EU OFFICIALS SAY IF THE CZECH REPUBLIC JOINS THE EU BEFORE SLOVAKIA, THE CUSTOMS UNION MUST GO

Czech-Slovak free trade zone barrier to EU entry

The six-year-old free trade zone between the Czech and Slovak Republics - known formally as the Customs Union - has survived both political and economic tensions between the two countries. Even today, the former federal partners are each other's biggest trading nation after Germany and cooperate closely, despite occasional missteps like Slovakia's imposition of a 7% import surcharge on June 1 affecting 54% of Czech exports.
The Customs Union's days may be numbered, however, given the hopes both countries cherish of integration into the European Union. For the EU is itself a free-trade zone, one that requires member countries to cancel free-trade agreements with non-EU countries before they enter.


The Czech-Slovak Customs Union could turn out to be a headache for EU High Commissioner Hans Van den Broek.
photo: Vladimír Martinka

The six-year-old free trade zone between the Czech and Slovak Republics - known formally as the Customs Union - has survived both political and economic tensions between the two countries. Even today, the former federal partners are each other's biggest trading nation after Germany and cooperate closely, despite occasional missteps like Slovakia's imposition of a 7% import surcharge on June 1 affecting 54% of Czech exports.

The Customs Union's days may be numbered, however, given the hopes both countries cherish of integration into the European Union. For the EU is itself a free-trade zone, one that requires member countries to cancel free-trade agreements with non-EU countries before they enter.

This means, in effect, that if the Czech Republic enters the EU before Slovakia - which seems likely, given that Slovakia is still not among the frontrunners for EU acceptance - the battered Customs Union agreement will have to be cancelled, leaving Slovakia out in the cold.

"Cancellation of the Customs Union would mean trade restrictions with the Czech Republic, which is our second biggest business partner after Germany," said Ján Tóth, a senior analyst with investment bank ING Barings. "It would negatively influence the economic development of both countries."

EU hard line

EU High Commissioner Max Van den Broek confirmed that the Czech and Slovak Customs Union was an obstacle facing both countries in their integration dreams. Speaking at an international conference of EU candidate countries in Luxemburg on June 22, Van den Broek said that since Slovakia "will apparently become a EU member later than the Czech Republic," the free trade zone between the two countries might have to be cancelled.

"If the Czech Republic preserves the Customs Union [with Slovakia], the EU will have to continue to control the flow of goods over the borders between the Czech Republic and EU member couontries," he warned

Juraj Mihálik, director of a division of the Slovak Customs Office, explained that the EU wants Slovakia and the Czech Republic to cancel the Customs Union to avoid possible conflicts over tariff rates. "The entrance of the Czech Republic into the European Union would force it [the Czech Republic] to abide by the customs tariffs valid in the EU. Otherwise the system in the EU would be violated," he said.

How to avoid ban

Finance Ministry spokesman Peter Švec confirmed that "the closer the Czech Republic and Slovakia get to the EU front door, the stronger the pressure for the cancellation of the Customs Union will be." The only hope that Slovakia had of losing preferential trade agreements with its second largest trading partner, Švec said, was if "Slovakia enters the EU at the same time as the Czech Republic."

"I don't see any reason why Slovakia shouldn't enter the European Union at the same time as the Czech Republic," confirmed Finance Minister Brigita Schmögnerová in an interview for The Slovak Spectator on June 29.

Despite her apparent confidence in Slovakia's EU chances, Schmögnerová is hedging her bets. During bilateral talks in late June with her Czech counterpart, Ivo Svoboda, Schmögnerová exacted a promise that the Czechs would preserve the Customs Union as long as possible, and would work with Slovakia to bring the free trade agreement into line with EU regulations.

"The project of remodelling the Customs Union is a difficult one," Schmögnerová said. "It means that we will have to devise another tax regime, which would eventually move Slovakia closer to the European Union front door."

Svoboda and Schmögnerová said they supported the EU proposal to gradually eliminate the border between the two countries (as long as the EU financed the measure), and pledged that if the Czech Republic entered the EU sooner than Slovakia, the Schengen agreement (which provides for stiff border controls with non-EU countries but relaxed checks within the union) would be implemented not at the Czech-Slovak border, but at the border between Slovakia and the Ukraine.

The Customs Union agreement between the Czech Republic and Slovaka was signed on October 22 ,1992, and was drafted on the basis of consultations with the GATT (General Agreement on Tariffs and Trade). It has been in force since May 1993.

The main aim of the union is to secure the free movement of goods and services between the two countries. The Customs Union Council co-ordinates both sides and represents the union in contacts with foreign countries, including the EU Commission.

Although meant to secure completely free trade, the union has lately been unable to prevent the two countries from enacting a series of retaliatory import quotas. In 1996, Slovakia imposed a 532 hectolitre quota on Czech beer imports, later extending the quota to Czech wine and soft drinks. The Czechs responded with a 3,500 tonne quota on Slovak sugar.

In May this year, Slovakia slapped import quotas on Czech pork meat and pigs for slaughter, and in June introduced a general 7% import quota that affects 54% of Czech imports. Under the Customs Union agreement, the Czechs are free to respond if they can prove that the surcharge hurts Czech exporters.

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