EAEU and Asian Countries: Plans, Prospects and Challenges

16.12.2016

The Eurasian Economic Union (EAEU) attaches special importance to promoting trade and economic relations with the Asian countries. In doing so, it tends to focus on entering into agreements with specific countries, while working with other integration organizations poses a number of challenges. First, countries making up a block do not always share the same interests. For example, if the EAEU were to enter into a trade deal with ASEAN, the parties would have had to find the lowest common denominator, but when negotiating with a specific country, its interests can be taken into account in all their diversity and complexity. Second, it is always easier to agree on an agreement with a single state, rather than a block.

There is also a third aspect to this issue. It is unclear how a single major agreement can provide for the operation of a project like, for example, the Greater Eurasia project, which the Russian president has mentioned on a number of occasions. In my opinion, what we are dealing with in this case is a classical spaghetti bowl effect, which refers to a phenomenon in international trade whereby states create a network of agreements on specific issues. For instance, in order to address a specific issue like the Irtysh River flow, Kazakhstan, China and Russia enter into an agreement to this effect, and other agreements are signed with other states on other matters. In order to deal with trade and investment, a Free Trade Agreement (FTA) is signed.

The EAEU has stepped up its efforts to enter into FTA with East and Southeast Asian countries. The FTA agreement with Vietnam in 2015 was the first shot. An initiative to create a free trade area with Singapore is underway. However, things get more complicated when it comes to the major regional economies, i.e. China, Japan and South Korea.

The EAEU and China are negotiating a non-preferential economic cooperation agreement that does not cover and does not envisage the creation of a free trade area. The Eurasian Union is not yet ready to open its market to Chinese manufacturers, preferring to focus on investment strategies. Four rounds of talks have already taken place, with the last one devoted to the technical regulations of customs procedures.

Apart from market access, Russia needs to be able to operate on financial markets. For instance, subsidiaries of Russian banks in China are unable to provide yuan-denominated loans. There is a need to lift these restrictions.

As for South Korea, what’s at stake is not just creating a free trade area and lowering tariffs on both sides, but also securing additional advantages, such as a favorable investment regime. South Korea is unlikely to agree to fully open its market under an FTA+ agreement with the EAEU and will probably have a list of products subject to lower tariffs. The reductions should be offered for a substantial period of 5 to 7 years. The Koreans could be interested in Russian agricultural products, which are becoming increasingly popular on international markets, and not just grain. South Korea could also be interested in timber and timber products, as well as metals and metal products.

There are no official agreements with Japan. It should be noted in this respect that in order for the EAEU to enter into any kind of agreement with Japan or South Korea, there needs to be an easing of tensions between Russia and the US. Escalating tensions will make it impossible to create a free trade area with Japan and probably South Korea.

In today’s world, free trade areas are not so much about goods, with trade accounting for less than half of the total volume, as they are about favorable investment regimes. The potential agreements between the EAEU and the East and Southeast Asian countries do not provide for a substantial increase in value-added exports. However, there is general interest in opening up the markets. In addition, agreements of this kind pave the way for further talks, for example, to develop cross-border infrastructure. Preferential agreements with the EAEU could be beneficial for countries within the union, as well as their partners. Negotiations are currently in full swing.

Yevgeny Vinokurov is Director of the Center for Integration Studies, Eurasian Development Bank, professor at the Russian Academy of Sciences.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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