_ Yuri Kofner, junior economist, Institute for Market Integration and Economic Policy. Munich, 27 May 2020.
Tensions over gas prices and other problems
The incomplete results of the latest heads of state summit the Eurasian Economic Union, which took place on May 19, 2020, became another occasion for many to recall their criticism of the Eurasian integration project.
This time, the parties did not agree on the pricing mechanism for the transportation of natural gas. President of Belarus Alexander Lukashenko and Prime Minister of Armenia Nicole Pashinyan consider it too high and suggest moving to a single intra-union tariff, which would be closer to the domestic Russian price.
To this, Russian President Vladimir Putin made it clear that this would be possible only in return for deeper integration up to a fiscal union, which hasn’t been reached even in the European Union.
From his part, Kazakh President Kassym-Zhomart Tokaev asked to discontinue this debate and reminded everyone not getting ahead of themselves, since the creation of unified energy markets was laid down in the union agreement only for 2025. In his opinion, before moving on, it is now important to first remove all remaining obstacles that impede free trade within the common markets of the Union, especially the free movement of goods.
And indeed, there are enough unsolved problems. Among them:
- Disputes over the application by national customs services of sanitary, phytosanitary and veterinary measures, for example between Minsk and Moscow on dairy products or between Nursultan and Moscow on watermelons and chicken meat.
- Pretensions on certain exemptions from the common customs tariff of the EAEU for third countries, for example, for supported foreign cars and sugar imports.
- Complaints about unlawful restrictions on cargo transit, or, conversely, on the re-export of products, which are under the Russian import ban. Examples include Kazakh coal deliveries for Ukraine or “Belarusian” shrimp.
And the list is far from exhaustive.
According to calculations by the Eurasian Development Bank, non-tariff barriers increase the cost of intra-union goods trade by an average of 32 percent. And despite the tireless efforts of the Eurasian Economic Commission (EEC), the total number of obstacles registered in the EEC’s “White Book” does not decrease, but, on the contrary, increases from year to year.
Dealing with “Eurasia-scepticism”
Naturally, on this basis, the number of “Eurasian skeptics” is growing. And as in the Europe, some hotheads in the EAEU member states are calling for an exit from the union.
Of course, we can and should talk about the ailments of Eurasian integration and non-pre-integration. Moreover, openly and frankly. However, two distortions interfere with having a sensible dispute.
Firstly, the overwhelming majority of commentators on a given issue of Eurasian integration are political scientists, journalists, and national politicians. Moreover, in both camps – supporters and opponents of the EAEU.
But the Eurasian Economic Union is officially and first of all a purely economic project. And therefore, to evaluate its effectiveness, we should use the conceptual approach of political economics: “spillover effects”, “economies of scale”, “heterogeneity of preferences”, etc.
The public discourse on the effectiveness and feasibility of the Eurasian Union needs a more balanced approach, based on the results of empirical research.
Secondly, against the background of ever new media reports about various deficiencies in Eurasian integration, it is easy not to notice the achievements of the Eurasian project, which are taken for granted.
All too often, representatives of the member states recall the losses that they incurred from integration, forgetting about the benefits they received from participation in the common markets of the union.
Properly evaluating Eurasian integration
The economic results of regional integration can be assessed in different ways. For example, using various computer simulations.
So, the recognized Vienna Institute for International Economic Research (wiiw) in 2018 using a “gravity model” found that, thanks to the creation of the Eurasian customs union, factual mutual trade between member states was on average one third higher in 2010-2015 than it could have been without its establishment. The greatest “trade creation effect” was noticeable for the Republic of Belarus.
The costs of dissolving the EAEU
The benefits of the EAEU and the work done by the EEC can be made clear, if we hypothetically reintroduce the barriers to mutual trade between member states that have been removed in the last decade.
Since the competencies of the Eurasian Commission are most expressed in the common goods market and in the field of labor migration, I evaluated the consequences of three hypothetical scenarios using a “partial equilibrium model”:
- What will happen, if tariff duties are introduced between the member states of the “former” EAEU, i.e. if the customs union dissolved would be dissolved and free trade in goods abandoned?
- What will happen if the common economic space is dissolved, i.e. if each “former” member state introduces its own and different from each other technical regulations and standards, sanitary, phytosanitary and veterinary measures, competition and subsidization rules, anti-dumping measures, requirements for licensing suppliers, etc.?
- What are the consequences of abandoning the common labor market and the free of movement of labor?
For simulation scenarios (1) and (2), I used the following input data:
- Bilateral trade data from 2018 for the four parties (EAEU, EU, China and the “rest of the world”) aggregated for 24 MTN product sectors from the WITS (UN COMTRADE) For the bilateral trade flows CIF recorded imports were preferred. Country effects were estimated by applying the share of each member state in intra-Union trade.
- Aggregated simple most favored nation (MFN) ad-valorem import tariffs from 2018 were taken from (WTO 2019) and the WITS (UNCTAD TRAINS)
- The AVEs of NTMs for intra- and extra-EAEU trade were taken from (Knobel et al. 2019), for China from (Niu 2018), for the EU were taken from (Berden et al. 2015), for the rest of the world from (Niu et al. 2018).
- Import elasticities were taken from (Ghodsi et al. 2016). The export supply (1.5) and substitution (5) elasticities were taken as constants across all sectors and regions.
For modeling scenario (3), I used the following input data:
- A matrix of bilateral data on labor migration for 2017 for four parties (EAEU, Uzbekistan, Tajikistan and the rest of the world) taken from the (World Bank) database.
