Do EU Rules of Origin Restrict Western Balkans’ Trade Performance?

Abstract

This paper aims to examine quantitative and qualitative aspects of trade flows of the Western Balkan Countries (WBCs) and to assess appropriateness of EU trade policy arrangements with respect to the system of cumulation of rules of origin towards the WBCs in the past decade. Due to bilateral cumulation of origin rules under SAAs and autonomous trade preferences prior to march 2009 exporters in WBCs have been constrained when using inputs from other countries from the region, as only inputs sourced from EU have been accepted as local content granting preferential status in the EU markets. The estimations of income elasticities of import demand confirm that growth of intra-regional WBCs’ imports of intermediates was slower than growth of total intra-regional imports in response to GDP growth - most significantly for Macedonia and Albania, while the opposite was the case for WBCs’ imports from EU-15 and from new EU member. Further, the results based on gravity model estimations for Croatia suggest that lack of cumulation of rules of origin do indeed have significantly negative impact on bilateral trade flows, in particular for trade with intermediates and food and beverages. More specifically, where there is no cumulation of rules of origin between Croatia and importing country exports of industrial supplies are estimated to be 24% lower than expected levels in case of the diagonal cumulation.