Deep Integration in the Eurasian Economic Union: What are the Benefits of Successful Implementation and Wider Integration?

_ N. Turdyeva (Bank of Russia), D. Tarr (World Bank), A. Knobel (RFTA), A. Malokostov (CEFIR), A. Lipin (Bank of Russia). Moscow, 8 February 2019.

We assessed deep integration in the Eurasian Economic Union (EAEU) through the reduction of time in trade costs, the reduction of non-tariff barriers in goods and the liberalization of barriers against foreign suppliers of services. We developed an innovative multi-region model of trade and FDI for preferential trade analysis where we incorporated Dixit-Stiglitz endogenous productivity effects from trade and FDI liberalization. This model produces important differences compared with a perfect competition model. We built on numerous surveys and econometric estimates of the trade and FDI barriers in our focus countries that we helped develop.

Our results for our central scenario of EAEU integration shows significant gains ranging from 0.8 percent of consumption for the Russian Federation to 4.8 percent of consumption for Armenia. If the measures to reduce trade costs and liberalize barriers against FDI in services are extended to third countries, either by a wider liberalization effort or by spillovers, then the estimated gains increase to between 3.6 and 7.2 percent of consumption, depending on the country. The importance of spillovers is especially true for FDI liberalization. The significantly larger gains from wider liberalization or spillovers reflects the fact that the five EAEU countries collectively have only 2.2 percent of world GDP in 2017. The estimated gains are significantly smaller with our perfect competition model, which shows the importance of incorporating the endogenous productivity gains from trade and FDI liberalization in services.

Since remittance income is very important to Armenia, we use the neoclassical model of labor migration to estimate the legal right of Armenian citizens to work anywhere in the EAEU, in particular, in the Russian Federation. Our data shows that wages in Russia were more than twice Armenian wages prior to Armenian accession to the EAEU. We find that the right to legally work in the Russian Federation is very substantial, approximately of equal value for Armenia to the combined aspects of the reduction of trade costs, including FDI liberalization.

We assessed the impact of measures to reduce trade costs in the Eurasian Economic Union through the reduction of time in trade costs, the reduction of non-tariff barriers in goods and the liberalization of barriers against foreign suppliers of services. We build on about ten background data papers done in our focus countries that one of us has either co-authored or supervised. We have developed an innovative model of trade and FDI to assess deep integration. The model incorporates the Dixit-Stiglitz mechanism in a multiregion model of preferential trade analysis. We showed that this model produces important differences in the results compared with a perfect competition model.

Our results for our central scenario of EAEU integration (with very limited spillovers or liberalization toward third countries) show significant gains, with Armenia and Belarus experiencing the largest gains at 3.1 and 4.8 percent of consumption, respectively. If the measures to reduce trade costs and liberalize barriers against FDI in services are extended to third countries, either by a wider liberalization effort or by spillovers, then the estimated gains increase between 2.5 and 4.5 times for Belarus, Kazakhstan and the Russian Federation. For Armenia, the right of its workers to legally work in Russia, including social benefits for the workers and their families, is likely the most important source of gains for Armenia.

Regarding spillovers from regions, for Armenia, Belarus and the Russian Federation, the European Union is the region that is most important. For Kazakhstan, however, China is most important for its trade, but the United States is most important with respect to FDI for Kazakhstan. Regarding spillovers from the type of reform, we estimate that, for Belarus, trade facilitation and the reduction of non-tariff barriers on third countries are the most reforms for its additional welfare gains.

For the Russian Federation and Kazakhstan, the reduction of FDI barriers against third country services suppliers is the source of the largest increase in welfare. For Armenia, it is the spillovers from the reduction of non-tariff barriers that contributes the most to its increase in welfare from spillovers.

Trade negotiation typically involves an exchange of “concessions.” Our estimates show that all of these trade costs reduction reforms and all of the spillovers are beneficial to all the EAEU countries. Given the different estimated welfare gains from the trade cost reductions within the EAEU and from the spillovers, the results may help define the different lobbying interests among the EAEU countries regarding wider liberalization or willingness to encourage spillovers of the internal reforms.

Source: https://conf.hse.ru/

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