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Central European Free Trade

Agreement:

History and analysis

Economic relationships between

European Union e other countries

Maria Serra

Course of economy – Prof. Vito Bobek – University of Maribor

Master in “European Studies – the process of building Europe”

A.a 2008/2009

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Introduction

Before to speak about the Central European Free Trade Agreement, describing its

history, its characteristics, its tasks, we should do a historical and economic overview

that preceded the drafting of this Agreement, to have clear guidelines in which this

agreement was born and moved, and its trends in recent years. We can consider CEFTA

agreement as a part of a political and economic framework well-defined, which

probably can not be reduced to the mere observation of the economic characteristics

included in the document. This agreement, indeed, is important not only to understand

the individual relationships between the countries of Central and Eastern Europe, but

also to understand the political and economic relationships that exist between these

countries and the European Union.

General frame

1. From the Iron Curtain to the fall of Berlin Wall: an overview of major economic

agreements.

During the years of the Cold War the western and eastern blocks are encountered

on two different organizational schemes: NATO and the Warsaw Pact from the military

point of view, and on the other side, the EEC and the COMECON in economic terms.

Differences between these two organizations cover essentially all aspects: the origin,

structures, policies, social and cultural patterns. However the target for both was a

greater economic integration among its member states. If we know very well the EEC’s

features, we can observe briefly the main characteristics of the Eastern bloc.

COMECON, the Council for Mutual Economic Assistance, was founded in 1949

by the Soviet Union, Bulgaria, Czechoslovakia, Poland, Romania and Hungary (during

the years also Albania, German Democratic Republic, Mongolia, Cuba and Vietnam,

joined to it). The desire of Josif Stalin to strengthen the Soviet domination on smaller

countries of Central Europe and weaken some countries that had expressed interest in

the Marshall Plan (Czechoslovakia, Hungary and Poland) were the primary factors in

the formation of the Comecon.

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Until the late'60s, “cooperation” was the official term used to describe the

activities of Comecon. In 1971, with the development and adoption of the program for

the expansion and the further development of the socialist economies of the countries

members of Comecon, the activities were redefined with the term “integration”,

eliminating the differences through the elimination of barriers to trade and through

other forms of interaction.

Comecon maintained three types of relations with the outside world:

Yugoslavia was the only state that was considered an associate member status. On the

basis of the Agreement of 1964, Yugoslavia participated in twenty of the thirty-two key

institutions of Comecon and for this reason it is considered a full member of the

organization; Finland, Iraq, Mexico, Nicaragua and Mozambique had a status of

cooperating non-socialists; after 1957, Comecon authorized some States with

communist governments or pro-Soviet, to attend meetings as observers. In November

1986 the delegations of Afghanistan, Ethiopia, Laos, Nicaragua and Yemen joined the

42nd meeting as observers.

Pic.1: trading blocs at the and of 1980s.

All years of the Cold War, we can consider, were marked by antagonism between

the two visions of a planned economy and free market capitalist, represented in Europe

by the two economic organization. Despite the objective of economic integration

among the members was similar, remained serious differences between them.

In 1980s Comecon joined together 450 million people in 10 countries and on 3

continents. The level of industrialization from country to country differed greatly: the

organization linked three underdeveloped countries – Cuba, Mongolia, and Vietnam –

with some highly industrialized states. Likewise, a large national income difference

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existed between European and non-European members. The physical size, military

power, and political and economic resource base of the Soviet Union made it the

dominant member. In trade among Comecon members, the Soviet Union usually

provided raw materials, and East European countries provided finished equipment and

machinery. In this system, which mirrored the member countries' planned economies,

the decisions handed down from above ignored the influences of market forces or

private initiative. Comecon had no supranational authority to make decisions or to

implement them. Its recommendations could only be adopted with the full concurrence

of interested parties and did not affect those members who declared themselves

disinterested parties.

EEC was completely different: incorporated the 270 million people of Western

Europe into economic association through intergovernmental agreements aimed at

maximizing profits and economic efficiency on a national and international scale. It was

a regionally, not ideologically, integrated organization, whose members had all attained

an accomplished level of industrialization and were considered to be roughly equal

trading partners. The EEC was a supranational body that could adopt decisions (such as

removing tariffs) and enforce them. Activity by members was based on initiative and

enterprise from below (on the individual or enterprise level) and was strongly

influenced by market forces.

