US embassy cable - 03ZAGREB2654

UNCLAS  ZAGREB 002654 
 
SIPDIS 
 
 
SENSITIVE 
 
VIENNA FOR FAS 
 
E.O. 12958: N/A 
TAGS: EAGR, ETRD, HR, Trade 
SUBJECT: CROATIAN TRADE SPAT WITH HUNGARY 
 
 
Sensitive but Unclassified -- please handle accordingly. 
 
Summary 
------- 
 
1.  (U) Recent headlines announcing the death of the 
Hungarian-Croatian Free Trade Agreement are premature, but 
not by much.  Hungary's decision to raise tariffs on 
selected Croatian products may be a last gasp of 
exasperation before Hungary apparently loses its ability to 
single out countries for special treatment upon its entry 
into the EU.  While trade negotiators and veterinarians 
will hopefully find a compromise over the meat 
certification issue that has provoked this mini-trade war, 
the Minister of Agriculture has warned that Hungary has 
more to lose than Croatia should Croatia decide to 
reciprocate.  End Summary. 
 
Another case of BSE-fallout? 
---------------------------- 
 
2.  (U) The trade tensions that ultimately resulted in 
Hungary raising its tariffs on December 9 on 15 items -- 
mainly processed food -- arose out of a Croatian decision 
in May to ban all meat products from livestock fed with 
bone meal, whether they be ruminants (such as cows) or non- 
ruminants (such as chickens and pigs).  The U.S. and other 
countries argue that there is little risk in using bone 
meal to feed animals that do not contract BSE-like 
diseases.  Croatia itself banned the practice of using bone 
meal feed for all livestock three years ago, whereas 
Hungary (like the U.S.) at first only banned the use of 
bone meal for ruminants when BSE first broke out in Europe. 
 
3.  (SBU) According to our contacts at the Ministry of 
Agriculture, after originally protesting the Croatian ban, 
Hungary adopted a similar measure this past summer. 
However, it gave its agricultural producers 60 days to 
implement the measure, presumably in order to give them 
time to use up existing bone meal stocks and to find 
substitutes.  Croatia duly lifted the ban on products from 
Hungary, as long as they were "bone meal free." 
 
4.  (SBU) While Hungary wanted Croatia to accept meat 
products from a list of about 200 Hungarian companies that 
Hungarian veterinarians were willing to certify as bone- 
meal-free (companies which had adopted a "voluntary ban"), 
Croatia demanded testing and traceability.  The Croatians 
wanted to do random checks of a number of these "bone meal 
free" meat plants.  This apparently was the final straw for 
the Hungarians 
 
5.  (U) On December 9, Hungary suspended FTA rates for 15 
Croatian products.  In effect, the low FTA-rates reverted 
back to MFN rates.  This can be a high barrier -- in one 
example, the tariff on dried soups jumped from four percent 
to 32 percent.  The Croatians claim this was done without 
prenotification and in violation of the provisions of the 
FTA, which calls for consultations if "interests" are 
damaged and before any privileges are withdrawn, though 
they admit the Hungarians had indicated there would be 
consequences if Croatia continued to block pork imports 
once Hungary had a comprehensive ban in place.  The 
Croatians claim they learned of the tariff changes the day 
they were implemented.  While exports to Hungary only make 
up less than three percent of Croatian exports, the tariffs 
hit a few companies, most significantly Podravka, hard. 
While Prime Minister Racan has spoken of how a trade war 
would hurt everyone, Minister of Agriculture Pankretic has 
pointedly reminded the Hungarians that they have more to 
lose than Croatia.  In the first 10 months of 2003, Croatia 
exported only $67 million of goods to Hungary, but imported 
$350 million from that country. 
 
Or Croatian Protectionism? 
-------------------------- 
 
6.  (SBU) While Croatia is probably motivated partly by 
protectionism, the picture is a bit more complicated than 
that.  While Hungary is reportedly facing a surplus of pork 
and depressed prices, Croatia is actually in a shortage 
situation, especially for higher quality pork, and has been 
importing pork for a number of years.  Shortages have been 
exacerbated by foot-and-mouth disease in some of its source 
 
countries.  Nevertheless, Croatian pork producers have 
tried to urge the government to "encourage" meat processors 
to use lower quality, higher priced Croatian pork.  They 
can argue that with the total bone meal ban they have lived 
with for three years, they face higher costs and need a 
level playing field.  This justification will be eliminated 
in a few months time, when the generation of Hungarian pigs 
old enough for slaughter will all be from the post-ban era. 
 
7.  (SBU) Additionally, Croatian officials are extremely 
cautious -- even over-cautious -- in the face of public 
concern about BSE.  Bureaucratic pride may have played a 
role as well -- the Hungarian veterinarians did not like 
having their certificates questioned, while the Croatians 
did not like being told they did not have the right to 
verify these certificates. 
 
8.  (SBU) While the FTA will lapse upon Hungary's entry 
into the EU in May 2004, Croatia will then face in the 
Hungarian market the generally low preferential tariffs it 
enjoys with the EU.  Our contacts tell us that Hungary 
should lose its ability to single out countries for 
punishment (the possibility of misusing sanitary measures 
will remain, no doubt).  However, May is a long way off for 
the companies that are negatively affected, and the GOC 
hopes to negotiate a solution.  If not, Croatia may well 
retaliate. 
 
FRANK 
 
 
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