EU – EAEU Mega Deal Amid a Relationship Crisis

_  Evgeny Vinokurov, Ph.D (Economics), Director of the Center for Integration Studies, Eurasian Development Bank. Journal "Russia in Global  Affairs". N4. Saint-Petersburg, 18 December 2014.

Today even raising the question of an economic integration agreement between the European Union and the Eurasian Economic Union seems a non-starter. Recent economic sanctions have severely hurt economic cooperation between the two political entities. Yet the foundations of any new institution are frequently set out in times of crisis.

Will the idea of an economic integration agreement between the European Union and the Eurasian Economic Union (EAEU) ever come about? At this point even raising the question seems a non-starter. Relations between the EU and Russia – a country that accounts for 87 percent of total GDP and a full 75 percent of the population of the EAEU – are in deep crisis. Recent economic sanctions have severely hurt economic cooperation between the two political entities. Fully aware of the gravity of the current situation, let us recall, however, the grave circumstances in which the European Union began and the discussions that took place in 1944-1945. It was a time when the foundations of European integration were being laid (as well as the Bretton-Woods system, a structure of trade and financial relations still operational today). The foundations of any new institution are frequently set out in times of crisis. Who would have imagined in 1944 that in just ten years the idea of a European Community would acquire tangible forms?

Country leaders and officials have already expressed their support for the idea of “European-Eurasian” economic integration. Russian President Vladimir Putin put forward a proposal to consider the idea of a free-trade zone with the EU at the EU-Russia summit held on January 28, 2014. On February 5, Kazakh President Nursultan Nazarbaev lent his support to the proposal. On September 12, European Commissioner for Enlargement and Neighborhood Policy Štefan Füle gave his full support for free-trade negotiations. According to Füle, the time has come to establish official ties at the level of the two unions – the European and Eurasian –with a view to starting the negotiation process. The Europeans have come to realize that the Eastern Partnership project cannot be implemented without Russian participation. Moreover, a new entity has emerged that must be dealt with – the EAEU (the EU had blatantly ignored both the Customs Union and the Eurasian Economic Commission for years). Unfortunately, as it always happens, there is a fly in the ointment: Füle’s term in office is coming to an end.

The expert community has discussed an economic integration agreement between the European Union and the Eurasian Economic Union for several years. From among the most recent works on the subject, particularly noteworthy are a report by the Center for Integration Studies at the Eurasian Development Bank, Quantitative Analysis of Economic Integration between the EU and the EAEU: Methodological Approaches, (April 2014) and the report Deadlock of Integrations’ Struggle in Europe, published in May 2014 under the auspices of the Committee for Civic Initiatives. Today, the future of European-Eurasian relations has to be reconsidered in a new light, against the backdrop of the deep crisis, in view of the EAEU’s establishment, and in the most practical way possible.

The main thesis of this article is that the anticipated agreement or set of agreements must be framed as a “mega deal” due to the huge scope of issues involved. Mutual concessions and compromises will be necessarily interconnected. The importance of individual issues will be different for the parties. Deferring in one area, a partner may naturally expect a “trade-off” in another. While not claiming to be exhaustive or conclusive, this article considers 19 essential issues that can form the negotiation agenda.

Naturally, the work ahead will be long, hard, and dotted by moments when it would seem there are no prospects to reach the finish line. But there are still chances for success. The key question is, of course, the position of the U.S. – a country clearly unenthusiastic about the prospects for a mega deal between the EU and the EAEU. Finding common ground with the U.S. in terms of pragmatic interests is crucial for the success of the project, which, however, goes beyond the scope of this short article.

The anticipated integration agreement may provide a long-term framework solution to the problem of a shared neighborhood, above all in what concerns Ukraine and Moldova, with Georgia and Azerbaijan certainly on the agenda as well. Of all these four countries, Azerbaijan is the only one whose status quo looks sustainable, provided oil and gas prices remain relatively constant. The economic growth potential of Georgia and Moldova will be substantially lower without interaction with Russia. There is no viable alternative whatsoever for Ukraine. The latter three countries have a direct invested interest in the EU-EAEU mega deal. In fact, without it they will be unable to embark on the path of sustainable growth.

