Lately | Economy

Fighting with taxes

By - 23.11.2018

A history of Kosovo and Serbia’s tempestuous trade relations.

Earlier this week, the Kosovo government announced that taxes on imports from Serbia and Bosnia and Herzegovina (BiH) will increase from the 10 percent announced earlier in the month to 100 percent. The move comes as part of a long history of difficult trade relations between the three states that have spilled over from the political discord.

But, what has preceded the current situation? Here’s a summary of some of the key moments and issues to take into account.

The trio are all members of the Central European Free Trade Agreement (CEFTA), a trade agreement between seven non-EU member states in the Balkans that aims to ease the path toward EU integration, and consolidate free-market economics. Kosovo became a member of CEFTA in July 2007, while represented by the United Nations Mission in Kosovo (UNMIK).

After declaring independence in 2008, Kosovo changed customs stamps, from “UNMIK customs” to “Kosovo customs.” In December 2008, Serbia and BiH, which had (and still have) not recognized Kosovo’s independence, stated that they would neither allow the export of Kosovo goods with those stamps nor the use of their territory as a transit passage for these goods.

As a response, on July 20, 2011, the Kosovo government announced a decision to take reciprocal measures against Serbia and BiH. Six days later, the Kosovo Police tried to ensure their presence at border points 1 and 31 in the northern part of Kosovo, which had been previously been operated by the EU Rule of Law Mission in Kosovo, in order to enforce the measures. In response, local Serbs set fire to the border points.

The measures remained in force until September 2011, when Kosovo and Serbia reached an agreement on customs stamps in Brussels. As part of the EU-mediated dialogue, Kosovo agreed to change the stamps so as not to include any state symbols, and Serbia accepted Kosovar goods not stamped as such.

However, the general lack of implementation of other agreements in the EU-mediated dialogue, and a series of spats between the two states, including Serbia’s recent campaign against Kosovo’s membership to Interpol and attempts to get states to ‘de-recognize’ Kosovo, has meant that the already tense situation between the countries has escalated.

The tax hike

On Nov. 6, the government of Kosovo decided to introduce a 10 percent tax on products originating from Serbia and BiH. A few days later, Prime Minister Ramush Haradinaj said that this tax could increase.

On Nov. 8, a meeting scheduled in Brussels between presidents Thaçi and Vučić was cancelled after the President of Serbia stated that there is no dialogue with Kosovo while the import tax was still in force. In response, Thaçi insisted that Belgrade does not need to be afraid of Kosovo under any circumstances, because the latter will be responsible in the dialogue as well as in its actions.

The European Union called on Kosovo to revoke its decision to impose an import tax on goods coming from Serbia and BiH. On Nov. 9, Kosovar Serb party Serbian List, though part of the government coalition, threatened that if the government does not abolish the tax increase on Serbian products, it will come out in opposition and organize civic protests.

On Nov. 20, Vučić stated that due to this tax, Serbia loses 1 million euros in a single day, while Kosovo Customs announced that it received around 300,000 euros more in the week after the tax was imposed than the previous week.

With tensions already escalating, it seems that the situation got hot-blooded after the Serbian diplomatic offensive to convince several states to revoke Kosovo’s recognition, and especially after its strong lobbying against Kosovo being admitted to Interpol. On Nov. 20, Kosovo didn’t receive the two thirds majority of the vote required to be admitted to the international police organization.

The next day, Nov. 21, Kosovo raised customs tariffs on Serbian and Bosnian goods from 10 to 100 percent, with Deputy Prime Minister Enver Hoxhaj explicitly referencing Serbia’s recent approach to Kosovo and the campaign against Kosovo’s membership to Interpol.

"[The] EU can pressure Kosovo, but the problem is there are no more sticks."

RTK's Brussels correspondent, Gjeraqina Tuhina.

The retaliation also required the authorities to remove or prevent from entering any goods that did not address Kosovo by its constitutional name, the Republic of Kosovo, which Serbia and BiH do not recognize. Haradinaj also announced that measures imposed on products coming from Serbia should remain in place until recognition. “Unless Serbia recognizes Kosovo as an independent and sovereign state, we should not abolish [the tax],” he said.

The same evening, President Vučić called an emergency meeting of the National Security Council in Belgrade, while the European Union High Representative for Foreign Affairs and Security Policy, Federica Mogherini, said on Wednesday that the Kosovo government has to immediately revoke its decision to increase tax on goods coming from Serbia and BiH. “Today’s decision is a clear violation of CEFTA and the spirit of the Stabilisation and Association Agreement between the EU and Kosovo,” she said.

Reacting to Mogherini’s statements, in a letter to her, Haradinaj said that the Kosovo Government calls on EU representatives as mediators in the dialogue between Kosovo and Serbia to force Serbia and BiH to meet their commitments according to CEFTA and other agreements.

