Untapped Potential: Intra-Regional Trade in the Western Balkans

Strengthening regional economic integration has been set as a priority by the leaders in the Western Balkans. In this context, the paper examines merchandise trade patterns in the region and tries to identify the main drivers of and obstacles to intra-regional trade. Although intra-regional trade comes second in importance, after trade with the EU, it underperformed and was in a relative decline in the last decade. The structure of intra-regional trade has been rather stable and remained concentrated in goods with low value added. The trade of the region with Russia, China and Turkey is less pronounced and is systematically skewed towards imports from them. The results of a gravity model of trade show that intra-regional trade has been positively driven by the level of economic activity and to some degree by cultural factors, like language similarity, while non-tariff barriers significantly reduce trade exchanges between the countries in the region. Contrary to expectations, geographical proximity did not come out as a statistically significant factor impacting trade dynamics in the examined period. Nonetheless, the poor connectivity in the region, attested by a number of indicators and other studies, is a major obstacle to economic development. Therefore, recent initiatives to support regional economic development by reducing non-tariff barriers and improving regional transport corridors seem to be well-placed.