Natural Interdependence

In 2003–2004, economic cooperation and integration was in the common interest of the European Union and Russia. However, negotiations on a EU-Russia common space hit an impasse and the topic was put on the back burner soon thereafter. Nevertheless, the foundation for mutual interest in the project still exists: it is based on territorial proximity, significant trade flows, potential investment ties, need of economic security, the EAEU’s interest in the transfer of European technology, outstanding issues of developing cross-border infrastructure, and the presence of common contiguous states.

For the Eurasian Economic Union, close economic cooperation with the EU is crucial for several reasons:

  • The EU is the largest trading partner of both Russia and Kazakhstan; it accounts for more than half of Russia’s total trade, while Russia is the third-largest trading partner of the European Union.
  • The EU could play a key role in addressing modernization issues of Customs Union member countries.
  • The emerging Eurasian Economic Union is currently initiating a series of free-trade agreements with partners of lesser importance in terms of economic size and overall significance, such as Vietnam and Israel. Yet the very fact of these negotiations is beneficial: they help clarify priorities, shape areas of expertise, and perfect negotiating tactics. At the same time, it is precisely the European Union that should be viewed as the main long-term partner in this context.
  • The Ukrainian crisis can only be resolved within the scope of deep economic cooperation between the EU and the Eurasian Economic Union, which additionally underscores the importance of this cooperative initiative.

For the EU, close economic cooperation with the EAEU is also of fundamental importance:

  • The EAEU is the European Union’s third-largest trading partner after the U.S. and China. The impact of Russian restrictions on food imports clearly demonstrates the current level of trade interdependence and the interest European manufacturers and farmers have in normal commercial relations.
  • Security issues, including those of a shared neighborhood, can only be addressed within the scope of cooperation with EAEU countries.
  • The EU is structurally dependent on Eurasian hydrocarbons.
  • In general, the free trade regime with the EAEU will provide EU producers with an opportunity to not only strengthen their competitiveness on this important market, but also to enhance terms of trade on the markets adjacent to the Eurasian Union. The combination of EU and EAEU competitive advantages will make it possible to effectively realize the “double rent” – the technological rent for the EU and the resource rent for its Eurasian counterpart. This will lead to higher competitiveness of all economies from Lisbon to Vladivostok.

The Growing Trend of Global Interregionalism

Over the past two decades interest in regional integration has risen sharply, spurring an increase in the number of new regional trading agreements. Regionalism has emerged as the dominant factor in the development of global trade, investments, and labor flows. It has a tremendous impact on both economic and political relations between individual countries, prompting them to face some critical questions: Which trading bloc should we join? Which form of integration would be the most preferable? What powers should be transferred to the supranational level? What institutions meet Russia’s national interests?

The number of regional trade agreements (RTA) has risen sharply. As of early 2014, the WTO received 583 notices on the conclusion of goods-and-services RTAs, of which 377 have already come into force. The EU has announced the creation of 47 RTAs; the U.S. is a party to 14 RTAs; Japan, 17; Chile, 24; China, 15; and Brazil, 4. According to WTO data, most of the RTAs reached around the world involve the establishment of free-trade zones, with only 17 of them classified as customs unions. That said, only six customs unions are actually functioning and only three of those are full-fledged customs unions (the EU, EU–Turkey, and the Customs Union of Belarus, Kazakhstan, and Russia). The rest, including Mercosur and the South African Customs Union, have an exemption rate from the common customs tariff of 30 percent or higher.

The rise of regionalism hinges on a number of factors. In particular, it is associated with the fact that progress within the scope of WTO rounds – particularly the Doha round – has been painfully slow. Then the “domino effect” came into play: countries started realizing that the costs of remaining on the sidelines of trade-and-economic unions might be higher than the costs of joining. Nevertheless, the wish of individual countries to form RTAs is primarily prompted by their desire to stimulate economic growth by taking advantage of the many opportunities that regional trade agreements offered their members: wide access to markets, the effect of large-scale economies, attraction of foreign direct investment (FDI), technology transfer opportunities, and so on.

