Enhancing Regional Trade Integration in

The countries of the Southeast Europe region have the common objective of joining the European Union (EU). To achieve this goal, these countries have pursued closer integration with the EU and with each other, including signing the Central European Free Trade Agreement (CEFTA). CEFTA aims to fully liberalize trade in the region and work toward greater cooperation in a number of trade-related areas, such as investment, services, public procurement, and intellectual property rights. This paper aims to help policy makers in Southeast Europe assess the impact of the recently introduced trade policy measures, and proposes actions that could complement these measures and help achieve greater regional trade integration. The paper considers intra-regional trade flows and the remaining nontariff barriers to trade, the benefits of allowing free movement of skilled labor in the region, and how adopting the EU's Common External Tariff could prevent trade diversion.

Acknowledgments	p. vii
Foreword	p. viii
Acronyms and Abbreviations	p. x
Executive Summary	p. xii
Evolution of Infra-regional Trade in Southeast Europe: The Role of CEFTA for Enhancing Regional Trade Integration	p. 1
Abstract	p. 2
Introduction	p. 3
Trade Patterns in the SEE Region	p. 5
Patterns and Structure of Trade Flows in SEE	p. 7
Decomposition of Intra-regional Trade	p. 11
Intra- versus Inter-industry Trade	p. 15
Quality of Foreign Trade Statistics for the Region	p. 18
The Role of Trade Regulations, Trade-related Business Environment, and Rules of Origin in Trade Expansion and Integration	p. 22
Technical Regulations and Standards	p. 22
Trade-Related Business Environment	p. 29
Cost and Quality of Trade Logistics	p. 35
Rules of Origin	p. 38
How Are Firms Reacting to Regional Trade Integration?	p. 41
The Case of Agrokor	p. 41
The Case of ArcelorMittal	p. 42
Conclusions and Recommendations	p. 44
Annexes	p. 46
Trade Structure by HS-2 Product Category in 2007	p. 46
Trade Structure by HS-2 Product Category in 2008	p. 48
Net Exports to CEFTA, the Top and Bottom Five HS 2-digit Products in 2008	p. 50
Description of 2-digit HS Categories	p. 51
Labor Mobility in Southeast Europe	p. 53
Abstract	p. 54
Introduction	p. 55
CEFTA: The Setting	p. 56
Population and Labor Force	p. 56
Economic Growth and Employment	p. 58
Migration Patterns	p. 61
The Diaspora	p. 64
Migrants' Education Levels	p. 64
Migrant Stocks in the CEFTA Countries	p. 66
Irregular Migration	p. 68
Remittances	p. 69
Labor Mobility Provisions in Free Trade Agreements	p. 71
Asia-Pacific Economic Cooperation (APEC)	p. 71
ASEAN Free Trade Area (AFTA)	p. 72
Caribbean Community (CARICOM)	p. 72
East Africa Community (EAC)	p. 74
Mercado Comun del Sur (Mercosur)	p. 75
North American Free Trade Agreement (NAFTA)	p. 76
European Union (EU)	p. 76
Lessons from Labor Mobility Provisions of FTAs	p. 79
The Benefits (and Costs) of Labor Mobility Provisions	p. 83
Overall Production and Productivity	p. 83
The Distribution of Benefits and Costs	p. 84
The Transition to EU Requirements	p. 86
Implementing Mobility in CEFTA	p. 87
Migration Management: Alignment with the EU	p. 87
Informal Economies and Work Permits	p. 89
Credential Recognition, Social Security, Other Issues	p. 90
Conclusions	p. 92
The Impact of Establishing a Virtual Customs Union between Southeast Europe and the European Union	p. 95
Abstract	p. 96
Introduction	p. 97
Customs Union versus a Virtual Customs Union	p. 101
Tariff Profile of Southeast Europe	p. 106
The Level of Adjustment	p. 107
Estimates of Trade Diversion and Trade Creation Due to Adoption of EU's CET	p. 117
Breakdown of Trade Diversion and Creation among Trade Partners	p. 121
Summary and Policy Recommendations	p. 125
Appendix: Consumer Surplus by Product and Country	p. 129
References	p. 135
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Enhancing Regional Trade Integration in Southeast Europe

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