Who gains what from the EU – EAEU common economic space?

_ Patrick Bessler, Editor-in-Chief, OWC Foreign Trade Publishing House. Published from the EastContact journal (Berlin, April 2017) with kind permission.The whole journal can be bought at https://shop.owc.de/

Many people are giving serious thought to a proposed “Lisbon-Vladivostok com- mon economic space”. However, actual economic effects are hard to quantify. Two research institutes have set out to try and change that.

The idea of a “common economic space” between the countries of the EU and the Eurasian Economic Union predates the formation of the EAEU. Kazakhstan President Nasarbajev spoke about it back in 1994. Russian President Putin then espoused the idea in 2010. In the intervening period, it has become lodged in many people’s minds. Proponents of closer East-West ties portray it as a distant but realistic vision of future trade relations.

Two philosophies, many models

However there seem to be as many opinions as to what exactly a “common economic space” might look like as there are interests between 9 degrees West and 131 degrees East longitude. The Eurasian Development Bank’s Centre for Integration Studies talks about a “free trade regime”. It sees major potential in the complementary nature of technology leadership and abundant resources in the two economic areas. “The combination of competitive advantages will make it possible to effectively realise ‘double rent’ – technological rent for the EU and resource rent for its Eurasian counterpart”, wrote Evgeny Vinokurov, Director of the Institute. A model which the EU previously could have envisioned is that of a deep and comprehensive free trade agreement (DCFTA), similar to the agreement between the EU and Ukraine. The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada has been a possible alternative model.

The philosophies in East and West differ as well. For the EU, a “common economic space” means free trade and consequently a common set of rules. “When Russian decision makers talk about a common economic area, they are thinking instead about linkages between the many investment projects as well as about business partnerships,” pointed out Prof. Alexander Libman from the University of Munich. However, business representatives do not care much about philosophies. In a joint paper, proponents of East-West trade in Germany promote closer ties between the EU and the EAEU under the Lisbon-Vladivostok banner. They favour a pragmatic agenda and strive for what is realistic in their eyes: tangible results such as alignment of procedures in the cross-border movement of goods, mutual recognition of technical standards and certificates, which are already similar, and harmonised jurisdiction in a common legal space. Still, the potential economic effects of these tangible results remain uncertain.

Up to 71% increase in trade

In the middle of 2016, the Munich-based Ifo Institute for Economic Research attempted to answer this question on behalf of the Bertelsmann Foundation. It aims to quantify the economic ramifications of a common free trade area between the EU and the EAEU. The scenario is based on an assumed ambitious agreement which basically reflects an average derived from current EU agreements, explains Gabriel Felbermayr from the Ifo Institute who is in charge of the study. However even a less ambitious agreement would be an improvement, given the relatively high customs duties and non-tariff trade barriers (NTBs). The economist argues that it is essential to reduce the NTBs in particular.

For Germany, which is the source of more than one-fifth of EU exports to the countries of the former Soviet Union, an EU-EAEU free trade agreement could result in a general 2% rise in exports. That equates to about 19 billion EUR. Compared to current bilateral trade in goods and services with the EAEU countries, this would represent a 59% increase. Bilateral trade between the EU and the EAEU would rise by 63%, according to the study. 2011, which was prior to the current crisis, was selected as the baseline year. The positive impact could be even stronger, according to Christian Bluth who has coordinated the project for the Bertelsmann Foundation.

“The competitive sectors of the German manufacturing industry such as the automotive and mechanical engineering sectors could increase turnover in EAEU markets,” according to the study. The institute estimates that the effects on the value-added chains in these industries would amount to 2.4 and 0.9 billion EUR respectively. In the service sector, the residential construction and healthcare industries could potentially attract more business. If the agreement were to be expanded to include the other post-Soviet countries which are not in the EU in addition to the five existing EAEU members, bilateral trade could increase by 71%.

Eastern Europe would benefit most

Based on this model, the Eastern European countries and Russia would have more to gain than the West. Russian exports to the EU would rise by 32% compared to 2011. The estimated increase for Armenia is 80%, and Belarus and Kyrgyzstan could expect exports to double. In addition, the study estimates that real wages in Russia would increase by 3.1%. That equates to 34 billion EUR. The figure for Belarus would be 4.9%. Wage levels in Armenia, Kyrgyzstan and Kazakhstan could rise by between 1.7% and 2.3%. Incomes in Germany would be up by an estimated 7 to 9 billion EUR. The positive impact would be even more profound if not only tariffs but also NTB’s were reduced.

