Free Trade Area in Southeast Europe: Growth Potentials and Implications for Croatia

Paper focuses on preconditions, actual trade flows and growth potentials of the Free Trade Zone in Southeast Europe. Further trade liberalisation and implementation of all 21 bilateral trade agreements would be important incentive for intra-regional trade, especially within SEE-5, where, according to gravity model results, there exist situations of “under-trade”. Bilateral trade between Croatia and S&MN represents such “under-trade” situation that gives large space for Croatian export growth to this market. On the other hand, trade with B&His already above the predicted level and it could even fall in the future because great part of B&H imports was triggered by Western assistance. According to the analysis, the establishment of the Free Trade Area in SEE gives potentials for an increase in intra-regional trade (especially SEE-5), but these benefits could be fully reached only by pursuing parallel trade integration towards the EU in order to avoid trade diversion effect.