The transformation of international trade has significantly picked up pace as of late. Sanctions and protectionism (and its rather aggressive variant used by the United States) prompt states to create alternative institutions and integration alliances based on the principles of liberalism, equality and openness.
Acting together is the only way for states to withstand such a disturbance of the balance in the global trade system and satisfy their interests.
Integration initiatives emerged a long time ago and are now developing successfully: the global geopolitical space is permeated with a network of regional integration groups. The number of such groups is growing, and their trade ties are becoming deeper.
Compared to Europe, the Asia Pacific, Latin America and other regions, the post-Soviet space has far less experience of the type of integration known as “international economic integration.”
The situation is certainly changing. The founding of the Eurasian Economic Union (EAEU) and its work towards concluding free trade agreements have introduced adjustments to existing trade relations. However, since the EAEU was founded in 2015, only one full-fledged free trade agreement was signed with Vietnam.
The EAEU and MERCOSUR: Institutional Grounds for an Alliance
The agreements concluded with Vietnam, China and Iran suggest that the basis for a new stage in moving into Eastern markets has been formed.
The EAEU’s trade cooperation with MERCOSUR, the world’s third largest and third most influential trade bloc, could become a very profitable strategic alliance. The market potential of Latin American countries is tremendous, and it is unused today.
If mutually beneficial terms of cooperation are achieved, such an economic alliance could have every chance of becoming a mega-bloc and, most importantly, the embodiment of a new model that is based on best and more advanced practices.
The EAEU’s trade and economic dialogue with a Latin American partner could occupy a unique place in the structure of global economic cooperation as a whole. It would make it possible to overcome certain limitations in inter-country economic cooperation and use regional “economies of scale.”
Together with regional integration alliances, this structure could serve as the missing link in the “South–South” cooperation line and resolve the so-called “gaps” in the cooperation balance. The problem of the global economy we are now part of stems from the sharp transition from bilateral economic integration to mega projects. Countries do not have enough time to find their bearings and amend their national legislation, and this often slows down the dialogue on establishing global institutions.
The Advantages of Cooperation between the EAEU and MERCOSUR
An integration dialogue between MERCOSUR and the EAEU would allow the EAEU to solve the task posited to all its member countries, one that is similar to MERCOSUR’s own strategic goal of finding its rightful place in the so-called “sixth technological order” where leading positions will be held by countries that actively use the “ten emerging technologies”.
In this regard, the specific features of MERCOSUR, whose member countries have historically never received large-scale technology transfer (as happened, for instance, in the United States) and consequently formed a “secondary” model of innovative development that is mostly associative and fragmentary and has large areas of stagnation, are of particular interest in terms of building business ties with EAEU companies.
The advantages are mutual.
The Eurasian Economic Union started developing contacts with Latin American countries back in 2012. The first arrangements on cooperation were achieved with Chile, an associate member of MERCOSUR.
Later, the Commission signed a memorandum on cooperation with Peru, also an associate member of MERCOSUR.
In late 2018, the Eurasian Economic Commission (EEC) and MERCOSUR signed a memorandum on cooperation in trade and economy on the side-lines of the MERCOSUR summit in Montevideo (Uruguay).
Promising Areas of Cooperation
The FTZ+ trade agreement format would appear to be the most suitable institutional basis for deeper economic collaboration between the EAEU and MERCOSUR. Such an agreement would involve in-depth integration, emphasizing reduced non-tariff barriers, an improved regime for trade in services and investments, measures to increase trade, regulatory alignment and standardization, and, most importantly, identifying promising areas of cooperation and creating special conditions for individual projects
Without dwelling on such obvious contractual components as zero duties, customs cooperation, technical barriers in trade and sanitary and phytosanitary measures, etc., issues are proposed for consideration that may be debatable as far as the readiness of the parties to implement them is concerned, yet at the same time constitute particularly advantageous areas for mutual development.
Both the MERCOSUR and EAEU countries are interested in developing the following areas: marine research; bioeconomics research; renewable energy sources; etc.
Given the common interest in developing the above-stated areas, the strategic tasks of tapping the markets of MERCOSUR for EAEU businesses may be implemented by building similar institutional mechanisms.
The issue of technology transfer (TT) and innovations becomes ever more pressing, both on the bilateral level and on the level of global trade relations. With increasing frequency, this item is being put on the agenda of global forums such as the United Nations (UNCTAD), the World Trade Organization (WTO) and the World Intellectual Property Organization (WIPO).
MERCOSUR countries are also actively working in this area. Initially, the general policy on technology transfer was based on the South Korean model, with innovations introduced in major companies.
The trade aspects of e-commerce should clearly become a fundamental issue. The greatly increasing data flow in the cost and supply chain and the rapidly growing digitization of global trade that now involves millions of customers make this issue a priority.