Finally, there were members of European Free Trade Association, composed by

countries that had not wanted to join the EEC: exit Britain, Denmark and Portugal

during 1970s and 80s, that had joined the EEC, were the Scandinavian countries,

Iceland, Switzerland, Liechtenstein and Austria.

2. 1990s: new economic perspectives in Europe.

After the demise of the Berlin Wall and the dissolution of the Yugoslav Republic,

European Union, in its new version of the Maastricht Treaty and completed the single

market, opened its relations to the post communist countries: however privileged

countries for a gradual integration into European system remained the countries of

Central Europe. Western Balkans and southern Europe remained outside negotiations

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and agreement (except Slovenia, as we will see), because an important requirement was

the internal stability; and during 1990s, until 1999, Balkans were crossed by several

conflicts. But besides, we have not to forget that the entry into the European Union was

and is subject to observance of the Copenhagen criteria (1993): the political criterion,

that is the respect for democracy, rule of law, human rights and minorities; economic

criterion, that is the existence of a market economy able to compete with a concurrency

system; respect of “aquis communautaire”, the acceptance of political, economic and

monetary tasks, with an adjustment of domestic legislation.

A possible enlargement to the countries of Central and Eastern Europe accounted for

the European Union an opportunity to integrate countries more advanced and less

advanced, but which had a high potential for development; a wider internal market

would have increased trade; political and economic stabilization would have allowed a

growth rate of employment. Therefore the influence of the European Union towards

these countries was expressed through two strategies: by a side a financial support to

promote reforms within economies (like Phare Program since 1989), and on the other

side to conclude association agreements which prepared each country to the

membership in the European Union.

Since 1992 some countries tightened economic agreements, mainly commercial,

with a view to a future inclusion in the European Union.

Central Europe Free Trade Agreement

1. Evolution of the Agreement

The 1990s represented a new era of political and economic relations.

First Step: the Central Europe Free Trade Agreement was created in December 19921

by Poland, Hungary and Czechoslovakia (then Czech Republic and Slovakia), the so-

called "Visegrad Group", and entered into force in July 1994. Until the Treaty of Nice,

the new treaty formulated to deal the entry of many countries into the European Union,

1 During the same period in which CEFTA was created, Baltic countries gained independence from Soviet

Union and created a similar free trade area, called BAFTA, which ceased to exist when Estonia, Latvia and

Lithuania joined EU on May 1, 2004.

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the CEFTA agreement also saw the participation of Slovenia (the only country in the

Western Balkan with economic relations with EU) since 1996, Romania (1997),

Bulgaria (1999) and Croatia (2002).

Pic.2: CEFTA enlargement before Treaty of Nice.

The Agreement was an instrument through which accelerate the process of integration

into the European Union, by adjusting its policy, economics, security system and legal

system. Indeed, according to Poznan Declaration (1994) on the criteria of CEFTA

membership, these countries not only had to be members of the World Trade

Organization, not only had to exchange freely with each other by reducing the barriers,

but all member countries were to have already signed a Stabilization and Association

Agreement2 with the European Union, and subsequently they were able to apply for

entry in EU. These three criteria were slightly revised in Zagreb (1995): the policy of

free trade among CEFTA countries was maintained; it was not important to be a

member of WTO, but was important to respect the rules of the organization; thirdly

there was no need for a SSA with EU, but any type of association agreement.

2 From the beginning the European Community/European Union has a legal personality and can sign

agreements with countries outside (art. 310 TEC). They could be free trade agreements; partnership agreements;

agreements for development; and stabilization and association agreements. Stabilization and Association

Agreements (SSA) are bilateral agreements between the requesting country and the EU, which relate to matters of

political, economic, commercial as well as human rights and with whom the countries will undertake to adopt the

reforms in the domestic legislation needed to bring their laws to the acquis communautaire. In return, the EU can

offer access to some or all of its markets (services, agricultural or industrial products, etc..) and technical and

financial assistance.

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The aim was achieved: Poland, Czech Republic, Hungary, Slovakia, Slovenia entered

the EU on May 1, 2004; Bulgaria and Romania on January 1, 2007; Croatia has the

status of official candidate for membership. First obvious consequence of this

enlargement is that most of the trade of CEFTA countries is with European Union.

