Analysis of the Effects Produced by Trade Liberalization in the Republic of Uzbekistan and the EAEU

Abstract—

This study quantitatively assesses the consequences arising from the liberalization of the regional market in the EAEU member states for the exports of the Republic of Uzbekistan using a number of trade indicators, including Balassa index of revealed comparative advantage, the regional orientation index and others. It is shown that for a significant part of the exports of the Republic of Uzbekistan, the reduction in trade barriers (in particular, nontariff measures of customs regulation) will have a positive effect, i.e., it will contribute to the growth of exports to the Member States of the Union. It is also demonstrated that the main part of the export from the Republic of Uzbekistan does not compete with the export of the EAEU member states in the markets of third countries.

The regulation of international trade through the imposition of duties and other barriers on imported and exported commodities has existed for centuries. However, in the 20th century, the processes of regulating export–import exchanges reached a new level and in many cases began to be determined by multilateral international trade agreements. As a rule, the purpose of these multilateral agreements was to reduce barriers to international trade between the member countries of the created unions. This trade liberalization was seen by many economists as a way to boost the growth of the global economy and individual economies. The theoretical foundation for the liberalization of international trade was the theory of comparative advantages created by David Ricardo, which was quantitatively expressed by Balassa [1] in his studies. In our time, according to the head of the WTO, the liberalization of world trade will allow developing countries to overcome the crisis [2] caused by the COVID-19 pandemic, which has had an insulating effect on many countries [3].

The rapid development and diversification of world trade in the twenty-first century had led to the creation of many regional trade groupings based on free trade agreements and tailored to the specifics of their member countries. Potential and already realized benefits from the reduction of trade barriers have been assessed in a number of fundamental scientific works [4]. These works also presented proposed methodological approaches to assessing the effects produced by the liberalization of trade in the framework of international trade agreements, including regional ones.

The Eurasian Economic Union (EAEU) can also be considered a significant regional economic union. The EAEU was established in 2015 and it currently includes five post-Soviet countries: the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, and the Russian Federation. Article 1 of the Treaty on the Eurasian Economic Union [5] provides for the free movement of goods, services, capital, and labor within the framework of the Union.

Free movement of goods within the EAEU is ensured by the removal of internal customs barriers between the member states of the union, the maximum reduction in the list of tariff and nontariff barriers and other obstacles to the movement of goods between member states (including through the development of a unified technical, sanitary, etc. regulation), and the establishment of uniform rules for trade with third countries. It should be noted that EAEU rules allow for exceptions and limitations to the Uniform Rules for the Internal Market, but throughout the operation of the Union, efforts are being made to reduce their number (see, e.g., [6]).

Free movement of services implies harmonizing the legislation of the member states in terms of regulating the services sector ensuring equal (nondiscriminatory) conditions for trade in services for individuals and legal entities of the member states within the Union, the formation of a single market for a number of sub-sectors of this sector (for more details, see [7]).

Free movement of capital implies the removal of barriers to cross-border money transfers between member states of the Union as well as the implementation of investment operations. In order to realize these goals, article 64 of the Treaty on the Eurasian Economic Union, inter alia, declares “the step-by-step implementation of the harmonization and convergence of approaches to the formation and conduct of monetary policy to the extent that it corresponds to the established macroeconomic requirements of the integration cooperation.”

Free movement of the labor force implies a significant simplification of the procedure for staying and carrying out labor activities for EAEU citizens throughout the territory of the Union. Thus, workers from the member states of the Union, as well as members of their families, are entitled to social security (compulsory health insurance, temporary disability benefits, etc.) to the same extent as citizens of the state of employment. The children of EAEU workers have the right to attend preschools and receive education in accordance with the laws of the employing state. In 2021, the Agreement on Pensions for Workers of the EAEU Countries [8] came into force, guaranteeing equal rights to pensions for citizens of the member states of the Union and citizens of the state of employment.

In the member states of the Eurasian Economic Union, there is an increase in trade turnover, mutual investment, improvement of national legislation with a corresponding positive economic effect (see the annual reports of the Eurasian Economic Commission [9] and reports on the results of the first two years of membership in the EAEU of the Republic of Armenia [10] and the Kyrgyz Republic [11]. It can be argued that, at least in part, the growth in trade between the EAEU member states was the result of earlier integration decisions, which creates a fertile ground for further work on trade liberalization in the region.

