November 12, 2019
_ Yuri Kofner, editor-in-chief, analytical media “Eurasian Studies”. Munich, 12 November 2019.
On October 25 in Moscow, prime ministers of the Eurasian Economic Union (EAEU) member states, Chairman of the Eurasian Economic Commission (EEC) Tigran Sargsyan and Prime Minister of Serbia Ana Brnabic signed a Free Trade Agreement between Serbia and the EAEU.
The rise of Eurasia?
Serbia’s decision to conclude a free trade zone agreement with the Eurasian Economic Union was bad news for the European Commission, which had warned Serbia over making that decision several times. There are several reasons for Europe’s grudge. And given that Serbia accounts for less than 1 percent of the EU’s foreign trade (Table 1), they are obviously geopolitical.
Firstly, Brussels has always been uncomfortable when it comes to the special friendship between Moscow and Belgrade, as they have been counting on Belgrade’s “gradual alignment with the common EU foreign and defense policies” as part of European integration. However, this naughty junior partner declined to join the European sanctions against the “eastern aggressor,” and worse still, decided to sign a new preferential trade deal with that aggressor.
Secondly, on the day when it is supposed to become a member of the EU, which is formally slated for the year 2025, Serbia will be obliged to cancel all its previous bilateral trade agreements with any third parties. However, there is no real guarantee that this day will ever really come, whether it be 2025 or some other year. Serbia is unlikely to have thrown aside the lessons it learned from its neighbors Northern Macedonia and Albania and their experience. Both these countries have been striving to become part of the European family for the last five and 10 years, respectively, only to get their accession vetoed from the European Council just last week.
Thirdly, Europe behaves this way because it still has not grown out of its good old Eurocentrism and is not ready to accept that the 15-year belle epoque, when it was the only point of gravity in the wider Eurasian space, has given way to a multipolarity era with emerging rival gravity centers such as China and the EAEU. In this context what it needs to do is move away from the zero-sum game and its own exclusiveness mentality towards the logic of inclusive economic cooperation “from Lisbon to Shanghai.”
To be fair, I must say that Serbia accounts for only a small share in the foreign trade structure of the EAEU: 0.4 percent. Similarly, for Belgrade, trade with the EU is far more important than that with the EAEU. The EU’s share in Serbia’s foreign trade is 76.1 percent, while the EAEU only accounts for about 6 percent. (Chart 1, Table 1)
Free trade 101
In theory, each party to a free trade deal has two goals. On the one hand, with zero or lower import duties we open new market niches for our manufacturers’ goods (greater demand). On the other hand, opening our market in the same way, we get less expensive and better products for domestic consumption (greater supply). According to David Ricardo’s theory, cumulative welfare should grow on both sides. At the same time, there is no need to open markets with each other symmetrically. In international practice, it is often done asymmetrically, in terms of time, when the parties are given phasing-in periods, as well as for individual product groups. This is the case with the EAEU’s free trade deal with Serbia.
On the other hand, the agreement provides for a duty-free import of 99.5 percent of goods produced in Serbia into the EAEU. This means that a few years after the deal, Serbia’s exports to a common market of 184 million people can increase by another 15 percent or so above the agreement-free scenario.
Basically, the EAEU will open its market by reducing import duties for Serbian farm produce such as cheese, tobacco and local brandy (Rakia). At the same time, the EAEU will not extend trade preferences to poultry meat, sugar, fabrics, plus to a number of industrial goods including compressors and motor vehicles. According to experts, Russia will keep its protectionist policies to protect its auto industry from the possible competition of the Serbian Fiat.
The EAEU-Serbia free trade agreement provides for a number of other advantages in addition to the direct reduction of import duties. Firstly, Serbia is not a member of the World Trade Organization (WTO), yet, under the deal, Belgrade agrees to grant EAEU goods “basic” conditions based on the WTO rules, especially as regards applying protective measures, permission disputes and rules of origin. Thirdly, transparent and preferential trade terms should contribute to stability on the markets, which naturally enhances the confidence of entrepreneurs, and consequently, creates a favorable environment for investments into Serbia.