Joining the EAEU could increase Uzbekistan’s GDP by 1.7%

_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief  analytical media “Eurasian Studies”. Moscow, February 24, 2020.

In October 2019, the Ministry of Economy and Industry of Uzbekistan unveiled the draft “Concept for the Comprehensive Social and Economic Development of the Republic until 2030”, which includes plans to “conclude a free trade agreement with the Eurasian Economic Union (EAEU)” by 2021 and to “assess the feasibility of joining the EAEU and the WTO” by 2025 .

State of play of mutual trade between Uzbekistan and the EAEU

In 2017, the commodity structure of imports to the Eurasian Economic Union corresponded to the export commodity structure of Uzbekistan by 36%. The EAEU’s export commodity structure corresponded to the import commodity structure of Uzbekistan by 36.6%.

In 2018, the share of processed goods in the republic’s export to the EAEU amounted to 18.5%, the share of semi-finished products in its supplies to the EAEU was 23.4%. The EAEU’s export structure to Uzbekistan was 43.6% for processed products and 38.8% for semi-finished products.

In 2018, the top three export positions of Uzbekistan to the Eurasian Economic Union included raw minerals, precious stones and metals for almost USD 1130 million (36.2% of the total export of Uzbekistan to the EAEU), fruits and vegetables for USD 623 million (20 %) and clothing for USD 352 million (11.3%). In turn, Uzbekistan bought semi-finished products from metal (iron, steel, aluminum) from the Eurasian Economic Union for USD 1213.6 million (25.6% of all imports to the Republic of Uzbekistan from the EAEU), transportation equipment by almost USD 461 million (almost 9 %) and non-electric machinery for USD 406 million (8.6%).

The level of diversification of Uzbekistan’s exports towards the EAEU had a Herfindahl-Hirschman index of 0.18. The Eurasian structure of exports to the republic was more diversified with an HHI of 0.08. The lower the concentration index, the better.

In 2017, the share of Uzbekistan in the extra-Union exports of the EAEU was slightly higher than 1% and amounted to only 0.8% of all imports of the Union. The Eurasian market plays a more important role for the Uzbek republic. Almost 23% of Uzbekistan’s exports went to the Eurasian Union, and imports from it accounted for 36% in the geographical structure of foreign imports to the country.

Tariff protection of Uzbekistan and the EAEU

In 2014, with a special protocol, Uzbekistan joined the CIS Free Trade Area, which also includes all EAEU member states. In it the parties agreed to cancel import customs duties for each other on an overwhelming composition of the commodity nomenclature. However, there are two “buts.” Firstly, the protocol provides exemptions, that is, it retains existing non-tariff barriers in terms of technical regulations, sanitary-phytosanitary measures, dispute resolution and other NTBs. Secondly, Uzbekistan continues to apply excise taxes as “hidden” tariffs that apply to hundreds of items of goods.

Therefore, a further strengthening of trade and economic ties between Uzbekistan and the EAEU could be achieved by concluding an Agreement on a Comprehensive Economic Partnership, based on the package agreements model between the EAEU and Singapore, signed in October 2019. Here, special attention should be paid to reducing non-tariff barriers (primarily excise taxes), harmonization of technical regulations and sanitary-phytosanitary measures, as well as creating the necessary basis for expanding trade.

One of the main steps towards deepening regional economic integration would be the possible accession of Uzbekistan to the EAEU customs union. As part of this process, which will include many steps to harmonize national foreign trade regulation with the supranational one, any future member state will have to coordinate its tariff profile with the common customs tariff of the EAEU. The greater the difference between the two, the more difficult the potential accession will become. At the same time, it should be noted that this harmonization process usually takes several years, and that both parties usually provide each other with (significant) phasing-in periods and exceptions, depending on the sensitivity of each sector of each of the parties.

The simple average MFN applied tariff regime of the EAEU has decreased in recent years, but still remains quite high: in 2018, it amounted to 6.8%,  – 11.0% for agricultural products and 6.1% for non-agricultural products. Similarly, until recently, Uzbekistan had one of the most protectionist tariff profiles in the region. In 2015, its simple average applied MFN amounted to almost 15%, and for agri-food products – almost 20%.

However, Uzbek president Shavkat Mirziyoyev has undertaken many reforms since 2016 to modernize the economy, including liberalizing exchange controls and revising the customs system. The average level of tariff protection decreased to 6.4% as a whole, which is 7.2% for agricultural products and 5.9% for non-agricultural products. Such a liberalization of the country’s foreign trade policy will facilitate the possibility of joining the Eurasian Economic Union. In such a case the total tariff protection in respect to third countries would then have to be increased again by only 0.4 percentage points. and only 0.2 pp, in particular, for non-agricultural products. Only in the agro-industrial sector would average tariffs have to be raised again by almost 4 pp, since the average import duty to the EAEU is 11% for agricultural products.

Potential trade effects of Uzbekistan joining the EAEU

Using a gravity model to assess country-to-country export potential (Box 1), we can estimate that upon entry into the EAEU, Uzbekistan’s exports to the Union’s common market could increase by USD 800 million, which is equivalent to a 1.6% increase in the republic’s GDP. In this case, the total export to the EAEU member countries would be almost 30% of the country’s total foreign exports. Conventionally, from the republic’s entry into the EAEU, every Uzbek would become richer by USD 22.3 (if we divide the income from increased exports by the total Uzbek population in 2018).

Box 1. Gravity model for assessing export potential

𝑣𝑖𝑗𝑘 = 𝛼𝑖𝑘𝛽𝑖𝑗𝛾𝑗

The potential export value of product k delivered by country i to market j in US dollars (USD) is calculated as supply × demand (adjusted for market access) × bilateral “simplicity” of trade. The value of potential exports is predicted by a gravity model based on the characteristics of the exporter, the target market and the strength of the relationship between them. The estimated value in US dollars serves as a benchmark for comparison with actual export performance.

Compared to a scenario without integration, Uzbekistan’s export to Armenia would increase on average 1.6 times, to Belarus 2.6 times, to Kazakhstan 1.6 times, to Kyrgyzstan 1.4 times, to Russia 1.4 times and tp the EAEU as a whole, one and a half times. Such results are obtained if we divide the potential volumes of Uzbek exports to the EAEU member states by the real average annual export volumes of Uzbekistan to the EAEU countries for 2014-2018.

The republic’s agricultural products show greatest export potential to the Eurasian countries, primarily cherry, peaches, and raisins. There is a potential for increasing cotton raw materials to Kyrgyzstan by USD 22.5 million. Of non-raw materials, polyethylene  has a sales potential to Armenia, Kazakhstan and Russia, as well as iron bars to Armenia.

In addition, the EAEU has free trade agreements with Serbia, Iran, Vietnam and Singapore. Not later than 2025 (most likely much earlier), FTAs with India, Israel and Egypt will be added concluded as well. Thus, upon joining the EAEU, Uzbekistan will gain free access to these markets, which could lead to an increase in exports to them by USD 70 million additionally.

As a result, upon joining the Eurasian Economic Union, and taking into account access to the EAEU’s free trade areas with third countries, Uzbekistan’s GDP could be 1.7% higher and each Uzbek could be USD 26.4 richer than without joining.

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