This paper attempts to assess the expected effects of lowering barriers to trade between the Republic of Uzbekistan and the EAEU. It should be noted that Uzbekistan is a member of the Free Trade Zone (FTZ) of the CIS. Since all EAEU member states are also members of the CIS FTZ, the degree of freedom of trade between them and Uzbekistan is already quite high. However, at the moment, exports from the EAEU member states to the Republic of Uzbekistan are subject to export duties, and the Republic of Uzbekistan often applies nontariff measures to imported goods (in particular, related to the certification of goods). There are no duties on exports from the Republic of Uzbekistan to EAEU member states but EAEU member states in many cases also apply nontariff measures to Uzbek goods. Thus, harmonizing nontariff measures of customs regulation and other actions aimed at further reduction in trade barriers will create additional opportunities for expanding mutual trade between Uzbekistan and the EAEU countries.

The following hypothesis was put forward during the research. Due to geographical and historical factors, the trade between the Republic of Uzbekistan and the EAEU countries is very intensive, and therefore a further reduction in trade barriers will ensure an increase in the supply of many Uzbek goods to the member states of the Union. The indices used in the study included RCA (Revealed Comparative Advantage Index), RO (Regional Orientation Index), TCI (Trade Complementarity Index), and ESI (Export Similarity Index). The calculation of these indices for the studied region made it possible to identify the existence of mutual benefits in reducing nontariff measures of customs regulation between Uzbekistan and the EAEU member states.

With the help of the Balassa index of comparative revealed advantage (revealed competitive advantage, RCA) and the index of regional orientation (regional orientation, RO), merchandise exports of the Republic of Uzbekistan are classified into groups characterized by different expected effects from the liberalization of international trade in the region. The Balassa index was introduced into scientific circulation in [1] and it represents the ratio of the particular commodity’s share in total national exports to its share in total world export. Although this index has been criticized and attempts of its modification have been made (see [12, 13]), it remains one of the most common tools for analyzing international trade. Among the numerous works devoted to the application of this index to the trade statistics of various countries, regions and economic sectors, one can mention, for example, [14–21].

The Regional Orientation Index, calculated as the ratio between the particular commodity’s share in a country’s exports to a region and its share in exports to third countries, is also a widely used indicator in the analysis of the functioning of different trade associations. Examples are, for instance, publications [4, 22, 23]. In addition, the work used the indices of complementarity and similarity of exports, described, for example, in the book [4].

Data. The basis for calculating the trade indices given below was trade statistics at the level of 6 digits of the Harmonized Commodity Description and Coding System (Harmonized System, HS). As a source of trade statistics for the Republic of Uzbekistan and the EAEU member states, the UN Comtrade database [24] was used that collects national trade statistics all over the world. In the course of calculations, data were used starting from 2017. Earlier data at the required level of detail for Uzbekistan are unavailable from both Comtrade and national sources. The data were collected according to the commodity nomenclature of the HS mentioned above. It is important to note that the range of goods in this system is reviewed on average every 5–6 years. Thus, currently in force is the HS 2017 edition [25] (referred to as H5 in the UN Comtrade database) replacing HS 2012 (referred to as H4 in the UN Comtrade database).

On studying trade, statistics data often have to be brought to uniform nomenclature. When preparing the statistical block of our calculations, the issue of reconciliation also arose, since the data of the Republic of Uzbekistan for 2017 were published in the HS 2012 nomenclature, while the indicators for subsequent years are only available in the HS 2017 nomenclature. Accordingly, it was required to bring the data of the Republic of Uzbekistan for 2017 to the HS 2017 nomenclature.

The following approach was used to solve this problem. Transition keys from HS 2012 to HS 2017, as well as transition keys between other versions of the HS nomenclature, are available on the UN Statistics Division website [26]. On switching from one version of HS to another, different options for changes are possible, which are described in detail in the methodology [27]. Let us briefly describe the main principles of work on bringing the used data into conformity. The table of correlation between HS 2012 and HS 2017 as well as between two other pairs of versions can contain one of four options for the relationship between codes:

— The commodity in the new version of the nomenclature corresponds to one and only one commodity in the old version. This situation is indicated as 1 : 1.

— The commodity in the new version of the nomenclature is the result of the division of the commodity in the old version into several positions. This situation is indicated as n : 1.

