EU – EAEU common economic space: winners and losers

_ Yuri Kofner, head, Eurasian sector, CCEIS, HSE; research assistant, IIASA. Moscow, 7 November 2017.

According to the general economic theory, the creation of an EU-EAEU FTA should produce an overall positive impact stemming from the mutual opening of the two unions' markets.

The export of natural resources and industries such as steel, chemicals, the production of certain intermediate products, as well as agricultural sectors producing cereals, certain meat and dairy products from EAEU countries could gain from an FTA with the EU.

According to these estimates, a possible emergence of an EU-EAEU free trade agreement [1] is expected to have a positive effect on trade between the EU and the EAEU, and a 30% increase of Russian exports (primarily of natural resources) to the EU. The EU exports to the EAEU are projected to grow even by 60% (particularly as regards machine engineering and agricultural products), bringing real income in Central and Eastern European countries (Baltic states, Poland, Czech Republic, Slovakia) up by 1.2 - 1.8%. The inclusion of Ukraine in this FTA would increase the estimated benefits even more.

In the long run, real income in Russia is expected to increase in this case by 3.1%. Belarus income may post an even more significant increase by 4.9%, with growth indicators in the other EAEU member states also winding up in the positive domain. Economic gains from EU-EAEU FTA would even bigger if Ukraine would be covered as well.

In Russia, most benefits will be reaped by metallurgy (the national net worth would go up by 23%), mining industry (growth by 17%), and the petroleum industry (growth by 15%). The agriculture and automotive industry, conversely, may suffer (-16% and -37%, respectively). In the EU, industry trends will be the reverse of those described above, with agriculture and automotive industry being the chief beneficiaries.

The European Union's metallurgic companies are less competitive than the Russian and Eurasian ones. Thus, the EU is likely to eliminate its imports tariffs only over a longer period. However, a harmonization of non-tariff barriers, i.e. a facilitation of customs procedures in this sector is possible.

According to other estimates by the Moscow-based CEFIR and the Russian Presidential Academy), the hypothetical EU-EAEU FTA would benefit Kazakhstan (an increase of GDP by 2.6%), the EU and Russia, while Armenia (-3.4% of GDP), Georgia, Azerbaijan, Belarus, and Moldova may find themselves on the losing side. In particular, export of Armenian food and beverages (liquors, tomatoes, grapes, cheeses and curds, fish) to EAEU member states may decrease. It should be noted, however, that these are only preliminary calculations.

However, one should be cautious when predicting which countries and sectors are likely to win and lose from a potential Lisbon to Vladivostok common economic space. One should not base future projections on trade statistics of the past. Most advanced analytical approaches should be used to produce more reliable estimates.

When studying the potential losers and winners from the Lisbon to Vladivostok concept, it is important to use econometric models, based on micro regional statistics, i.e. that of federal states, not whole countries, as well as on gravity models.

As part of a FTA, the EU would require to include important cross-cutting commitments related to such areas as the enhanced protection of intellectual property, government procurement, trade-related investment measures, the intervention of the state and government decisions in the economy, disciplines on state-owned and state-controlled enterprises.

Notes:

  1. Freihandel von Lissabon bis Wladiwostok. Wem nutzt, wem schadet ein eurasisches Freihandelsabkommen? Bertelsmann Stiftung; IfO-Institut. 216 S. 2016.

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