Pros and cons of Kyrgyzstan’s entering Customs Union

A seminar entitled ‘Does Kyrgyzstan need the Customs Union?’ organized by the Central Asian Free Market Institute (CAFMI) was recently held in Bishkek.

The Customs Union of Russia, Belarus and Kazakhstan, established within the Eurasian Economic Community (EurAsEC) limits, came into force on January 1, 2010. Tariffs on more than 11,000 products have already been adjusted. Beginning in July 2011, the three countries will have a common customs border.

Tajikistan and Kyrgyzstan, which are EurAsEC members, have also showed their interest in joining the Customs Union. However, many in Kyrgyzstan are questioning what the country will gain from membership in this regional economic bloc.

According to Mirsuljan Namazaliev, CAFMI director, Kyrgyz authorities are considering the opportunity to join the Customs Union. President Kurmanbek Bakiyev said in November 2009 that Kyrgyzstan is already a member of the World Trade Organization (WTO), but that does not prevent Kyrgyzstan from entering the Customs Union.

“Kyrgyz officials point to a number of benefits of Kyrgyzstan’s membership in the Customs Union, including access to new markets, interest for investors, the reduction of prices for Russian and Kazakh imports, the removal of trade barriers, adjustment of technical, sanitary and veterinary regulations, as well as a possible decrease in prices for imported energy,” said Namazaliev. “However, Kyrgyzstan will lose its main advantage, which is its low import tariffs, which make the re-exports attractive.”

The practice of transporting cargo to other Central Asian countries through Kyrgyzstan, and taking advantage of the lower cost of customs clearance, may end.

“Dordoi [a huge wholesale market in Bishkek] is developing successfully because of international trade, providing many Kyrgyz residents with jobs. According to experts of the Customs Union, Russia will reduce its tariff rates by one percent, and Kazakhstan will increase them by four percent. If Kyrgyzstan loses its advantage of being able to import goods at lower price, who will be interested in this small poor country, which has a huge gap between the living standards and prices for many goods?” Namazaliev added.

He predicts serious setbacks in the standard of living for many Kyrgyz citizens: “In particular, most citizens will be not able to afford medicines. Today, medicines in Kyrgyzstan are duty free, while the customs duty for drugs in Russia is ten percent of their value.”

Anarkhan Rakhmanova, head of the Trade Policy of the Kyrgyz Economic Regulation Ministry, said, “Membership in the WTO for over ten years has already proven to be an advantage, as the rules of this organization manage 97 percent of the world trade. The Customs Union means a common customs territory and a common customs tariff (CCT). If a CCT [with Russia, Kazakhstan, and Belarus] is introduced in Kyrgyzstan, the price for some products will definitely go up. Moreover, the formation of a CCT in the Customs Union is possible only after the entry of all members of the Customs Union in WTO, as that will help them establish commitments which will serve as a basis for the CCT.”

Because Kyrgyzstan is a WTO member, it has no authority to apply higher tariff rates than stipulated by the WTO, and Kyrgyz tariffs are typically lower than those stipulated by the WTO. Customs rates of the countries included in the Customs Union are currently higher than those in Kyrgyzstan.

Malik Kadyrshayev, president of the Youth Diplomats Club, explained: “Trade between Kyrgyzstan and the Customs Union member countries is as follows: Russia – 31.6 percent, Kazakhstan – 9.8 percent, and Belarus – 0.8 percent. In general, these three countries take 42.5 percent in Kyrgyzstan’s trade turnover (32.1 percent in exports, and 47.1 percent in imports). At the same time, WTO member countries cover 43.2 percent in Kyrgyzstan’s total foreign trade turnover, including 52.3 percent in exports and 37.6 percent in imports.”

Given who Kyrgyzstan’s main trading partners are, Kadyrshayev asks, ”Would it not be better to continue to trade with the WTO member countries? If Kyrgyzstan enters the Customs Union, the country will lose its advantage in imports. The rise in prices for imported goods will negatively affect consumers and producers.”

Altynai Adabaeva, a participant of the seminar, said she feared that Kyrgyzstan’s manufacturing industry couldn’t withstand competition with Russian, Kazakh and Chinese goods. Kyrgyzstan will be in demand only as a source of raw materials, and only the agricultural industry would remain competitive. However, it is likely that Kyrgyz fruits and vegetables will be exported for processing in Kazakhstan, and then the processed products will be imported back.

Kamila Murzayeva, CAFMI analyst, said, “We are talking about joining a partnership with our closest neighbors, but we do not want to recognize the fact that as a member of WTO and as the country which took the 80th place in the economic freedom rating, we are entering into a partnership with the most protectionist countries.” According to the Global Trade Alert, Russia is a leader in the introduction of trade barriers in 2009.

“Currently, Russia exports more than 300 items on which export duties are levied. From January 1, 2010, with the introduction of a unified customs tariff, import duties in Russia changed slightly. Almost 80 percent of items will be rated according to Russia's tariffs. The CCT will keep the existing Russia’s tariffs for the imports of aircraft and vehicles, aimed at supporting domestic manufacturers. This means that Kyrgyzstan’s chances for exports will be minimal. Imported goods will be more expensive. In particular, prices for used cars that make up the basic automobile fleet in Kyrgyzstan may rise by several times,” said Namazaliev. “China (70.5 percent), Russia (13.9 percent), and Kazakhstan (3.4 percent) will remain Kyrgyzstan’s main sources of imports. The selective elimination of customs barriers for certain countries may lead to overflow of the local market with imported goods and may undermine the position of domestic producers, creating unfair competition.”

Malik Kadyrshaev noted that, despite the expected 15 percent GDP growth in the countries included in the Customs Union, these countries fear that their markets will fill up with cheap Chinese goods going through Kyrgyzstan.

As a result of the discussion, CAFMI analysts suggested officials to thoroughly think over all the pros and cons of Kyrgyzstan’s entering the Customs Union.

This article is published in Times of Central Asia (TCA) by Viktor Winner.