CEPR Discussion Paper No.3768 - 'EU Enlargement and Beyond: A Simulation Study on EU and CIS Integration'
Authors: Pekka Sulamaa (The Research Institute of the Finnish Economy) and Mika Widgren (The Research Institute of the Finnish Economy and CEPR)
February 2003
EU enlargement will change European trade relations significantly. One of the key issues will be how an enlarged EU will trade with Russia. Full EU membership is not an option for Russia but to avoid marginalization the EU should adopt an open attitude towards the rest of the continent in its external commercial policy. The obvious starting point would be a free trade agreement with Russia. However, this would divert trade away from other Commonwealth of Independent States (CIS) countries. CIS currently unites: Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan and Ukraine. There is the danger that the approach that is too concentrated towards Russia will marginalize CIS countries. The authors of CEPR DP 3768 believe the EU should adopt a broader approach, which makes EU-CIS free trade an obvious candidate for future trade relations. But before this happens, CIS countries need to improve productivity.
Sulamaa and Widgren examine the economic effects of widening and deepening EU-integration from the Russian economy’s viewpoint and how deeper EU integration with Russia might contribute to these effects. The next stage of EU enlargement will widen the internal market to an area that will have almost twice as many consumers as the United States. This expansion will have a large impact on Russian trade as these countries make up around half of her total exports. A common fear related to EU enlargement is that it may marginalize the European economies left outside. Eastern enlargement is likely to affect Russian trade in at least three ways. First, lower trade barriers within the EU internal market increase intra-EU trade and lower the demand for Russian imports. Though this effect is likely to be rather small as trade is already relatively free between EU members and the ten accession countries. Second, Russian exporters will be hit by relative price changes that will make their exports more expensive in relation to EU goods leading to a negative terms-of-trade effect for Russian exporters. Third, within the EU lower barriers will create trade, raising welfare within the EU but may also increase demand for Russian goods. Eastern enlargement may also marginalize the Russian economy via direct foreign investments. Full membership of the EU will give accession countries a more favourable position as host countries for foreign direct investment (FDI) relative to Russia.
This Paper examines the economic effects of the opening of the former Soviet Union. The analysis carried out in the Paper is two-fold. First, the authors simulate the impact of the eastern enlargement of the EU, and second, they analyse how deeper integration between the EU and former Soviet Union contributes to this. The study finds that there is a trade-off between the two roads of European integration arrangements. Eastern enlargement seems, even in its very deep form, be beneficial for all EU regions without causing substantial welfare losses outside the Union. The only regions that seem to lose somewhat are NAFTA and Japan. EU-CIS integration, on the other hand, has a different impact. To be beneficial for CIS-countries, free trade between the EU and CIS countries requires improved productivity in the latter, which may be due to better institutions or increased FDI, but as things stand the agreement is not beneficial for large parts of the EU and the rest of the world.
|
Up