Vectors of Collaboration between the Leading Countries in the EAEU and MERCOSUR
The research activities of individual MERCOSUR countries, for example Brazil (the organization’s economic leader), creates opportunities for implementing joint investment projects (for instance, in the mining industry).
“Joint manufacturing of machine tools in Russia is another promising cooperation project that in which Russia is greatly interested.”
However, some experts note that the positive dynamics in the export of technological solutions is very weak due to the outdated contractual framework for cooperation between countries. The present scale of the presence of EAEU companies and the pace at which joint projects in innovations are developing are linked to the low level of state support for exports, unstable partnerships that in many cases stem from the absence of a long-term legal basis, and inconsistencies between collaboration plans and programmes and real results.
Summing up, we can confidently state that the integration cooperation between the EAEU and MERCOSUR could become an example of a radically new cooperation format based on a FTZ+ trade agreement. The advantage of such cooperation will lie, among other things, in a “technological step forward compared to territorial and exclusive regionalism.”
It is apparent that the integration of integrations requires the creation of a contractual framework for the emerging trade and economic alliance. Such a framework could develop a network of promising joint projects buttressed by independent institutional platforms for each strategic area, which will create a micro-level foundation and thus boost the macro-level potential of the integration alliance.
Fitting such collaboration formats into the traditional order of the functioning of FTZs might shift the emphasis from trade liberalization to building a foundation for integration and cooperation.
A “pin-pointed” search for possible production collaborations and bilateral investment initiatives could become an effective way for pooling the parties’ efforts. The basis for deepening existing projects and launching new ones is already in place: major Russian companies are working actively in joint projects being carried out in individual Latin American countries and the Caribbean: Rostec, Rosneft, INTER RAO UES, Power Machines, KAMAZ, Russian Helicopters and VEB.
Ultimately, the performance results of such an intercontinental trade and economic project will depend on how effectively the strategic bilateral projects that are intended to ensure cooperation synergy and liberalize mutual trade are coordinated.
First published in our partner RIAC
Turkey and Trump’s sanctions-based “political economy”
By the end of last year, the Turkish economy had slipped into a technical recession, boosting in 12 months by only 2.6%, despite the fact that a year ago the government expected GDP to grow by 3.8%. The slowdown is particularly striking against the background of sustainable development over the past seven years: in 2010, the country’s GDP grew by 8.5%, in 2011 – by 11.1%, in 2012 – by 4.8%, in 2013 – by 8.5%, in 2014 – by 5.2%, in 2015 – by 6.1%, in 2016 – by 3.2% and in 2017 – by 7.4% This trend has turned Turkey into one of the fastest developing economies, earning it 17th position worldwide in nominal GDP and 13th in the GDP value regarding purchasing power parity.
The situation changed by the middle of 2018, when relations with Washington deteriorated to the point of a trade war. The Trump administration resorted to the much-practiced method of targeting the “dissenters”: it raised drastically customs duties on steel and aluminum imported from Turkey (which, however, did not prevent the United States from becoming the second buyer of Turkish metallurgical produce by the end of the year). On August 1 the US introduced sanctions against Turkish Interior and Justice Ministers. At that time, the main stumbling block (at least on the surface of it) was Turkey’s refusal to release American priest Andrew Brunson who was detained in 2016 on charges of espionage and links to Fethullah Gulen’s movement along with the Kurdistan Workers ’Party. For some time Donald Trump’s propaganda slogans were dominated by the maxim “to save rank-and-file pastor Brunson”.
Turkey responded by slapping import duties on American goods: cars, alcohol, tobacco, cosmetics. And, of course, it put two US ministers on its sanctions list.
But the forces were clearly far from equal. As a result, the Turkish lira collapsed. At the beginning of 2018 one dollar traded for 3.8 liras, whereas by the end of the year it sold for 5.3 liras. Moreover, at the peak of the weakening of the national currency, the dollar cost almost 7 liras. The Central Bank of Turkey was forced to raise the interest rate, even despite opposition from the country’s omnipotent president. Today, the rate has climbed up to the red level of 24%. Consequently, there has been a drop in the sales of real estate, cars, and a number of other industrial goods. Prospects for inflation have materialized too – in October, inflation hit a fifteen-year high, exceeding 25 percent.
Recep Tayyip Erdogan put the blame for the crisis on Turkey’s foreign ill-wishers. This time – with a lion’s share of truth.
In October, the court sentenced Branson to imprisonment for exactly the time he had already served. The pastor returned home, mutual sanctions were lifted, which partly calmed the markets. But only partly.
