Transcript Слайд 1 - Homepage of Gerald Pech

Master Class in Economics
by Dr. Gerald Pech
Associate Professor
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The Customs Union Game
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EurAsian Customs Union
• Launched in July 2010
• between Belarussia, Kazakhstan and Russia
• with Kyrgyzstan expected to be the next
member to join
• maybe now overtaken by Armenia
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Customs Union versus Free Trade
Agreements
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Free Trade Agreements
• Parties to free trade agreement abolish tariffs
(and non tariff barriers) between members
• Each country has its own tariff regime against
the rest of the world
• Examples of free trade blocs: NAFTA, CISFTA
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Problems with Free Trade Agreements
• Third country imports
– Trade deflection: Imports enter through country
with lowest outside tariff, say Kyrgyzstan
– But other countries in the free trade bloc often
wish to “protect” themselves against third country
imports
– Border controls have to be maintained to impose
the “origin principle”.
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Free Trade Agreements
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Customs Union
• A customs union abolishes all tariffs (and non
tariff barriers) among the member countries
• Common tariff is applied to third countries
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Customs Union
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Customs Union
• Trade creation effect
– CU partners trade more intensively because of
reduction of tariff/non tariff cost of trade
• Trade diversion effect:
– as barriers to imports from third countries
increase, producers within the customs union are
at an advantage
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Winners and Losers in CU
• There are winners …
– Within a Customs Union, most industrialized
country typically wins: Belarus
• and losers
– Kazakhstan’s imports from CU countries increased
more than exports
– and consumers are worse off with higher external
tariff
– Kyrgyzstan would have been a loser too but, as we
shall see, it also loses by being non-member
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Customs Union and Free Trade Blocs
• Customs unions and free trade blocs can in
principle co-exist
– remember that there are border controls which
prevent that the free trader becomes the point of
entry for imports into the customs union
• Examples: CISFTA/EurAsian CU, EFTA/EU
– In the long term some EFTA members ended up
joining the Union (Finland) while others stayed
separate (Norway)
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More Complicated Constructions
• Could one country engage in free trade with
two customs unions?
EU
Ukraine
EurAsian CU
– why not, as long as origin principle is enforced
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More Complicated Constructions
• Could one country (Ukraine) do free trade with
one customs union (EU) and be member of
another customs union (EurAsian CU)?
EU
Ukraine
EurAsian CU
– difficult unless EurAsian Customs Union would like to
engage in free trade with Europe
– “cannot” (Barroso)
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More Complicated Constructions
• Solution: Second class membership?
– Ukraine as free trader with Europe and EurAsian
CU member with separate border controls?
– This might be the final outcome for Kyrgyzstan
with border controls remaining between
Kazakhstan and Kyrgyzstan
– and maybe for Ireland if Britain leaves the EU?
– similarly for independent Scotland if it joins?
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The Dynamics of Economic
Integration
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Which is the Logic behind the Timing
of Customs Union Formation
• Why was Eurasian CU not founded in one
step?
– Perceived benefits of political decision makers
change over time
– Institutions and infrastructure take time to build
– “Momentum” created by foundation of core
customs union
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A Historical Precedent
• Neither was the European Union created in
one step
• nor the other particularly successful customs
union – the Zollverein
• which ultimately resulted in German
nationhood
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The Zollverein
• The German Customs Union (Zollverein) was
founded in 1833 between independent
German states
• Starting with Prussian drive for economic
integration of their own territory in 1819
• Smaller German states experienced negative
impact on their trade with the emerging union
• and one after the other joined
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The Zollverein
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Footnote: How come Prussia was the
driving force behind the Zollverein?
• Prussia did not benefit that much from trading
with the smaller states
• But it gained better a bargaining position
when negotiating over trade with big players
such as England and France
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What creates “momentum”?
• We have seen that because of trade diversion
effects at the first stage of creating a customs
union
• smaller countries will see their trade balance
with the union deteriorate
• and be more willing to join
• the same seems to happen to Kyrgyzstan
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Trade diversion in Kyrgyzstan
Annual Percentage Change in Exports to CIS
Countries
2010
2011
2012
30
20
10
0
-10
-20
-30
-40
Kyrgyzstan
Compared to CIS
Other CIS
source: cisstat.com
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The Logic behind the Timing of
Customs Union Formation
• Assume a leading country such as Russia can
choose whether to offer Kyrgyzstan immediate
membership or second round membership
• It is aware that Kyrgyzstan needs to be
compensated to join such that it is not worse
off than before
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The Logic behind the Timing of
Customs Union Formation
• Now if Kyrgyzstan is a loser in the customs
union it would need compensation when
joining in the first round
• But it also loses by staying out!
