Table of Contents:
Sub-regional cross-border trade
Cross-border trade constraints
Sub-regional trade facilitation
Regulatory framework and political environment
Trade facilitation level Impact on sub-regional cooperation of Kyrgyzstan accession to the EAEU
The Fergana valley is divided between Kyrgyzstan, Tajikistan and Uzbekistan. Given its naturally rich soil, optimal for agriculture, its privileged location in Central Asia, and the historical and cultural interconnections, the valley could enjoy a high level of trade and economic development.
Yet, this potential has thus far remained unfulfilled. The average GDP per capita of the valley’s regions is well below the average of their respective countries. The Fergana valley accounts for a very important part of the border extension between Kyrgyzstan, Tajikistan and Uzbekistan. Therefore, a developed sub-regional trade environment could boost economic interaction and development in the Valley (for the purposes of this article, sub-regional will refer to the combination of Kyrgyzstan, Tajikistan and Uzbekistan).
Moreover, in a context of landlocked economies lacking modern infrastructure and a fully developed economic structure, and with the shortest way to sea complicated by unstable neighbors, becoming reliable trade and transit partners should be a priority for the three countries in order to develop the whole of their economies.
The creation of a more trade-conducive environment between Kyrgyzstan, Tajikistan and Uzbekistan would require that they all have incentives to trade. This article will present some reasons that justify enhancing sub-regional trade cooperation. Furthermore, the article will give an overview of the existing sub-regional trade facilitation framework, will explain the benefits of improving it and will recall the advantages of sub-regional cooperation for the removal of non-tariff barriers.
Sub-regional cross-border trade
Bilateral cross-border trade has been steadily increasing between the three countries in the last years. Since 2016, the trade growth rate increased: between Kyrgyzstan and Uzbekistan by 72%; between Tajikistan and Uzbekistan by almost 300%; and between Kyrgyzstan and Tajikistan by more than 100%. This growth is remarkable considering that trade between the countries was very limited or almost halted some years ago and shows progress towards improved trade environment.
Table 1. Cross-border trade 2015-2018. In $ Mln. Source: Intracen
Before discussing ways to promote sub-regional trade, it is necessary to assess if there is real potential that justifies it. Allayarov et al. found that Kyrgyzstan’s trade with Tajikistan and Uzbekistan is underdeveloped, standing at 20 to 30% of its real potential owing to significant barriers to trade. Yuldashev et al. arrived to the same conclusions regarding Uzbekistan. They concluded that Central Asian countries must form ties with each other in order to take advantage of the untapped trade potential and to increase their relevance on the global stage.
This potential has also been recognized recently by governments: Kyrgyzstan’s and Uzbekistan’s leaders pledged to boost bilateral trade to 500 million USD. Tajik and Uzbek leaders set a bilateral trade goal of 1 billion USD, whereas Tajik and Kyrgyz leaders have also promoted increasing bilateral trade by signing a program of trade and economic cooperation.
For Kyrgyzstan, Tajikistan and Uzbekistan, reaching this potential is vital given their geographical conditions and the lack of competitiveness in third markets such as the EU, Russia or China, with which they suffer from high trade unbalances. The creation of a bigger and stable sub-regional market could bring economic growth, employment and investments. This would allow regional companies to grow enough to become more competitive in third markets.
The trade complementarity index (TCI) has been defined by the World Bank as the extent to which the export profile of the reporter matches, or complements, the import profile of the partner, from 0 to 100. A high index may indicate that two countries would stand to gain from increased trade and vice versa. Kyrgyzstan, Tajikistan and Uzbekistan show a low level of trade complementarity, ranging from 15 to 28. This matches the average index for developing economies (around 20).
It would appear that there are little advantages to promoting sub-regional trade. However, comparative advantage analysis is static and can vary, for example if economies develop. Indeed, as seen below, TCI has increased between the years 2010-2013 and the years 2016-2018:
The improvement of the TCI between the two periods shows that there has been an alteration in their comparative advantages and in their economic structures, making them more specialized (although still at a limited level). As expressed by Montague Lord, “countries can alter their situations by adopting new technologies either internally through research and development or externally through foreign direct investment (FDI) or via the development of cross-border production facilities involving value chains. These channels introduce a dynamic element to the ability of countries to alter their comparative advantages and thereby improve their economic structures and income levels.” This is consistent with the idea that open cross-border trade promotes competitiveness and exploitation of comparative advantages, thus creating more specialization, complementarity and added-value in the long term. Moreover, given the natural conditions of the Fergana valley, and certain similarities in exports and comparative advantages, the possibility of cross-border production involving value chains in the valley should be explored.
