Eastern Europe would gain most from EU-EAEU free trade area

_ Yuri Kofner, junior economist, MIWI – Institute for Market Integration and Economic Policy. Munich, 25 November 2020.

Unfortunately in the West, especially in the “new European” countries, there is yet very little information about the aims and workings of the Eurasian Economic Union. And most of the existing coverage is biased due to purely ideological reasons.

The Eurasian Union can best be understood from a liberal intergovernmental approach. As stated in the Astana Treaty from 2014, the Union’s objectives are purely economic:

  • to create proper conditions for the sustainable economic development of the member states in order to improve the living standards of their population;
  • to seek the creation of a common market for goods, services, capital, and labor within the Union;
  • to ensure comprehensive modernization, cooperation, and competitiveness of national economies within the global economy.

The Eurasian integration project is modeled along with the European experience. It is based on the principles of the superiority of national sovereignty, voluntariness, equal representation, openness, and the market economy. Each member state has an equal voting right, independent of economic and population size, and all decisions are made solely by consensus. The main bodies of the EAEU are mainly intergovernmental with three supranational exceptions: the Eurasian Economic Commission (EEC), based in Moscow; the Court of the EAEU, based in Minsk; and the loosely affiliated Eurasian Development Bank (EDB), based in Almaty.

Some of the main benefits that have already been achieved by the Eurasian Economic Union can be summed up as follows:

  • creation of a common domestic market with the four freedoms of movement for over 184 mln people;
  • promoting an increase of mutual trade between member states of the Union (e.g. mutual exports rose from 10.9% in 2015 to 14% in I-II 2018);
  • promoting an increase in the share of goods with higher added value in mutual trade (e.g., the share of imports of industrial products from third countries decreased from 24.6% in 2015 to 22.8% in 2017);
  • the building of interstate technological production chains;
  • acting as a driver for the implementation of the world’s most progressive economic policies, standards, rules, and governance models;
  • strengthening of the bargaining power of the member states in trade negotiations with third parties;
  • promoting a network of free trade areas with a wide range of countries and economic blocks (Vietnam – 2015; Iran – 2018; China – 2018, non-preferential; India, Singapore, Serbia, and others – planned for 2019);
  • helping Armenia overcome its trade isolation and making it an attractive location for European companies due to its membership in the EAEU, enhanced partnership with the EU, and the EAEU’s FTA with Iran;
  • acting as a multilateral leverage institute for Belarus in trade disputes with Russia (apart from being Belarus’ key export destination);
  • helping Kazakhstan overcome its geographic isolation by increasing continental connectivity and the creation of a common transport market;
  • acting as Kyrgyzstan’s key export location for agro-food products and human labor;
  • providing cheap labor, necessary for sustained economic growth of the Russian economy, as well as promoting a “cordon of economic stability” around Russia’s borders.

Despite the current Ukrainian crisis and crisis in EU-Russia relations, there are significant benefits that, the European Union could gain from deeper cooperation with its large neighbor to the East:

  • The EAEU has a large market for the export of EU manufactured goods and food products (over 184 mln people)
  • The EAEU is a source of cheap resources (oil, gas, coal, lumber, metals, etc.) which is very important for keeping the EU economy competitive in the global market.
  • The EAEU has a relatively high-qualified labor force, e.g. in the IT sector, where the EAEU implements an ambitious “Digital Agenda by 2025”.

Econometric models created by the Munich-based Ifo Institute in 2016 have shown, that the Eastern European “shared neighborhood” countries would benefit the most from the creation of a free trade area “from Lisbon to Vladivostok”:

  • The three Baltic states (Estonia, Latvia, Lithuania): An increase in exports to the EAEU by 80% (10% in overall exports). GPD growth by 1.2% to 1.8%, i.e. 200 Euro per capita.
  • Poland: An increase in exports to the EAEU by 70% (5% in overall exports). GPD growth by 0.5%, i.e. 50 Euro per capita.
  • Belarus: An increase in exports to the EU by 109% (46% in overall exports). GPD growth by 5%, i.e. 290 Euro per capita. (!)
  • Ukraine: An increase in overall exports by 26%. GPD growth by 5%, i.e. 90 Euro per capita.