What happened with the entrance of the CEFTA countries to the EU?

Second step: European Union has suggested to preserve and converter the

Agreement, covering the rest of the Balkan countries that have already signed

stabilization agreements with EU, under the Stability Pact for Southeast Europe.

On 6 April 2006, at the Summit of Prime Ministers of South-Eastern Europe in

Bucharest, was adopted a joint declaration on the enlargement of CEFTA to Albania,

Bosnia and Herzegovina, Kosovo, Moldova, Serbia and Montenegro. A possible entry

of Ukraine was also discussed.

Therefore, the new Central Committee was established in Brussels on 9 November

2006 and signed at Bucharest on 19 December 2006. At the end of 2007, it is officially

composed by Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia,

Moldova, Montenegro and Serbia.

This new agreement also reflected the changing attitude of the European Union

towards the Western Balkans. Stabilized also the area of Kosovo, this agreement

follows the previous one, with the intention to absorb these countries in the big

European space.

Pic. 2: new CEFTA composition

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Even in this case, therefore, the Agreement is a part of a framework between UE and

outside countries.

Therefore, before analyzing the contents of CEFTA is necessary to explain briefly

what is the Stability Pact for Southeast Europe, to understand better relationships EU

and this area.

The idea for the Stability Pact arose in late 1998, before the 1999 Kosovo war, with

the idea that a regional approach is an indispensable factor for progress in Balkan area.

This approach was initiated already with other process of cooperation: the “Royaumont

Initiative” by France, and the “Southeast European Co-operative Initiative” (SECI) by

United States, aimed to supporting implementation of the Dayton peace accord (1995).

So Stability Pact was born after Kosovo war and after a meeting of foreign Ministers of

the European Union in Cologne on 10 June 1999: from this meeting was born the joint

statement which creates the Pact; a subsequent reaffirmation was held in the Sarajevo

meeting, on 30 July. The Pact is based on the idea that the conflict prevention,

reconstruction of peace, and reintegration in international context, pass through the

development of three key areas: creating a safe environment, promotion of sustainable

democratic systems, and, above all, supporting for the economic and social well-being.

Stability Pact – in close cooperation with Balkan countries, United States, G8 countries,

international organizations (UN, OSCE, UNHCR, NATO, Council of Europe), financial

institutions (European Bank for Reconstruction and Development, European Investment

Bank) – is a political statement and provides a series of cooperation agreements in

integrated optical. In the Cologne Statement are clear the relationship between EU and

Western Balkans, specifying which are the respective tasks. In particular Western

Balkans “(will) have a most important role to play, in accordance with (its) specific

mandates, in supporting the countries in the region in achieving economic stabilization,

reform, and development of the region. We rely on it to develop a coherent

international assistance strategy for the region and to promote sound macro-economic

and structural policies by the countries concerned”. While European Union “will draw

the region closer to the perspective of full integration of these countries into its

structures. In case of countries which have not yet concluded association agreements

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with the EU, this will be done through a new kind of contractual relationship taking

fully into account the individual situations of each country with the perspective of EU

membership, on the basis of the Amsterdam Treaty and once the Copenhagen criteria

have been met (…)”.

Economic reconstruction pass through EU and WB cooperation, to facilitate: the

promotion of free trade areas; border-crossing transport; energy supply and savings,

deregulation and transparency; infrastructure; promotion of private sector business;

environmental issues; sustainable reintegration of refugees, and so on.

Therefore European Union has wanted to create links with these countries once they

have ceased their conflicts. Their integration was not a bone because the other ten

countries joined the European Union. Is a fact that European institutions believe that the

Western Balkans are a value added for the European Union. On the other hand, their

input would be helpful to provide a gateway to the Middle East and to contain the

influence of Russia. During the summit in Thessaloniki (2003), the EU has declared

once again to admit the Western Balkan countries when they were aligned with

European standards. But the internal crisis into the EU after the Treaty establishing the

Constitution and then the Treaty of Lisbon, with the added difficulties of the last

entered (Bulgaria and Romania are trying to modify their administrative and judicial

systems) are making far the entry of Southern Europe countries in EU.

2. CEFTA content (1992)

After a preamble to the principles to which the agreement is based on (pluralistic

democracy, rule of law, human rights and fundamental freedoms’ respect, but also

principles of a market economy, which constitutes the basis for their relations), the

document is composed by three parts: the first one relating to industrial products; the

second one relating to agricultural products; and the third one in which are enclosed all

the other general provisions.

