Customs Union in the CIS. Prepared for the World Bank Institute Course in Moscow, Russia “Trade Policy and WTO Accession for Development in Russia and the CIS” March 28-April 8, 2005. Constantine Michalopoulos and David G. Tarr The World Bank
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Prepared for the World Bank Institute Course in Moscow, Russia
“Trade Policy and WTO Accession for Development in Russia and the CIS”
March 28-April 8, 2005
Constantine Michalopoulos and David G. Tarr
The World Bank
*The views expressed are those of the authors and do not necessarily reflect those of the World Bank or its Executive Directors.
They developed new inefficient industries and sold high priced products to each other that they could not sell elsewhere. Eventually these industries collapsed as the governments refused to allocate foreign exchange for high price goods.
Joining the existing Customs Union of Russia, Belarus and Kazakstan for such a CIS member assuming no change in the external tariff of the Customs Union would be costly. If the Customs Union external tariff were to be modified and replaced with a low and uniform tariff, the costs of joining would be dramatically reduced. Joining the WTO with a low and uniform tariff is the first best policy choice for trade policy.
Potential members of the Customs Union are not likely to obtain improved access to the markets of the Customs Union. Since the CIS countries already have a Free Trade Agreement with the present members of the Customs Union, they already have tariff free access to these markets (i.e., there is no gain to the exporters of the CIS countries that are not members of the Customs Union on their sales in these markets).
Joining the WTO with low and uniform tariff bindings would also be the first best choice in trade policy. Joining the Customs Union with the present external tariff structure of the Customs Union has both advantages and disadvantages, but the disadvantages are likely to dominate. If the external tariff of the Customs Union is modified to become low and more uniform, the costs of joining the Customs Union will be dramatically reduced.
Joining the WTO with a low and uniform tariff is again the first best choice. These countries will experience short run gains from the Customs Union, but the Customs Union may retard their long run growth and impede the import of needed Western technologies.
Most CIS countries recognize their need to open up to international competition and to be competitive on world markets. International competition will induce a reorientation of production, but will allow them to import badly needed new technologies. The Customs Union in the CIS serves to preserve the old structure of production in the countries whose producers are protected, and thereby retards the necessary adjustment toward an open economy.
If the potential new members are able to influence the external tariff by lowering the overall level and modifying its structure so that it reflects their own interests as producers and potential exporters then they could improve the prospects of obtaining some benefits from joining the CU.
In practice, smaller countries, with smaller markets, have found it difficult to affect the overall protective structure of a customs union, and the overall tariff level and structure —while reflecting some compromises among the producing interests in various countries, tends to reflect primarily the interest of the largest and more industrially advanced members. This is why it is almost always the case that small countries are much better off in establishing low and uniform protection, outside a customs union framework.
Converting a Free Trade Area to a Customs Union with a High Common External Tariff