_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief analytical media “Eurasian Studies”. Munich, 20 April 2020.
Intra-union merchandise trade
Since its inception in 2010, the average share of intra-union trade within the Eurasian Economic Union (EAEU, then – Eurasian customs union) occupied only 7.3 percent of the total trade of the integration bloc. Concurrently, wood products, metals, minerals, and energy carriers, i.e. all raw materials, made up 77.1 percent of the Union’s foreign export structure, on average.
In other words, the common domestic market and intergovernmental value chains are for the EAEU member states much less important than the global business cycle and the demand in foreign markets for primary goods.
This state of affairs is certainly not good. In this connection, the governments of the member states and the Eurasian Economic Commission (EEC) are already taking measures to increase intra-union mutual trade.
Of course, the main effort is directed at eliminating non-tariff barriers (NTBs) to mutual trade within the common market. According to my estimates based on data by (Vinokurov et al. 2015) and (Knobel et al. 2019), the weighted average ad valorem equivalent of NTBs to mutual merchandise trade in the EAEU is still 32 percent. Such a line of work is called “negative integration” in the sense that the obstacles to creating a single space (market) are removed.
Coordinated industrial policy and industrial cooperation
Another direction is the work on creating within the framework of the integration bloc new and independent institutions and spheres, as well as supranational normative acts. This is the so-called “positive integration”. In this area, the EEС and the governments of the union countries are trying to formulate and implement a coordinated industrial policy.
As part of this coordinated industrial policy, a number of programs are already being implemented, including: the creation of “Eurasian technological platforms” in 16 sectors (Tab. 1) for the transfer of know-how between specialized research institutes and enterprises of the member states; an interactive map of the EAEU’s industry in link with an online system for industrial subcontracting.
Table 1. Agreed sectors for the formation of Eurasian technology platforms (as of April 2020)
|1. Medical biotechnology, pharmacy2. Information and communication technologies
4. Aerospace technology
5. Nuclear and radiation technologies
7. Transport technologies
8. Metallurgy technologies and new materials
|9. Extraction of natural resources and oil and gas processing10. Chemistry and petrochemistry
11. Electronics and engineering technology
12. Environmental development
13. Industrial technology
14. Agriculture, food industry, biotechnology
16. Technologies for maintenance and repair of industrial equipment
Source: Compiled by the author based on news publications by the EEC.
After having studied the rather successful European experience, policy makers in the EEC and relevant national ministries are actively discussing the possibility and potential format of introducing the supranational legal category of “Eurasian firms” (i,e, societas Eurasicaea) in order to foster industrial cooperation. Here, the main idea is to allow certain subsidies or tax breaks for companies that produce a joint product within value chains between at least two EAEU member states.
As a result, all these industrial cooperation efforts should, inter alia, contribute to an increase in mutual trade between the member states of the bloc.
Of course, for such efforts to succeed, it is necessary to concentrate on promising product groups, desirably with a higher added value, in terms of technological compatibility, potential for import substitution, intra-union demand and export potential to third parties abroad.
A study by the EEC from 2015, identified as such: metallurgical production of ferrous and non-ferrous metals, production of basic chemical elements and pharmaceutical products, cultivation of plant agricultural products. Furthermore, clothing, elevators, space satellites for remote sensing of the earth, transformers and energy storage devices have come up over the years in news publications of the Eurasian Economic Commission as potentially promising areas for cooperation. And the author has earlier argued for processing of rare earth elements to become an area for EAEU industrial cooperation.
Determining promising product sectors for industrial corporation (methodology)
In this and in the following article, I would like to assist in identifying promising product groups for an industrial corporation in the EAEU.
In this article, I will identify promising product groups for industrial corporation in terms of intra-union demand potential. In the second article, I will do the same in terms of potential demand in third parties that have already signed or will soon have preferential trade agreements with the EAEU (Vietnam, Iran, Serbia, etc.), and also for the global market as a whole.