— The commodity in the new version of the nomenclature is the result of combining several commodities of the old version. This situation is indicated as 1 : n.

– The commodity in the new version of the nomenclature is the result of splitting and merging of several commodities in the old version. This situation is indicated as n : n.

For most commodities, when updating the HS version, it is possible to maintain a one-to-one correspondence (1 : 1 situation), however, the presence of n : 1 and n : n situations require data transformation, and it will inevitably be based on assumptions that may not be justified in reality. We used the following assumption: if during the transition from the old nomenclature to the new one the commodity was divided into several ones, then it is considered that the volumes and costs of export/import of the commodity are divided among the “new” commodities in equal proportion.

The second component of the statistical base for the study was a dataset on global exports of goods. The corresponding statistics were extracted from the Trademap database [28], which is more convenient than Comtrade for our task. At the same time, it is important that the Trademap database contain the same data that is used in Comtrade, which ensures the consistency of these sources.

For global export statistics extracted from Trademap, there is also a problem of version inconsistency of HS nomenclature. Thus, even in recent years, statistics contain trade codes that are absent in the modern HS 2017 nomenclature. This is because some countries still use the old HS nomenclatures. In particular, global export statistics still contain commodity codes included in the HS 1996 nomenclature and eliminated in subsequent versions. Accordingly, additional data processing was required to bring them to uniformity.

Export analysis of the Republic of Uzbekistan. Over 2017–2020, exports from the Republic of Uzbekistan increased by 31.8% (from 10.1 to 13.3 billion US dollars), including exports to the EAEU by 23.5% (from 2.6 to 3.2 billion US dollars) (Fig. 1).

Fig. 1. The structure of exports of the Republic of Uzbekistan by directions:

export to EAEU; export to the rest of the world.

During the considered period, the most significant commodity group exported from Uzbekistan was group 71 “Precious or semiprecious stones, precious metals” mainly represented by gold. Other major Uzbek exports include cotton, hydrocarbons (mainly natural gas), copper, fruit, and nuts (Fig. 2).

Fig. 2. The structure of exports of the Republic of Uzbekistan by commodity groups(at 2 digits of the Harmonized System):

precious stones and metals; cotton, hydrocarbons; copper; fruit and nuts; other goods.

The RCA index is the ratio between the share of a particular commodity group in a country’s exports and the share of the same group in global exports:

1

where the volume of exports of goods g of the country c; denotes the total exports of the country с; the global export of goods g; . The revealed advantage corresponds to the index value exceeding one.

In 2017–2020, Uzbekistan’s exports consisted of 2862 commodity items at 6 digits of the HS Harmonized System. At the same time, globally, trade is conducted in 5468 commodity items (at 6 digits). For 489 positions, a comparative advantage (index RCA > 1) was revealed at least for one year during the specified period, and this list includes goods from almost all two-digit groups (76 out of 97). Calculation on aggregated statistics at two digits allows us to identify 20 groups with RCA > 1. The calculation data show that the highest values of the RCA index characterize goods from group 52 (cotton). Also, high values of the RCA index are observed in other Uzbek goods related to the textile and leather industries—knitted fabrics, silk, raw skins, and special fabrics, respectively. In addition, high values of the index of comparative revealed advantage are observed in vegetables, fruit, berries, and products of their processing. Separately, we can mention zinc and molybdenum, inert gases, and other natural resources. For the listed groups, the index value is consistently high in the period from 2017 to 2020.

Table 1 and Table 2 show the dynamics in the number of commodity groups with high RCA and their share in the total exports from the Republic of Uzbekistan.

Table 1.  .

Number of goods (at the level of 6 digits of the HS system) with a high RCA by year

Indicator	2017	2018	2019	2020
RCA from 1 to 10	222	202	222	244
RCA > 10	110	99	106	118

Table 2.  .

Proportion of goods (at the level of 6 digits of the HS system) with high RCA in the total exports, %

Indicator	2017	2018	2019	2020
RCA from 1 to 10	11.1	11.1	19.8	13.0
RCA > 10	83.6	83.4	77.1	78.7

It can be seen from the tables that the number of goods with RCA > 1 has generally increased over the reviewed period. It is also evident that these goods make up the bulk of Uzbekistan’s exports.

