Institute for War and Peace Reporting | Giving Voice, Driving Change

Serbia/Montenegro: Customs Row Holds Up Union

Dispute over harmonisation of customs duties frustrates efforts to establish new union between Serbia and Montenegro.
By Zoran Radulovic

Linking Serbia and Montenegro into a new federation has suddenly proved more difficult than anybody first thought. The big problem is the harmonisation of customs taxes - a task that seemed simple enough until ministers met to discuss the matter at the beginning of November.


At that point, it became obvious that raising duties to the levels imposed by Serbia would damage Montenegro's imports and leave it vulnerable to smugglers. On the other hand, Serbia's highly protected domestic industry would be under threat if the taxes were lowered from the present 12.4 per cent to anything like the Montenegrin level of 3.5 per cent.


A difference in currencies - Montenegro has embraced the euro while Serbia is still clinging to the old dinar - is also causing difficulties.


The Belgrade Agreement of March 2002 required the two nations to move towards speedy economic and political integration. The European Union wants to see a state with a unified market, currency and customs. Only when this happens can negotiations on signing a Stabilisation and Association Agreement - a precondition for EU membership - begin.


Local analysts believe that both countries would suffer if their duties were the same. If taxes were raised in Montenegro then smuggling is likely to increase - and if they were lowered in Serbia cheap imports would probably flood in.


Montenegro and Serbia have been operating separate economic systems since 1998, when the former took over control of border crossings from the federal authorities, formed its own customs service. Businessmen and ordinary people alike mostly favoured this as the lower taxes brought down the cost of imports.


After the fall of Milosevic, Brussels pressed Montenegro to give up its bid for independence, at least temporarily. Reluctantly, President Milo Djukanovic agreed to sign the Belgrade Agreement establishing a new union of Serbia and Montenegro. Ministers from the two republics joined in negotiations to establish a constitutional charter.


In October, EU experts at the Counseling Centre for Legal and Economic issues, SCEPP, suggested that an optimal tariff be set between the two rates currently in place in both countries. However, each side wanted the other to adopt its own tax levels.


Montenegro pointed to the 7.7 per cent increase in revenues it had enjoyed since 2000 because of low taxes. Its economic experts forecast revenue would continue to increase by three or four per cent a year if duties were kept low. Montenegro's director of customs Miodrag Radusinovic has argued that the republic, unlike Serbia, does not rely on the import of industrial products and has no local industry to protect.


Mladjan Dinkic, governor of the National Bank of Yugoslavia, NBJ, and one of leaders of the non-governmental organisation G17 Plus, has said that Serbia will resist cutting its current tax rate. "Either Montenegro will raise customs to our level, or we should not live with them. It is not acceptable for us to destroy half of our industry to have one quasi-state," he said, adding that harmonisation would hit Serbia's textile, metal, and wool industries especially hard.


An SCEPP spokesperson told IWPR that while they favour the idea of aligning the tariffs between the two republics prior to the adoption of EU rates, the body has not suggested that Serbia and Montenegro should adopt a specific tax rate.


The authorities in Podgorica and Belgrade are clearly keen to maintain the status quo - so are the region's flourishing smugglers who buy cheap, low-taxed goods in Montenegro and sell them at higher prices in Serbia. It's estimated that between a third and half of total economic activity in Montenegro is conducted in this way.


Zoran Radulovic is assistant editor at the Podgorica weekly Monitor and a regular IWPR contributor.