This analysis is carried out in three steps. In the first step, using a gravity model developed by (Decreux et al. 2016), as well as the product space model, developed by (Hausmann et al. 2007), I compile for each of the EAEU member states a list of goods in terms of export potential* and diversification potential** to the other EAEU member states. The model covers bilateral trade data for 226 countries for over 4300 products during a study period between 2014-2018 (as well as economic forecasts until 2024).
In the second step I highlight the same and / or close products that show the potential for export and / or diversification from two or more member states. Based on the logic that these products have potential demand in the common domestic market of the union and that they are produced and / or can be produced in two or more member states, these are exactly the goods for which a production corporation seems most feasible.
Based on the simulation results, in the third step I look in more detail at the possibilities of creating additional joint value chains up-stream in Kazakhstan and down-stream in the Russian Federation.
Intuitively, I rank all product groups based on three preferences: a. level of processing (the higher the added value the better); b. number of potential participating countries for industrial cooperation (the more the better); c. number of potential importing countries (the more the better).
*Export potential identifies products in which the exporting country has already proven to be internationally competitive and which have good prospects of export success in specific target market(s) (intensive product margin).
*Diversification potential identifies products which the exporting country does not yet export competitively but which seem feasible based on the country’s current export basket and the export baskets of similar countries (extensive product margin).
Prospects for industrial cooperation based on intra-union export potential
Table 2 shows a list of goods for which two or more member states have the potential to expand existing export flows to other member states. Through the analysis, it became apparent that the intra-union export potential of the member states is limited mainly to primary goods with low added value. This speaks of the relative uncompetitiveness of Eurasian producers in relation to the import of goods with higher added value from foreign manufacturers.
The most promising product, in terms of higher added value, number of exporters and of importers, seems to be the joint manufacturing of conductors and batteries, as well as of DC motors & generators which can be jointly produced in Belarus, Kazakhstan and Russia and have demand in all of the five member states.
Other promising manufactured goods include the joint production of aluminum products (can be co-produced by ARM KAZ RUS); iron and steel products (BLR KAZ RUS); glass products (ARM KGZ RUS); rubber pneumatic tires (BLR KGZ RUS); knit/crochet hosiery (ARM BLR KGZ); chocolate and confectionary (ARM KAZ RUS).
Promising areas for bilateral cooperation are the joint production of copper products and cable wire (ARM RUS); ferrosilicon alloys (KAZ RUS), which, inter alia, are important for the manufacturing of electromotors and transformers; oil/gas line pipe, casing and tubing (KAZ RUS); jewelry of precious metal and diamonds (ARM RUS); uranium and fuel elements for nuclear reactors (KAZ RUS); polypropylene and plastic (KGZ RUS).
In case of full implementation of industrial corporation with the expansion of intra-union exports, the additional trade income (welfare effect) may amount up to USD 4.3 bln or 0.2 percent of the EAEU’s GDP.