More importantly, the three countries show improvement in their complementarity from the export side. Consequently, all three are fitting their exports to the others’ demand better than before. As a result, sub-regional bilateral trade potential could be achieved not only via import, which would be a deterrent for a country if bilateral trade increased only through import. Indeed, from 2016 to 2018, Kyrgyzstan increased its exports to Tajikistan and Uzbekistan by 140%; Uzbekistan to its two partners by 294%; and Tajikistan to its two partners by 400%. It must be taken into account that Kyrgyzstan and Uzbekistan have a higher starting point, so growth rates are lower than those of Tajikistan.
Cross-border trade constraints:
Despite remarkable improvements achieved by the countries, existing trade potential between Kyrgyzstan, Tajikistan and Uzbekistan is still far from being reached, due to different constraints. This has important consequences for economic growth and sustainability. As stated in Moody’s report “Sovereigns -- Central Asia: Low global trade integration, legacy economic models constrain growth in Central Asia”, “the constraints come in the form of physical and soft barriers to international trade. […] Given their (Central Asian) small domestic markets, they are unlikely to develop specialized industries and experience productivity gains related to economies of scale without increasing their integration into global trade.”
Though several barriers exist, for the purposes of this article only soft barriers to trade will be considered. These barriers have been identified as the costliest obstacle to trade and have been the reason for the development of the WTO Trade Facilitation Agreement. In order to assess whether there is room for trade increase through trade facilitation, the article will provide with an overview of the sub-regional trade facilitation framework.
Sub-regional trade facilitation:
As defined by the United Nations Economic Commission for Europe (UNECE), trade facilitation is “the simplification, standardization and harmonization of procedures and associated information flows required to move goods from seller to buyer and to make payment”. This definition focuses on specific non-tariff measures (NTM) such as documentary requirements or customs controls. These measures are very deterrent to international trade since they create a lot of uncertainty and considerable costs and delays. Although it is difficult to calculate the exact costs of these measures, according to a recent United Nations Conference on Trade and Development (UNCTAD) report non-tariff measures are equivalent to an ad-valorem tariff of 7% in low-income countries. In the agricultural sector, it can reach 20%. Trade facilitation does not cover all non-tariff measures but it could still eliminate a substantial part of trade costs. This section will focus on the existing sub-regional trade regulatory framework and will provide an overview of the current level of trade facilitation. It will also include an addendum on the potential effects on trade facilitation of the Kyrgyzstan’s accession to the EAEU.
Regulatory framework and political environment:
Kyrgyzstan, Tajikistan and Uzbekistan signed with their counterparts bilateral free trade agreements (FTAs) in the 90’s that are still in place. They have also signed several mutual recognition agreements (e.g. conformity assessment for products with equivalent requirements), transit agreements and protocols for customs information exchange. In practice, the regulatory framework is deemed confusing and would benefit from simplification. The FTAs have a narrow scope with almost no focus on trade facilitation. They lack enforcement mechanisms. Their implementation and that of the other agreements has been very limited, to non-existent. Relations between the countries have been for many years determined by political tensions, mainly due to water management, ethnic clashes and border disputes around Fergana valley. Border closures have been common and the levels of cooperation and trade have been kept to a minimum.
At the multilateral level, the three countries ratified the Commonwealth Independent States (CIS) FTA, which provides a more stable and clear framework and has a high degree of consistency with World Trade Organization (WTO) and the General Agreement on Tariffs and Trade (GATT) rules. It helped eliminate some trade barriers and build the grounds for more solid trade integration among CIS countries. However, its scope is also limited: it focuses mostly on issues such as customs duties, quantitative restrictions or safeguard measures; there are a high number of exemptions to the elimination of trade duties; and the number of trade facilitation measures is very limited. Other multilateral agreements such as the Economic Cooperation Organization Trade Agreement (ECOTA) had limited or no success. Besides that, Kyrgyzstan and Tajikistan are members of the WTO, whereas Uzbekistan resumed its accession procedure in 2017. Membership to the WTO provides a common framework for formal trade policies and dispute resolution, helping create a stable institutional environment for international trade that can reduce part of the regional trade-costs. They are also members of regional programs such as the Central Asia Regional Economic Cooperation Program (CAREC) or the Transport Corridor Europe-Caucasus-Asia (TRACECA).
