Policy Pulse - 12 June 2019 - George Anjaparidze
This week, Kosovo celebrated the 20th anniversary of the departure of troops of former Serbian President Milosevic. Despite two decades since the end of the worst of the violence and bloodshed, Kosovo remains troubled by its past. So much so that its past has clouded its judgement on economic policy today.
In November 2018, Kosovo announced 100% tariffs on all goods originating from Serbia. Based on 2017 data from the Kosovo Agency of Statistics, this tariff would impact €449.9 million or 14.8% of goods imported into Kosovo. As a result, this could decrease the purchasing power of Kosovars by €149.8 million or 6.4%. This is the equivalent of having Kosovars forego 23 days of consumption per year (See Chart).
What makes the tariffs particularly damaging for Kosovo is its poor integration into the global trading system. It is a landlocked territory with relatively weak logistics infrastructure and small domestic market. This means that, in the short-to-medium term, it will find it costly to substitute goods originating from Serbia with imports from other countries.
The World Bank estimates that landlocked territories have higher trade costs, which include higher costs of logistics, high degree of unpredictability in transportation time, widespread rent-seeking activities and weak transit systems. Furthermore, empirical research from Loughborough University points to the existence of high search and switching costs related to finding alternative suppliers, this will also contribute to driving up costs of substitutes. In addition, there may also be higher costs for the goods themselves. The combination of these factors will increase the cost of importing these goods, which, in the short-to-medium term, would lead to an increase in costs of these imports by about 33%.
There are several channels through which the tariffs will have an economic impact, two are highlighted below. First, if the bundle of goods imported are finished products that are consumed domestically in Kosovo, the impacts will be most directly felt by consumers. This is the scenario quantified in this assessment. Assuming these costs are passed through to consumers, they will face having to replace their consumption with higher cost substitutes, reduce consumption or switch to inferior substitutes. For purposes of this scenario analysis these impacts have been modeled to be of equivalent scale and on average equal to 33% of the value of goods imported (See Table 1). Second, if the bundle of goods imported are used as inputs in production processes, the impacts will be first felt by businesses unless they are able to pass through these costs to consumers or through the supply chain. The higher production costs may be even more damaging to the Kosovo economy. It will reduce competitiveness of businesses in Kosovo, thereby reducing activity and output, which will have a negative impact on employment and consumption.
The only economic rationale for this policy is if it is motivated by a desire to redistribute the gains of trade to a new set of entities (middlemen or producers) engaged in importing. Alternatively, the policy may be motivated by retaliation for blocking Kosovo membership in Interpol as well as emotive reasons, rooted in its troubled past. In either case, it is the consumers and businesses in Kosovo that pay the price for this ill-advised economic policy.
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