• Once it has realized its losses by staying out, it
will be more willing to join
• for less
– i.e. willing to accept less favourable terms of entry
than it would have requested in the first round
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The Logic behind the Timing of
Customs Union Formation
• In the following diagram we measure as wKyr
and wRus the welfare for Kyrgyzstan and Russia
• We further assume that different membership
arrangements are differently advantageous for
Kyrgyzstan and Russia
– moreover, there is a trade-off between advantage
for Russia and Kyrgyzstan
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A: Immediate Entry Solution:
Full Access to CU market,
compensation for losses
wKyr
B: Full access to CU market,
less some compensation
C: “Second class membership”
with limited access to CU market,
and some compensation
0
wKyr
A
B
status quo ante
C
wˆ Kyr
core customs union
0
wRus
wˆ Rus
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wRus
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Conclusion and Outlook
• The “momentum” argument helps understand
the process of customs union formation
• There are other dynamic aspects of interest,
such as:
– Does customs union lead to ever deeper
integration ?
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Conclusion and Outlook
• The EU has experienced ever deeper integration
• Recall that extension creates winners and losers
• So if there are losers, they need to be
compensated
• How can this be done?
– winners agree to pay some money (not credible in
long run)
– bargaining over joint institutions (EurAsian EC?)
– common budget
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Some further reading
• Alimbekov/Madumarov/Pech (2013), Sequencing
in Customs Union Formation, KIMEP, at
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• Jandosov/Sabyrov (2011), Tariff Protection Level
in Kazakhstan, RAKURS discussion paper 5.3./5.4.
• Macho-Stadler/Xue (2006), Winners and Losers
from the Gradual Formation of Trading Blocs,
working paper, Barcelona.
• Mattli (1999), The Logic of Regional Integration,
Cambridge UP and google-books.
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New in the Master of Arts in
Economics Program
• From Fall 2014
• Three full professors in economics
– PhD’s from US and Australia
• One health economist!
• Major in Financial Economics!
• Expected: Scholarships
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Supporting Materials
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EurAsian Customs Union
• 1995: First agreement signed between Belarus,
Russia, Kazakhstan, Kyrgyzstan, Tajikistan and
Uzbekistan.
– Uzbekistan not interested at the moment
– Tajikistan only has land border with Kyrgyzstan
• 2007: Dushanbe agreement on customs union
signed between BY, KZ and RU
• 2010: Official launch of CU with external tariff at
(high) Russian rates
– for some goods July 2010, for others July 2011
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Other Organizations
• CISFTA: Free trade agreement between
Armenia, Belarus, Kazakhstan, Kyrgyzstan,
Moldova, Russia, Tajikistan, and Ukraine,
signed in October 2011
• EurAsian Economic Union: Creation of single
economic space between Belarus, Kazakhstan
and Russia launched in 2012
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Winners and Losers
• Economic welfare of a country is sum of
– Consumer surplus
– Tariff revenue
– Profits of home producers
– We assume that foreign firms have market power!
• As a proxy for impact of CU we use
– change in current account balance
– change consumer surplus of non numeraire good
• Political benefits and costs!
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Tariff Protection
Kazakhstan
simple
average 2009
6.78%
weighted
average 2009
5.52%
Belarus
8.00%
2.3%
Russia
8.09%
5.9%
EU
10.6%
7.37%
from: Jandasov/Sabyrova 2009
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Trade diversion and creation in
different CIS countries
Annual Changes in Exports to CIS Countries
2011
Ukraine
Tajikistan
Russia
Moldova
Kyrgyzstan
Kazakhstan
Belarus
Armenia
2012*
Azerbaijan
60
50
40
30
20
10
0
-10
-20
source: CISSTAT
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Standard and non standard channels
Source: Vashakmadze, E., Kaminski, B., Mironova, Y., (2011).
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Standard and non standard channels
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