Free Trade Agreements in Eurasian Economic Union. Identifying key preferences
1. Part One:
This essay will investigate the foreign trade policy area, especially focus on free trade agreements that were signed between EAEU and third parties. Section IX Article 33 of the EAEU Treaty signed on the 29th of May 2014 in Astana, which allocated for the foreign trade policy states that trade with other states ensure the competitive economy of the member states (Article 33). Moreover, Article 46 of the same section cites that “In trade with third countries the EAEU shall apply the following common non-tariff measures: ….3) the exclusive right to export and (or) import of goods;” (Article 46); therefore, EAEU grants an exclusive competence for the foreign trade with the third countries; which means that EAEU can adopt binding acts for foreign trade policies with other states. The foreign trade policy cycle is directly attached to the Eurasian Economic Commission; which consists of two chambers: Council and Collegium (Annex 1.8).
The agenda for the foreign trade with third parties is implemented by Chairperson of the Council of the Eurasian Economic Commission (Annex 1.28), while the foreign trade policies are formulated by the trade ministry, which is a permanent member of the Collegium of the Commission (Eurasian Economic Commission, 2020). Even though, EAEU has established the EEC institution, the major part of the decision-making process is under the control of the head of the states (19). There is two option of decision-making in the Eurasian Economic Commission. Firstly, decisions are taken by qualified majority voting for the Collegium; where policy or decision adopted by qualified majority voting should gain two-thirds votes of the Collegium members (Article 18.2). The members of the Council are each per member state, while the members of the Collegium are allocated by the Supreme Council based on the principle of equal representation. Each vote of the member of Collegium and Council counts as one vote. The second option is the decision achieved by the consensus by the Council of the Commission (Article 18.2). Furthermore, The Council of Commission is finalizing and passing decisions. Nonetheless, if no consensus achieved within the Council, the decision should be passed to the further consideration of implementation to the Supreme Council or Intergovernmental Council (Article 18.2). Besides, as the higher authority institution Supreme Council has a function of overseeing the implemented decisions by the Eurasian Commission (Annex 1.30).
The official web-site of EEC on 31st October 2019 has posted that EAEU took measures to control the common market over unsafe imported products from other states. Minister of Technical Regulations states, “To ensure the safety of goods, persons authorized by foreign manufacturers should act on behalf of this manufacturer in assessing conformity and releasing products into circulation in the Union's customs territory” (Eurasian Economic Commission, 2020). Currently, EAEU signed 5 trade agreements, mainly with China, Vietnam, Singapore, and Serbia (legalization postponed due to COVID-19 crisis), and temporary agreement with Iran (Eurasian Economic Commission, 2020). Comparing to EAEU, the EU has signed 8 trade agreements with Vietnam, New Zealand, Australia, Singapore, Mexico, MERCOSUR, Japan, and Canada (Negotiations and Agreements-Trade-European Commission, 2020). This essay will focus on identifying the trade and political preferences of EAEU on signing the free trade agreements with third states.
2. The main research question is the: What are the trade preferences of EAEU on signing the free trade agreements with third parties?
3. Literature review
3.1 Introduction
Since the moment, when the economy liberalization turned to a major view of the global economy in the high number of independent states in the world; states began to change the direction of their economy to a global market-oriented (Economic Liberalization and Poverty Reduction, 98, 2020). It caused, the great improvement in export-import trade relations that were adjusted, developed the labor market, mobility, and the improvement of investment funds. The liberalization of the economies became the basis for the foundation of the European Union, as well as the Eurasian Economic Union, which was based on the agreement of several CIS countries. Besides, the creation of EU, MERCOSUR, ASEAN, NAFTA, and EAEU, countries signed a series of free trade agreements; which helped to distant and developing countries; that are not the member states of the unions, have the right to carry out trading activities at lower tariffs, and giving the member states right to improve their trade towards the diversified economy. Signing free trade agreements is the first step towards economic integration among the states, which are set under the low tariffs and quotas with limitations on regulations (EU Trade Policy, 20, 2020). Free trade agreements (FTAs) have a strong opportunity to create liberalized and diversified economies with cost-benefit production (Thompson, 2, 1994). Nonetheless, the significant number of signed FTAs has an ambiguity due to both trade and political preferences in the major states (Ornelas, 1477, 2005). This literature review will focus on different aspects of trade preferences and further development of FTA through the liberalization process in the Eurasian Economic Union.