Moldova would benefit significantly from a more unified EU – EAEU/CIS free trade area. In the case of such a scenario, real GDP per capita in Moldova would increase by 6.3% (98 euros), incomes would increase by 6.9%, and inflation would decrease by 2.8%. The sectors of the Moldovan economy that would benefit the most would be the garment industry, agriculture, and retail trade.

In September 2018 the EU finally published a common strategy concept on enhancing connectivity in the wider Eurasian space. It successfully lays out sound common principles and general areas for cooperation.

However, by 2018 the Eurasian Economic Union has irrevocably become a reality and a player that Brussels has to deal with in Eastern Europe; if it wants to or not. In order to revive the Eastern Partnership program, which has been stagnating in recent years, the EU would need to let go of its zero-sum game mentality and its approach of projecting its own agenda against that of the EAEU.

Given the political will, mutually beneficial cooperation would be quite simple to achieve in the shared neighborhood area.

The establishment of a tripartite EU – EaP – EAEU negotiation platform might help to achieve this goal. Its first task could be to find common and mutually acceptable approaches to such issues as technical regulations, customs procedures, and rules of origin.

After Trump, the world order is likely to become bipolar once again, divided by an “economic NATO” (“TTIP-2”) and a China-led “Greater Eurasian Partnership”. However, based on their incredible economic compatibility, an economic alliance between the EU and the EAEU would be more beneficial for both of them. And Eastern Europe would gain the most of it.

The title of this year’s Economic Forum in Krynica Zdroj, Poland was “A Europe of Common Values or A Europe of Common Interests?”. In this regard, I adhere to the school of neorealism. Common interests are more important than common values. A public declaration in favor of common values is possible, but common interests should precede them and build the foundations. Relations between nations should be built on common interests first and on common values only second.

2014 has been a hallmark year for Russia. The EU’s irrational behavior in Ukraine during the Euromaidan and subsequent civil war has partially led and intensified Russia’s “Pivot to the East”.

Firstly, the ideology of “Westernism” has fallen into a political and intellectual coma in Russia. From 2014 onwards we saw the rise of a new national feeling in Russia, most importantly, among Russia’s intellectual elite. E.g. just look at how such influential experts as Sergey Karaganov and Andrey Kortunov changed their attitude towards the West. This new sentiment is expressed in the support for Russia’s “Pivot to the East” and the acknowledgment of Russia’s “Eurasian” nature, both in the domestic and in the international sense.

Secondly, in 2014 in Astana, the Treaty on the creation of the Eurasian Economic Union was signed. Its importance for the future of the economic architecture of the wider Eurasian space cannot be underestimated. This is a new modus vivendi that Europe has to deal with. Then, from 2016 onwards the presidents Vladimir Putin and Nursultan Nazarbayev have been calling for the creation of a “Greater Eurasian Partnership”, but which would officially be “open for Europe”.

During the last 4-5 years, Russia has seen that building relations with Asian nations can be more effective, since Asian nations are more pragmatic in their approach and they build their relations based on their national interests first and foremost. This once again shows that common interests are more useful than common values. Although, on top of that Russia and the Asian states also share a lot of common values – cultural conservatism, multipolarity, the supremacy of national sovereignty, and of course – pragmatism.

This success in the East can be seen by the following:

However, initially, the final goal of the creation of the EAEU was the creation of a common economic space “from Lisbon to Vladivostok”.

The reasons for this are the following:

The EAEU is an economic midget. According to the IMF, in 2017 the GPD adjusted to purchasing power parity of China was $23.2 trillion; that of the EU – $21 trillion; of the USA – $19.4 trillion; of the EAEU – only $ 5 trillion. The World Bank Group gives similar results.

Thus, in order to “stay afloat” in the competitive global economy, the EAEU needs a strong(er) partner with whom equal cooperation would be possible. This could be either the EU, or China, or even both.

As shown above, whereas EAEU-EU interactions are at an all-time low, EAEU-China cooperation is already in full swing. However, increased cooperation with China has not only its benefits but also bears the threat of creating an unhealthy dependence on Bejing. Moreover, the EAEU is unlikely to receive technological transfers and investments from China, which the Eurasian Union desperately needs in order to attain its goal of economic modernization.

