Trade and welfare effects of deeper merchandise trade integration in the EAEU

_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief  analytical media “Eurasian Studies”. Munich, 30 March 2020.

One of the main goals of Eurasian economic integration is the creation of a single domestic market for the free movement of goods. Indeed, the creation of the Eurasian customs union (from 2015 – the Eurasian Economic Union, EAEU), and the abolition of tariff duties between its member states in 2010 (with some few exemptions), led to a significant increase in mutual trade in goods. A recent study by A. Adarov from the Vienna Institute for  International Economic Research (wiiw), using a gravity model, showed that thanks to the creation of the Eurasian customs union, mutual trade in 2010-2014 was on average three times higher than if the participating countries had not created the customs union. Further, from 2015 to 2018, trade within the EAEU increased by 23.6 percent.

Non-tariff barriers remain main obstacle


However, the preservation of many non-tariff barriers hinders the growth of intra-Union mutual merchandise trade, which by 2018 accounted for only 7.2 percent of total EAEU trade. Based on a large-scale survey of 530 enterprises in Belarus, Kazakhstan and Russia, a group of Eurasian Development Bank economists led by E. Vinokurov estimated that non-tariff barriers to mutual trade “steal” 15-30 percent of the value of commodity exports.

Non-tariff barriers

Non-tariff barriers to trade (NTB) are a set of methods of foreign trade regulation that have the effect of complicating and or complicating import (or export) operations, but which are not related to customs and tariff methods of foreign trade regulation. They include a wide range of measures, such as: technical regulations and standards, sanitary and phytosanitary measures, quotas, prohibitions and measures of quantitative control, price control measures and measures affecting competition (institution of special exporters, restrictions on sales and public procurement, subsidies), etc.

Over the past twenty-five years, starting with the creation of the WTO in 1994, non-tariff barriers have surpassed import tariffs as the main instrument of trade protection used by countries and integration blocks. Between 1997 and 2015, the simple average ad valorem equivalent of global import tariffs decreased from ~ 12 percent to ~ 5 percent, while the simple average ad valorem equivalent of NTBs increased from ~ 20 percent to ~ 57 percent.

Using input data from (Knobel et al. 2019), the author has estimated the weighted average ad valorem equivalent of non-tariff barriers (AVE of NTMs) to mutual merchandise trade in the EAEU to be 32 percent. This can be understood as the cost of under-integration. The highest AVEs of NTMs are found in the following five segments: petroleum and coal products (34.4 percent); paper products and publishing (29.3 percent); mineral products nec (28.5 percent); chemical products and plastic (27.3 percent) and metals (25.7 percent).  Interestingly enough, as of March 2020, energy policy was the area with the second most obstacles (19.7 percent) that were officially recognized by the Eurasian Economic Commission (EEC) as impeding the functioning of the single domestic market, – after technical regulations and product conformity standards (22.7 percent). The Russian Federation imposes the highest simple average AVE of NTMs with 32.4 percent. This is significant, since Russia is by far the main importer of intra-EAEU merchandise trade. In 2018 it accounted for 96.7 percent of intra-Union exports from Armenia, for 93.2 percent from Belarus, for 87.3 percent from Kazakhstan and for almost 56 percent from Kyrgyzstan. Within the Union, Belarus imposes the lowest AVE of NTMs with 22.4 percent (Table 1).

Table 1. Ad valorem equivalents of non-tariff barriers to intra-EAEUa  merchandise trade (2018, in percent)

ARM to other EAEU member states (weighted) BLR to other EAEU member states (weighted) KAZ to other EAEU member states (weighted) RUS to other EAEU member states (weighted) Intra-EAEU weighted average
Agriculture 18.8 16.8 32.6 34.1 26.7
Forestry 20.8 20.8 20.5 32.2 24.4
Fishing 20.0 14.6 14.6 18.8 16.1
Minerals 19.3 19.3 15.6 22.7 19.4
Minerals nec 17.2 17.0 15.7 31.1 21.2
Food 50.7 27.4 20.4 25.2 25.4
Textiles and apparel 18.3 17.1 15.3 28.7 20.4
Leather products 26.6 13.2 17.9 22.3 17.7
Wood products 47.1 13.7 13.1 16.4 15.2
Paper products and publishing 33.9 32.0 30.3 47.7 36.7
Petroleum and coal products 9.1 39.6 39.5 52.2 42.9
Chemical rubber plastic rods 36.4 28.8 31.1 42.8 34.1
Mineral products nec 30.6 29.8 29.3 48.1 35.6
Metals 24.0 29.0 29.0 39.1 32.1
Transport equipment 50.5 18.9 17.3 32.1 23.5
Electronic equipment and machinery 28.8 15.1 15.7 28.5 19.9
Manufactures nec 28.2 26.9 28.8 29.4 28.3
Average (ARM, BLR, KAZ, RUS – simple average; EAEU – weighted average) 28.3