3.2. Liberalization of EAEU economies
Bergsten in his report (1996) introduces term the “negotiated liberalization”; which is the ability of a state to negotiate and bargain with the partners. The author claims that this term became a base for the development of the global economy from the mid of the 20th century. Steven Blockmans, Hrant Kostanyan and Ievgen Vorobiov (29, 2012) researched the structure of EAEU and its benefits for the member states. Authors pointed that the main reason for Russia to integrate with other member states is to diversify the economy; which is oil-based through low-tariff exports and imports by signing trade agreements (Blocksman, Hrant &Vorobiov, 26, 2012). Moreover, the authors added that EEC is trying to negotiate with the EU on creating further FTA; which has major significance for Russia. Nonetheless, since this paper was written in 2012 further sanctions against Russia negotiations on FTA were stopped. Karliuk (6, 2015) stated that EAEU integration is economic-based, it has an economic need for member states. The second point of liberalization of Russian`s economy is supported by Vinokurov (66, 2016), who discovered the internal trade preference of the member states, non-tariff barriers, and mutual recognition principle. Regarding the FTAs Vinokurov stated that FTAs signed with Vietnam in 2015, and further agreements are the solution to resolve the crisis in Russia. with Maksakova (2018) conducted research in Russian on future FTA with Serbia, and concluded, that to liberalize the economies, and establish contact with the EU, Serbia is a chance to do so (42, 2018). The author concluded that negotiations of EAEU with third parties on the Balkan region might be more successful through Serbia (43, 2018).
However, Tarr (2018), discussed the possible losses for the member state of signing the EAEU treaty. According to author Kazakhstan as a more diversified economy losses negotiations with western states, “Russia has a geopolitical battle with the west” (17, 2018). While recently, Kazakhstan adjusted friendly relationships with the USA, EAEU agreements might spoil them. Moreover, Kazakhstan receives no potential subsidies from Russia for oil and gas; therefore, it is less beneficial for Kazakhstan comparing to Armenia, which as a significant number of labor forces (16-17, 2018).
Wrapping up all the presented source about the EAEU it can be concluded that EAEU integration with third parties are related to the liberalization of the economy, where Russia gains more benefits that other member states. The term negotiated liberalization is applicable for the case of EAEU signing free trade agreements. Apart from Russia, countries as Kazakhstan, which already established political relationships with western states experiences lose in signing the EAEU treaty. The main limitation of articles written on Eurasian Economic Union Trade is the limited timeframe since the majority of the trade deals were signed recently. Even, there are different scholars as Vinokurov, who has written articles on trade and EAEU structure, there is not enough information on foreign trade policies of EAEU.
4. Analytical framework
To identify the trade preference of EAEU in signing FTAs, it is necessary to the notion of the main international trade theories for the political economy. There are two main traditional theories on international trade Stolper-Samuelson and Ricardo-Viner (Frieden, Lake & Schultz, 295, 2016). The Stolper Samelson trade theory is an approach to liberalization suggesting that “trade protection benefits are the scarce of production” (Frieden, Lake & Schultz, 305, 2016). It arises from the Heckscher-Ohlin notion of, what is produced more, should be exported more. For instance; labor-rich country exports more labor; while protects the capital (Frieden, Lake & Schultz, 296, 2016). However, apart from the liberalization of the economy, the question arising from this theory is who are the interest groups of signing the FTAs? Thompson (23, 1994) in his paper on trade liberalization in Canada hypothesized that comparing to Canadian capital based firms, which are losing groups over the US capital supporting protectionism, Canadian natural resource firms have supported the comparative advantage and signing of FTA, since Canada has an abundance of natural resources, while it lacks capital-flow market. The chapter on a trade supports the argument of Thompson states that owners of scarce factors are protectionists, while resource-abundant companies are in favor of free trade. The EU-Australia trade agreement might be analyzed through the Stolper-Samuelson theory framework. Drake-Brockman and Messerlin (42-43, 2018) in his paper suggested that both EU and Australia gain a huge financial benefit and capital flow through this FTA.