But first of all, the member countries (we know Czech Republic, Republic of

Hungary, Republic of Poland and Slovak Republic) declared their intention to create

this free trade area, in conformity with the article XXIV of General Agreement on

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Tariffs and Trade in a transitional period ending on 1 January 2001. So the objectives to

achieve are:

i) to promote through the expansion of trade the harmonious development of the

economic relations between the Parties and thus to foster in the Parties the

advance of economic activity, the improvement of living and employment

conditions, and increased productivity and financial stability;

ii) to provide fair conditions of competitions for trade between them;

iii) to contribute, in this way, by the removal of barriers to trade, to the harmonious

development and expansion of world trade.

The principles of free area are reflected on two important trade sectors: industrial and

agricultural products.

From the first point of view, free trade means progressive reductions and definitive

abolishment of:

- custom duties and charges equivalent on imports (art. 3. and 5);

- custom duties and charges equivalent on exports (art. 7);

- custom duties of a fiscal nature (art.6);

- quantitative restrictions and measures having equivalent effect on imports and

exports (art. 8 and 9).

According to GATT, there are basic duties. Indeed, for each product the basic duty

to which the successive reductions set out in this agreement are to be applied shall be

the Most Favored Nation rate of duty3 applicable on 29 February 1992. besides the

second paragraph says that if, after entry into force of the Agreement, any tariff

reduction is applied on an erga omnes basis, in particular reduction resulting from the

tariff agreement concluded as a result of the Uruguay Round of Multilateral Trade

negotiations, such reduced duties shall replace the basic duties referred to in paragraph

1 as from the date when such reduction are applied4.

3 Art.1 GATT(47) says: “(…) any advantage, favour, privilege or immunity granted by any contracting party to

any product originating in or destined for any other country shall be accorded immediately and unconditionally to

the like product originating in or destined for the territories of all other contracting parties”.

4 This article refers to the Uruguay Round, in which GATT47 was modified (and other two agreement were

signed – GATS and TRIPS – ) and was created the World Trade Organization. Its fundamental points are:

reduction of tariffs, of subsides on exports and other distortions to exports in a free market; services; agreements

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As regards agriculture, the Agreement is intended to safeguard the trade of

agricultural products originating in one country. Therefore, they will exchange some

concessions taking account of:

- the role of agriculture in their economies;

- the development of trade in agricultural products between the Parties;

- the particular sensitivity of agricultural products;

- the rules of their agricultural policies;

- the consequences of the multilateral trade negotiations under the General Agreement

on Tariff and Trade.

Therefore, no prejudice, economic or otherwise, that modifies in negative way the

functioning of the market may be imposed.

The third part of the document contains general provision. They concern:

a) rules on cooperation in custom administration;

b) prohibition of internal taxation (or negative fiscal measures) that may be

discriminatory between the products originating in member countries;

c) possible necessary measures by Parties in order to defend country’s security;

d) the downsizing of state monopolies to ensure that there is no discrimination on

goods traded;

e) rules of competition concerning undertaking;

f) state aids, which are considered incompatibles with the proper functioning of the

Agreement;

g) protection of intellectual property rights;

h) measures against dumping, that is a sales strategy to lower prices that normal

standard (“predatory pricing”), so an unfair and distorting trade strategy:

i) creation of a Joint Committee: indeed the Parties set up a Committee, composed by

representatives of each member country, which is responsible for overseeing

observance and implementation of the Agreement. The Parties have opportunity to

consult with each other through this Committee, which may consider the possibility

of further removal of obstacles to trade between the Parties.

for reinforcement of intellectual property; rules to international settlements; insertion of agriculture and textiles

sectors.

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The last important thing concerns the trade relations by this and other Agreement (art.

36). Indeed, the first paragraph says that the Agreement shall apply to trade relations

among Czech Republic, the Republic of Poland, the Republic of Hungary and the

Slovak Republic, but not to the trade relations between the Czech Republic and the

Slovak Republic. Secondly the Agreement shall not prevent the maintenance of custom

unions, free trade areas or arrangements for frontier trade to the extent that these do not

negatively affect the trade regime and in particular the provisions concerning rules of

origin provided for by this Agreement.