In order to assess the structure of exports by directions, the index of regional orientation is used, which is the ratio between the share of exports of a certain commodity group to the countries of the studied region and the share of exports of the same group to third countries, i.e.,

2

where is the export of the goods g from the country с to the region r; denotes the total exports of the country c to the region r; is the export of the goods g from the country c to third countries; is the export of the goods g to third countries. If the calculated value of the index exceeds one, this means that the export of this product is focused on the studied region.

Among the goods exported from Uzbekistan, the following have a high value of the orientation index in the case of the EAEU countries:

— Natural gas in its gaseous state (1.3 billion US dollars, 15% of Uzbekistan’s exports in 2019).

— Vehicles with engine displacement from 1000 cm³ to 1500 cc (0.12 billion US dollars, 0.8% of Uzbekistan’s exports in 2019).

— T-shirts, knitted or hand-knitted sweatshirts (0.11 billion US dollars, 0.7% of Uzbekistan’s exports in 2019).

Also highly oriented to the EAEU countries is the export of building materials (Group 39). Among the goods in this group, the export of high-density polyethylene granules is the most significant, valued at 0.36 billion US dollars (2.44% of Uzbekistan’s exports in 2019). Other goods of group 39 (for example, fasteners, pipes and hoses, epoxy resins) also have a high value of the regional orientation index (up to the complete absence of Uzbek exports outside the EAEU) but their total share in the total exports of the Republic of Uzbekistan is small, 0.12%.

According to some foreign researchers, the simultaneous consideration of the RCA and RO indices makes it possible to estimate the effectiveness of reducing trade barriers (see, for example, [4, Chapter 2]). The general logic for analyzing combinations of indices as well as market volumes and examples of relevant products (based on 2019 data) in each case are presented in Table 3.

Table 3.  .

Analysis of combinations of RCA and RO indices with reference to the consequences of trade liberalization in Uzbekistan and EAEU

	RCA > 1	RCA < 1
RO > 1	There is a comparative advantage for the commodity; export is focused on the region. Reducing trade barriers will be beneficial for both parties if there are market niches in the export market for expanding the consumption of this commodity and competition between local and foreign producers does not tend to intensify 4.5 billion US dollars (30% of exports),   including:     271 121 Natural gas in gaseous state,     390 120 Polyethylene with a specific gravity of 0.94 or more	There is no comparative advantage for the commodity, but when trade barriers are lowered, a high level of regional orientation will create a trade diversion effect—ousting exporters from third countries (not participating in the trade agreement between Uzbekistan and the EAEU) from the market 0.2 billion US dollars (1.6% of exports),   including:     852 872 Receiving equipment for television communication, other, color image,     870 210 Motor vehicles designed to carry 10 persons or more
RO < 1	There is a comparative advantage for the commodity, but export is not region-oriented. Reducing trade barriers as a result signing a trade agreement may lead to a reorientation of exports to the countries that have signed the agreement 10 billion US dollars (66.9% of exports),   including:   710 813 Gold,     740 311 Unwrought copper cathodes and cathode sections,   520 100 Uncombed cotton fiber,   710 691 Silver	Absence of comparative advantage in terms of commodity and orientation to the region. Reducing trade barriers is unlikely to affect trade in these positions. 0.2 billion US dollars (1.5% of exports),   including:   271 012 Light distillates and products,   240 220 Cigarettes containing tobacco

In order to evaluate the potential effects arising from trade liberalization, it is also important to examine the relationship between the demand and supply of specific goods on the international market. For this, the indices of complementarity and similarity of exports were calculated. The complementarity index shows how complementary supply and demand (imports and exports) are for a particular commodity group for the pair of countries under study, i.e.,

3

where is the share of imports of goods g by the country i in the total imports of the country i; is the share of exports of goods g by the country j in the total exports of the country j. This index can take values from 0 to 1. The closer the index value is to one, the more country i imports those goods that country j exports.

Table 4 shows the dynamics of the complementarity index for the Republic of Uzbekistan and the EAEU member states.

Table 4.  .