The second approach to international trade is the Ricardo-Viner model; which is industry-specific (Frieden, Lake & Schultz, 306, 2016). Apart from the Stolper-Samuelson Ricardo-Vined model states that trade is not based on labor, capital; contrary, it favors industry-specific trade; which favors export and free trade (Specific Factors Model, 2020). The interest groups in the Ricardo-Viner model are formed according to the sector of groups they are working on (Specific Factors Model, 2020). Econ Iaste web-site (2020) stated that Ricardo-Viner explains the specific factor as “industries that cannot be moved”; climate, land, agriculture. The case study for the Ricardo-Viner approach borrowed from EU FTAs was researched by Wolde. Wolde (2011) in his paper applied both Stolper-Samuelson and Ricardo-Viner theory on the EU-South Korean trade agreement and identified the main industrial benefits of South Korean markets over the EU. The author concluded that Ricardo-Viner affects Korean IT, chemistry, and electronic industries, where the country has the most advantage over these industries (Wolde, 25, 2011).
5. Analysis
Being a new union in the global arena, EAEU already had a significant number of legislated acts by the Eurasian Economic Commission. For the last 5 years, EAEU has signed 5 different trade agreements with China, Singapore, Vietnam, Serbia, and Iran. Moreover, EAEU is negotiating with Israel and Egypt as future trade partners (Maksakova, 40, 2018). Nonetheless, the trade preferences of FTAs are directly related to both political preferences and economic determinants. Bergsten (1996) stated that in order to achieve political economy liberalization it is necessary to include a bargaining model with third parties and signing FTAs. In this part of the paper, I will try to analyze the logic behind EAEU in signing FTAs with those states through political preferences, Ricardo-Viner, and Stolper-Samuelson models.
5.1. Serbia
Recently, along with Montenegro, Serbia became one of the first applicants for EU membership. Joining European Union would be quite beneficial for the Serbian government and citizens previously; however, recent Brexit, and Greece crises, showed the inability of the EU to take control over its integration politics (Maksakova, 40, 2018). Moreover, the FTA with Serbia is industry-specific; which is analyzed through the Ricardo-Viner model. These facts might explain Serbia signed a free trade agreement with EAEU, which created a high number of questions on what are the precedents of this action. This agreement is beneficial from a political approach for both actors. As Vinokurov (2016) in the literature review was cited free trade agreements of EAEU is the chance for Russia to liberalize their economy and move towards the western market. The liberalization of the economy towards the western capitalistic approach might be transmitted through Serbia. While in 2014 the US and EU implemented sanctions against Russia, Serbia might become a bridge between European and Eurasian unions; which is the main preference of signing FTA for Serbia (Maksakova, 42, 2018). According to Maksakova (2018, 42) currently, Serbia has a chance to develop its economic status in the global economic arena by improving the relations between two unions. Secondly, signing FTA with Serbia was industry-specific, since EEC reports that during the negotiations with Serbia EAEU states are willing to export mainly agricultural products, alcohol, and cigarettes (EAEU and Serbia signed Free Trade Agreement, 2020). Therefore, the main interest of EAEU is both political preference, and landowners, small production factories.