Table 2. Goods with prospects for industrial cooperation based on intra-union export potential
|Spirits obtained by distilling grape||ARM KGZ||BLR KAZ KGZ RUS|
|Aluminum products||ARM KAZ RUS||ARM BLR KAZ RUS|
|Glass products||ARM KGZ RUS||ARM BLR KAZ RUS|
|Chocolate & other cocoa preparations||ARM KAZ RUS||ARM KAZ KGZ RUS|
|Copper products & cable||ARM RUS||BLR RUS|
|Wood products||BLR RUS||ARM KAZ RUS|
|Iron and steel products||BLR KAZ RUS||ARM BLR KAZ KGZ RUS|
|Rubber pneumatic tires||BLR KGZ RUS||ARM KAZ KGZ RUS|
|Unglazed ceramic flags, paving, hearth, wall tiles, mosaic cubes & the like, nes||BLR KGZ||ARM RUS|
|Wallpaper & similar, paper coated/covered with decorated layer of plastic||BLR||ARM KAZ KGZ RUS|
|Plant oil products||KAZ RUS||ARM BLR KGZ|
|Conductors and batteries(+DC motors & generators)||BLR KAZ(RUS)||ARM KAZ BLR RUS(BLR)|
|Sugar confectionery not containing cocoa||KAZ RUS||ARM KGZ|
|Ferro-silicon products||KAZ RUS||ARM BLR KAZ RUS|
|Portland cement||KAZ KGZ||ARM BLR KAZ KGZ RUS|
|Ammonium nitrate||KAZ RUS||ARM BLR KAZ KGZ|
|Oil/gas line pipe, casing & tubing||KAZ RUS||KAZ KGZ RUS|
|Hosiery, knit/crochet||ARM BLR KGZ||ARM BLR KGZ RUS|
|Shirts||ARM KGZ||KGZ RUS|
|Jewelry, of precious metal, nes and diamonds||ARM RUS||ARM KAZ KGZ|
|Uranium and fuel elements for nuclear reactors||KAZ RUS||ARM RUS|
|Polypropylene and plastic||KGZ RUS||BLR KAZ|
Source: Compiled by the author using the results of a trade gravity model by (Decreux et al. 2016).
Prospects for industrial cooperation based on intra-union export diversification potential
Table 3 shows new products in which two or more EAEU member states have the potential diversify their industries and which are in demand in some or all of the countries of the common domestic market. Fortunately, in terms of export diversification potential the modeling has identified many more high-value-added product groups, including high-tech products.
Interestingly, the most promising direction, from the point of view of export potential, number of producing countries, number of importing countries, and, most importantly, production chain complexity paired with supply compatibility by the member states, is the joint production of motor vehicles and parts. According to the model, Armenia can supply ignition wiring; Belarus – seat belts and automobile bodies; Russia – spark-ignition reciprocating piston engine, as well as other parts & accessories. Concurrently, as Table 2 shows, ARM, BLR and RUS can supply the rubber tires. As indicated by the model, the final assembly is most cost-effective in Kazakhstan.
Secondly, the three core countries of the union – Belarus, Kazakhstan, Russia – show potential in the joint manufacturing of trucks and trailers, as well railway equipment.
Rather significantly, Belarus and the Russian Federation have the potential to jointly produce data processing machines (computers), as well as smartphones and tablets, which would have demand in all five member states. Belarus, in particular, has the potential to supply ferrosilicon needed for the integrated circuits.
Furthermore, Armenia, Kazakhstan and Belarus show diversification potential for the supply of electric conductors which are in demand in Kazakhstan and Kyrgyzstan.
Due to the growing trend towards e-mobility, the co-production of energy storage devises (batteries) seems feasible, for which Belarus and Kazakhstan have the diversification potential to supply zinc products. Kazakhstan, in particular, shows diversification potential for the supply of ferromanganese and cobalt, which both are primarily used in lithium-ion batteries.
Results of the product space model also indicate that Armenia, Belarus, Kazakhstan and Kyrgyzstan have the capacity for cooperation in the clothing industry.
