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  • Measuring Trade Integration between EEU Members during 1995-2016

    12.04.2017 | Comments | Economy | 331 Kanat Makhanov

    The creation of the Customs Union between Russia, Belarus and Kazakhstan in 2011 and its subsequent transformation to the Eurasian Economic Union (EEU) with accession of Kyrgyzstan and Armenia in 2015 was one of the major integrational events in Eurasia. Unlike other economic integrations, the current members of the EEU once were parts of a single state. Between 1991 and 2011, all the current EEU members had different and varying degrees of trade cooperation and preferential trade regimes. On the other hand, at the beginning of 2000s, many of the current EEU member-states were characterized by trade liberalization with bursting exports and increasing trade with the other countries. During the period of 2003-2008, Kazakhstan’s trade increased several times through trade liberalization, inflow of investments, improving property rights and transportation infrastructure. The rapid growth of trade, however, was based heavily on oil industry (World Bank, 2011). In the early 1990s, the trade relations between the current EEU members weakened due to the high level of trade liberalization with the rest of the world and the deep economic recession (Asian Development Bank, 2006). On the other hand, trade relations among CIS and current EEU member-states improved due to the economic recovery process, special trade regimes and reduction in costs of trade. However, these are the general patterns for the whole CIS. Particular bilateral trade cases differ from country to country reflecting the geographic, economic, political and other diversities between the countries. In this light, it is highly relevant to shed light on trade integration between the current EEU member-states since the creation of the organization. 

    In order to measure the trade integration, we use the following technique: , used in Cheung et al. (2008) where  denotes exports of country  to country  and  stands for exports of country  to country . Thus, the larger the shares of trade in the joint GDP of the two countries, the higher the index.

    The graphical representation of the index throughout the period of 1995-2016 is shown in Figure 1 below:

    Along with the Trade Integration Index we also use the Degree of Connection Index from Arribas et al. (2007) which is measured as follows: , where  is the trade flow between country  and . The given index shows the evolution of trade between two particular countries relative to their total trade. The results of these measurements are shown in Figure 2 below:

    When comparing Figure 1 and Figure 2, no major discrepancies can be observed between the two indices used. There is also no generalized trend for all cases of bilateral trade. In many cases, there were great fluctuations in bilateral trade integration. Considering Kazakhstan, the trade integration with Russia represents a growing trade integration until 2000 and gradual decrease afterwards. Since 2010, however, the bilateral trade integration between Kazakhstan and Russia stays approximately at the same level. If to look at Degree of Connection Index, however, we can see that the degree of trade connection between Russia and Kazakhstan did not change very much during the whole period.

    The trade integration between Kazakhstan and Belarus was subject to greater fluctuations. Thus, the trade integration decreased between 1996 and 2001 and subsequently increased until 2007. The pattern of the degree of connection between Kazakhstan and Belarus is practically the same.

    The trade integration index between Kazakhstan and Kyrgyzstan shows two peaks in 1996 and 2004 and a gradually decreasing pattern afterwards. The degree of connection between Kazakhstan and Kyrgyzstan, however, is a bit different and suggests a slight increase in bilateral trade connection starting from 2008.

    The trade integration with Armenia represents a rather irregular trend with huge changes from year to year. Since 2009, however, the trade integration as well as the degree of trade connection between Kazakhstan and Armenia does not show significant changes.

    Thus, bilateral trade integration patterns between Kazakhstan and its other EEU partners are different. However, the downward sloping pattern predominates. It is worth mentioning that the greatest trade flow between two countries in the EEU is that of Kazakhstan and Russia.

    It is interesting to note that there is no significant increase in bilateral trade integration between the founding members of the union since 2011 with the exception of perhaps Kazakhstan and Belarus. The trade integration index between the two countries slightly increased in 2011. Considering the newly admitted member-states, there is only one case of a sudden increase in trade integration, which is of Russia and Armenia. In Figure 1, we can observe a skyrocketing trade integration index between Russia and Armenia in 2015 and 2016. However, in terms of degree of trade connection this is not so evident.

