Free Trade from Lisbon to Vladivostok: the Winners and Losers of a Eurasian Trade Agreement?

Tasks

Trade relations between the EU and Russia are currently severely impacted by Western sanctions against Russia and mutual embargo measures. This, however, has not led to a visible change in the geostrategic orientation of Russia. An adjustment of interests might perhaps the prospect of closer economic cooperation, rather than meting out more punishment. Both the EU and the successor states of the Soviet Union should take a strong interest in a free trade area “from Lisbon to Vladivostok” because the structures of their comparative advantages are highly complementary. For Russia, a deep agree-ment between the EU and the Eurasian Economic Community could lead to an increase in real per capita income of 3%; for Germany this would lead to an increase of 0.2%. This translates into an income increase of 235 Euros per capita and year for Russia and 91 Euros for Germany. Hence, Russia and the other countries of the former Soviet Un-ion could be interesting partners for a deepened economic cooperation with the EU. The EU should have a strong interest in stable economic development in its immediate neighbourhood. In addition, the complementary specialisation structure of these coun-tries promises substantial economic benefits for the EU too.

Methods

To quantify the agreement's potential economic consequences, we used a multi-country, multi-industry Ricardian trade model with national and international input-output linkages. Based on the assumption that the FTA would eliminate all tariffs between the EU and the Eurasian Customs Union and reduce non-tariff barriers, we simulated trade, the value added and the welfare effects of the trade agreement.

Data and other sources

GTAP 9, World Development Indicators, Heritage Foundation, WTO, Polity IV, World Economic Outlook, IMF DoTS, Eurostat, UN COMTRADE, OECD TISP, OECD TiVA, WITS-TRAINS.

Results

The potential for additional trade in goods and services between member states of the EAEU and the EU is substantial. A deep agreement could increase Russia's exports to the EU by 32% compared to the status quo in 2011; Armenian exports could increase by over 80%; while exports by Belarus and Kyrgyzstan could double. EU exports to EAEU countries could increase by over 60% in a deep agreement compared to the 2011 status quo. The potential is highest in Slovakia, Finland, and Poland. Nevertheless, German exports could also rise by as much as 59%. If a deep FTA including not only EAEU members, but all successor states of the USSR were to be concluded, European exports could even rise by 74% compared to the status quo of 2011.

In Russia, an agreement would mainly benefit natural resource sectors; and most notably the oil industry, but also would also boost the metal products industry. The fruit and vegetables sectors, by contrast, as well as automotive sector, would be on the losing end of any deal. An agreement with the EAEU would make it easier for Europe to export agricultural products, foodstuffs and cars to the countries of the former Soviet Union. 

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