Table 3. Goods with prospects for industrial cooperation based on intra-union export diversification potential
|Trousers||ARM BLR KGZ||BLR KAZ KGZ RUS|
|Shirts and jackets||ARM KGZ||ARM BLR KAZ KGZ RUS|
|Footwear||ARM KAZ KGZ||KGZ KAZ|
|Carpets||ARM KAZ KGZ RUS||ARM BLR KAZ KGZ RUS|
|Other welded tubes & pipes||ARM KAZ||ARM BLR KAZ KGZ|
|Ammonium products||ARM BLR KAZ||ARM BLR KAZ KGZ|
|Iron and steel products||ARM BLR KAZ KGZ||ARM BLR KAZ KGZ RUS|
|Plant oil products||ARM BLR KGZ RUS||ARM BLR KAZ KGZ|
|Electric conductors||ARM BLR (Electricity supplymeters, transformers) KAZ||(ARM) KAZ KGZ|
|Motor vehicles and parts||ARM (ignition wiring) BLR (seat belts, automobile bodies) KAZ (motor vehicles) RUS (parts & accessories, spark-ignition reciprocating piston engine)||ARM BLR KAZ KGZ RUS|
|Trucks||BLR KAZ RUS (incl. road tractors for semi-trailers, parts of trailers, nes, spark-ignition reciprocating piston engine)||ARM BLR KAZ KGZ|
|Wood products||ARM BLR||ARM KAZ RUS|
|Telephone sets & other voice/image transmission apparatus (e.g. smartphones and tablets)||BLR RUS||ARM BLR KAZ KGZ RUS|
|Data processing machines (computers)||BLR (including ferro-silicon) RUS||ARM BLR KAZ KGZ RUS|
|Aluminium products||BLR KAZ KGZ||ARM KAZ RUS|
|Railway equipment||BLR KAZ RUS (self-propelled tamping machines)||ARM (self-propelled tamping machines) KAZ KGZ RUS|
|Zinc products||BLR KAZ||RUS|
|Electrodes||KAZ (Carbon electrodes,for electric ovens) RUS (Carbonaceous pastes for electrodes & similar)||BLR KAZ|
As mentioned above, Kazakhstan and the Russian Federation demonstrate export diversification capacity that is met by corresponding demand on the common domestic market, to establish predominantly upstream (KAZ) and downstream (RUS) intra-union production chains.
Kazakhstan has the potential to diversify its export structure within the EAEU, and therefore, for possible value chains involving uranium fuel for nuclear reactors (with Russia for sale in Belarus); methanol, but also generators (to BLR); isoprene rubber (with Kyrgyzstan to Belarus); ferroniobium and ferrotungsten alloys (to RUS).
Russia, on the other hand, shows high export diversification potential in order to provide the other EAEU member states with a wide range of sophisticated vehicles, machinery and equipment, including:
- in the agri-food and forestry sector:
agricultural, horticultural or bee-keeping machinery (to ARM BLR KAZ); machinery for the industrial preparation of fruits (to ARM KGZ); chainsaws (to BLR KGZ);
- in the mining industry:
boring or sinking machinery for extracting minerals (to ARM KAZ KGY); self-propelled coal or rock cutters, as well as earth-moving machinery (to KGZ); self-propelled mechanical shovels (front-end shovel loaders) (to ARM BLR KAZ KGZ).
- for households and businesses:
lifts and skip hoists (with BLR to ARM BLR KAZ KGZ RUS); parts of air conditioning machines (to ARM BLR); compressors for refrigerating equipment (to with BLR to ARM BLR KAZ);
- other industrial sectors:
self-propelled trucks with lifting equipment (to BLR KAZ KGZ); machines for arcwelding of metals (to KGZ);
- medical equipment:
dental fittings, artificial body parts, orthopedic & other appliances; ultrasonic scanners (to ARM BLR KAZ KGZ);
aircraft, helicopters and parts (to KAZ KGZ).
Although this model does not suggest it, the other EAEU member states might consider the feasibility of finding niches for entering the production chains (i.e. by supplying parts) of the above listed products.
The above conducted analysis, using a gravity model in pair with a product space model, shows that the greatest prospects for industrial cooperation between the EAEU member states for the joint production of manufactured goods, which will be in demand in the common domestic Union market, are:
- in the transport sector: motor vehicles and parts, trucks, trailers and railroad equipment;
- in information and telecommunication hardware manufacturing: computers, smartphones and tablets;
- in both sectors: energy storage devices (batteries), integrated circuits, as well as a wide range of strategic metal products (steel, aluminum, cooper, but also silicon, cobalt, zinc, manganese, tungsten, niobium alloys).
Therefore, the governments of the member states of the Eurasian Economic Union, the Eurasian Economic Commission and the Eurasian Development Bank should consider establishing regulatory, technological and financial prerequisites for industrial cooperation primarily in these sectors.