    Table 1 below represents bilateral trade integration indices between current EEU member states for 2016:

    Table 1: Trade Integration and Degree of Trade Connection Indices between current EEU member-states 2016

     

    Russia

    Kazakhstan

    Belarus

    Kyrgyzstan

    Armenia

    Russia

     

    0,934 (0,026)

    1,923 (0,051)

    0,094 (0,003)

    0,104 (0,003)

    Kazakhstan

    0,934 (0,026)

     

    0,207 (0,004)

    0,431 (0,010)

    0,002 (0,0001)

    Belarus

    1,923 (0,051)

    0,207 (0,004)

     

    0,097 (0,001)

    0,048 (0,001)

    Kyrgyzstan

    0,094 (0,003)

    0,431 (0,010)

    0,097 (0,001)

     

    0,007 (0,00004)

    Armenia

    0,104 (0,003)

    0,002 (0,0001)

    0,048 (0,001)

    0,007 (0,00004)

     

    Degree of Trade Connection Indices are shown in parenthesis

    Source: Prepared by author based on data from World Bank and Comtrade

     
    The value of indices correspond to the degree of trade integration. Thus, among the EEU member-states, Russia and Belarus represent the highest level of trade integration with . The second highest value of the index is between Russian and Kazakhstan with . We can see that the trade integration degrees between the rest of the members of the union are significantly lower.

    The trade integration of Kazakhstan with the rest of the EEU member-states was different in each case. The integration index for Kazakhstan was, however, more descending over the course of the sample period. The countries do not show an immediate increase in trade integration right after being admitted into the EEU except for Armenia. In general terms, until 2000 the current EEU members were integrating with each other in terms of trade. However, after 2000 the members of the union were on a path of trade disintegration. Even after 2015, there is no sign of bursting trade integration between the EEU member-states. This makes sense since the trade turnover between the members of the union is still falling. Recently Published Statistics for 2016 trade in the EEU reveals a drop of 6.6% in trade between the member-states (Eurasian Commission, 2017).

    The analysis shows that the degree of bilateral trade integration between the current members of the EEU did not increase significantly since the creation of the Customs Union in 2011. In fact, they were more integrated in terms of trade in late 1990s and early 2000s than they are now. The measurement technique used in this analysis shows that the trade integration between the current members of the EEU has been different since 1995. Particularly, the trade integration between the founding members of the Customs Union, which are Russia, Kazakhstan and Belarus, was much greater than that of Kyrgyzstan and Armenia, which became the EEU members in 2015. The effect of the trade slowdown that persists since late 2014 on the bilateral trade integration between the EEU member-states is weak and cannot be considered as significant. The trade slowdown with non-EEU states was higher than between the member-states. Therefore, the trade integration index shows a sight increment in 2016. If to consider the degree of trade connection between the current EEU member-states the dynamics of trade connections vary from country to country. There is obvious increase in trade intensity Belarus vs Kyrgyzstan, Belarus vs Armenia and Russia vs Kyrgyzstan. The trade connection between Russia and Kazakhstan which is the largest trade flow in the EEU did not change considerably throughout the sample period. The trade connection between the rest of the EEU partners vary significantly between 1995 and 2015.


    References

    Arribas, I.F., Pérez, F.G. and Tortosa-Ausina, E. (2007): “Measuring International Economic Integration: Theory and Evidence of Globalization”, Documentos de Trabajo No.24, University of Valencia.

    Asian Development Bank (2006): “Central Asia: Increasing Gains from Trade through Regional Cooperation in Trade Policy, Transport, and Customs Transit”, Publication Stock No. 030106.

    Cheung, Y.W., Yiu. M.S. and Chow, K.K. (2008): “Measuring economic integration: the case of Asian economies”, BIS Papers No 42, pp.136-158.

    Comtrade: UN Comtrade Database for Russia, Kazakhstan, Belarus, Kyrgyzstan and Armenia for 1995-2016.

    Eurasian Commission, (2017): “Trade data in the Eurasian Economic Union for 2016” 

    http://www.eurasiancommission.org/ru/act/integr_i_makroec/dep_stat/trade...

    World Bank, (2011): “Trade Expansion through Market Connection, The Central Asian Markets of Kazakhstan, Kyrgyz Republic, and Tajikistan”, World Bank Study 63435.

    World Bank Data: GDP in current prices for Russia, Kazakhstan, Belarus, Kyrgyzstan and Armenia for 1995-2016.


    Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.

    Tags: EEU, Integration, Economy, Trade

Author

  • Junior Research Fellow

    Kanat Makhanov

    Kanat Makhanov is a research fellow at the Eurasian Institute of the International H.A Yassawi Kazakh-Turkish University. He holds a BA in Business Economics from the KIMEP University from 2012.