BELGRADE (Reuters) – A trade deal meant to boost economic activity and draw investment into the Balkans risks being severely weakened unless Bosnia and Serbia win concessions from their neighbors on tobacco and food duties in the next two weeks.

Officials from the two countries say they are reluctant to sign on to the Central Europe Free Trade Agreement (CEFTA), considered a training ground for states vying to join the European Union, without better protection for domestic industries.

Serbia, the largest country in what will be a market of 29 million people, is concerned about its tobacco sector, which has attracted over $1 billion in investment from companies such as Philip Morris and British American Tobacco.

It currently applies a relatively low 15 percent tax on imported cigarettes but protects its own producers by means of high excise duties. Vlatko Sekulovic of Serbia’s negotiating team said it was unfair to ask Belgrade to cut duties without concessions from elsewhere.

He says Croatia should scale back its 38 percent customs tax which protects the country’s Rovinj cigarette plant, a practical monopoly. Zagreb so far rejects the demand.

“If we are opening up, then the other countries must also open up,” Sekulovic told Reuters in an interview. “The objective should be to create harmonized and transparent rules for the tobacco industry in the entire region, from Croatia to Moldova.” Romania and Bulgaria will leave CEFTA in January to join the EU, leaving Croatia and the Former Yugoslav Republic of Macedonia (FYROM) as the sole signatories.

The newcomers to the pact – Albania, Bosnia, Serbia, Montenegro, Moldova and Kosovo – have until a December 19 signing ceremony to seal a deal, and even that would only come into force if their governments later ratified it.

Bosnian negotiator Duljko Hasic said Bosnia could suffer more from joining CEFTA than from opting out, as its farmers would be crippled by unfair competition within the bloc. He said Serbia and Croatia heavily subsidize their food sectors, impose non-customs barriers and even block Bosnian exports in transit to Slovenia and FYROM.

Sarajevo’s signature was now conditional on its neighbors allowing it to keep customs duties on some products, such as meat and dairy, for two years – a request so far denied.

“It will be a shame if we don’t reach a deal,” Hasic said.“But if Croatia refuses to give in, we’ll probably stay out.” The 370-page CEFTA, which would replace 31 bilateral pacts, is designed to expand economic activity and attract investors who might otherwise avoid small markets known for bureaucracy, weak infrastructure and low product quality.

Erhard Busek, head of the Stability Pact which leads talks along with the European Commission, said failure to clinch a full deal could hurt the region’s economic integration. “If Serbia and Bosnia fail to sign, the economic and political impact will be felt by all CEFTA parties,” Busek said.

“The exclusion... will send a negative signal that the region remains incapable of overcoming historical rifts.” Sticking points aside, the dialogue between countries who were at war a decade ago is seen as a step forward. Once signed, an expanded CEFTA would stay relevant until all its countries join the EU. Croatia is seeking membership in 2010 and the others are unlikely to join before 2012, at the earliest.

Despite its expected benefits, some governments will have a hard time selling the deal to their people, many of whom are distrustful of bilateral trade pacts signed in the past.

Bosnian farmers, who have been protesting daily over unfair trade conditions since 2005, say they oppose all trade pacts. “We had such deals in the past and they were useless,” said one trade unionist. “Slovenians exported everything to us and we couldn’t sell them a single salami.”