5.2. Iran
The signing of a temporary trade agreement with Iran can be explained from two main perspectives: political, and economic. Firstly, Iran as Russia and Kazakhstan is a country with a large oil reserve, where oil is a major factor in the development of the economy. According to OPEC (2020), 10% of the world's oil reserves are located in Iran. A new economic theory in international trade called “country similarity theory”, which defined as “trade results from similarities of preferences among consumers in countries that are at the same stage of economic development” (QS Study, 2020), may be applicable in case of Iran and EAEU. Countries with a common oil-oriented economy are highly interrelated in a global arena. Secondly, huge sources of capital; foreign direct investments are invested in Iran from EAEU and vice versa. Financial times states that in 2018 Russia invested $50bn for Iran`s gas and oil sector (Foy and Bozogmerh, 2018). Since Iran borders with Kazakhstan through the Caspian Sea, the government of Kazakhstan allocated quotas for many specialists who come from Iran, to work on oil production (kursiv.kz). In addition, a temporary agreement with Iran an important factor of trade with Armenia, which has no common border with EAEU member states (Kuzmina, 2019). Given the facts of capital investment and labor, it can be analyzed that the temporary FTA was signed based on the Stolper-Samuelson trade model. Nonetheless, the second reason is related to the political views of the Iranian government. It was discussed above, that Russia was sanctioned by the EU and the US in 2014 as the protest of the issue on the Crimean territory. Consequently, in 2019, the United States President Donald Trump announced strengthening sanctions against Iran, and cancel the nuclear deal (Manson and Peel, 2020). While, the conflict between the US and Iran has been going a long time, recently, in early 2020, US President Donald Trump posted a Twitter post of a possible war with Iran, due to the destruction of Ukrainian aircraft (New York Times, 2020). Even though a temporary agreement with Iran was signed in May 2018, the prolonged conflicts with the US could be the primary reason for creating the FTA. Russia, as the pivotal player of the EAEU, weights creating a treaty with Iran's position, since relations between Russia and the USA are not at the highest level of trust to each other.
5.3. Vietnam
Along with China, which has been an export leader for many years with its intensive labor and production market, South Asian countries, as Bangladesh and Vietnam, are intensively developing commercial production with the third countries. Currently, Vietnam is gaining momentum in industrial production and enters the labor market as a competitive area for producers. The first EAEU agreement on a free trade area was signed with Vietnam, which has direct economic preferences for the EAEU countries. For this paper, I decided to choose Vietnam as the third country for the analysis in order to focus on the third party, whose trade agreement is based on the Stolper-Samuelson trade theory, and which has a significant role for the economy of Kazakhstan. Vietnam has a comparative advantage, which means it is cheap in labor and industry production, so it is actively exporting it to a global arena. Moreover, Vietnam has a cheap labor market, according to the Vietnam Briefing, the minimum wage in Vietnam equals to $118 (Das, 2019), while China`s minimum labor cost is $180 (Global Economy, 2019). The FTA of EAEU with Vietnam had an important role in Kazakhstan. Currently, Kazakhstan directed its import towards Vietnam by increasing the supply of iron, lead, and grain for 39% (Kuzmina, 2019). According to the OEC web-site (2020), Vietnam is 21st largest exporter in the world, which specializes in textile, leather, phones, etc. This case is applicable for Stolper-Samuelson theory since both states are exporting abundant resources. Although, the official document of FTA on the Commissions website states that trade with Vietnam both goods and services, investments (Q&A, 2020), for the most part, this agreement was signed because of the cheap production of Vietnam and implement low tariffs on exporting goods into the territory of the EAEU (Kuzmina, 2019). Since Vietnam occupies 21st place in industrial production and export in the world, it was necessary to for EAEU to simplify measures for the export products into the territory of the EAEU member states.
6. Conclusion
To conclude, this essay was focused on providing a picture of the free trade areas that the EAEU signs with third countries. Paper has been analyzed through traditional theories on international trade Stolper-Samuelson, and Ricardo-Viner. This essay investigated the political preferences of EAEU member states and how trade preferences work in the global arena. According to the resources three FTA`s signed with Serbia, Iran, and Vietnam were applied to analyze this research. I concluded that the agreement with Serbia was signed to liberalize Post Soviet, especially Russia, who was sanctioned by the EU and the US and to establish a connection with the EU, in which Serbia acts as a neutral actor, as well as through the prism of Ricardo-Viner theory of industry-specific trade. The agreement with Iran, contains mainly political motives, as agreements with an ally towards US opposition. The last country I choose for my analysis was Vietnam to apply the Stolper-Samuelson theory since Vietnam exports the abundant resources as cheap labor and production. Moreover, Vietnam plays a special role in Kazakhstan as an exporter of textiles and leather. I suppose that further FTAs of the EAEU with Egypt and Israel also have a special role for political actors.
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