 

22.4

 

22.8

 

32.4

 

32.0

 

Source: (Knobel et al. 2019) and own calculations. aThe study did not have data for the Kyrgyz Republic.

Effects of deeper integration


Model

The main priority of the Belarusian presidency in the EAEU, and, at the same time, the main task of Mikhail Myasnikovich as the new chairman of the EEC Board is officially named one thing – the removal of (non-tariff) barriers to ensure the functioning of the single domestic market within the Union.

Using a partial equilibrium model, the author has estimated the trade and welfare effects of deeper integration within the Eurasian Economic Union in the form of a 20 percent mutual reduction of non-tariff barriers between its member states.

The author used the following input data for the simulation: 1. Bilateral trade data from 2018 for the four parties (EAEU, EU, China and the “rest of the world”) aggregated for 24 MTN product sectors from the WITS (UN COMTRADE) database. For the bilateral trade flows CIF recorded imports were preferred. 2. Aggregated simple most favored nation (MFN) ad-valorem import tariffs from 2018 were taken from (WTO 2019) and the WITS (UNCTAD TRAINS) databases. Import tariffs within the EAEU were taken as zero. 3. The AVEs of NTMs for intra- and extra-EAEU trade were taken from (Knobel et al. 2019), for China from (Niu 2018), for the EU were taken from (Berden et al. 2015), for the rest of the world from (Niu et al. 2018). 3. Import elasticities were taken from (Ghodsi et al. 2016). The export supply (1.5) and substitution (5) elasticities were taken as constants across all sectors and regions.

Results

Deeper integration within the EAEU in the form of a 20 percent mutual reduction of non-tariff barriers between its member states would lead to an increase in mutual trade by 12.4 percent or USD 7.1 bln. The gross welfare effect (producer surplus + consumer surplus) would be USD 4 bln. Thus, a more coherent policy to remove non-tariff barriers to mutual trade in goods would increase the Union’s GDP by 0.4 percent annually. The share of intra-union trade in the EAEU’s total trade would increase by ~1 percentage point from 7.2 to 8.1 percent. The following industries would experience the largest relative increases in mutual exports: chemicals (17.9 percent), metals (16.3 percent) and manufactured articles, nes (16 percent) (Table 2).

Table 2. Trade and welfare effects of a 20 percent mutual reduction of NTBs in intra-EAEU merchandise trade (2018)

Trade increase (percent) Trade increase (USD mln) Gross welfare gain

(USD mln)

Wood, pulp, paper & furniture 15.7 358.5 168.7
Textiles & clothing 8.0 178.2 86.3
Leather, rubber, footware, travel 11.3 132.7 56.7
Metals 16.3 1559.9 819.7
Chemicals 17.9 1139.3 540.9
Transport equipment 10.0 501.9 239.1
Non-electric machinery 10.2 440.9 197.6
Electric machinery 8.4 283.8 133.1
Minerals and precious stones 11.5 791.3 462.9
Manufactured articles n.e.s. 16.0 207.3 93.7
Fish and fish products 11.1 57.3 25.1
Fruit and vegetables 12.7 108.2 50.0
Coffee, tea 11.4 71.4 34.0
Sugars 9.6 43.1 24.3
Spices,cereal and other food prepar 12.5 135.0 66.1
Grains 13.7 39.2 21.6
Animals and products thereof 5.8 96.0 55.5
Oilseeds, fats and oils 15.8 133.5 61.3
Flowers,plants,vegetable materials 8.6 12.9 6.6
Beverages and spirits 10.6 72.0 34.8
Dairy products 3.8 113.8 93.0
Tobacco 13.0 33.0 15.5
Other agricultural products 16.0 43.9 19.6
Petroleum 5.9 596.1 681.9
Total trade 12.4 7149.3 3988.1
In relation to EAEU GDP (2018, percent, in current prices) 0.4 0.2

Source: Author’s calculations.

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