- A matrix of bilateral data on personal remittances for 2017 for the EAEU member states taken from the EEC Statistics Department.
- As the “ad valorem equivalents of barriers to labor migration”, the author interpreted the reverse value of the integration index on the EAEU labor market for 2011 and 2017, developed by the EEC Macroeconomic Policy Department. The ad valorem equivalent of barriers to labor migration within the EAEU is 41%, for the CIS countries outside the EAEU – 70%, for the rest of the countries – 95%.
- The elasticity of imports, taken from (Ghodsi et al. 2016) and (Tokarick 2010). The elasticity of export supply and substitution were taken as constant values in all regions.
The analysis shows the significant costs of potential Eurasian disintegration. Primarily for Belarus, Kyrgyzstan and Armenia, which means that by comparison, they are in fact the largest beneficiaries of the Eurasian integration project.
No Eurasian customs union (1)
Without the Eurasian customs union, mutual intra-union trade in goods would have fallen by USD 13 billion, i.e. by 22 percent. As a result, the total GDP of the union countries would be 0.3 percent lower each year.
The greatest losses from the hypothetical return of customs posts and duties at internal borders would be experienced by Belarus (-3.7 percent of GDP), Kyrgyzstan (-2.7 percent) and Armenia (-1.1 percent). The effect would be less noticeable for Kazakhstan and Russia. Annually, their gross domestic product would be 0.8 and 0.1 percent lower. This difference in effects is logical due to differences in their economic size and in the relative importance that trade with the other EAEU partners plays for each country.
No single economic space (1+2)
Even more significant would be the losses from the hypothetical dissolution of the single economic space and the return of already eliminated “non-tariff barriers.” In this case, mutual trade in goods would drop as much as 114 percent. This would mean an annual loss of USD 70 billion. As a result, the aggregate GDP of the EAEU countries would be 1.8 percent lower each year.
This may not seem like such a big figure. But it is worth considering that the average annual GDP growth of the EAEU in 2014-2018 amounted to 0.8 percent and that the pre-COVID forecast for its average annual economic growth for 2020-2024 amounted to 2.1 percent.
The estimated country effects are even more depressing: Kyrgyzstan’s GDP would be 14.2 percent lower, Armenia’s – by 6.2 percent, Kazakhstan’s – by 4.2 percent. Exiting the EAEU common economic space would be a huge blow to the Belarusian economy, which would drop by one fifth (-20.3 percent). Compared to this, the gross domestic product of the Russian Federation would be reduced “only” by 0.6 percent, which is explained by the large size of its economy, the relative importance of foreign markets and fuel exports for Russia.
No common labor market (3)
The potential abandonment of the common labor market and of the free movement of labor would lead to negative consequences commensurate with the dissolution of the union’s single economic space. Intra-union migration of workers would fall by more than half, due to which the aggregate GDP of the region would be another 0.3 percent lower annually.
The largest losses would be incurred by the net labor migrant donors – Armenia and Kyrgyzstan. In the case of the supposed abolition of preferences within the framework of the EAEU common labor market, personal remittance to these countries would fall by USD 1.1 billion and USD 1.7 billion dollars, respectively.
For Armenia, this would mean a decrease in national income by another 8.8 percent, for the Kyrgyz Republic – by as much as 20.8 percent additionally. But the GDP of the countries of the union’s “core” would also be reduced: of Belarus – by 0.8 percent, of Kazakhstan – by 0.3 percent, of Russia – by 0.1 percent.
No Eurasian Economic Union (2+3)
All the scenarios taken together, the hypothetical complete dissolvement of the EAEU would reduce the region’s GDP by 2.2 percent as a whole and would mean an economic knockout for each of the member states individually, except for Russia: Armenia’s GDP would fall by 15 percent, that of Belarus – by 21.1 percent, Kazakhstan’s – 4.6 percent, Kyrgyzstan’s – by 35 percent.
The gross domestic product of the Russian Federation would fall “only” by 0.7 percent. But this does not take into account the likely social, political and security threat posed by the neighboring countries around the Russian borders being pushed into a deep economic recession.
Table 1. Trade and welfare effects of Eurasian disintegration
|Scenario 1. No Eurasian customs union||Scenario 1+2. No single economic space||Scenario 3. No common labor market||Effects of scenarios 2 + 3 together|
|Intra-union trade change||Welfare change||Intra-union trade change||Welfare change||Intra-union labor migration change||Intra-union personal remittances change||Welfare change||Welfare change|
-USD 13 bln
-70 bln USD
|-1.8 percent||-50.3 percent||-USD 5.8 bln||-0.3 percent||-2.2 percent
– USD 76 bln
|Welfare change||Welfare change||Personal remittances change||Welfare change||Welfare change|
|ARM||-1.1 percent||-6.2 percent||-USD 1.1 bln||-8.8 percent||-15.0 percent|
|BLR||-3.7 percent||-20.3 percent||-USD 0.5 bln||-0.8 percent||-21.1 percent|
|KAZ||-0.8 percent||-4.2 percent||-USD 0.6 bln||-0.3 percent||-4.6 percent|
|KGZ||-2.6 percent||-14.2 percent||-USD 1.7 bln||-20.8 percent||-35.0 percent|
|RUS||-0.1 percent||-0.6 percent||-USD 1.9 bln||-0.1 percent||-0.7 percent|
Source: Author’s estimates.
Despite all the problems of the Eurasian Economic Union, the study makes one thing obvious – without it, things would be much worse.