According to the Turkish Statistical Institute (TSI), the country’s GDP increased by 2.6% by the end of the year. At the same time, the service sector grew by 5.6%, agrarian – by 1.3%, industrial – by only 1.1%. Exports, compared to the previous year, increased by 7% – to 168 billion dollars (a record figure in the entire history of the Turkish Republic). Foreign trade deficit, amid a boost of imports prices, decreased by 28.4% to $ 55 billion, while imports proper dropped by 4.6% to 223 billion dollars. Tourism revenues increased by 12.3% to 29.5 billion
At first glance, the situation is far from critical, but, according to the TSI, over the year, per capita GDP dropped from $10,597 to $ 9,632; household expenditures, although going up by 1.1% on the year, went down by 8.9% in the fourth quarter. In December unemployment rate among the able-bodied population reached 13.5% – more than 4.3 million people.
Nevertheless, Berat Albayrak, Minister of Treasury and Finance of Turkey, sounded optimistic: “The worst days for the economy are over. The government is confident that the growth of the Turkish economy in 2019 will match the forecasts laid down in the New Economic Program. ”
In general, the above-mentioned program envisages the implementation of reforms that will protect export-oriented small and medium-sized enterprises, strengthen their competitiveness, stimulate the economy to secure a high level of added value. An important part of the document is a clause that stipulates cutting government spending on expensive infrastructure projects, often designed to foster the image rather than the economy.
Specialists differ in assessing the prospects for the Turkish economy: forecasts vary from a slight increase to a further decline. In particular, according to the Frankfurter Allgemeine Zeitung, “Economists expect the cooling to continue. The OECD forecasts a further reduction in the economic growth of (Turkey-author) for 2019 to minus 1.8 percent.” So far, the trend is as follows: industrial production, for example, in January 2019 fell by 7.3% against January last year.
Among the chronic illnesses of the Turkish economy is a deficit of the balance of payments, which the government traditionally tries to compensate with foreign loans and foreign investment – these primarily provided economic growth in previous years. Now this source seems nearly exhausted as investors worldwide are growing increasingly wary of developing markets. The position of Turkey is aggravated by the uncertainty of foreign capital about the independence of the Central Bank, its concerns about the unpredictability of the country’s policy and the adequacy of its economic course (first of all, its adherence to ambitious projects with questionable economic efficiency).
Also, potential investors are deterred by the strained relations between Ankara and Washington. For many, President Trump’s recent treat to “ruin” Turkey for its policy on Syrian Kurds and his recent decision to abolish customs preferences for a number of Turkish goods came as signaling the continuation of a trade war. Significantly, these statements were made after the Turkish leadership confirmed its determination to acquire Russian air defense systems, thereby making it clear that pursued a course towards independence in strategic decision-making.
For Turkey, the United States is a fairly important trading partner, which in 2018 accounted for almost five percent of Turkish exports ($ 8.3 billion) and more than five percent of imports ($ 12.3 billion).
The recession in the Turkish economy has a certain negative impact on Russian-Turkish economic results. Last year, Turkey became Russia’s sixth largest trading partner. In particular, it accounts for a considerable share of Russian exports of metals, grain and, most importantly, energy carriers (the second, after Germany, importer of oil in the world). In February, according to Gazprom, the export of Russian gas to non-CIS countries decreased by 13% in annual terms. The company said the main reasons behind the decrease were the warm weather in Europe and the crisis in Turkey.
The Russian economy has succeeded in adapting to the extensive sanction pressure from Washington and, it looks like the Trump administration has now chosen to “attack from the flank”, targeting one of Moscow’s major foreign economic partners. It would not be a mistake to assume that the ability of the Turkish leadership to resist pressure from its “strategic ally” and NATO partner in the near future will largely determine not only economic, but also political relations between Moscow and Ankara.
First published in our partner International Affairs
Ambiguity in European economic leadership
Europe’s economic situation remains uncertain! The European economic crisis and austerity policies remain in place. On the other hand, there is no sign that the EU is passing through the current situation. Two conservative /Social Democrats in Europe have not been able to effectively counteract the economic crisis over the last few years.
This same issue has led to anger by European citizens from traditional European parties. Subsequently, the trend of European citizens to nationalist and extremist parties has increased in recent years.
The events that have taken place in France in recent months have led to disappointment with the eurozone leaders over the current deadlock.The most important point is that Macron was planned to assume the title of the Europe’s economic leader in the short term, and that was to be after succeeding in creating and sustaining economic reforms in France and the Eurozone.
Meanwhile, European citizens expressed their satisfaction with the election of Macron as French President in 2017. They thought that the French president, while challenging austerity policies, would strengthen the components of economic growth in the European Union. Moreover, EU leaders also hoped that Macron’s success in pursuing economic reforms in France would be a solid step in pushing the entire Eurozone out of the economic crisis.
In other words, in the midst of anti-Euro and extremist and far-right movements in Europe, Macron was the last hope of European authorities to “manage the economic crisis” which was raising inside the Eurozone: the hope that has soon faded away!
