27 SEE-5 trade will not become in a foreseeable future a lever of economic growth of countries<sup>of</sup> the region any time soon.

# **Dominance of Inter-industry Trade: Implications for Expansion and Pressures for Protection**

Three observations can be derived from data on the composition of trade among SEE-5<sup>countries</sup> (Table 8).36 First, manufactures account for a relatively low share of intra-SEE-5 trade,<sup>although</sup> there are differences among countries reflecting their uneven level in industrialization. Except<sup>for</sup> FYR Macedonia's exports to a more developed Croatia and Croatian exports to Albania<sup>and</sup> Bosnia and Herzegovina, the share of manufacture exports is below 50 percent. Agricultural products make up almost half of the bilateral trade recorded between FYR Macedonia and Albania, and Bosnia and Herzegovina and FYR Macedonia.

Second, some dyads exhibit the traditional division of labor linking least developed and highly developed countries through exchanges of raw materials and low processed goods for processed ones. For instance, take the dyads: Albania-Croatia and Albania-FYR Macedonia. Albania specializes in exports of production inputs to these economies, which, in turn process, them and export some portion back. These inputs include items, which-unlike components and parts-have no discernible use in their present form and are basically unprocessed. Agricultural raw materials, ores, minerals and nonferrous materials regarded as traditional production inputs, i.e., not processed in their present form, account for a dominant share of Albania's exports to Croatia (96 percent) and FYR Macedonia (88 percent). Manufactures account for 72 percent and 56 percent of Albania's imports from these two countries respectively (Table 8). Thus<sup>Albania</sup> seems to be locked in a traditional division of labor as a supplier of production inputs in return for manufactures, albeit with a caveat. The share of production inputs in exports from higher developed Croatia and FYR Macedonia remains quite significant pointing to some processing within Albania. The situation in other dyads is even less clear with a mixture of production inputs and final products dominating mutual trade.

Third, both import and export baskets in trade among SEE-5 diverge rather significantly from those that they have in trade with the EU. In both exports to and imports from the EU of each SEE-5 economy manufactured goods account for a dramatically larger share than in their mutual trade. Contrary to expectations, Albania's trade is no exception to this pattern with manufactures accounting for more than 80 percent of their exports to the EU. The composition<sup>of</sup> SEE-5 exports to the EU is quite similar with textiles and clothing, footwear and<sup>wood</sup> accounting for between 30 percent (FR Yugoslavia) and 54 percent (Albania). These shares<sup>for</sup> other countries were 40 percent in Croatia's exports, 51 percent in Bosnia<sup>andHerzegovina</sup> exports and 45 percent in FYR Macedonia exports.

In contrast, textiles and footwear represent only a small fraction of intra-regional<sup>trade</sup> compared with its weight in the total exports for most of SEE-5 countries. For instance,<sup>while for</sup> Albania, Croatia, Bosnia and Herzegovina, and FYR Macedonia exports of<sup>textilestotheEU</sup> represent around one third of their total exports to that region, they account<sup>for a muchsmaller</sup> share of their exports to the region. The only exception is Bosnia and Herzegovina<sup>withexports</sup> of textiles to FR Yugoslavia accounting in 1999 for 30 percent of its total FR<sup>Yugoslavia-oriented</sup> exports. FR Yugoslavia appears to be an important outlet for final consumer<sup>goods including</sup> footwear from Croatia and FYR Macedonia. Wood products are an important item<sup>in Bosnia and</sup> 36 Federal Republic of Yugoslavia is not included because of the unavailability of disaggregated foreign trade data.