Gjeraqina Tuhina, a correspondent for Radio Television of Kosovo in Brussels has suggested that the EU’s influence on Kosovo is dwindling and their words may go unheeded. She tweeted that Kosovo has no credible EU membership perspective and will not have visa liberalization, being treated differently in all forums by EU institutions, adding that: “[The] EU can pressure Kosovo, but the problem is there are no more sticks.”

Kosovo Customs Spokesperson, Adriatik Stavileci, told Gazeta Express that the new customs tax was implemented on the same day that the government announced its decision, adding that there has been a decrease in imports since. He also revealed that on the day of the announcement, 20 trucks turned back after receiving the information about the new tax.

With the decision sparking enthusiasm among large sections of the Kosovar Albanian population, the governing coalition parties — the Democratic Party of Kosovo (PDK), Haradinaj’s Alliance for the Future of Kosovo (AAK), and the Social Democratic Initiative (NISMA), all tried to take the credit for it.

Trade imbalance

Kosovo joined CEFTA without setting quotas, despite the agreement foreseeing that member states have the right to. A tariff quota regime is applied when a CEFTA member state uses its right to impose preferential tariffs on imports of products, usually agricultural products, which are protected by that member state.

Kosovo thus entered CEFTA in an unequal position, causing many problems for local producers. While neighboring countries set quotas, as is the case with the quota Albania has set for potatoes, Kosovo has not protected any of its producers from the threat of cheap imports.

As a result, Kosovo has a trade deficit with most CEFTA members, but especially Serbia. According to data from the Kosovo Agency of Statistics, in 2017 Serbia exported goods to Kosovo worth 449,918,000 euros, while the goods Kosovo exported to Serbia only valued 48,246,000 euros, creating a trade deficit with Serbia of 401,672,000 euros. Of the total value of trade exchanges between the two countries in 2017, only 9.68 percent were Kosovo exports, while 90.32 percent were Serbian exports.

The trade relationship between Kosovo and Serbia was even more unequal a few years ago. In 2010, while Serbia exported to Kosovo goods worth 260,471,000 euros, Kosovar exported goods to Serbia had a value of only 3,941,000 euros. Thus, Kosovo was in a deficit of 256,530,000 euros in its trade exchanges with Serbia. In 2010, Kosovar goods accounted only 1.49 percent of trade exchanges between the two countries, while Serbian goods made up 98.51 percent.

According to the same report, in 2017 Serbia was the largest exporter in Kosovo, followed by Germany (378,515,000 euros), Turkey (292,626,000 euros), China (275,463,000 euros) and Italy (194,722,000 euros). BiH on the other hand, was the ninth largest exporter in Kosovo, exporting goods to Kosovo worth 81,674,000 euros. Thus, while Serbia accounted for 14.8 percent of total imports entering Kosovo, BiH only accounted for 2.7 percent.

Economics professor and expert Safet Merovci sees the decision as a political and populist move.

While much of the discussion in the media has focussed on Kosovo’s reliance on the import of flour from Serbia, it was actually seventh on the list of the most valuable exports from Serbia to Kosovo in 2017. Electric conductors were the most valuable, totalling 54,849,000 euros, followed by petroleum oils and oils derived from bituminous minerals (44,754,000 euros), non-alcoholic beverages (38,904,000 euros), sugars, molasses and honey (20,221,000 euros), wheat and meslin (17,494,000 euro), clay construction materials (16,800,000 euro), cereal and flour preparations (14,176,000 euros), vegetable oils and grease (12,445,000 euros), animal feed (11,649,000 euros), and iron and steel products (11,341,000 euros).

Political economist Besnik Pula wrote on his Facebook account that it is the most sensitive sector of consumers that will be damaged by the new import tax, and cites an article he wrote in 2011 that outlines the necessity for a well thought out strategy for replacing Serbian goods within the Kosovo market before measures are taken.

Economics professor and expert Safet Merovci meanwhile sees this decision as a political and populist move, saying it may be fair in the short term, but if there is a rise in prices on these products from Serbia and BiH, it will be the citizens, not politicians, who would pay for it. Deputy at the Assembly for opposition party the Democratic League of Kosovo, Hykmete Bajrami, meanwhile, believes that this decision was taken to cover government mismanagement.

Regardless, it seems as though the countries of the region have once again decided to solve their problems on their own. This time no longer with a rifle, but through trade war, the kind of which are not completely unfamiliar to European and world history.

History tells us that many times several countries in the world have tussled without weapons, but with economic constraints: from the so-called “Opium War” between the British and Chinese in the early 19th century to the “Banana War” of 1993 between the US and the EU, the U.S.’s “Steel tariffs” of 2002, and the latest U.S. trade war against China.K

Feature image: Majlinda Hoxha / K2.0.

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