At present, various forms of economic integration are constantly evolving, and becoming more sophisticated and mutually complementary. For instance, a free trade zone and customs union can encompass elements of higher levels of integration, namely: reduction of non-tariff barriers, removal of restrictions on trade in services, capital movement, and labor flows; dispute-resolution mechanisms; trade facilitation policies; protection measures; institutional mechanisms; etc. This is associated with a growing understanding that, from the standpoint of economic impact, eliminating trade barriers only requires a modest effect compared to a deep and comprehensive integration.

There are several stages of trade liberalization and a whole range of different integration models. For instance, bilateral free-trade agreements concluded between two national economies can be relatively straightforward. Most agreements of this kind deal only with free trade in goods, while a significant share involve trade in services and only a few have a more ambitious goal of establishing customs unions.

The second model involves the formation of integrated regional blocs, of which the European Union is a graphic example. In South America, the Mercosur group made an attempt to form a robust customs union, but its trade policy still contains numerous exemptions and has effectively stalled. A valiant attempt has been made by the 10-member ASEAN group in Southeast Asia, but it still does not constitute a customs union. The North American Free-Trade Agreement (NAFTA) between the United States, Canada, and Mexico represents yet another regional integration initiative, but is quite loose in terms of member integration and is similarly not a customs union. From among the more recent examples, the Customs Union of Belarus, Kazakhstan, and Russia is the dynamic standout.

The third model embraces interregional integration agreements that feature a number of different variants. The most impressive of them are intercontinental initiatives, of which only two are currently up and running. The first is the Trans-Pacific Partnership (TPP), which unites the bulk of East and Southeast Asia and the Pacific West Coast, with the exception of China. The second initiative is the Trans-Atlantic Trade and Investment Partnership (TTIP), negotiations on which are currently underway between the United States and the European Union. The TTIP, currently the subject of lively discussion, aims at greater convergence in regulatory matters, which lies beyond the scope of routine free trade pursuits.

Work is continuing on both the TPP and TTIP. Both initiatives aim at sweeping liberalization of a large volume of global trade in the regions of the Pacific and Atlantic Oceans, while the anticipated degree of their integration is both comprehensive and deep. Yet experts believe that chances for the Trans-Pacific initiative’s success are minimal, since its structure is too loose. On the other hand, the outlook for the Euro-American TTIP is formidable. These integration processes, should they come to fruition, will have an unprecedented powerful impact on the world economy and global trade and investments. They entail a potential erosion – and quite possibly partial replacement – of the WTO regime.

Another option for potential interregionalism (and one that requires the most complex negotiations) is inter-bloc agreements. There have been no such precedents thus far. The European Union has made attempts to conduct negotiations with Mercosur, but came to the conclusion that weak internal cohesiveness among Mercosur members is complicating the process. At the same time, it is precisely this form of interregionalism that is most likely to play an increasing role, making the system of global trade and investment even more multilayered and intricate.

Features and Contents of the EU - EAEU Mega Deal

The EU-EAEU mega deal assumes exactly this idea of an interregional integration agreement that unites two blocs. It is an essentially novelty idea, so it is particularly complicated to implement. What might be the main characteristics of this agreement?

First, the party to the mega deal, irrespective of the legal form it might take, would be not Russia but the Eurasian Economic Union, by virtue of its supranational authority. National representatives (the relevant departments of economic ministries, foreign affairs ministries, etc.) would certainly be present and at the decisive stage influence the course of negotiations and final agreements, but the Eurasian Economic Commission would formally lead these negotiations. This is an important nuance just as new and unfamiliar to the participants of the Eurasian integration process as it would be to the European Union.

Second, EAEU member states would be interested not merely in a free trade agreement per se but in a deep and comprehensive agreement with the European Union. The motivation is quite simple: a “barebones” free-trade zone is not advantageous to either Russia or Kazakhstan, whose exports are primarily composed of raw materials. Due to their current trade structure, Russia and Kazakhstan would have little interest in a narrowly defined free trade regime with the EU (this holds true for Belarus as well, although to a lesser extent). That said, obvious problems in the realm of trading concessions would have to be offset by gains in other areas. In order to make the idea of free trade zone truly viable, significant progress is needed in other areas of economic cooperation.

