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DE RUEHBW #1604/01 3651251
ZNR UUUUU ZZH
R 311251Z DEC 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0532
INFO EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 BELGRADE 001604 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD PREL SR KV
SUBJECT: SERBIA ASSUMES CEFTA PRESIDENCY, BUT KOSOVO POLICY LIKELY TO 
IMPEDE PROGRESS 
 
SUMMARY 
 
------- 
 
 
 
¶1.  (U) Two years after ratifying the Central European Free Trade 
Agreement (CEFTA), the 30 million person free trade market is a key 
Serbian market, with which Serbia has a trade surplus and a trade 
volume second only to the EU.  For it to further prosper as a 
market, CEFTA needs to address additional trade issues, such as 
non-tariff barriers.  However, on the eve of assuming the CEFTA 
Presidency in January 2010, Serbia's refusal to accept the Republic 
of Kosovo as an equal CEFTA member is blocking both CEFTA 
development and profits for Serbian businesses.  Serbian exporters 
claim the Kosovo issue costs them millions in lost exports and the 
increased cost of diverting exports via third countries.  CEFTA as 
an institution could be further undermined as a result of Serbia's 
rigid Kosovo agenda.  END SUMMARY. 
 
 
 
Central European Free Trade Agreement 
 
------------------------------------- 
 
 
 
¶2.  (U) The Central European Free Trade Agreement (CEFTA), signed 
in December 2006, replaced 32 bilateral trade agreements.  The 
signatories include Albania, Bosnia and Herzegovina, Croatia, 
Macedonia, Moldova, Montenegro, Serbia, and UNMIK/Kosovo.  Serbia 
ratified the agreement in October 2007.  Within the 30 million 
person market, CEFTA has eliminated customs tariffs on industrial 
goods and significantly liberalized trade in agricultural goods. 
The most important novelties that CEFTA introduced and did not 
exist in previous bilateral agreements included: domestic origin of 
goods, liberalization of the services industry, granting equal 
treatment to domestic and regional investors, opening the public 
procurement market, protecting IPR rights, improving dispute 
resolution mechanisms, and applying WTO-compliant rules.  CEFTA 
also continues to deal with elimination of non-tariff barriers. 
 
 
 
Serbia's Trade Surplus With CEFTA Countries 
 
------------------------------------------- 
 
 
 
¶3.  (U) CEFTA countries, excluding Kosovo, are Serbia's second 
largest regional foreign trade partner, behind the EU. (Note: 
Serbia records trade with Kosovo as "domestic" trade.)  Unlike its 
huge trade deficit with the EU that reached $6.23 billion in 2008, 
Serbia consistently has a trade surplus with its CEFTA partners 
which grew from $1.36 billion in 2007 to $1.86 billion in 2008. 
Even amid the current economic crisis, this surplus reached $1.17 
billion in the first ten months of 2009, with $2.19 billion in 
exports and $987 million in imports.  Agricultural products account 
for the majority of this surplus (e.g., wheat and wheat products, 
beverages) while Serbia imports from other CEFTA members mostly 
iron and steel, electricity and non-metallic mineral products. 
During the first ten months of 2009, non-Kosovo CEFTA trade 
accounted for 16% of Serbia's total trade, including 30.8% of 
Serbia's exports and 7.7% of Serbia's imports. 
 
 
 
Increased Cooperation with Most CEFTA Members 
 
--------------------------------------------- 
 
 
 
¶4. (SBU)  Aside from favorable trade results, increased interaction 
with CEFTA partners has paid off in improved personal relationships 
in neighboring ministries between countries that had recently been 
in conflict.  Assistant Minister of Economy and Serbia's lead trade 
negotiator, Bojana Todorovic, told us her counterparts in CEFTA 
countries, particularly in Croatia and Bosnia, had become valued 
resources providing support and advice on common issues such as WTO 
negotiations.  She said these relationships were particularly 
useful in strategizing for difficult WTO negotiations, particularly 
with Ukraine. 
 
