Removing non-tariff barriers within the EAEU would significantly raise its GDP

_ Yuri Kofner, junior economist, MIWI Institute. Munich, March 28, 2020.

Officially, within the Eurasian Economic Union (EAEU), there is a single domestic market in place and tariff duties on mutual merchandise trade have been lifted. Despite this success, the existence of non-tariff barriers (NTBs) for mutual trade is the main obstacle to further integration. Therefore, the Union-wide effect of removing non-tariff barriers to trade in goods, services and mutual investments between the member states may amount to 0.6 higher GDP annually. This is the result of a research report by a group of economists led by A. Knobel (RANEPA, RFTA), written in 2019 for the Bank of Russia.

The main goal of Eurasian economic integration is the creation of a single domestic market for the free movement of goods, services, capital and labor.

Indeed, the creation of a customs union and the abolition of tariff duties between member states in 2010 led to a significant increase in mutual trade in goods. A recent study by A. Adarov from the Vienna Institute for  International Economic Research (wiiw), using a gravity model, showed that thanks to the creation of the Eurasian customs union, mutual trade in 2010-2014 was on average three times higher than if the participating countries had not created the customs union. Further, from 2015 to 2018, trade within the EAEU increased by 23.6%.

However, firstly, the preservation of many non-tariff barriers hinders the continued growth of intra-Union mutual merchandise trade, which during the study period never exceded 14% of total EAEU trade. Based on a large-scale survey of 530 enterprises in Belarus, Kazakhstan and Russia, a group of Eurasian Development Bank economists led by E. Vinokurov estimated that non-tariff barriers to mutual trade “steal” 15-30% of the value of commodity exports.

Non-tariff barriers

Non-tariff barriers to trade (NTB) are a set of methods of foreign trade regulation that have the effect of complicating and or complicating import (or export) operations, but which are not related to customs and tariff methods of foreign trade regulation. They include a wide range of measures, such as: technical regulations and standards, sanitary and phytosanitary measures, quotas, prohibitions and measures of quantitative control, price control measures and measures affecting competition (institution of special exporters, restrictions on sales and public procurement, subsidies), etc.

Over the past twenty-five years, starting with the creation of the WTO in 1994, non-tariff barriers have surpassed import tariffs as the main instrument of trade protection usded by countries and integration blocks. Between 1997 and 2015, the simple average ad valorem equivalent of global import tariffs decreased from ~ 12% to ~ 5%, while the simple average ad valorem equivalent of NTBs increased from ~ 20% to ~ 57%.

Secondly, in the modern economy, merchandise trade is becoming less important to ensure international competitiveness and economic growth. Other factors of production and their unhindered movement — investments (capital) and services — are becoming increasingly more important for that purpose. For example, according to the OECD, imports of services account for more than 3/4 of the total value of imports of goods and services to the Russian Federation. Services create 51–62% of the GDP of the EAEU member states.

But it is here – in the services sector and in the movement of capital – that the main barriers remain. According to the Eurasian Economic Commission (EEC), uniform rules already apply to 55% of the types of services. However, according to M. Khasenov, associate professor, Eurasian National University , the EAEU’s common market for services is only 17% created.

According to the study by A. Knobel’s team, non-tariff barriers raise the cost of mutual trade in services in the EAEU by 34%. The Republic of Belarus has the highest non-tariff barriers on import of services from other countries of the Union – 46% (Table 1). For example, Minsk still does not allow the opening of bank branches from other member states on its territory (but intends to remove this restriction in the near future).

Tab. 1 Ad valorem equivalents of non-tariff barriers to cross-border services within the EAEUa (in%)

ARM BLR KAZ RUS Average weighted value within the EAEU
Transport, nes 30,7 52,2 41,1 42,8 45,2
Water transport 30,7 52,2 41,1 42,8 45,2
Air transport 30,7 52,2 41,1 42,8 45,2
Communications 30,2 43,6 23,2 19,9 28,1
Financial services 30,2 43,6 23,2 19,9 28,1
Insurance 30,2 43,6 23,2 19,9 28,1
Business services, nes 57,7 34,6 0 9 18,5
Simple average 34,3 46,0 27,6 28,2 34,1

Source: (Knobel et al. 2019) and own calculations. aThe study did not have data for the Kyrgyz Republic.

Non-tariff barriers also complicate the attraction of mutual investments in the services sector: by almost 26% on average within the EAEU. The highest restrictions are in the Russian Federation, where they “eat up” 28.6% of FDI (Table 2).

Tab. 2 Ad valorem equivalents of non-tariff barriers of the EAEUa member states to foreign direct investment in the services sector (in%) 

ARM BLR KAZ RUS Average weighted value for the EAEU
Transport, nes 31 36,9 53 36b 38,9
Water transport 38,7 30,3
Air transport 51,6 33,8 0 55,9 45,4
Communications 1,3 3,2 3,8 1,9 2,3
Financial services 5,3 13,8 12,3 11,9 12,0
Insurance 13,6 14,2 19,4 27,3 25,3
Business services, nes 18,7 15,1 21,2 28,3 26,5
Simple average 17,4 16,7 15,7 28,6 25,8

Source: (Knobel et al. 2019) and own calculations. aThe study did not have data for the Kyrgyz Republic. bData taken form (Fontagné et al. 2016).

As of March 2020, there were 66 obstacles in the EAEU that impede the functioning of the EAEU domestic market. Most obstacles are encountered in the following five areas: technical regulation – 22.7%; energy policy – 19.7%; tax policy – 9.1%; transport policy – 9.1%; public procurement – 6.1%. Between 2016 and March 2020, the total number of registered obstacles increased: from 60 to 66 (in September 2019 there were 71).

The main priority of the Belarusian chairmanship in the EAEU, and, at the same time, the main task of Mikhail Myasnikovich as the new chairman of the EEC Board has officially named one thing – the removal of (non-tariff) barriers to ensure the single domestic market for the free movement of goods, services, capital and labor within the Union.

The study of A. Knobel and his colleagues, carried out using the general equilibrium model, shows that the painstaking implementation of such an agenda would lead to a significant positive effect for increasing the welfare and economic growth of the EAEU member states. Thus, the reduction of non-tariff barriers to mutual trade in goods and services, as well as to mutual investments within the Union, would lead to the fact that the gross domestic product of the Russian Federation would be 0.4% higher annually than without a more consistent policy to eliminate NTBs. The GDP of the Republic of Kazakhstan would be 0.8% higher annually. And the republics of Armenia and Belarus would benefit most from persistent work to reduce non-tariff barriers in the EAEU: each year their GDP would be 2.6% and 3% higher, respectively. The total weighted average effect would mean that the GDP of the Eurasian Economic Union would be 0.6% higher annually.

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