Page 238 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes

In 1995 three countries, Belarus, Kazakstan and Russia established a customs union
which the Kyrgyz Republic agreed to join in 1996.

The tariff regimes vary considerably, but on the whole countries have established few tariffs exceeding
30%. Some countries have low and uniform tariffs, e.g., Armenia's maximum tariff is 10% and the
Kyrgyz Republic has a 10% uniform tariff); while in others the range goes up to 100% for a few items.
In Russia, the average is about 13-14% with a range from 0 to 30% for most commodities, with some
selected items considerably higher (see table 2 for details at a somewhat aggregated level).
On the export side, there has been significant dismantling of export controls in most countries; but
controls of exports through state trading continues in some key exportables (cotton, oil and natural
gas).
Trade with each other, is in principle free under the terms of the FTA. Imports are duty free, but it
appears that export and foreign exchange controls in practice limit trade among some of the countries.
Weaknesses in the payments systems continue to hamper trade, leading to continuing use of barter;
but the previous state to state barter agreements have been by and large eliminated. Many countries
have established a mixed VAT system: "origin" based for CIS trade and "destination" based with
regard to the rest of the world. This means that with respect to CIS countries, imports are not taxed
but domestic producers pay the VAT regardless of whether the good is exported or sold domestically.
For the rest of the world, imports pay the VAT but exports are zero rated.
The Customs Union members negotiated a common external tariff based on the Russian tariff. But in
the course of 1996, the three original members unilaterally introduced modifications to the external
tariffs they applied to some commodities (Rietzler and Usmanova, 1996); also, as of the time of this
writing, the Kyrgyz Republic had not taken any steps to introduce the common external tariff but
instead continued to apply a uniform 10% tariff to imports from the rest of the world. All four countries
are applying to the WTO on the basis of individual tariff schedules rather than as a custom union.
Thus, at present, strictly speaking, there is no common external tariff for the Customs Union. But the
agreements are still in place and the governments may pursue further steps towards their full
implementation.
21.2 The Effects of Customs Union

There are two kinds of effects of customs unions, static and dynamic. The static effects relate to the
impact of the establishment of the customs union on welfare. The analysis in this instance focuses on
a comparison of the welfare of a country or groups of countries before and after the establishment of
the customs union; thus the analysis is one of comparative statics.
The dynamic effects focus on the impact the customs union on the rate of output growth of a country
or countries in the medium term. Many analysts have noted (Winters 1996) that supporters of customs
unions and other regional preferential arrangements frequently find that the static welfare effects are
typically small and possibly negative. They then focus on the potential dynamic benefits, which
however, are difficult to define and even more difficult to measure.
In the case of the CIS countries, there is already a FTA among all members as well as a Customs
Union (CU) among some of them however modified by specific exceptions for variation from a common
external tariff. Hence the analysis of both dynamic and static effects has to compare the advantages
and disadvantages of joining this specific customs union not just any one, and assumes that in principle
the alternative to joining, is continuation of the FTA among the CIS; but the implications of a different
alternative, under which countries that do not join the CU are excluded from the FTA area, also
briefly examined.
Static Welfare Effects
The principal impact of joining the customs union would be to replace the external tariff of each of
the countries with the common external tariff of the customs union. In general, under these

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