BELGRADE 00001604  002 OF 003 
 
 
Non-Tariff Barriers (NTBs)Challenge CEFTA 
 
----------------------------------------- 
 
 
 
¶5.  (U) Despite Serbia's positive trade balance in CEFTA, industry 
representatives continue to encounter many non-tariff barriers in 
trading with CEFTA countries.  Dejan Jovovic of the Serbian Chamber 
of Commerce told us on December 16 that a study by the SEE 
Stability Pact done before it ceased to exist in June 2008 
identified approximately one hundred such barriers, including: 
complicated customs procedures, non-recognition of quality 
certificates, lack of internationally recognized accreditation and 
certification bodies, an insufficient number of authorized 
laboratories and institutions, additional verification of 
documentation, regulations that are non-compliant with 
international standards, lack of proper transportation and other 
infrastructure, corruption and smuggling.  Representatives of 
Serbia's biggest brewery, Apatinska, told us on December 24 that 
companies exporting to Serbia face a number of NTB's that do not 
exist when exporting to other CEFTA countries, such as Bosnia. 
Apatinska representatives attributed Bosnia's attempt to impose 
higher customs rates in June (since repealed) as retaliation to 
Serbian NTBs faced by BIH exporters. 
 
 
 
Priorities During Serbia's CEFTA Chairmanship 
 
------------------------------------------- 
 
 
 
¶6.  (SBU) Serbia will assume the one year rotating CEFTA 
Chairmanship from Montenegro in January 2010 and Todorovic outlined 
Serbia's CEFTA priorities for its Chairmanship. These included: 
launching negotiations to liberalize and open the services market, 
harmonizing investment policies to establish a regional investment 
market, opening government procurement markets, and 
reviewing/adopting competition rules that are harmonized with EU 
rules.  Todorovic also highlighted two key constraints to CEFTA 
progress:  Kosovo and the ongoing global financial crisis. 
 
 
 
CEFTA Decision Making at a Standstill 
 
------------------------------------- 
 
 
 
¶7.  (U) Todorovic told us CEFTA members have made no joint 
decisions since Kosovo's independence in February 2008.  She 
attributed CEFTA's inertia to the political and legal questions 
regarding signatory authority for Kosovo.  CEFTA rules require 
consensus so this situation is likely to continue for the 
foreseeable future, Todorovic said.  UNMIK signed CEFTA in 2006 on 
Kosovo's behalf, prior to Kosovo's independence, which Serbia 
refuses to recognize.  As a result, the Serbian government 
continues to insist that UNMIK should represent Kosovo at all CEFTA 
meetings, and insists Serbian delegations walk out of meetings if 
the UNMIK representative is not present.  When asked how Serbia 
will handle visa issues for Kosovar CEFTA representatives to travel 
to Serbia this year, Todorovic had no clear response, saying that 
the Interior Ministry was included in all CEFTA chairmanship 
preparation meetings so this issue could be resolved. 
 
 
 
Industry View:  Kosovo Policy Only Hurts Serbia and Serbian 
Companies 
 
--------------------------------------------- -------- 
 
 
 
¶8.  (U) Despite CEFTA's gains, Serbian businesses are losing 
revenue and potential customers as a result of the GoS's Kosovo 
policy.  As a result, some Serbian companies are forced to find 
alternative delivery routes to access the Kosovo market.  Apatinska 
representatives explained that it was impossible for their brewery 
to export beer directly from Serbia into Kosovo because Serbian 
authorities prohibit the use of labels that say "exported to the 
 
BELGRADE 00001604  003 OF 003 
 
 
State of Kosovo," as required by Kosovo.  Apatinska has resolved 
the issue by exporting beer from its Montenegro plant to Kosovo 
instead of from Serbia, costing Serbia $1.5 million in export 
revenues per year. 
 
 
 
COMMENT 
 
------- 
 
 
 
¶9.  (SBU) Since its inception, Serbia has benefited greatly from 
CEFTA, and the positive trade balance with CEFTA partners has 
provided Serbian businesses a much needed cushion during the 
current economic downturn.  CEFTA has also proven to be a good 
training ground where Serbia can work on legislation, trade 
practices, and relationships in preparation for WTO and EU 
accession, with the help of fellow CEFTA members.  Serbia's 
intransigent Kosovo policy, however, threatens to undermine CEFTA 
decision making and could limit any further deepening of CEFTA. 
Serbia still has not figured out how it will harmonize its desire 
for economic expansion with its rigid Kosovo policy.  Unless this 
is resolved CEFTA may become an empty shell of what it was 
envisioned to be.  Serbian exporters and consumers would be the 
biggest losers if that happened.  End Comment. 
BRUSH