A potential turning point has been the inauguration of President Mirziyoyev in Uzbekistan in 2016. Mr. Mirziyoyev has stressed in several occasions that improving relations with Uzbekistan's neighbours is his top foreign policy priority. He has also stated that he expects trade with Kyrgyzstan and Tajikistan to increase in order to improve sub-regional economic development. This has translated into strategic partnership agreements with Kyrgyzstan and Tajikistan and the initiation of the official negotiation process for accession to the WTO in July 2019. Also Kyrgyzstan and Tajikistan signed cooperation agreements in 2018 in the context of an improved sub-regional political atmosphere. Several border-crossing points have been reopened and the trade turnover has been boosted since 2016. All these events show progress towards facilitating sub-regional trade.
Trade facilitation level:
Political breakthroughs should be considered as an essential step towards stronger sub-regional trade integration, but there is still a long way to go. The three countries have made important achievements in facilitating trade during the years. Yet, assessments conducted in several surveys and reports, such as the UNECE country reports on trade facilitation, have revealed that several important non-tariff barriers remain. These barriers have a serious impact on costs and times, apart from harming legal certainty. Moreover, traders also face them in their own country when engaging in international trade activities (“domestic barriers”). In particular, traders encounter problems such as:
Lack of transparency;
Problems with accreditation and conformity processes due to inappropriate testing facilities;
Insufficient institutional, financial and technological capacities (including those of public and private sector and of market-support institutions);
Burdensome technical requirements (e.g. safety and phytosanitary measures);
Cumbersome customs and administrative procedures;
Unnecessary documentary requirements;
Lack of rule of law.
The reduction or removal of these barriers is essential to promote cross-border trade between Kyrgyzstan, Tajikistan and Uzbekistan but also to enhance trade with third countries. Furthermore, the existence of “domestic barriers” harms the competitiveness of companies in third markets such as Russia, China or the EU, contributing to existing trade imbalances. Kyrgyzstan, Uzbekistan and Tajikistan are among the 10 most expensive countries in the world for transporting goods according to the World Bank. As seen in the figure below, Montague Lord found that the main obstacles hampering regional trade in Central and South Asia have been poor trade facilitation measures and high trade costs, which rank the worst among all trade-related measures:
Figure 1. Overall Central and South Asian ranking on trade-related issues. Montague Lord (2015), "Regional Economic Integration in Central Asia and South Asia”.
Measures are implemented at the national level. However, the effect of removing these barriers would be multiplied by common implementation by all countries involved of trade facilitation measures. The study “Fostering intra-regional trade within SPECA (Special Programme for the Economies of Central Asia) through streamlining non-tariff measures and addressing procedural obstacles” argues that if the Asia-Pacific region implemented all WTO TFA measures plus other paperless trade measures, the reduction in trade costs would be striking: Uzbekistan would reduce close to 40% of its trade costs, Kyrgyzstan about 30% and Tajikistan about 25%. In the case of a full implementation of trade facilitation measures only in Central Asian countries, cost reduction would still be significant. Despite not being a member of the WTO yet, Uzbekistan is already implementing trade facilitation measures. Indeed, it is perfectly possible and recommended to implement the whole TFA even if not being a WTO member.
If common implementation is accompanied by cooperation to find synergies, beneficial effects can be further enhanced. Intracen states in its paper “Charting a roadmap to regional integration with the WTO Trade Facilitation Agreement” that “the benefits of cross-border reforms can be maximized when regional economic communities take regionally coordinated approaches to improve trade. These communities should collaborate more closely on trade facilitation to build a transparent, predictable and efficient trade environment at the community level”. Some examples of measures that could be discussed in the framework of sub-regional cooperation and implemented in a coordinated way are:
Alignment of customs’ working hours;
Secure data exchange;
Congestion at borders;
To achieve this, the creation of a sub-regional platform for trade facilitation seems advisable. That kind of platform does not exist yet between the three countries. Kyrgyzstan, Tajikistan and Uzbekistan are members of programs such as TRACECA or CAREC. However, they have never established a sub-regional trade facilitation map or any kind of platform to that end. In the abovementioned report Intracen suggests a well-detailed process for the creation of a regional trade facilitation roadmap. The Asia-Pacific Trade Facilitation Forum, in which representatives of the three countries take part, is a good example of stable regional platform for discussion and for sharing knowledge and best practices in the field of trade facilitation.
Impact on sub-regional cooperation of Kyrgyzstan accession to the EAEU:
Kyrgyzstan became a full member of the EAEU in 2015. This allowed the country to reach a single market of about 180 million people more easily. EAEU trade regulation is based on WTO rules and on international and EU regulations and standards. The EAEU is already working on or has already formalized FTAs with third parties such as China, Vietnam or Iran. Tajikistan and Uzbekistan are observers of the EAEU, which altogether represents the main trade partner for both of them.