However Christian Bluth admits that “it is important to bear in mind that a trade agreement would lead to restructuring in the economy, particularly in the EAEU. The effects in key sectors would be positive. Other sectors would face challenges. “Suitable transition strategies” could be developed to manage the consequences, claimed the Project Manager. Beyond the economic benefits, the Bertelsmann Foundation anticipates that trade ties of this nature would also help improve political relations between the EU and Russia. Free trade would lead to an “acceleration of the Minsk process, reduced potential for conflict between the EU and Russia and greater sovereignty for EAEU member states”.

Vienna is studying the “mega deal”

The potential consequences of “Lisbon-Vladivostok” are being examined in Vienna as well. Over a period of three years, the International Institute for Applied Systems Analysis (IIASA) brought together politicians, government officials, business leaders and scientists from the EAEU and the EU to explore cooperation opportunities. “To our knowledge we have been able to attract the highest possible level of representation from different sides”, says Elena Rovenskaya, Program Director Advanced System Analysis at IIASA. However, the number of EU representatives who took part in the project, which was financed by the Eurasian Economic Commission and Eurasian Development Bank, has been markedly lower than that of their Eurasian counterparts.

The intention is to have models and political proposals ready for the post-conflict period. The horizon extends well out into the future. “An agreement on deeper economic cooperation integration could become a reality by the mid-2020s”, reports the IIASA.

The scientists in Austria are working on the assumption that “a bare-bones free-trade zone” would fall short of EAEU expectations. “It is not sufficiently advantageous for either Russia or Kazakhstan, which dominate the EAEU’s economy. Due to their current trade structures, [they] would have little interest in a narrowly defined free trade regime with the EU”, according to the preliminary final report. With this in mind, 20 possible aspects of an agreement were singled out and studied in greater detail. This is being described as a “mega deal” given the potential scope involved. Opportunities for cooperation are said to be enormous: energy security, development of a Eurasian transport corridor by 2030, development of common electric power markets, pipeline systems, transcontinental fibre-optic links and mobility of people.

Small steps to achieve tangible results

Rovenskaya believes that results could possibly be achieved for example in the transport sector in the foreseeable future. “In my view, developments regarding transport are also driven by new technological developments”, explains the IIASA research scholar who coordinates the project. In the past fast transportation corridors simply were not feasible. Now they have become so. “Costs have changed as have opportunities to transport different kinds of cargo”, she says. South Korean companies, among others, are investing heavily in new fleets which are able to travel the Northern Sea Route from Norway along the coast of Russia down to China and Japan. “If it works, the length of this trip could become much shorter than for example through the Suez Canal. This opens completely new opportunities but also challenges for transportation.” Of course, this would call for dialogue on issues like environmental protection, laws of the sea et cetera. “That is why it is an area where experts should come up with good advice”, says Rovenskaya.

Table 1. Who gains what from an EU – EAEU common economic space?

Source: Bertelsmann Stiftung 2016: Focus Paper: Free Trade from Lisbon to Vladivostok (own translaton).

In the future the project will focus on two pillars, Rovenskaya explains: “Number 1 is general trade issues like NTBs and general trade policy. How should the EU build a relationship with the EAEU?” As a second pillar, the scientists want to focus on aspects which are more tangible and possible to access in the short term. This could be from the field of transport, energy and labour migration or investment opportunities, says Rovenskaya. “We are still in the process of discussing how far we should go. Some issues that would definitely be of high importance are related to people: recognition of diplomas, movement of pensions.”

At the moment, neither a “mega deal” nor an ambitious agreement as envisaged in the Bertelsman Stiftung study appear realistic. The economists are aware of that. “Free tradebetween the EU and the EAEU is only conceivable in a post-Putin era, after which a normal state of affairs would have to be restored. All of that takes time”, argues Gabriel Felbermayr. “A substantive trade agreement in the next 10-15 years is hardly realistic.”

In the meantime, proponents are searching for reliable data which they can use to give credibility to the anticipated positive impact of “Lisbon-Vladivostok”. Even if the models indicate that everyone wins, there is undoubtedly still a llot of convincing to do. “This is just the beginning”, stresses Elena Rovenskaya.

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