Opportunities and Instruments for Inreasing EAEU Value Added Chains in Greater Eurasia

_ Yuri Kofner, head, Eurasian sector, Centre for Comprehensive European and International Studies (CCEIS), National Research University “Higher School of Economics”. Based on the lecture given at the “Greater Eurasia” Young Researchers School at Kazan, 7 –  13 May 2018.

EAEU: Opportunities for the creation of value added chains in Greater Eurasia

When discussing the prospects for the integration of the Eurasian Economic Union (EAEU) into the international production value chains into  the emrgin nexus of FTAs and economic cooperation in the wider Eurasian space, it is necessary to first establish that in the medium term, because of the Ukrainian crisis and the resulting crisis between the EU and Russia, this “Greater Eurasian space” is likely to emerge without the direct participation of the Euroean Union.

Thus this “Greater Eurasian space” or “Greater Eurasian Partnership” as it is also called,  mainly concernes the conjunction of the EAEU with the Chines Belt and Road Initiative and the formation of a complex network of various international agreements on free trade and economic cooperation between the EAEU and the countries of the Middle East and Asia.

A major deterrent factor for the EAEU’s participation in the  development of international value added chains is the relativly inadequate diversification of the export commodity structure of the EAEU to third countries. In early 2018, mineral products amounted for 68.3% of the total exports of the EAEU member states to third countries, metals and metal products thereof (11.3%), and chemical products (5.1%). About 80% of these goods were sold on the foreign market by the Russian Federation.

A lack of institutional cohesion between the major regional integration projects and trading powers is also hampering the creation of a network of value chains in the Greater Eurasian space. A major issue is the insufficient cooperation and coordination within the so called “Greater Eurasian traingle”: EU – EAEU – China + Asian Regional Comprehensive Economic Partnership (RCEP). A big step towards overcoming this shortcoming was the signing in May 17, 2018 in Astana of an agreement on non-preferential trade and economic cooperation between the EAEU and China, as well as of an interim agreement leading to an FTA between the EAEU and Iran.

According to research by the Russian Foreign Trade Academy, for all industries of the Russian Federation, as the largest member state of the EAEU (87% of the total GDP of the entire Union), a high proportion of the national added value in exports is characteristic. The lowest indicator is typical for the production of transport equipment – 68.31%. This speaks, in particular, of the closed nature of the Russian economy, the lack of development of international industrial cooperation and non-inclusion in global and regional value added chains.

In a number of cases the indicator national added value in Russian exports to third countries is quite high. This is typical for such industries as the chemical industry, metallurgy, the production of electronic, optical and transport equipment. These sectors can in the future become the basis for the development of international industrial cooperation. In a number of cases, it is also possible to create a number of joint production capacities on the territory of partner countries in the Greater Eurasian space.

To date, there are a number of promising areas for expanding international industrial cooperation and cooperation between key players in Greater Eurasia, which is due to the nature of their competitive advantages.

In particular, for Russia certain already existing competitive advantagex and formed niches in the world markets for such commodities from the chemical industry, metallurgy, woodworking industry can contribute to strengthening the role of Russian producers in the markets of the wider Eurasian space and their further access to higher stages of the international value added chains. In the case of engineering and transport equipment, identifying specific niches of domestic producers and building up cooperation with the most competitive foreign partners can stimulate the development of relevant Russian industries.

EAEU: Instruments for increasing international value added chains

In order to increase the role of international value added chains of the Eurasian Economic Union, both within the Union and with the outside world, two instruments can be considered.

Firstly, the aggregated state sector occupies a huge role in the economies of the EAEU member states – from 60% to 85% of the GDP. In this regard, it is advisable to take measures to admit member states to the markets of public procurement of each other, and, above all, to the market of state purchases of the Russian Federation. This is especially important in the components segment of value added chains. A common public procurement market can substantially increase the share of cross-border intra-union value chains.

Secondly, in order to stimulate the transfer of foreign production plants into the customs territory of the Eurasian Economic Union (including the processing stage), it is would prove useful to introduce such institutions as “rules of origin”, regional value content (RVC) and “diagonal cumulation”.

The “rules of origin” of goods are determined in the Eurasian Union in accordance with Article 37 of the EAEU Treaty (2014) and Chapter 4 of the EAEU Customs Code (2018). In April 2018, the Eurasian Economic Commission Council approved new rules clarifying Article 37 for determining the origin of goods imported into the customs territory of the Eurasian Economic Union. The document replaced the rules adopted by the EurAsEC intergovernmental agreement dating back to 2008.

The rules establish criteria and peculiarities of determining the country of origin of goods imported into the Union, as well as requirements for documentary confirmation of their origin. If materials from other countries are used in the production of these goods, the origin of the goods is determined on the basis of one of two alternative criteria: by the commodity nomenclature code stipulated in the EAEU Customs Code, which can be changed at the level of any of the first four characters or by the share of foreign added value in a good. In the second case its value in the  production process should not exceed 50% of the price of the finished product. The product can not be labeled originating from a country, if only formal operations have been carried out on its territory – formation of batches, gluing of labels, packaging and canning, etc.

For comparison, in ASEAN, for a product to qualify for duty-free trade, the share of added value produced in the countries of the agreement should be at least 40%. The rule of changing the product category as an indicator of a significant degree of processing, as a rule, involves a change at the level of the four-digit category, less often six-digit (more detailed classification of goods).

As for now, the Eurasian Economic Commission Council has not yet made a decision that a “regional added value” status of a good (according to the EAEU Cusotms Code over 50% have to be produced within the Union) will grant the importer tariff preferences, since only in this case the new rules of origin of goods will serve as an incentive for the relocation of part of the production process to the customs territory of the Union.

An important additional impetus for the establishment of international value added chains can be the introduction of “diagonal cumulation”. In this case, for example, goods can be produced at 49% in Germany, 30% in Belarus and 21% in Russia. According to the logic of diagonal cumulation, the added value of the product was by 51% created within the EAEU, which theoretically would allow to give the goods tariff preferences. The institute of “diagonal cumulation” is implemented successfully  by the European Union in trade relations with some Mediterranean countries.

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