Despite being in the situation of a political stalemate, potential deepened cooperation with the EU would bring the following benefits for the EAEU:

  • Attaining the much needed technological transfer, which is unlikely to come from China;
  • Increased investments. According to the Eurasian Development Bank, in 2017 Сhina invested $ 33.7 billion into the EAEU (+ Az, Tj, Ukr), whereas only the Netherlands and Austria combined invested $ 43.7 billion (much of which is re-investment from the Eurasian side, admittedly);
  • Security of stable EU demand on EAEU oil and gas supplies.

At the same time, a potential EU-EAEU common economic space would have the following benefits for the EU:

  • The EAEU has a large market for the export of EU manufactured goods and food products (184 million consumers in 2017, and potentially 214 million if Uzbekistan joins the Union);
  • The EAEU is a source of cheap resources (oil, gas, coal, lumber, metals, etc.) which is very important for keeping the EU economy competitive in the global market.
  • The EAEU has a relatively high-qualified labor force, e.g. in the IT sector, where the EAEU implements an ambitious “Digital Agenda by 2025”.

Econometric models created by the Munich-based Ifo Institute in 2016 have shown, that the Eastern European “shared neighborhood” countries [1] would benefit the most from the creation of a free trade area “from Lisbon to Vladivostok”:

  • The three Baltic states (Estonia, Latvia, Lithuania): An increase of exports to the EAEU by 80% (10% in overall exports). GPD growth by 1.2% to 1.8%, i.e. 200 Euro per capita.
  • Poland: An increase in exports to the EAEU by 70% (5% in overall exports). GPD growth by 0.5%, i.e. 50 Euro per capita.
  • Belarus: An increase in exports to the EU by 109% (46% in overall exports). GPD growth by 5%, i.e. 290 Euro per capita. (!)
  • Ukraine: An increase in overall exports by 26%. GPD growth by 5%, i.e. 90 Euro per capita.

Currently, the EU is a “junior partner” to the United States of America. This mode of relations is likely to solidify after president Donald Trump. A post-Trump administration is likely to wrap up the current protectionist policies of the United States and to propose the signing of a “TTIP-2”, which Brussels is highly likely to accept. Thus, sometime after 2020 or 2024, we are likely to see the creation of a “Transatlantic Economic Union”, i.e. what is sometimes called in the press the “economic NATO”. This then will lead to the formation of new bipolar world order, since, extrapolating current trends, the EAEU in turn is likely to become a junior partner to China.

However, the EU-EAEU combination would be better, since the EU and EAEU would be to each other relatively more equal partners, albeit of course asymmetric, than the USA are now with the EU (in the political-security aspect) and China will be with the EAEU (in the economic aspect).

The EU and EAEU are incredibly economically compatible and through an alliance could secure their joint global competitiveness.

The EU and EAEU do share if potentially not common values, yet still a connected culture. Russian and Kazakh students are more likely to be familiar with the works of St. Augustine, Voltaire, and Kant, than with that of Sun Tsu, Confucius, and Lao Zi.

Even the founding father of a united Europe, count Caudehove-Kalergi argued: “Russia not only constitutes a military threat for Europe, but also an economic supplement. […] Russia needs industrial products, Europe needs resources. […] Hostility between Europe and Russia would be to the detriment of both and would only benefit the American industry. […] Both Russia and Europe need each other to rebuild each other. For both, at least for a decade, political issues must recede behind economic ones, and politics must be dictated by the economy”.

Notes:

*The views expressed are solely that of the author and may not represent the position of any affiliated organizations.

[1] “EU-EAEU shared neighborhood countries” is a term used by the author to describe two groups of countries: Firstly, those member states of either the EU or the EAEU that share a common border (Finland, Estonia, Latvia, Lithuania and Poland from the EU side; Belarus and Russia from the EAEU side). Secondly, those countries of the former Soviet Union that either share a boarder with the EAEU or are member states of the EAEU and, at the same time, are members of the EU Eastern Partnership (Belarus, Ukraine, Moldova, Georgia, Armenia, Azerbaijan).

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