Diagonal Cumulation – An important aspect of trade integration Nand Shani Economic and Social Development Regional Cooperation Council

Benefits of economic integration and cooperation An important mechanism contributing to the lasting stabilization of South East Europe and its faster integration into the EU and NATO Preconditions for successful cooperation: stability (peace and security), the rule of law, good governance, and macroeconomic and monetary stability One of the key development objectives of the EU under the Maastricht Treaty is 'the smooth and gradual integration of developing countries into the world economy‘. The Thessaloniki summit emphasized the European future of the countries of SEE. Good preparation and adjustment for full EU membership

Benefits of integration Economic growth and new jobs Increased competitiveness through healthy competition. An environment conducive to FDI is crucial for increasing the competitiveness of products in international markets. Accompanied with structural reforms. An environment conducive to FDI is crucial for increasing the competitiveness of products in international markets - mitigate external vulnerabilities and move up the value chain Should integration move beyond trade liberalization to include free movement of capital and workers – this would decrease divergences among countries

Trade, Growth and Development Incomes of the poorest quintile rise in line with overall growth (Dollar and Kraay, 2000) Countries that liberalized their trade regimes enjoyed annual growth rates that were about 1.5 percentage points higher than before liberalization (Wacziarg and Welch, 2008) In the region, growth has not been strongly supported by trade. Poor export performance based on low skills. Large remittances and private inflows have reduced incentives to export through two channels: appreciation pressure of exchange rate and domestic demand.

Trade, Growth and Development The benefits from regional integration can only be realized if the countries gain better access for their exports on regional and international markets CEFTA 2006 – major achievement Deeper integration within CEFTA members will increase market size, improve service quality and help attract FDI in a larger single market Liberalization along all dimensions limits the potential for trade diversion, allows for significant welfare gains and expansion of trade and output across majority of sectors. Complete the implementation of CEFTA: behind the border regulatory restructuring, NTBs. To use full potential, SEE needs to be part of pan-European/Mediterranian Cumulation of Origin arrangements

Current Trade Situation Export Performance during the First Half of the Year (January-June 2007 = 100) Source: National Statistical Offices

And imports… Import Performance during the First Half of the Year (January-June 2007 = 100) Source: National Statistical Offices

Diagonal Cumulation an important mechanism for admission of non-originating materials it expands the geographical and product coverage of the system and is a major factor of harmonization. Implies that qualifying materials from anywhere in the region can be used without undermining preferential access. It allows originating materials from regional partners to be further processed in another country in the group and treated as if the materials were originating in the country where the processing is undertaken. countries are linked by identical agreements, with identical rules of origin will lead to trade creation and/or trade reorientation.

Diagonal Cumulation The framework for trade cooperation in the Western Balkans is provided by CEFTA and SAP with the aim of establishing a free trade area among WB countries and also with EU. Pan-European and Pan-Euro-Mediterranean cumulation systems EC established a zone of diagonal cumulation of origin between the EU and those interested countries in the WB that have an FTA with the EU, the so called SAP cumulation zone. SAP+ stands for the cumulation zone including EU, WB countries, EFTA countries and Turkey. As the system of PEM cumulation entails a lengthy process, SAP+ is an intermediate short-term solution.

Benefits of SAP+ Enhance economic cooperation among all members Improve trade outcomes More opportunities for investment Technically easily implemented An extenssion to the Pan-European Cumulation system

11 SAP Cumulation BIH Montenegro Serbia UNMIK/Kosovo Albania Macedonia Croatia EC Island Norvay Switzerland LiechtensteinTurkey Algeria Moroko Tunizia Israel Palestina Egypt Lebanon Jordan Siria Faroe Island Moldova --- SAP Cumulation CEFTA 2006 PEM Source: Iris Gorjanc-Dolnicar

12 SAP + Cumulation BIH Montenegro Serbia UNMIK/Kosovo Albania Macedonia Croatia EC Island Norvay Switzerland Liechtenstein Turkey Algeria Moroko Tunizia Israel Palestina Egypt Lebanon Jordan Siria Faroe Island Moldova --- SAP Cumulation CEFTA 2006 PEM Source: Iris Gorjanc-Dolnicar

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