Croatia: Trade War Winds Blowing From Serbia

Photo credit: agrobiz.hr

The contribution of domestic agricultural and fishing industries income is about 5% of Croatia’s GDP and that is a trend that roughly follows other, more developed countries and one would not like to see the contribution on a downward spiral. Agriculture has always been and is likely to remain for some time, an important component of the Croatian economy regardless of its relatively low contribution to GDP (service industry’s contribution is around 70%). What is worrying, though, is that developed countries’ relatively low agricultural contribution to GDP is not due to reductions of outputs but rather due to relative growth of manufacturing and service-based industries, while in Croatia the relatively low contribution of agriculture and fisheries follows reduction of outputs due to failing agricultural concerns as well as impositions of EU quotas that often call for limits/reductions in Croatia’s outputs. Hence. further unemployment and increasing reliance on imports of these products. Domestic food products supplies in Croatia are lower than 50%, which calls for urgent action on the part of Croatia to increase the country’s supply (production) of food from domestic products.

While the devastation caused by the 1990’s war and subsequent transition into a market economy are also definite causes of the alarming decline in domestic agricultural production in Croatia, in lieu of lack of business investments, it is of some comfort to note that new EU development funds are finally streamlined into agriculture and food production.

As of 1 August 2017 Croatia has lengthened its list of fruit and vegetables imported from third countries, including Serbia, that must undergo phytosanitary controls and checks at the Croatian border. Croatia has also at the same time set new taxes and tariffs on these imports, which are 22 times higher than previous tax rates.

Serbia’s trade and tourism minister, Rasim Ljajic, wasted no time to trash this Croatian move regarding screening imported fruit and vegetables and accused Croatia of drastically violating the Stabilisation and Association Agreement, announcing that, because of that, Serbia will approach the European Commission and seek an investigation into the decision made by Croatia as member of the EU.

– we’re obviously dealing here with drastic breaches of the Agreement on stabilisation and association reached between Serbia and EU from Croatia, and that breach is under article 36 paragraph 1, which says that from the day the Agreement falls into force there will be no new taxes or tariffs that have the effect, nor would the existing ones be increased, said Ljajic in his statement for Serbian media. Because of that, he said, Serbia will immediately approach the European Commission.

Ljajic further announced that, in line with their economic interests Serbia would contact the region’s countries like Macedonia, Bosnia and Herzegovina who are also the subject of the changes to Croatia’s new import rules.

– Croatia’s decision represents a drastic violation of the rules and principles of the World Trade Organisation, which say that there should be no discrimination in tariffs between domestic and imported goods, said Ljajic.

Oh dear! What else will Serbia come up with in the face of Croatia dealing with its own weak food production needing boosts as well as dealing with unfair Agreements, if how Ljajic describes the Agreement is to be believed. If Ljajic is to be believed then he knows, Serbia knows, that Croatia was a party to signing what looks like an unfair trade agreement that would do it more damage than good (?). And then Ljajic goes on about the World Trade Organisation “rules” as if the WTO is some kind of a government authority requiring compliance. Members of the WTO can be seen as Members of a club, for goodness sake. One of the fundamental rules of the club is that each Member will grant all other Members the best possible treatment it grants to any trading partner, whether or not a Member of the club.

According to the WTO national treatment principle, each Member shall treat imports no less favourably than it treats like domestically produced goods. Whilst the MFN principle seeks to ensure that a WTO Member does not discriminate between like products originating in, or destined for, other WTO Members, the national treatment principle addresses the non-d discriminatory treatment to be applied to imported and domestic like products.

The national treatment principle embodiedin Article III of the GATT 1994 (General Agreement on Tariffs and Trade) works to:

Avoid protectionist measures.

Indeed as far as the non-discriminatory practices in tariffs between domestic and imported products, that Serbia’s Ljajic speaks of so full-headedly, all that WTO Members need to do is provide equality of competitive conditions for imported products in relation to domestic products. In other words and if we want to use the word “discrimination”, measure is de jure discriminatory when discriminatory treatment between imported and domestic like products is clear from the wording of the legal instrument. When the discrimination is not clear on the text or face of the legal instrument, it can still be de facto, or in practice, discriminatory. In the case of the national treatment principle, de facto discrimination occurs when a legal instrument in effect or in fact favours domestic products over imported like products. WTO jurisprudence has distinguished two levels of obligations regarding internal taxation depending on whether imported and domestic products can be considered “like products” or “directly substitutable products”

The criteria used for the determination of “Like Products”
The four criteria employed by the GATT/WTO jurisprudence in determining “likeness” under Article III:2 first sentence are the following:
1. The product’s end uses
2. Consumer tastes and habits
3. The product’s properties, nature and quality
4. The customs classification of the product

The rules on non-discrimination are designed to secure fair conditions of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies. The issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade.
Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual property, services, for example. The agreement on government procurement (a “plurilateral” agreement because it is signed by only a few WTO members) extends competition rules to purchases by thousands of government entities in many countries. And so on.

Measures introduced by Croatia regarding new import taxes and tariffs on fruit and vegetables appear to be measures of balancing domestic and foreign products, where the dynamics have been most likely affected by unfair trade agreements,  and lend themselves to measures seemingly designed to boost and/or stabilise domestic production, which, in turn, boosts employment figures and contribution of agriculture to the GDP. I would assume that Croatia knows what it’s doing in this case and that Serbia’s ranting about alleged breaches of Agreements (that appear unfair anyway) would end up nothing but scandalous hot air in the face of reduced imports from Serbia to Croatia. It is of note here that in 2016 Serbia exported 116 million euro worth of goods while it imported from Croatia 79 million. Croatia needs a boost to its agricultural industry and decreasing or slowing down imports is one of the ways to make positive inroads to propping up the frail and declining domestic food industry. Ina Vukic
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