However, the accession of Kyrgyzstan has also some disadvantages. The primacy of WTO-rules does not mean that countries cannot make use of technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) regulations as hidden non-tariff measures. EAEU regulation is based on international and European Union regulations and standards (such as the Hazard Analysis and Critical Control Points system (HACCP) or ISO 22000). This has a serious impact on quality requirements for companies, in a context of SME-based economies with poor quality management and lack of quality infrastructure accredited and recognized in third countries, such as certifying laboratories. In practice, a conformity assessment issued in Kyrgyzstan, Tajikistan or Uzbekistan is not valid in the rest of EAEU members, who only recognize those issued by EAEU-accredited and registered entities (Kyrgyzstan does not have any so far). These obstacles have a particularly damaging effect on export of agricultural products, where quality requirements tend to be tougher. For Tajikistan and Uzbekistan this is further complicated by the need to obtain certificates of origin, which require controls with which companies in those countries are seldom in a position to comply. As a result, it could become a potential deterrent for sub-regional cooperation.
However, Kyrgyzstan’s membership of the EAEU does not eliminate potential sub-regional cooperation with Tajikistan and Uzbekistan. Not all products are included within EAEU regulations, and are thus subject to national legislation and to the national standards and conformity process. That keeps open the possibility for wide cooperation between the three countries, in particular in terms of mutual recognition, transit and customs procedures. Indeed, considering the dependence the three countries have to Kazakhstan and Russia, and taking into account that technical, safety and quality requirements have become tougher, the creation of the EAEU suggests that an increase in sub-regional trade between Kyrgyzstan, Tajikistan and Uzbekistan would allow them maintain their exports while getting ready to compete in the EAEU market.
The Fergana valley is divided between Kyrgyzstan, Tajikistan and Uzbekistan and comprises a very important part of the border extensions between the three countries. The valley could enjoy good levels of economic development. However, this is not the case due to different causes including limited sub-regional trade (sub-regional refers to Kyrgyzstan, Tajikistan and Uzbekistan altogether).
Sub-regional trade has strongly increased in the last 3 years, but it is still far from its potential. Reaching it through a more integrated sub-regional market would bring economic development much needed to become more competitive in third markets and raise their relevance on the global stage.
Trade complementarity is still low, but has developed together with trade growth. Export complementarity has also increased for the three countries. It reveals some level of development and specialization of their economic structures, and shows that increasing sub-regional trade can make their economies more productive and competitive in the long-term.
Trade barriers impede countries reach their trade potential. Barriers come in the form of physical and soft barriers to international trade. Central Asian domestic markets are too small to develop specialized and productive economies without integrating into global trade. Given that, their geographical situation and their physical barriers, removing trade barriers is essential for economic development in Central Asia.
Non-tariff barriers have been found as a key obstacle to promote sub-regional trade. Domestic barriers are also constraining traders in their operations. Trade facilitation is essential to reduce trade costs and increase competitiveness. Cross-border coordinated implementation of trade facilitation measures produces important synergies in trade costs reduction. There are several issues that could be dealt with at a sub-regional level through a sub-regional trade facilitation platform that currently does not exist. The creation of such platform seems advisable. The Asia-Pacific Trade Facilitation Forum is an interesting example.
The creation of the EAEU requires adaptation to the new standards and regulations, which are hard to reach for Kyrgyz, Tajik and Uzbek traders. Enhanced sub-regional trade is necessary to maintain export levels and get ready to compete in the EAEU market.
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This material has been prepared as an introductory material for government agencies, the expert community and business associations within the framework of the project: Ready4Trade Central Asia
The 4-year EU-funded Project is a trade component of a larger EU-funded programme which aims to support Investment, Competitiveness and Trade in Central Asia, thus contributing to sustainable and inclusive economic development in the region. The Project will support the development of intra-regional and international trade in five Central Asian (CA) countries. This will be done by enhancing the transparency of cross-border requirements, removing regulatory and procedural barriers, strengthening business capability to comply with trade formalities and standards, as well as by improving cross-border e-commerce. The Project will be implemented by the International Trade Centre (ITC) in close collaboration with national partners. The Project will target selected sectors / value chains in each country based on the export potential and accounting for participation of women in the labour force in the sector. Each intervention will be customized to meet specific needs of the beneficiary countries. A 6-month inception phase will be carried out to calibrate the project approach and customise it to each country individual needs.