Of vital importance is the agreement’s nature as a mega-deal embracing a broad range of interconnected issues. The agreement must be concrete and comprehensive at the same time.

Third, the prototypes of such an agreement between the EU and the EAEU encompassing the broad spectrum of pertinent issues are diverse – from a deep and comprehensive free-trade agreement (DCFTA) to an all-round economic and trade agreement (CETA). The latter is, in fact, the legal form of a principal agreement reached between the EU and Canada in 2013. СЕТА and the aforementioned U.S.-EU Trans-Atlantic Trade and Investment Partnership (TTIP) could be viewed as particularly useful prototypes for the EU-EAEU mega deal.

Fourth, full-fledged negotiations between the EU and the EAEU will be impossible without the WTO membership of all member states of the Eurasian Economic Union. Consequently, Russia should lend full support to Kazakhstan and particularly Belarus in their negotiations with Geneva. Russia should become the driver of both countries’ accession to the WTO.

However, this WTO membership depends not only on the EU or even Russia, but also to a large extent on the position taken by the United States. In the U.S., relations with Russia fall within the realm of domestic politics and squabbles between the country’s two main political parties, and that is where they are likely to remain. Swift improvements are unlikely here: suffice it to recall the Jackson-Vanik amendment, which took more than 20 years to abolish in the case of Russia, while it continues to remain in force in the case of Belarus and Kazakhstan.

A separate question demanding an answer is how the TTIP regulations will correlate with the norms of the prospective EU-EAEU deal.

Fifth, the scope of potential issues that could be addressed by the mega deal (whether it takes the form of a single agreement or set of agreements) encompasses dozens of items. Here are a few of them:

  • Foreign trade (abolishing import duties with a clearly-defined set of exemptions);
  • Elimination/streamlining of non-tariff trade barriers;
  • Regulation of cross-border electronic trade;
  • Trade in services;
  • Liberalization of access to financial markets;
  • Free capital movement;
  • Regulatory convergence (norms and standards);
  • Intellectual property rules;
  • Reciprocal recognition of education degrees, including vocational training;
  • Visa-free regime, including a set of agreements on readmission.
  • Special status for Kaliningrad Region (investment or trade-and-investment).
  • Shared neighborhood regions.
  • Educational exchanges (Erasmus Mundus, and so forth).
  • Application of the EU’s Third Energy Package to projects envisioning Russian gas exports.
  • Development of international transport infrastructure (road and rail corridors).
  • Establishment of an EU-EAEU common electric power market.
  • Regulation of partial reciprocal access to public procurements.
  • Competition rules.
  • Dispute resolution mechanisms.

Sixth, work on the baseline scenario of the agreement will take several years, while the comprehensive agreement itself could be concluded sometime in the 2020s.

Two approaches should be employed in determining the desirable or even possible date of an agreement. The first stems from the EAEU member states’ need to modernize their economies. In their recent article in Eurasian Economic Integration magazine, A. Shirov and A. Yantovsky dwell on the possible timeframe for the creation of a free-trade zone between the two integrated blocs. They proceed from the following basic argument: at present free trade would be disadvantageous for EAEU countries by virtue of the low competitiveness of Eurasian manufacturers and high barriers to EU markets due to discrepancies in technological standards (as opposed to import duties). Modernization efforts inside the EAEU, combined with positive forecasts for the heightened efficiency of the use of primary resources and growth in the manufacturing sectors suggest 2021-2024 as the earliest possible timeframe for establishing a free trade zone.

I believe this is a plausible timeframe, especially considering the various technical factors. Even if a tentative solution to the Ukrainian crisis is reached and opportunities emerge to commence substantive negotiations, they are bound to take at least several years for purely technical reasons predicated on the extreme complexity and sheer scope of related issues. Clearly, these negotiations promise to be difficult. A realistic estimate of the duration of EU-EAEU negotiations would be five to eight years. In order to have a chance at toasting a signed agreement in the mid-2020s, it is vital to sit down at the negotiating table as soon as the political situation allows. For now it is the job of the expert community and the concerned state agencies to get down to the work of determining the prospective agenda and prerequisites for future negotiations.

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