After the analysis, it is proved that there is no confirmation for the possible benefits of joining the Customs Union for Kyrgyzstan. This decision has a big influence on the life of each citizen in the country.
In 2011, one of the most important decisions of the government was the decision to join the Customs Union (CU). On October 19, 2011 countries of CU approved the request of Kyrgyzstan to join the CU. Thus, a special working group was created to address the technical issues of the membership.
It should be noted that this decision that has a big influence on the life of each citizen in Kyrgyzstan was made by government only, without broad public and parliamentary debate.
According to the Kyrgyz government, this decision will increase industrial capacity, surge agricultural productivity, expand the markets, create more jobs and increase investment. This article in turn will show that these arguments are not backed up by confirmed reasons and are questionable.
The Customs Union is a protectionist organization. 92% of the Common Customs Tariffs of the CU are tariffs of Russia aimed to protect the Russian production from imports, and stimulate the transition of the CU consumers to Russia’s production. It is clear that the use of protectionist measures characterizes Russian products as less competitive in relation to foreign counterparts.
Protectionism in any form is detrimental to human welfare, since it limits the free trade and leads to the rise in prices of goods and services. Entering the CU will have a significant impact on the economy and living standards.
Hence, there are a number of negative consequences awaiting Kyrgyzstan as a result of joining the CU:
- The average customs tariff in the Kyrgyz Republic (KR) is 5.1%, in the CU – 10.6%. Thus, the average tariff of the KR is twice less than the common customs tariff of the CU. Therefore, the increase in customs tariff will lead to higher prices for all imported goods. According to the project of the Fund “Future project”, the prices for imported goods will rise from 10% to 100%. Customs clearance of cars will increase from 2 to 4 times depending on the year and engine volume. Rising commodity prices will lead to inflationary spiral up to hyperinflation. The result will be a noticeable decline in living standards and increase in poverty. The large quantity of imported foods, including fruits and vegetables from Uzbekistan, Turkey, China and other countries will increase significantly in price, undermining the security of food in the country.
- As the prices rise, the raw materials will be imported in smaller quantities, which can lead to the decrease in the competitive power of Kyrgyz products, particularly the garment industry.
- Currently, most Chinese goods are imported under the simplified scheme of customs clearance. Customs clearance of goods at a given time is worth 0.28 USD per 1 kg. After joining the CU it will increase to an average of 4 euros. This will lead to the collapse of Chinese re-exports, which provides jobs to about 500 thousand people or about 20% of the working population. In large markets as Dordoy and Karasuu over 85% of sales are of Chinese origin. According to the World Bank’s data, total turnover of the two major markets, Dordoy and Karasuu in 2008 amounted to 3.5 billion USD or 68% of GDP. In the case of rejecting the CU membership, re-exports will continue to Uzbekistan and Tajikistan mainly through the Karasuu market. In the southern regions the trade is a reliable source of income. Therefore, if Kyrgyzstan joins the CU, all of those people will become unemployed and later this will lead to the rise of social tensions.
- In the CU distribution of revenues from custom tariffs is divided according to following proportions: Kazakhstan 7.0%, Belarus 5.3% and Russia 87.7%. The size ratio of Kyrgyzstan in the total revenue from customs tariffs remains unanswered. But certainly, the proportion of Kyrgyzstan will be less than the proportion of Belarus.
- The budget of the countries in the Customs Union is mainly the result of tax and customs revenues from exports. However, the budget of Kyrgyzstan is manly formed of revenues from imports. In other words, the economies of the CU countries are based on export while the economy of Kyrgyzstan, is mainly based on imports.
- Supranational bodies were crafted for the Customs Union. The first one is the Customs Union Commission. The Commission decisions are made by a majority vote and votes are distributed as follows: Russia has 57%; Kazakhstan and Belarus each have 21.5%. As a result, Kyrgyzstan loses its independence in determining foreign trade policy.
- Although bilateral trade between Kyrgyzstan and the CU countries (primarily with Russia) is increasing, but compared to China, is steadily declining. In recent years, the economic interdependence of post-Soviet states has decreased. It should be noted that according to the Chinese statistics China’s exports to our country is about 10 billion USD. These data indicates that the major trading partner of Kyrgyzstan is China. The difference of statistics between Chinese and Kyrgyz parties caused by the fact that Kyrgyz Customs measures and clear Chinese imports by weight, which provides low-cost importation and the competitiveness of further re-export.
