INTERVIEW: EDB study urges unified trade policy

By bne IntelliNews February 11, 2013

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"If the economies of Russia, Belarus and Kazakhstan are to effectively modernise, they need a unified trade policy inside the Common Economic Space (CES)."

This is the conclusion made by the authors of the report, "Unified Trade Policy and Addressing the Modernisation Challenges of the CES", prepared by the Centre for Integration Studies of the Eurasian Development Bank (EDB) with the participation of leading Russian, Kazakh and Belarusian experts.

The paper concludes that the governments of the three countries need to concentrate on four areas: improving the productivity of enterprises and increasing the share of research-intensive and high-tech sectors in GDP; attracting investment in manufacturing sectors, infrastructure, the energy sector and the efficient use of resources; supporting exports in high value-added sectors; and encouraging the development of small and medium-sized enterprises.

"Russia, Kazakhstan and Belarus face similar tasks in modernizing their economies. Modernization is closely associated with the state of foreign trade, making the convergence of their foreign trade policies in the framework of the Customs Union a priority of economic interaction. In particular, it should be used to improve the structure of exports. The CES should become a single competitive economy in the global markets," says Igor Finogenov, Chairman of the EDB Management Board.

The report says that getting the structure of exports right is especially important, as this is the key to setting up a vibrant and competitive market, which drives economic development.

Importance of trade

Trade is a key element for increasing the wealth of a country because it allows countries to make the most of its own comparative advantages with exports and tap into the strengths of its partners through imports.

Exports bring the obvious benefit of earning money that can used to maintain a balance of payments, but the process of engaging in competition with the rest of the world also leads directly to the development and modernisation of domestic industry, which has to operate at world standards if it is to compete.

Imports, especially the import of foreign direct investment (FDI) as international producers choose to set up shop in the member countries, bring with them the spread of the best technology and the stimulus of world class competition.

The problem that the members of the Custom's Union face at the moment is that their exports are predominately raw materials, accounting for 70% of the total of both Russia and Kazakh exports, and 30% of Belarus'.

A second problem is that Russia plays an overly important role in trade within the Commonwealth of Independent States (CIS). Russia only exports 10% of its goods to the other Customs Union countries, but Russia accounts for 40% of Kazakh exports and half of Belarus'. And Kazakhstan and Belarus have very little trade with each other.

Despite the rhetoric the development of high-tech industries in Russia is going very slowly and it plays a negligible role in the trade profile of all three countries. "In Kazakhstan, the share of high-tech products reached just 3.2% of total export volume in 2011 (totaling $2.1bn in absolute terms in 2010 - exports of uranium and uranium-bearing components for the nuclear power industry accounted for $1.6bn or a full 76% of this figure), while the same indicator stood at just over 1% for Russia and Belarus ($5.2 and $0.4bn, respectively). By comparison, this index totals 23% ($406.1bn) in China and roughly 9% ($574.3bn) in the EU," the EDB said in its report.


Open trade is also a difficult issue, as the natural tendency for emerging markets is to protect their leading industries while they are in the process of transition; the lack of investment resources and modern technology means many strategic industries are unable to weather the full force of international competition in the early stages and need some tariff production while they are brought up to scratch.

The trick is to manage this process, because in the latter stages competition will accelerate the very same transition and is a bonus rather than a problem. The ultimate goal is to create the conditions in which the domestic industries of the three member countries of the union can export and compete in the global marketplace.

When it comes to dismantling these trade barriers, the report says that particular attention should be paid to the sanitary and phytosanitary measures - also known as the SPS Agreement that was set up by the World Trade Organisation to coordinate food safety standards on bacterial contaminants, pesticides, inspection and labeling (sanitation), as well as animal and plant heath (phytosanitary). Part of developing the Customs Union trade policies will be to integrate these standards with those of the WTO to make entry into the global markets easier in addition to expanding trade within the Custom's Union.

Strategy development of a common trade policy

Drawing on the EU's experience, the report says that successful trade liberalization goes beyond simply consolidating tariffs and customs regulations, but includes liberalized investment and competition policies.

"The maximum gains from trade liberalizations are derived when the markets are simultaneously characterized by a high degree of competition and the free flow of capital," says the report.

The report came up with three practical suggestions to help the development of a common trade policy amongst members of the Custom's Union.

In the short term, the first thing that should be done is to simplify the VAT-refund system and customs procedures, which can present major financial and bureaucratic hurdles to trade.

In the medium term, customs duties and technical regulation should be reconciled between the members, followed by the development of a system for the collection of statistical data on trade within the Customs Union.

Finally, in the long term, support needs to be provided to exports by things like credits from a state-owned export-import bank. Common anti-dumping policies need to be established and FDI encouraged.

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