Complementarity index

Importer	Exporter	2017	2018	2019	2020
Uzbekistan	Armenia	0.06	0.06	0.09	0.08
Uzbekistan	Belarus	0.24	0.27	0.28	0.30
Uzbekistan	Kazakhstan	0.13	0.13	0.13	0.15
Uzbekistan	Kyrgyzstan	0.12	0.13	0.11	0.11
Uzbekistan	Russia	0.20	0.20	0.20	0.24
Armenia	Uzbekistan	0.17	0.15	0.16	0.14
Belarus	Uzbekistan	0.18	0.17	0.18	0.16
Kazakhstan	Uzbekistan	0.10	0.11	0.10	0.11
Kyrgyzstan	Uzbekistan	0.11	0.11	0.10	0.14
Russia	Uzbekistan	0.07	0.08	0.08	0.12

The import of the Republic of Uzbekistan has a relatively high index of complementarity with the export of the Republic of Belarus (including due to the import of Belarusian timber and products of the pulp and paper industry) and Russia (including due to the import of Russian wheat and ferrous metallurgy products).

Imports of the Republic of Armenia and the Republic of Belarus have a relatively high index of complementarity with the exports of the Republic of Uzbekistan (in the case of the Republic of Armenia including through the import of Uzbek citrus fruits and light industry products, in the case of the Republic of Belarus, of nonferrous metallurgy and agriculture products).

The Export Similarity Index (ESI) shows potential competition between trading partners:

4

where is the export of the goods g from the region r; is the export of the goods g from the country c; denotes the total exports from the country c; stands for the total exports from the region r.

This index can also take values from 0 to 1, but, unlike the TCI complementarity index, it is symmetrical and can be calculated both for different pairs of countries, and for the relationship of an individual country and a region (a group of countries). An index value equal to one means that countries export the same goods.

As follows from the estimates presented in Table 5 and Table 6, there is no significant competition between the exports of the Republic of Uzbekistan and the exports of the EAEU, both in general and at the level of individual member states. This circumstance can be considered as an indirect confirmation of the expediency of further trade liberalization between Uzbekistan and the EAEU.

Table 5.  .

Export similarity index for the Republic of Uzbekistan and the region including the EAEU countries

Indicator	2017	2018	2019	2020
EAEU	0.09	0.09	0.17	0.13

Table 6.  .

Export similarity index for the Republic of Uzbekistan and EAEU member states

Indicator	2017	2018	2019	2020
Armenia	0.11	0.13	0.13	0.17
Belarus	0.09	0.09	0.12	0.12
Kazakhstan	0.11	0.11	0.12	0.14
Kyrgyzstan	0.08	0.08	0.07	0.06
Russia	0.08	0.08	0.15	0.11

Conclusions. The calculation results for the indices of revealed comparative advantage (Balassa indices) and indices of regional orientation for the export of the Republic of Uzbekistan can be interpreted as follows:

— About 30% of Uzbek exports are already oriented to the EAEU and at the same time, these export goods are characterized by a high Balassa index (revealed comparative advantage). In this connection, it can be expected that the reduction of trade barriers will provide Uzbekistan with an additional improvement in the conditions for the export of these goods to the EAEU countries.

— Another part of Uzbek exports—66.9% of the total—is characterized by a high Balassa index but is not oriented to EAEU. Reduction of trade barriers will also contribute to redirecting Uzbek exports to EAEU countries.

— About 1.6% of Uzbek exports are characterized by a low Balassa index but at the same time, this part of exports is already oriented towards the EAEU. Most likely, the reduction of trade barriers will contribute to the displacement of exporters from third countries from the market due to the expansion of Uzbek exports in the relevant categories of goods.

— About 1.5% of Uzbek exports are characterized by a low Balassa index and are not oriented towards the EAEU. Exports of such goods are unlikely to increase even if trade barriers are lowered.

Thus, the calculations show that further liberalization of trade between the Republic of Uzbekistan and the EAEU member states is highly likely to provide an increase in supplies for a significant part of Uzbek merchandise exports.

Indirectly, this conclusion is confirmed by the estimates obtained by calculating the indices measuring complementarity and similarity of exports. The values of these indices are also favorable for the growth of mutual trade. Consequently, Uzbekistan’s exports should not, in most cases, compete aggressively with local products either in the domestic markets of EAEU member States or in the markets of third countries. A similar statement is also true in relation to exports from EAEU member states to Uzbekistan. In this connection, it can be assumed that with a high probability the reduction of trade barriers between the EAEU and Uzbekistan will bring economic benefits to both parties.

CONFLICT OF INTEREST

The authors declare that they have no conflicts of interest.