- Value-added tax rate, as agreed in the CU is 17% in contrast to that of 12% in Kyrgyzstan. Thus, the increase in import prices will not be due to the increase in tariff rates only, but also to rise in VAT from 12% to 17%. In addition, prices will increase with the cancellation of the simplified customs clearance (0.28 $/kg.). The customs clearance costs of goods imported at a specified rate will skyrocket. However, the prices for Russian and Kazakh goods will not fall. This will result in inflation, devaluation of money, thus, reducing the range of available products. Consumers will be forced to buy the products of the CU, which is inferior in quality compared to foreign.
- The serious barrier for the Kyrgyzstan in entering the CU is a membership in the World Trade Organization (WTO). Within this organization Kyrgyzstan pledged not to raise existing tariffs against third countries, which in this case is not applicable to the members of the Customs Union. In the case of an increase of customs tariffs unilaterally to the CU level, there will be an issue of confiscation to the WTO countries for bringing losses. That confiscation can reach hundreds of millions of dollars.
Possible benefits of joining the CU:
- Expansion of markets for domestic products will stimulate the growth of domestic production. This potential benefit is questionable for the reason that KR has an agreement with CU countries in the framework of EurAsEC free trade zone, which provides mutual zero rates for goods. Consequently, noticeable changes in the manufacturing sector will not be seen and the majority of domestic production will remain uncompetitive as well.
- Duty-free import of petroleum products from Russia. The threat of imposition to export tariffs on petroleum products by Russia in the case of non-entry into the CU is exaggerated. Nevertheless, in the case of such use of threat the KR government can diplomatically remind the Russian side that the EurAsEC and CIS agreements provide duty-free trade. It should be noted that Kyrgyzstan is a friendly country and a strategic partner of Russia. In addition, the imposition of tariffs will cause negative reaction of the KR population in relation to the Russian government, considering the low purchasing power of the population. Rising fuel prices may lead to a diversification of fuel providers, which is also disadvantageous to the Russian side. As a supplementary measure to reduce the cost of fuel the government may exempt the petroleum products suppliers from excise and other taxes that lead to higher prices of one liter of gasoline by an average of 4 soms.
- Higher investment attraction to start manufactures in Kyrgyzstan will cause in the rise of foreign direct investment. There are no solid grounds for believing that joining the CU will lead to rise in foreign direct investment from the CU countries. The rise in foreign direct investment, including from the CU countries, can be expected after enabling favorable investment climate and the private property protection. These issues are not connected to the entry into the CU.
- More favorable conditions for the movement and residence of migrant workers in the CU territory. The situation of migrant workers firstly should be improved by measures of consistent government policies to protect their legitimate rights abroad.
Conclusions and recommendations:
- Joining the CU will lead to a substantial rise in inflation; the loss of two major trade markets; reduce in the competitiveness of the garment and other industries; loss of independence in foreign trade policy, etc.
- December 16, 2011 Russia was officially accepted to the WTO. Kazakhstan and Belarus are seeking to join the WTO and will probably be accepted next year. Therefore, the decision to join the CU becomes even more dubious and unfounded. The government in turn must restore and even increase Kyrgyzstan’s exports and re-exports with consistent policies.
- Kyrgyzstan does not use all the opportunities and benefits of the WTO and EurAsEC memberships.
- It is time to consider the possibility to lower customs duties to zero and eliminate non-tariff and administrative barriers to keep the competitiveness of re-exports. These measures will lead to increase in trade volumes and lower prices for imported goods for the local consumers. The losses in budget caused by zero customs duties will be compensated by increasing tax revenues due to growth in trade volumes. An important result of the above mentioned measures will be virtually the elimination of corruption in customs such as zero tariffs and absence of administrative barriers that do not require bribes to proceed.
- Joining the CU would mean that Kyrgyzstan in the long term cannot become a major regional trade center as the UAE, Singapore or Hong Kong. Entry into the CU will limit the economic and innovative development of Kyrgyzstan.
After the analysis, it is proved that there is no confirmation for the possible benefits of joining the CU for Kyrgyzstanю
CAFMI, December 26, 2011
Bishkek, Kyrgyz Republic