To this document subsequently, as we know, Slovenia, Romania, Bulgaria and

Croatia. The entrance of the last one was very important for Slovenia, because has

made a substantial improvement to the nature and extent of its trade, as we can observe

in these graphs:

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These two other graphs, however, show the individual markets in which Slovenia is

bound or not at the level of exports and imports:

3. Agreement on amendment of and accession to the Central European Free Trade

Agreement (2006).

With the entry of these countries in the EU, was signed an agreement for the

amendment in 2006, which involves Western Balkan countries. If in the previous

Agreement there was no reference to the European Union and to process of integration

of the countries of Central to this, things change in this second document.

In this sense, an example is given by preamble. We can observe the principal points:

- Having regard to aim of eligible Parties to accede to the European Union;

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- Recognizing the contribution of the CEFTA to improve the readiness of Parties for

membership in the European Union as witnessed by accession on 1 May 2004 (…);

- Convinced of the necessity to amend CEFTA, in order to contribute to the process of

integration in Europe through the opening of CEFTA to all Parties ready to observe

the provisions of this Agreement;

- Having regard to the principles contained in the Memorandum of Understanding on

Trade Liberalisation and Facilitation of 27 June 2001 adopted by the Parties under

the auspices of the Stability Pact for South Eastern Europe and to be resulting

network of bilateral free trade agreements concluded between them;

- Expressing their preparedness to cooperate with each other in seeking ways and

means to strengthen the process of economic integration in Europe;

- Convinced that this Agreement will foster the intensification of mutually beneficial

economic relation among the Parties and contribute to the process of integration in

Europe;

- Wishing to contribute to the development of each Party’s relation to the EU and

integration into multilateral trading system.

Regarding the structure, even in this case there are some differences with the

document of 1992. First the new agreement consists of two annexes: the first one

concerning the consolidated version of the CEFTA, in which are present the objectives

of European integration; the second one concerns bilateral free trade agreements to be

terminated upon entry into force of CEFTA 2006.

New consolidated version, besides, has a new structure:

first chapter on general obligations applicable to trade in all goods; second and third on

industrial and agricultural products, that follow what has been stated by previous

Agreement; chapter four on technical barriers to trade, which must be eliminated with

measures determined by World Trade Organization; chapter five contents general

provisions (for example rules of origin and cooperation in custom administration, fiscal

discrimination, payments, security exceptions, rules on competition and concerning

undertakings, state aid, anti-dumping measures); six chapter is new and is about new

trade issues, like services, investments, government procurement, protection of

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intellectual property); finally chapter seven is about functioning rules, and even in this

case exists a Joint Committee and there is the possibility to recourse to arbitration in the

event of any dispute regarding the interpretation or application of rights and obligations

of the Agreement, and besides, each country have to respond to principle of

transparency for any law, regulation, judicial decision and administrative ruling

regarding issues covered in this Agreement.

Conclusions

We can say that the Central European Free Trade Agreement was an important

document for the countries of the origin, but it is very important for new members.

CEFTA in its new version represents a modern Agreement and probably it would be an

excellent tool in their preparation for European Union membership.

Former countries have been able to reap benefits both in trade relations with each other

and in the way to access to European Union, and therefore we can expect the same from

the countries of South East Europe. We should also expect an increase in investment,

because a single market plays a key role in attracting investment, thereby promoting

economic growth, job creation and in reducing unemployment. The expansion of

CEFTA 2006 to include a range of newer trade policy areas should add to the impact of

the trade liberalisation in goods and services.

Than the CEFTA agreement, it is also true that the Stability Pact work in these

countries through other instruments, especially in infrastructure and private sector, but

also in measures of social cohesion and environmental policies. Their common goal is

to ensure that both the countries of South East Europe and international community take

a comprehensive regional approach towards economic development.

Certainly some countries are still facing the difficult process of transition, but the

opening to these new opportunities will bring benefits to themselves of course, but

somehow also to the European Union, although sometimes the idea of a multi – fast

Europe seems to be preferable to an identical economic integration.

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Bibliography and web sites:

- http://www.stabilitypact.org/default.asp

- http://www.ukom.gov.si/cefta2003/eng/cefta/

- http://en.wikipedia.org/wiki/Central_European_Free_Trade_Agreement

- http://it.wikipedia.org/wiki/Comecon