figure of 12.2% for 1992 from World Bank (2007) fall within this range.

                                                                                          (13) . Under Ceaucescu, Romania had signed a Generalized System of Preferences Agreement with the EU in 1974 and an “Industrial Products” agreement in 1980.

                                                                                          (14) . Differently from most other countries in the Eastern Bloc, Yugoslavia had several trade agreements with the European Community, the first of which was signed in 1970.

                                                                                          (15) . Agriculture was largely outside the scope of the ITAs. The agricultural share of GDP was higher in Eastern Europe than in EU 15 and a larger share of the population was employed by the sector. A low agricultural productivity, the reduction of state subsidies, the opening up of trade in agricultural goods, and the extent of EU support of its agriculture all contributed to a fall in agricultural output and a large trade deficit in agricultural products in the Eastern European countries. Moving toward EU membership meant opening up to free trade in agricultural products with EU 15 countries. In a first wave of liberalization, the “least sensitive products” phased a total and reciprocal liberalization of trade. In consecutive waves in 2001–2003, the “double zero” measure implied reciprocally increased quotas and reduced export subsidies for certain processed products. It was followed by the removal of duties and the creation of tariff-free quotas (European Commission, 2000a; OECD, 2002). The new member countries have also had to adapt to the various requirements of the EU Common Agricultural Policy.

                                                                                          (16) . Much of this discussion of the Baltic countries draws on van Elsuwege (2008).

                                                                                          (17) . The three Baltic countries had similar production structures in the Soviet planned economy and exchanged products with other parts of the Soviet Union, but there was very little regional trade. In the case of Lithuania, 80–90% of trade was with the Soviet Union, where Russia accounted for around 50%, and with Ukraine and Belarus also having large shares. Half of the 10–20% of trade that was not oriented toward the Soviet Union was with other CMEA countries (Čičinskas et al. 1996).

                                                                                          (18) . See Kaminski 1994.

                                                                                          (19) . See e.g. Carter and Singleton (1982) and Bartlett (1991) for the economy of Yugoslavia.

                                                                                          (20) . The conflict over Kosovo continued after 1995. In the region, there has also been civil conflict in FYR Macedonia in 2001 and in Albania in 1997.

                                                                                          (21) . On joining the EU, previous members of CEFTA have left the agreement. Croatia was the first SEE country to join CEFTA in 2003. For current CEFTA members see table 13.1 or www.cefta2006.com (available October 31, 2011).

                                                                                          (22) . Other free trade agreements exist in the region. One set of agreements are the bilateral agreements between Turkey on the one hand and Croatia, Bosnia and Herzegovina, FYR Macedonia, and Albania, respectively, on the other.

                                                                                          (23) . The Transparency International (www.transparency.org) Corruption Perception Index runs from 1 to 10 and is a subjective measure of public sector corruption. The lower the number, the more corrupt the country is perceived to be. For 2009, the average for the Baltic countries was 5.5, for the Visegrad countries and Slovenia 5.2, and for Romania and Bulgaria 3.8, whereas it was 3.6 for SEE. As a comparison, the average EU 15 score was 7.3.

                                                                                          (24) . Croatia and FYR Macedonia also have free trade agreements with EFTA.

                                                                                          (25) . In addition, in anticipation of the SAA, Interim Agreements on trade and trade-related matters have been signed by all SEE countries.

                                                                                          (26) . Kosovo is also part of the SAA process, but at an early stage.

                                                                                          (27) . Olcott et al. (1999) discuss the (lack of) CIS integration in the 1990s. They also discuss how a system of state trade, characterized by Soviet-style planning, currencies that were not fully convertible and, to some extent, barter trade, existed into the mid-1990s. To the extent that barter trade still exists, it is most common in Belarus, which may also imply that Belarusian trade data are the least reliable.

                                                                                          (28) . Information based on WTO’s “Regional Trade Agreement portal” (www.wto.org).

                                                                                          (29) . See Ronnås and Orlova (2000) for an account of Moldova’s experience during the 1990s.

                                                                                          (30) . See the country sheets, at http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/, for trade data for individual countries from 2008. In section 3, trade data and trade flows in the region, using IMF Direction of Trade Statistics, are presented.

                                                                                          (31) . World Bank (2005a) and European Commission (2010), respectively.

                                                                                          (32) . Sources: “Tariff Profiles,” at http://stat.wto.org/TariffProfile/WSDBTariffPFHome.aspx?Language=E (available October 31, 2011) and World Bank (2005a), annex table 3.1.

                                                                                          (33) . Authors´ own calculations based on average MFN applied rates from the “tariff profiles” of all African and Latin American countries included in the WTO database.

                                                                                          (34) . See for instance World Bank (2005a) for discussions of the large drop in trade during early transition and of the quality of the region’s trade data.

                                                                                          (35) . Bulgaria and Moldova also show high openness measures, which is explained by a large import/GDP fraction. These countries run substantial current account deficits. See the discussion below.

                                                                                          (36) . The share of total Slovak merchandise exports that goes to the Czech Republic has decreased from 42% to 13% between 1993 and 2007, and the share of total Czech merchandise exports that goes to the Slovak Republic has decreased from 22% to 9% over the same time period.

                                                                                          (37) . The EFTA countries Sweden, Finland, and Austria became EU members in 1995.

                                                                                          (38) . See the first subsection of section 3 for a discussion of the effects of the breakup of Czechoslovakia.