The main dilemma in France is quite clear!”Failing to persuade French citizens” on his economic reforms, and Macron’s miscalculations about the support of French citizens for himself, were among the important factors in shaping this process. Macron had to give concessions to protesters to prevent further tensions in France.
After the country’s month-long demonstrations, Macron was forced to retreat from his decision on raising the fuel price. Besides, he had no way but to make promises to the French citizens on issues such as raising the minimum wages and reducing the income tax. This had but one meaning: Macron’s economic reforms came to an end. Right now, European authorities know well that Macron is incapable of regaining his initial power in France and the Eurozone by 2022 (the time for the France general elections).
Therefore, Macron has to forget the dream of EU’s economic leadership until the last moments of his presence at the Elysees Palace. Of course, this is if the young French president isn’t forced to resign before 2022! The European authorities and the Eurozone leaders have no alternative for Macron and his economic reforms in Europe. That’s why they’re so worried about the emergence of anti-EU movements in countries such as France and Germany.
For example, they are well aware that if Marin Le Pen can defeat Macron and come to power in France during the upcoming elections, then the whispers of the collapse of the Eurozone, and even the European Union, will be clearly heard, this time with a loud voice, all over the Europe.
First published in our partner Tehran Times
Economic integration: Asia and the Pacific’s best response to protectionism
Deepening economic integration in Asia and the Pacific is a longstanding regional objective. Not an end in itself but a means of supporting the trade, investment and growth necessary to achieve the 2030 Agenda for Sustainable Development. It is a priority for all member states of the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP). China has a valuable contribution to make so I am beginning 2019 with a visit to Beijing. One to discuss with Chinese leaders how we can strengthen our collaboration and accelerate progress.
The case for deeper integration in Asia and the Pacific is becoming increasingly apparent. Recent trade tensions highlight Asia and the Pacific’s vulnerability to protectionism from major export markets. UN ESCAP analysis shows how regional supply chains are being disrupted and investor confidence shaken. Export growth is expected to slow and foreign direct investment to continue its downward trend. Millions of jobs are forecast to be lost, others will be displaced. Unskilled workers, particularly women, are likely to suffer most. Increasing seamless regional connectivity – expanding the infrastructure which underpins cross border commercial exchanges and intraregional trade – must be part of our response.
We should build on the existing Asian transport infrastructure agreements UN ESCAP maintains to further reduce regulatory constraints, costs and delays. For instance, UN ESCAP members are working to improve the efficiency of railway border crossings along the Trans-Asian Railway network. There is great potential to improve electronic information exchange between railways, harmonise customs formalities and improve freight trains’ reliability. The recent international road transport agreement between the governments of China, Mongolia and the Russian Federation grants traffic rights for international road transport operations on the sections of the Asia Highway which connect their borders. We should expand it to other countries. There is also huge opportunity to develop our region’s dry ports, the terminals pivotal to the efficient shipment of sea cargo to inland destinations by road or rail. A regional strategy is in place to build a network of dry ports of major international significance. UN ESCAP is looking forward to working with China to implement it.
Sustainable energy, particularly cross-border power trade, is another key plank UN ESCAP member States’ connectivity agenda. Connecting electricity grids is not only important to meet demand, ensure energy access and security. It is also necessary to support the development of large-scale renewable energy power plants and the transition to cleaner energy across Asia and the Pacific. The fight against climate change in part depends on our ability to better link up our networks. ASEAN’s achievements in strengthening power grids across borders is a leading example of what political commitment and technical cooperation can deliver. At the regional level UN ESCAP has brought together our region’s experts to develop a regional roadmap on sustainable energy connectivity. China is currently chairing this group.
For maximum impact, transport and energy initiatives need to come in tandem with the soft infrastructure which facilitates the expansion of trade. UN ESCAP analysis ranks China among the top trade facilitation and logistics performers in our region. This expertise contributed to a major breakthrough in cross-border e-commerce development and ultimately led to a UN treaty on trade digitalisation. This has been adopted by UN ESCAP members to support the exchange of electronic trade data and documents and signed by China in 2017. Now, UN ESCAP is working to support the accession and ratification of twenty-five more countries who recognise the opportunity to minimise documentary requirements, promote transparency and increase the security of trade operations. Full implementation of cross-border paperless trade in Asia and the Pacific could reduce export costs by up to 30 percent. Regional export gains could be as has high as $250 billion.
As we look to the future and work to accelerate progress towards the
2030 Agenda’s Sustainable Development Goals, economic integration must remain a
priority. A strong UN-China sustainable development partnership is essential to
take this agenda forward and strengthen our resilience to international trade
tensions and economic uncertainty. Working with all the countries in our
region, we have a unique opportunity to place sustainability considerations at
the heart of our efforts and build seamless regional connectivity. That is an
opportunity, which in 2019, UN ESCAP is determined to seize.UNESCAP
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